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

A broker's client buys 1,000 shares on Monday under the T+1 rolling settlement and does not pay the funds due. Which action is most consistent with prudent broker risk management and exchange rules on pay-in?

The broker should square off the defaulting client's position and recover any loss from the client's margin, as allowed by the client agreement. The broker must still meet its own pay-in obligation to the clearing corporation, so delay or transferring shares to others is improper.

  1. AIgnore the shortfall until the client next trades
  2. BSquare off or sell the position, adjusting losses against the client's margin, as permitted by the client agreementCorrect
  3. CAsk the clearing corporation to defer the broker's own pay-in
  4. DTransfer the shares to another client's account

Explanation

The broker remains liable to the clearing corporation for pay-in, so it may close out the client's position and recover any loss from the client's margin, if the agreement permits. Ignoring the shortfall increases risk, the clearing corporation does not defer pay-in on request, and moving shares to another client without authority is improper.

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