NISM Certifications · NISM-Series-VII: Securities Operations and Risk Management · Clearing Process
A clearing member fails to meet its pay-in obligation of funds on settlement day. Which sequence best reflects the typical action of the clearing corporation?
The clearing corporation first uses the defaulting member's own collateral and deposits, then moves through the default waterfall resources, and can also disable the member from trading. It does not cancel other members' trades or ignore the shortfall.
- AIt ignores the shortfall until the next settlement cycle
- BIt cancels the trades of all other members to rebalance
- CIt may use the defaulter's collateral and deposits first, then the resources in the default waterfall, and may also stop the member from further tradingCorrect
- DIt immediately asks the investors of the defaulting member to pay the shortfall directly to the exchange
Explanation
On a pay-in default, the clearing corporation can liquidate the member's margins and collateral, and then draw on further layers of the default waterfall, while also disabling the member. Other members' trades are not cancelled, and the shortfall is not ignored or simply passed to the member's investors.
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