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

A clearing member fails to deliver shares on the settlement day, and the seller's shares are short at pay-in. Which mechanism is normally used by the exchange to complete the buyer's obligation for such a shortage in the normal equity segment?

The exchange conducts an auction. When a seller short-delivers at pay-in, the exchange buys the shares through an auction and delivers them to the buyer, with the defaulting seller bearing the cost. Close-out applies only if the auction cannot procure the shares.

  1. AThe buyer's trade is cancelled and no further action is taken
  2. BAuction of the shares conducted by the exchangeCorrect
  3. CThe buyer is compelled to accept cash at the previous day's closing price in all cases
  4. DThe trade is carried forward to the next settlement automatically with interest

Explanation

When a seller fails to deliver, the exchange conducts an auction to buy the securities and deliver them to the buyer. The shortage is therefore met through the auction process. If the auction fails to procure shares, the trade is closed out, but that is a fallback rather than the normal first step. Cancelling the trade or automatic carry forward is not the standard method.

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