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

Broker A has a net pay-in obligation. Which of the following correctly describes the funds pay-in and securities pay-in for a normal-segment trade where settlement is through the clearing corporation?

Securities are delivered by the selling broker to the clearing corporation and funds are paid by the buying broker to it, and then paid out to the counterparties. This works because the clearing corporation becomes the counterparty to each trade through novation.

  1. ASecurities are moved from the seller's broker's pool account to the clearing corporation's account, and funds from the buying broker's clearing bank account to the clearing corporationCorrect
  2. BSecurities move directly from seller to buyer, bypassing the clearing corporation
  3. CFunds move from buyer to seller directly while securities go through the clearing corporation
  4. DBoth funds and securities are settled only on the trade day by the exchange trading system

Explanation

The clearing corporation acts as counterparty to every trade via novation. Sellers' brokers deliver securities to it and buying brokers pay funds to it; it then pays out securities and funds to the respective members. Direct settlement between parties bypasses novation and is incorrect.

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