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

A client with a margin shortfall fails to deposit the required margin by the deadline. Which action is consistent with sound risk management by the broker?

The broker should levy the penalty prescribed by exchange rules and, where the client agreement permits, reduce or square off the client's positions. Ignoring, waiving or falsely reporting the shortfall, or increasing exposure, would weaken risk control and breach rules.

  1. AIgnore the shortfall since the client is long-standing
  2. BWaive the shortfall and report it as margin collected
  3. CLevy penalty as per exchange rules and consider squaring off positions per the client agreementCorrect
  4. DIncrease the client's exposure limit to recover losses

Explanation

Shortfall in margin attracts penalty under exchange rules, and the broker may reduce or square off positions as permitted by the client agreement. Waiving or reporting a shortfall as collected is a violation, and increasing exposure raises risk.

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