NISM Certifications · NISM-Series-VII: Securities Operations and Risk Management · Introduction to Securities Broking Operations
A broker's client defaults on the pay-in obligation for a purchase, and the broker finds that the client's securities and margin are insufficient. Which statement about the exchange's investor protection arrangements for this situation is most accurate?
The Settlement Guarantee Fund is meant for completing settlement when a clearing member fails to meet obligations. It does not cover a broker's loss from its own client's default. Investor protection compensation is for investors of defaulting brokers, not for brokers.
- AThe Investor Protection Fund compensates the broker for the client's default
- BThe Settlement Guarantee Fund is used by the clearing corporation to complete settlement when a clearing member defaults, not to cover a client's default to the brokerCorrect
- CThe Exchange pays the client's loss automatically
- DThe depository compensates the broker
Explanation
The Settlement Guarantee Fund backs the clearing corporation's guarantee of settlement when a clearing member defaults. It does not reimburse a broker for a client's default. The Investor Protection Fund compensates investors for a defaulting broker's failure, not brokers. Exchanges and depositories do not automatically cover client defaults.
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