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

A clearing member has a net delivery obligation in a security but fails to deliver on the pay-in day. Under the usual exchange process for such a shortage in the normal rolling segment, how is the shortage generally handled?

The shortage is closed out through an auction. The exchange conducts an auction for the undelivered securities to deliver to the buyer, and if the auction fails, the trade is closed out at a prescribed price and the buyer receives funds as compensation.

  1. AThe buyer's trade is cancelled and no payment is made to the seller
  2. BThe shortage is closed out through the auction process, and the buyer is compensated from the auction or at close-out priceCorrect
  3. CThe clearing corporation delays the pay-out of all members until the seller delivers
  4. DThe buyer is required to deliver the securities instead

Explanation

Short deliveries are put through auction on the exchange, where other participants offer to sell. If auction fails, the trade is closed out at a price fixed under the rules, typically the higher of specified reference prices, and the buyer is credited. Cancelling trades or holding up all members is not the process.

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