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

A broker's client sells 500 shares of a company on the cash segment. Under the T+1 cycle, the client has not yet delivered the shares into the broker's pool account by the pay-in deadline. Which action by the broker is correct under the regulatory framework for settlement of securities?

The broker should treat it as the client's short delivery and let the exchange's shortage and auction process handle it. Securities belonging to other clients cannot be used to meet this obligation, because each client's holdings may be used only for that client's own settlement.

  1. AUse another client's shares lying in the pool account to meet the obligation
  2. BTreat the shortage as the client's default and manage it per the exchange's shortage and auction rules without using other clients' securitiesCorrect
  3. CAsk the buyer to wait until the client delivers
  4. DTransfer the shares from the broker's proprietary account and bill the client's family

Explanation

Client securities must not be misused to meet another client's obligation, and each client's securities are dealt with only for that client's own obligations. A short delivery therefore goes through the exchange's shortage and auction process. Waiting is not an option because the settlement obligation runs between the clearing corporation and the member.

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