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

A clearing member fails to deliver 500 shares of a company at pay-in, and the shares are not available for the buyer. Which course is followed by the clearing corporation for the short delivery in the normal cash segment?

The shortfall is handled by an auction in which the shares are bought on behalf of the buyer. If the auction does not succeed, the trade is closed out at the prescribed close-out price and the buyer receives that amount, with the defaulting seller bearing the cost.

  1. AThe shares are bought through an auction and the buyer receives them or is paid close-out if auction failsCorrect
  2. BThe buyer's trade is cancelled and the buyer pays a penalty
  3. CThe settlement for all members is postponed by one week
  4. DThe seller's client is allotted shares by the depository free of cost

Explanation

For short deliveries, the exchange conducts an auction in which the shortfall is purchased on behalf of the buyer. If the auction cannot be completed, the trade is closed out at the prescribed close-out price and the buyer is compensated. Cancelling the buyer's trade with a penalty, postponing everyone's settlement, or free allotment are not the mechanism.

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