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NISM Certifications · NISM-Series-VII: Securities Operations and Risk Management · Other Services Provided by Brokers

A stock broker wishes to offer margin trading facility (MTF) to clients. Which statement is correct about the funding under MTF?

Under margin trading facility, the client pays the initial margin upfront and the broker funds the balance from its own funds or permitted borrowings. The purchased securities are held as collateral. Using other clients' securities without consent is not allowed.

  1. AThe broker may fund the client only from its own funds or borrowings, and the client must pay the required initial margin upfrontCorrect
  2. BThe client need not pay any margin as the broker funds the full purchase
  3. COnly the clearing corporation can fund the client's purchase
  4. DThe broker can fund the client by using other clients' fully paid securities without consent

Explanation

Under MTF, the client brings in an upfront margin and the broker funds the balance from own resources or permitted borrowings. Stocks purchased are held as collateral and kept with the clearing corporation by way of pledge. Using other clients' securities without consent is prohibited.

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