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

A clearing member's client defaults on a pay-in obligation for a purchase. Which statement correctly reflects the operational position in the clearing process?

The clearing member stays liable to the clearing corporation for its client's unmet pay-in obligation and must fund it, then recover the amount from the client, for example by liquidating the client's collateral. The clearing corporation has no direct dealings with the client.

  1. AThe clearing corporation must cancel the trade and the seller bears the loss
  2. BThe clearing member remains responsible to the clearing corporation for the client's obligation and may recover it from the clientCorrect
  3. CThe stock exchange directly invoices the client's depository participant
  4. DThe obligation is automatically waived if the client's margin is above 50%

Explanation

The clearing corporation deals only with its clearing members. The member is liable for the obligations of its clients, including funds pay-in, and then pursues recovery from the client, including by liquidating collateral. Trades are not cancelled nor obligations waived by margin levels.

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