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

A broker's client has an open futures position, and the exchange raises the initial margin rate for that contract during the day. What is the most appropriate risk management action by the broker?

The broker should collect the additional margin under the revised rate from the client, because the higher exchange margin applies to open positions too. Ignoring it would create a shortfall and expose the broker and clearing member to unsecured risk.

  1. AIgnore the change until the contract expires
  2. BCollect the additional margin as per the revised rate from the client, since the margin requirement applies to the open positionCorrect
  3. CReduce the client's brokerage rate to compensate
  4. DTransfer the position to another client without consent

Explanation

A higher exchange margin rate increases the margin required on open positions, so the broker must ensure the additional margin is collected from the client. Ignoring it leaves the broker exposed to a shortfall, and the other options are improper or irrelevant.

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