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NISM Certifications · NISM-Series-VI: Depository Operations · Functions of Depository Participant - Trading and Settlement

A client bought shares, and the broker failed to deliver the purchased securities on the pay-out day because the selling member short-delivered. What is the usual way the clearing corporation handles the shortage for the buyer?

The clearing corporation auctions the short-delivered securities to obtain them for the buyer. If the auction does not succeed, the transaction is closed out at the prescribed close-out price and the buyer is paid in cash. The trade is not simply cancelled, and the DP has no obligation to buy shares.

  1. AThe shortage is put through an auction; if the auction fails, the buyer is paid close-out at the specified priceCorrect
  2. BThe buyer's trade is cancelled at once and no payment is made
  3. CThe buyer is forced to accept physical share certificates
  4. DThe buyer's DP must buy the shares from the market

Explanation

For short delivery, the clearing corporation conducts an auction to buy the securities for the buyer. If the auction cannot be completed, the trade is closed out at the prescribed price and the buyer is compensated in cash. Cancellation without compensation and DP purchase are not the process.

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