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

An investor buys shares through a broker who is a trading member only, not a clearing member. Which statement correctly describes how the trade gets cleared and settled?

A trading member that is not a clearing member has its trades cleared and settled through a clearing member it is associated with. That clearing member carries the funds and securities obligations to the clearing corporation. Investors do not settle with the exchange, and depositories only move securities on instruction.

  1. AThe trading member settles directly with the clearing corporation without any clearing member
  2. BThe trade is settled by the investor directly with the stock exchange
  3. CThe trade is cleared and settled through a clearing member with whom the trading member is associated, who has obligations to the clearing corporationCorrect
  4. DThe trade is settled by the depository on behalf of the trading member

Explanation

A trading member who is not a clearing member must route settlement through a clearing member (professional or custodial arrangement). The clearing member is responsible to the clearing corporation for funds and securities obligations. Investors do not settle directly with the exchange, and depositories only transfer securities on instruction.

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