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

A client sold shares on the exchange but failed to deliver them by the pay-in deadline, so the selling broker's obligation was short. What process does the exchange use to settle the buying side's delivery obligation in this situation?

The exchange conducts an auction to buy the short shares for the buyer, and if the auction cannot procure them the trade is closed out at the prescribed close-out price. Depositories never take shares from other investors' accounts to cover a short delivery.

  1. ACancellation of the buyer's demat account
  2. BAuction, or close-out where the auction is not possible or the shares remain unavailableCorrect
  3. CRematerialisation of the shares at the buyer's cost
  4. DTransfer of the shares by the depository from another investor's account

Explanation

When a seller fails to deliver, the exchange conducts an auction to buy the shares for the buyer's delivery. If the auction cannot procure them, the trade is closed out at a determined price. Depositories do not move shares from other investors' accounts and do not cancel the buyer's account.

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