Chapter 10: Code of Conduct & Investor Protection Measures
NISM Series I — Currency Derivatives | ~11% weightage | ~73 questions
What this chapter is about
Same philosophy as Series VIII CH10 but with currency-specific additions — URDD (Uniform Risk Disclosure Documents), specific complaint categories, ODR (Online Dispute Resolution) timelines, and AML risk classification. The code of conduct questions are almost always scenario-based: "What did the broker do wrong?" The answer is almost always one of three things — guaranteed a client against losses, advertised without exchange permission, or failed to issue a contract note promptly.
Broker code of conduct — the three violations that always appear
1. Guaranteeing losses: No trading member or associated person shall guarantee a client against a loss in any transaction. This appears in virtually every exam. The moment you see "guaranteed against losses" in a scenario — it's a violation.
2. Advertising without permission: A broker shall NOT advertise publicly unless permitted by the exchange. Not SEBI, not CRISIL — the EXCHANGE gives permission.
3. Contract notes: Must be issued WITHOUT DELAY to clients AND clients of sub-brokers in the FORMAT SPECIFIED BY THE EXCHANGE.
KYC and client documentation
KYC: Know Your Client. Mandatory before onboarding. KYC data uploaded to KRA (KYC Registration Agency) system after completion.
Power of Attorney: OPTIONAL — cannot be insisted upon by the broker or broker-depository participant for opening accounts.
Member-Client Agreement: Must be signed. Defines rights and obligations.
Sub-broker tripartite agreement: Three-party agreement between broker, sub-broker, AND client. NOT bipartite (two-party). Common trap — "sub-broker signs bipartite agreement with client" → FALSE, it's tripartite.
Risk disclosure — URDD
URDD (Uniform Risk Disclosure Documents): A single standardised risk disclosure document for ALL segments/exchanges detailing risks of dealing in securities markets. Signed by client at registration.
Pro account rules
Orders in 'Pro Account' (proprietary trading) can be placed only from ONE location approved by the exchange. For multiple locations: must request exchange permission with reasons stated. Exchange decides case-by-case.
Brokerage and transaction costs
Maximum brokerage:
- Futures: 2.5% of contract value (exclusive of statutory levies)
- Options: 2.5% of premium OR Rs 100 per lot, whichever is HIGHER
Stamp duty: Collected by Clearing Corporation from members.
AML risk classification: As per SEBI Master Circular on AML:
- Low risk: Respectable social/financial standing, satisfactory dealings
- Medium risk: Indulge in speculative transactions IN EXCESS of known sources of income
- High risk: History of default, financial status suspect
Investor grievances — what exchanges can and cannot handle
Exchanges CAN handle:
- Non-receipt of funds or securities
- Non-receipt of documents (contract notes, account statements, bills)
- Unauthorized transactions in client account
- Squaring up of positions without client consent
- Excess brokerage charged
- Closing out client positions without prior notice
- Service-related issues (delays, branch closure, technological issues)
- Deficiency in services resulting in financial loss
Exchanges CANNOT handle:
- Claims for notional loss or opportunity loss
- Complaints in arbitration proceedings (already sub-judice)
- Claims for mental agony/harassment expenses
- Claims of sub-brokers/authorized persons for PRIVATE commercial dealings with TM
- Transactions not executed on the exchange
- Loan/financing transactions
Arbitration process
Nature: Quasi-judicial process under Arbitration and Conciliation Act, 1996.
Timeline: Arbitrator passes award normally within 4 months from initial hearing.
Appeal: Aggrieved party can appeal to appellate panel. If still unsatisfied → Court of competent jurisdiction under Section 34 of the Arbitration Act. Cannot go to SEBI, cannot go back to exchange.
ODR (Online Dispute Resolution) — new framework
SEBI introduced ODR for faster dispute resolution in securities market:
Key timelines:
- ODR institution must appoint arbitrator(s) within 5 calendar days of receiving application + fees
- After arbitral award, losing party must submit intention to challenge (under Section 34) within 7 calendar days in the ODR Portal
Investor Protection Fund (IPF)
Established by stock exchanges under Central Government notification. Purpose: protect interests of clients of trading members who have been declared defaulters or expelled. Covers LEGITIMATE investment claims that are NOT speculative in nature.
Separate from Trade Guarantee Fund (TGF) which guarantees settlement of bonafide transactions.
Governing Council for currency futures
- Separate Governing Council for currency futures segment
- Representation of trading/clearing members shall NOT EXCEED 25%
- Public representatives can overlap with cash/equity derivatives council (up to 50% overlap)
- No trading/clearing member can simultaneously sit on BOTH the currency and equity/cash derivatives Governing Council
Real market example
Mr. Rajesh, a broker, calls his client Mrs. Sharma and says: "I've identified a sure-shot USDINR trade. I guarantee you won't lose money." He also puts out a Facebook advertisement for his brokerage services without informing the exchange.
Violations:
- Guaranteed against losses → Code of conduct violation
- Advertised without exchange permission → Code of conduct violation
What he should have done: Shared the trade idea, clearly disclosed all risks involved, and sought exchange approval before any public advertisement.
Trap Alert
Trap 1: "Sub-broker signs bipartite agreement with client" — FALSE Sub-broker signs TRIPARTITE agreement — broker + sub-broker + client. Three parties.
Trap 2: "Power of attorney is mandatory for account opening" — FALSE POA is OPTIONAL and cannot be insisted upon.
Trap 3: "Unsatisfied with arbitration → appeal to SEBI" — FALSE Go to court of competent jurisdiction under Section 34. SEBI is not the appeal authority.
Trap 4: "Exchange can handle notional loss complaints" — FALSE Notional losses, opportunity losses, mental agony — all excluded.
Trap 5: "Pro account orders from any terminal freely" — FALSE One exchange-approved location by default; exchange permission needed for multiple.
Trap 6: "Medium risk AML clients = default history" — FALSE Medium risk = speculative transactions IN EXCESS of known income. High risk = default history.
Trap 7: "ODR arbitrator appointment within 7 days" — FALSE Appointment = 5 calendar days. The 7-day rule is for challenging the award in the ODR portal.
Trap 8: "Governing council TM representation ≤ 50%" — FALSE For currency segment: TM representation ≤ 25% (more restrictive than some other segments).
Must-remember rules
- Guarantee against losses = prohibited (always)
- Advertise only with exchange permission
- Contract note: promptly, exchange format, to all clients + sub-broker clients
- Sub-broker = tripartite agreement (not bipartite)
- Power of attorney = optional, cannot be insisted
- URDD = uniform risk disclosure for all segments
- AML: low/medium/high risk based on client conduct
- Exchange handles: unauthorized trades, non-receipt, excess brokerage, service issues
- Exchange cannot handle: notional loss, arbitration matters, harassment claims
- Arbitration award: within 4 months of first hearing
- Unsatisfied with award: court under Section 34 (not SEBI)
- ODR: arbitrator appointed in 5 days | challenge in 7 days
- IPF: covers clients of defaulted/expelled members
- Governing Council: TM ≤ 25% | no TM on both currency + equity council simultaneously
Weightage note
~11% = ~73 questions. Code of conduct violations (guarantee, advertising) appear 3-4 times per exam. Complaint types (can/cannot exchange handle) appear 2-3 times. Arbitration process and appeal appears 2-3 times. ODR timelines (5 days, 7 days) appear 1-2 times. Contract note and KYC rules appear 2-3 times.
Quick revision — 60 second scan
- Never guarantee losses | Advertise only with exchange permission
- Contract notes: promptly, exchange format
- Sub-broker: tripartite (3 parties) | POA: optional
- Exchange handles: unauthorized trades, non-receipt, excess brokerage
- Exchange cannot: notional loss, arbitration matters
- Arbitration: award within 4 months | appeal to court (Section 34)
- ODR: arbitrator in 5 days | challenge intent in 7 days
- AML: medium = speculative excess income | high = default history
- TM on Governing Council: ≤25% (currency segment)
- IPF: covers clients of defaulted/expelled TMs