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NISM Certifications · NISM-Series-VII: Securities Operations and Risk Management · Other Services Provided by Brokers

Under SEBI's framework for the Margin Trading Facility, which of the following is a correct requirement for the collateral securities pledged by a client?

Collateral must be pledged by the client to the broker via the depository's pledge mechanism, with the securities held in a designated pledge account. The broker cannot hold them in its proprietary account or use them freely for its own funding, and verbal undertakings are not valid.

  1. ACollateral securities are kept by the broker in its own proprietary demat account
  2. BCollateral is pledged by the client to the broker through the depository pledge mechanism, with the securities held in a separate pledge accountCorrect
  3. CCollateral can be re-pledged freely by the broker to raise funds for itself without any limits
  4. DCollateral is retained by the client and only a verbal undertaking is given to the broker

Explanation

Under current SEBI norms, securities given as collateral for MTF are pledged through the depository system using the pledge mechanism with a margin pledge, so the client retains beneficial ownership. Holding them in the broker's proprietary account or re-using them for the broker's own funding is not permitted. A verbal undertaking provides no valid security.

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