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NISM Certifications · NISM-Series-VII: Securities Operations and Risk Management · Clearing Process

A trading member's client fails to pay the pay-in amount for shares bought. Under the usual operational practice, what can the broker do first to protect itself and meet its own pay-in obligation to the clearing corporation?

The broker should meet the pay-in from its own resources to avoid its own default, then recover the amount from the client, adjusting against margin or securities held in accordance with rules. The broker stays liable to the clearing corporation regardless of the client's failure.

  1. AIgnore the shortfall because the clearing corporation always funds it
  2. BMeet the pay-in from its own funds and recover from the client, using the client's margin or securities held as per rulesCorrect
  3. CCancel the trade in the exchange system after settlement
  4. DAsk the depository to reverse the credit to other clients

Explanation

The broker remains liable to the clearing corporation for the pay-in and must fund it, then recover from the defaulting client, adjusting against margins or securities lawfully held. The clearing corporation does not pay on the broker's behalf, and trades cannot be cancelled after settlement.

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