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

Which of the following is a typical purpose of collecting initial margin from clearing members in the derivatives segment?

Initial margin is collected to cover potential losses from adverse price moves during the time required to close out a defaulting member's positions. It acts as a risk buffer for the clearing corporation, and is not a listing fee, volume reward or tax payment.

  1. ATo cover potential losses from adverse price movements over the time needed to close out a defaulter's positionsCorrect
  2. BTo pay the exchange's annual listing fees
  3. CTo reward members for high trading volumes
  4. DTo offset the investor's tax liability on gains

Explanation

Initial margin, based on risk models such as VaR-type measures, is collected upfront to cover potential loss during the period needed to liquidate a defaulter's positions. It is not a fee, reward or tax payment.

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