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

As part of a broker's risk management, which of the following is a correct reason for a trading member to set client-wise exposure limits in its risk management system?

Client-wise exposure limits are set so that a client's positions stay within the margin deposited and the client's financial capacity. This limits the broker's credit risk from client default. The limits do not equalise quantities, determine brokerage or replace margin collection.

  1. ATo make sure that every client trades the same quantity of shares
  2. BTo restrict client positions to a level supported by the margin and financial capacity of that clientCorrect
  3. CTo ensure the exchange fixes the client's brokerage
  4. DTo remove the need for margin collection

Explanation

Exposure limits link the client's permissible trading size to margin deposited and financial capacity, so that losses do not exceed what the client can fund. They do not equalise quantities, set brokerage or replace margins.

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