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

A client of a broker fails to pay the margin shortfall on the due date. What action is the broker permitted to take under the risk management framework?

The broker may levy a penalty for the shortfall and, as per its disclosed risk management policy, may reduce or square off the client's positions. Ignoring the shortfall or increasing exposure would raise risk and conflict with the broker's obligation to collect margins.

  1. AIgnore the shortfall as it is the exchange's concern
  2. BImpose penalty only after the end of the financial year
  3. CIncrease the client's exposure limits to recover losses
  4. DLevy penalty as per the rules and consider squaring off positions as per the risk policyCorrect

Explanation

Brokers must collect margins and may charge penalties for shortfalls, and can reduce or square off positions under their risk management policy communicated to the client. Increasing exposure would raise risk, and ignoring the shortfall breaches obligations.

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