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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 primary purpose of collecting upfront margin from a client before accepting a fresh trade order?

Upfront margin is collected to limit the broker's exposure to client default and adverse price movement between trade and settlement. It works as collateral that can absorb losses, so the broker and clearing system are protected if the client fails to meet obligations.

  1. ATo reduce brokerage payable to the exchange
  2. BTo limit the broker's exposure to client default and price movement before settlementCorrect
  3. CTo guarantee profit to the client on the trade
  4. DTo avoid payment of securities transaction tax

Explanation

Margins act as a collateral cushion. If the client fails to pay or the price moves adversely, the broker has funds in hand to cover the loss. The other options have nothing to do with the purpose of margining.

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