Chapter 10: Code of Conduct and Investor Protection Measures **NISM Series IV — Interest Rate Derivatives | ~5% weightage | ~20 questions**

What this chapter is about

Same framework as Series I CH10 and Series VIII CH10. Code of conduct, grievance redressal, arbitration, ODR, investor protection fund. IRD-specific: SCORES 21-day timeline, diversification definition, and KRA for KYC uploads. Near-identical to currency derivatives conduct chapter — know the same three violations (guarantee losses, advertise without permission, contract notes) plus the same arbitration and ODR timeline rules.

Three core code violations (same across all NISM exams)

1. **Guaranteeing losses:** No trading member or associated person shall guarantee a client against a loss. STRICTLY PROHIBITED. Appears in virtually every exam.

2. **Advertising without exchange permission:** Broker must obtain EXCHANGE's approval before advertising publicly. Cannot advertise just because license held for 5 or 10 years.

3. **Contract notes:** Must be issued WITHOUT DELAY in the FORMAT SPECIFIED BY THE EXCHANGE.

KYC and client documentation

**KYC Registration Agency (KRA):** After completing KYC, broker must upload KYC information to the KRA system.

**Power of Attorney:** OPTIONAL. Cannot be insisted upon by broker for account opening.

**Rights and Obligations document:** Given to clients explaining their rights and obligations.

**Risk Disclosure Document (RDD):** Provides crucial information about risks of trading in equities and derivatives on a stock exchange.

SCORES — investor complaints

**SCORES = SEBI Complaint Redress System**

• 21 calendar days from date of receipt to resolve
• If unsatisfied: escalated to first-level review with designated body

Investor Grievance Redressal

**Exchanges handle:** Service complaints, unauthorized trades, non-receipt of funds, excess brokerage charged.

**Exchanges CANNOT handle:** - Notional loss or opportunity loss claims - Complaints in arbitration proceedings (already sub-judice) - Claims for mental agony/harassment expenses - Claims of authorized persons for private commercial dealings

Arbitration

**Nature:** Quasi-judicial process (not fully judicial, not informal).

**Timeline:** Arbitrator passes award normally within **4 months** from first hearing.

**Appeal:** Appellate panel of arbitrators. If still unsatisfied → Court of competent jurisdiction under **Section 34** of Arbitration and Conciliation Act, 1996.

**Cannot:** Go to SEBI, go back to exchange.

ODR (Online Dispute Resolution)

• Arbitrator appointed within **5 calendar days** of receiving application + fees
• After award: losing party must submit intention to challenge under Section 34 within **7 calendar days** in ODR Portal

Investor Protection Fund (IPF)

Created by exchanges. Covers legitimate investment claims (non-speculative) of clients of DEFAULTED or EXPELLED trading members. Does NOT cover speculative claims. Only clients are eligible — not brokers themselves.

Diversification

**Definition:** Investing in a variety of assets to MINIMIZE MARKET RISK (not eliminate, not insure against). Reduces unsystematic risk, partially reduces market risk.

Settlement Risk mitigation

**Delivery versus Payment (DvP):** Simultaneous exchange of cash and securities. If one party fails, other withholds. Eliminates settlement risk.

Trap Alert

**Trap 1: "Guarantee losses = violation only if client loses" — FALSE** Guaranteeing against losses is ALWAYS a violation, regardless of outcome.

**Trap 2: "Broker can advertise after 5 years of licensing" — FALSE** No time-based exception. Always need exchange permission.

**Trap 3: "SCORES = 30 days" — FALSE** SCORES = **21 calendar days**.

**Trap 4: "Unsatisfied with arbitration → appeal to SEBI" — FALSE** Appeal to Court under Section 34 (not SEBI, not exchange).

**Trap 5: "Diversification eliminates market risk" — FALSE** Diversification MINIMIZES market risk (not eliminates). Eliminates unsystematic risk.

**Trap 6: "IPF covers brokers who have suffered losses" — FALSE** IPF covers CLIENTS of defaulted members only. Not brokers.

**Trap 7: "ODR arbitrator appointment = 7 days" — FALSE** Appointment = 5 days | Challenge intent = 7 days

Must-remember rules

• Three violations: guarantee losses | advertise without permission | wrong/late contract note
• KYC → uploaded to KRA system
• Power of attorney = optional, cannot be insisted
• SCORES = 21 calendar days to respond
• Arbitration: 4 months for award | Appeal: Court Section 34
• ODR: arbitrator in 5 days | challenge intent in 7 days
• IPF: covers clients of defaulted/expelled members (non-speculative claims only)
• Diversification = minimizes market risk (not eliminates)
• DvP = eliminates settlement risk
• Exchanges cannot handle: notional loss, arbitration matters, harassment

Quick revision — 60 second scan

• Three violations: guarantee | advertise without permission | wrong/late contract note
• KYC → KRA | POA = optional
• SCORES = 21 calendar days
• Arbitration: 4 months | Court Section 34
• ODR: 5 days appoint | 7 days challenge
• IPF: clients of defaulted members, non-speculative only
• Diversification = minimize (not eliminate) market risk
• DvP = eliminates settlement risk