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

A broker's client defaults on a pay-in obligation for delivery of shares sold. The shares are not delivered on the settlement day, resulting in a short delivery at the exchange. What is the usual exchange process for dealing with this obligation?

Short delivery is handled through an exchange auction in which the shortfall securities are bought in and delivered to the buyer. If the auction fails to deliver them, the trade is closed out at the prescribed price and the buyer is compensated, rather than waiting indefinitely.

  1. AThe exchange cancels the entire trade of the buyer without any compensation
  2. BThe buyer is paid the settlement price in the pay-out for that day
  3. CThe exchange conducts an auction of the shortfall securities, and the buyer is compensated from the auction proceeds or by close-outCorrect
  4. DThe shortfall is carried forward indefinitely until the seller delivers

Explanation

For short deliveries, the exchange conducts an auction to buy the securities and deliver them to the buyer. If the auction cannot be completed, the trade is closed out at the prescribed price. The buyer is not left waiting indefinitely, and it is not simply cancelled without compensation.

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