NISM Series I · Unit 7 of 10 · about 10% of the paper
Clearing, settlement and risk management: NISM Series I notes and practice questions
Margins, daily settlement and the guarantee of the clearing corporation.
What to know in Unit 7
- Margin types.
- Daily and final settlement.
- Clearing corporation.
Key terms, examples and exam traps
Clearing corporation
The clearing corporation acts as the counterparty to every trade, guaranteeing its performance.
Example. The buyer and seller each deal with the clearing corporation.
Exam trap. This statement is false: Buyers and sellers deal directly with each other.
Initial margin
Initial margin is collected up front to cover the potential loss on a position over a short period.
Example. A client deposits margin before taking a position.
Exam trap. This statement is false: Initial margin is returned immediately.
SPAN margin
SPAN margin is computed by a risk-based method that estimates the worst loss across scenarios for the portfolio.
Example. The system calculates margin for combined positions.
Exam trap. This statement is false: SPAN margin is a fixed percentage of premium.
Extreme loss margin
An additional margin is collected to cover losses beyond the normal scenario.
Example. A buffer margin is added for extreme moves.
Exam trap. This statement is false: Extreme loss margin replaces initial margin.
Mark-to-market settlement
Daily mark-to-market profits and losses are settled in cash through the clearing banks.
Example. A losing member pays the loss the next morning.
Exam trap. This statement is false: Gains and losses are carried until expiry.
Daily settlement price
The daily settlement price is based on the weighted average price of the last half hour of trading.
Example. Positions are marked at the daily settlement price.
Exam trap. This statement is false: The settlement price is the opening price.
Final settlement
At expiry open positions are settled in cash at the final settlement price and the contract ceases.
Example. A position is closed automatically at expiry.
Exam trap. This statement is false: Open positions roll over automatically.
Margin call
If margin falls below the requirement, the member must top it up promptly or face position closure.
Example. A client receives a call to add funds.
Exam trap. This statement is false: A margin call is a request to withdraw funds.
Option premium settlement
Option premiums are paid by the buyer and received by the seller on the next day after the trade.
Example. A buyer pays the premium after the trade.
Exam trap. This statement is false: Premiums are paid at expiry.
Settlement guarantee fund
A fund maintained by the clearing corporation protects the market in the event of member default.
Example. The fund helps to complete settlement in a default.
Exam trap. This statement is false: The fund pays clients' trading profits.
Position limits and risk
Position limits for members and clients help control concentration and systemic risk.
Example. A member cannot hold positions above its cap.
Exam trap. This statement is false: Limits only apply to the exchange.
Default management
In a default, the clearing corporation closes positions, uses the defaulter's margin and then other resources as per a waterfall.
Example. The defaulter's margin is used first.
Exam trap. This statement is false: The clearing corporation ignores defaults.
6 practice questions
Read each question and choose your answer before opening the free mock, which shows the correct answer and the reason.
Q1. Which statement best describes “Final settlement”?
- An exporter with a dollar receivable can sell futures or buy a put to protect against dollar depreciation.
- At expiry open positions are settled in cash at the final settlement price and the contract ceases.
- Modifying client codes after trade is restricted and subject to penalties, to prevent misuse.
- Products should match the client's needs and understanding, and mis-selling is a violation.
Q2. Which statement best describes “Position limits and risk”?
- Position limits for members and clients help control concentration and systemic risk.
- Combining an option with an underlying position, such as a short call against a long futures position, can enhance income but caps gains.
- Non-speculative business losses can be set off against other income except salary, and carried forward for eight years.
- Turnover from derivatives is computed on the basis of the absolute sum of profits and losses, with audit rules based on thresholds.
Q3. Which term is described here? If margin falls below the requirement, the member must top it up promptly or face position closure.
- Margin call
- Put-call parity
- Forward premium and discount
- Factors affecting premium
Q4. Which term is described here? The daily settlement price is based on the weighted average price of the last half hour of trading.
- Base and quote currency
- Daily settlement price
- Exchange rate
- Long put payoff
Q5. Which term is described here? Initial margin is collected up front to cover the potential loss on a position over a short period.
- Initial margin
- Other pairs
- Cash settlement of options
- Underlying exposure
Q6. Which term is described here? Daily mark-to-market profits and losses are settled in cash through the clearing banks.
- Tick size and value
- Mark-to-market settlement
- Transaction costs
- Long straddle
Frequently asked questions
How much of NISM Series I comes from Unit 7?
Unit 7 (Clearing, settlement and risk management) usually carries about 10% of the questions. The whole exam has 100 questions and the pass mark is 60%.
What should I study in NISM Series I Unit 7?
Margin types. Daily and final settlement. Clearing corporation.
Are these NISM Series I practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
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