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

In the context of risk management at a stock broker, what is the primary purpose of a Risk Management System (RMS) applying a 'trading limit' to a client?

A trading limit restricts a client's exposure to what the margin and collateral held with the broker can support. It controls the broker's credit and default risk. It has nothing to do with brokerage rates, settlement dates or dividend entitlement.

  1. ATo restrict the client's exposure to a level supported by the margin and collateral heldCorrect
  2. BTo fix the brokerage rate charged to the client
  3. CTo decide the settlement date of the client's trades
  4. DTo determine the dividend entitlement of the client

Explanation

A trading or exposure limit caps the positions a client can take based on the margins and collateral deposited with the broker. It controls credit and default risk. Brokerage rates, settlement dates and dividend entitlement are unrelated to the limit.

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