Skip to content

NISM Certifications · NISM-Series-VII: Securities Operations and Risk Management · Risk Management

A broker receives a client's cheque as margin but it is dishonoured by the bank. What should the broker's risk management system do regarding the margin credit already given to the client?

The broker should reverse the margin credit given against the dishonoured cheque, since no valid margin exists, and then act on the unsupported exposure by demanding fresh margin or reducing positions. The amount cannot be kept as profit or converted into a loan.

  1. ARetain the credit because the client has traded already
  2. BReverse the credit and treat the client's exposure as unsupported by margin, taking corrective actionCorrect
  3. CTransfer the credit to the broker's profit account
  4. DConvert the margin into a loan to the client

Explanation

Margin supported by a dishonoured cheque is not valid collateral. The credit must be reversed, and the exposure now lacking margin must be addressed by seeking fresh margin or reducing positions. Treating it as profit or a loan is improper.

Did you get it right without looking?

One question tells you little. A timed set on Risk Management shows your real accuracy, how long you take and where you lose marks.

Practise Risk ManagementFree diagnostic mock

More Risk Management questions