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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 trade?

The main purpose of collecting upfront margin is to reduce the risk of client default. The margin acts as collateral that can absorb losses from adverse price movements if the client fails to meet settlement obligations, protecting the broker and the market.

  1. ATo generate additional interest income for the broker
  2. BTo reduce the risk of client default on settlement obligationsCorrect
  3. CTo avoid paying exchange transaction charges
  4. DTo eliminate the need for a clearing corporation

Explanation

Margins are collected upfront so that the broker holds collateral against potential adverse price movements. If the client fails to pay or deliver, the margin absorbs the loss. It is a risk-control tool, not an income source or a way to avoid exchange charges or the clearing corporation.

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