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

A trading member's client buys shares worth Rs 10,00,000 in the cash segment on a T+1 rolling settlement basis. The client has not paid by the pay-in time, and the broker has already met the pay-in obligation to the clearing corporation. Which statement best describes the broker's position and appropriate action?

The broker bears the default risk, because the clearing corporation's guarantee covers only member obligations, not client payments to the broker. Having funded the pay-in, the broker can recover from the client's margin or by selling securities, according to its risk policy and client agreement.

  1. AThe broker has no exposure because the clearing corporation guarantees the client's payment to the broker
  2. BThe broker bears the client default risk and may recover from margin or sell the securities held, as per its risk management policy and client agreementCorrect
  3. CThe broker must cancel the trade with the exchange the next day
  4. DThe broker must ask the depository to freeze the client's bank account

Explanation

The clearing corporation guarantees settlement between members, not between broker and client. If a client defaults, the broker has already funded the pay-in and bears the risk, so it recovers using client margins or by liquidating holdings under the agreement. Trades cannot simply be cancelled and a depository cannot freeze bank accounts.

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