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NISM Certifications · NISM-Series-VII: Securities Operations and Risk Management · Market Participants in the Securities Market

A custodian-confirmed institutional trade is executed by a broker, but the client is a foreign portfolio investor whose custodian is a clearing member. The broker is a trading member only and not a clearing member. Which statement correctly describes how the trade is settled?

The trade is settled through a clearing member, with the custodian confirming the institutional trade so that it is cleared and settled via the clearing corporation. A trading member need not be a clearing member, and trades do not settle bilaterally or directly through the exchange.

  1. AThe trading member must itself be a clearing member, otherwise it cannot trade
  2. BThe trade is settled by the exchange directly with the FPI
  3. CThe trade is settled through the clearing member, with the custodian confirming the trade for settlement through the clearing corporationCorrect
  4. DThe trade is settled outside the clearing corporation bilaterally between broker and FPI

Explanation

Trading members who are not clearing members route settlement through a clearing member, and for institutional trades the custodian confirms the trade and settles it. The exchange does not settle directly with clients, and trades are not bilateral.

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