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

A broker's client has a net debit balance and fails to pay. Under the exchange's risk-management practice, which action is the broker most appropriately permitted to take to limit the risk, subject to the client agreement and applicable rules?

The broker may square off or liquidate the defaulting client's positions or the client's own collateral in line with the client agreement and exchange rules. It cannot use other clients' securities or shift the debit to another account, since client assets must stay segregated.

  1. ASquare off or liquidate the client's positions or collateral as per the agreementCorrect
  2. BTransfer the client's debit to another unrelated client's account
  3. CIgnore the debit until the client chooses to pay
  4. DUse other clients' fully paid securities to cover the debit

Explanation

A broker may liquidate the defaulting client's positions or collateral as provided in the client agreement and rules. Using other clients' securities or shifting the debit is prohibited, and ignoring the debit leaves the broker exposed to loss.

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