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

Clearing member Alpha has a net obligation to deliver 1,000 shares of a security on pay-in day, but the securities are not delivered by the pay-in deadline. Which sequence correctly describes how the clearing corporation typically handles this shortage in the normal segment?

The clearing corporation auctions the shortfall quantity in the market, and if the auction fails it closes out the obligation at a prescribed price, compensating the buyer. The defaulting selling member bears the auction costs and penalties; trades are not simply voided or left pending.

  1. AThe pay-out to the buying member is cancelled and the trade is declared void
  2. BThe shortfall is auctioned in the market, or closed out at a defined price if the auction fails, and the defaulting member bears the costs and penaltyCorrect
  3. CThe buying member is asked to wait until the selling member delivers at any later date
  4. DThe depository debits the selling client's account automatically with an equal quantity from other investors

Explanation

For short deliveries, the exchange conducts an auction for the shortfall quantity to buy in the securities. If the auction cannot be completed, the buyer is compensated through close-out at a prescribed price. The defaulting seller bears the cost and penalties. Cancelling trades, indefinite waiting, or debiting others' accounts is not the process.

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