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NISM Series XIII module
Chapter reading
S4_CH8
Workbook pages 252-268
Concept lesson
This is the learning layer for Regulatory Framework for Exchange Traded Interest Rate Derivatives: bond math, yield logic, formulas, delivery rules, traps and quick revision. The practice buttons sit on the side only after the concept has landed.
IRD regulation is JOINTLY RBI + SEBI — same dual structure as currency derivatives (Series I). RBI has overall authority; SEBI regulates exchange-traded products. The chapter also covers who can participate, what positions are permitted for different entity types, and FPI position limits.
**RBI:** Overall authority for interest rate derivatives in India (under FEMA and RBI Act). Permission required from RBI for all IR derivatives.
**SEBI:** Regulates exchange-traded interest rate derivatives. Position limits for exchange-traded IRDs set by SEBI.
**Within SEBI regulations:** Exchanges and Clearing Corporations frame their own operational procedures under their bye-laws — they can tighten but cannot dilute SEBI's rules.
**Similar to:** Currency derivatives in terms of dual RBI+SEBI regulation structure.
**Operational procedures:** Framed by EXCHANGES AND CLEARING CORPORATIONS within RBI/SEBI regulations. NOT directly by RBI or SEBI.
**Who can participate:** - Residents (individuals, corporates, banks) - Non-Residents - Retail participants - Non-retail participants
**Bank participation:** - Allowed for HEDGING own interest rate risk - Allowed for TRADING for own account - NOT allowed to trade on behalf of clients
**Insurance companies:** LONG HEDGE only (cannot short sell / take short positions for speculation)
**Non-residents and FPIs:** - Short positions allowed ONLY for HEDGING - NOT for speculation (no naked short selling)
**Primary Dealers:** - Can short sell (naked) but must obtain prior permission from RBI first
**FPI collective limit in IRF:** Net long position up to Rs 50 billion total across all FPIs.
1. Exchanges (like NSE, BSE) 2. Over-the-Counter (OTC) market 3. Electronic Trading Platforms (ETPs) — RBI regulated
**SCORES = Securities and Exchange Board of India Complaint Redress System**
All SEBI-registered entities must resolve investor complaints received via SCORES within **21 calendar days** of receipt.
If unsatisfied: complaint escalated to first-level review.
The code of conduct for securities brokers is prescribed under Schedule II of SEBI (Stock Brokers) Regulations, 1992.
**SCRA (Securities Contracts Regulation Act) 1956:** Governs trading of securities. Derivatives are included in the definition of securities. NOT included in SCRA definition of securities: **Unit Linked Insurance Policy (ULIP)** — it is an insurance product regulated by IRDAI.
**Trap 1: "SEBI sets operational procedures for IRD trading" — PARTIALLY FALSE** Exchanges and CCs set operational procedures within SEBI's framework.
**Trap 2: "Banks can trade IRF on behalf of clients" — FALSE** Banks: own account only (hedging + trading). NOT for clients.
**Trap 3: "Non-residents can short sell IRFs freely" — FALSE** Non-residents and FPIs: short position for HEDGING ONLY.
**Trap 4: "PDs don't need prior RBI permission to short sell" — FALSE** Primary Dealers need prior permission from RBI for naked short sell.
**Trap 5: "ULIP is a security under SCRA" — FALSE** ULIP is excluded from SCRA definition. It is regulated by IRDAI.
**Trap 6: "SCORES complaint resolution = 30 days" — FALSE** SCORES = 21 calendar days.