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NISM Certifications · NISM-Series-VII: Securities Operations and Risk Management · Other Services Provided by Brokers

A broker offers margin trading facility (MTF) to clients. Which of the following statements about the shares purchased under MTF is correct?

Shares bought under margin trading facility are held as collateral by the broker through the prescribed pledge arrangement until the client repays the funded amount. The broker cannot use them for its own proprietary trading, and the client does not have free use of the shares until the dues are cleared.

  1. AThe shares are held by the client in the client's demat account and the broker has no claim over them
  2. BThe shares purchased are kept as collateral with the broker, who pledges them in the prescribed manner, until the client repays the funded amountCorrect
  3. CThe broker may use the shares for its own proprietary trades
  4. DThe shares are delivered directly to the clearing corporation's own account permanently

Explanation

Under MTF the shares bought with the broker's funding are held as collateral by the broker, who can pledge them only in the prescribed manner. They are kept in a separate pledge arrangement until the client repays. The broker cannot use them for proprietary purposes, so the other options fail.

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