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NISM Certifications · NISM-Series-VI: Depository Operations · Special Services - Pledge and Hypothecation

A pledgee bank wants to enforce its security after the borrower defaults on a loan secured by a depository pledge. Which action does the pledgee take?

The pledgee invokes the pledge through its DP. Invocation transfers the pledged securities from the pledgor's account to the pledgee's account after default, whereas closure is the process used when the loan is repaid and the securities are released.

  1. AInvoke the pledge through its DPCorrect
  2. BClose the pledge by instructing the borrower's DP
  3. CRequest the issuer to cancel the shares
  4. DAsk the clearing corporation to freeze the pledgor's account

Explanation

On default, the pledgee gives an invocation instruction via its DP, and the pledged securities are moved to the pledgee's account (or sold as agreed). Closure is used when the loan is repaid and securities are released to the pledgor.

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