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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 order in the cash or derivatives segment?

Upfront margin is collected to cover potential losses from adverse price movements and thereby reduce the risk that the client defaults on the obligation. It acts as a financial buffer for the broker and the clearing system, and has nothing to do with brokerage, profit guarantees or taxes.

  1. ATo reduce the brokerage payable by the client
  2. BTo cover potential losses from adverse price movements and reduce default riskCorrect
  3. CTo guarantee a profit to the client on the trade
  4. DTo avoid payment of securities transaction tax

Explanation

Margins are collected in advance so that the broker holds a buffer against adverse price movements and client default. They do not affect brokerage, do not guarantee profit and have no bearing on STT. The other options describe functions margins do not serve.

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