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

A broker receives Rs 6,00,000 from a client as margin and, without a client's instruction, uses it to meet the broker's own proprietary trading obligation. Which statement is correct under SEBI's rules on client funds and securities?

Using client margin for the broker's own proprietary obligation is a violation. SEBI rules require client funds and securities to be segregated from the broker's own and used only for the client's purposes. Later repayment or intimation to the exchange does not make the use legitimate.

  1. AIt is permitted if the broker returns the money the next month
  2. BIt is permitted if the exchange is informed after a week
  3. CIt is permitted because margin money is the property of the broker
  4. DIt is a violation, because client funds must be kept segregated and not used for the broker's own obligationsCorrect

Explanation

SEBI requires brokers to keep client funds and securities separate from their own, usually in a designated client bank account, and not to use one client's assets for another client or for proprietary dealing. Returning the money later or informing the exchange does not cure the misuse. Margin money belongs to the client, not the broker.

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