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

In the context of a stock broker's risk management, what is the main purpose of collecting upfront margin from a client before accepting a fresh trade?

Upfront margin is collected to cover potential losses arising from adverse price movements before the trade is settled. It protects the broker and the clearing system against client default. It is not a fee, brokerage prepayment, or a way to avoid position reporting.

  1. ATo cover potential losses from adverse price movements before settlementCorrect
  2. BTo pay the exchange's transaction charges on behalf of the client
  3. CTo fund the broker's brokerage income in advance
  4. DTo avoid the need to report client positions to the exchange

Explanation

Margins act as a security against the risk that a client defaults after prices move against the position. They are not a fee, brokerage prepayment, or a substitute for reporting positions. Hence the first option is correct.

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