NISM Certifications · NISM-Series-VI: Depository Operations · Special Services - Pledge and Hypothecation
A lender invokes a pledge on 1,000 shares because the borrower defaulted. Which statement correctly describes what happens in the depository system on invocation?
On default, the pledgee invokes the pledge through its DP, and the pledged shares are transferred from the pledgor's account to the pledgee's account as directed. The pledgor's signed instruction is not needed, and the depository does not sell the shares itself.
- AThe pledgee invokes through its DP, and the shares are transferred from the pledgor's account to the pledgee's account or as the pledgee directs, without pledgor's delivery instructionCorrect
- BThe shares are sold directly by the depository on the exchange
- CThe invocation requires a fresh delivery instruction slip signed by the pledgor
- DThe pledge is cancelled and the lender loses the lien
Explanation
On default, the pledgee initiates invocation through its DP. The securities are moved from the pledgor's account (pledged balance) to the pledgee's account, or as instructed, without needing the defaulting pledgor's signature. The depository does not sell the shares, and invocation preserves rather than cancels the lender's rights.
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