Equity Derivatives
CH8 · Legal & Regulatory Environment
SEBI board = appointed by Central Government
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Theme 8
Study SEBI/RBI jurisdiction, accounting, taxation, KYC, grievance, code of conduct and investor protection.
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Equity Derivatives
SEBI board = appointed by Central Government
Equity Derivatives
F&O income = Business Income (NOT capital gains)
Equity Derivatives
RDD (Risk Disclosure Document) = must be signed at registration, BEFORE trading
Currency Derivatives
SEBI-RBI framework, FEMA, AD Category I, FPIs
Currency Derivatives
ICAI accounting, taxation, carry forward, hedge accounting
Currency Derivatives
KYC, code of conduct, grievance, ODR, investor protection
Interest Rate Derivatives
RBI-SEBI framework, participants, FPI limits, SCORES and SCRA
Interest Rate Derivatives
AS 30, fair value, hedge accounting, taxation and stamp duty
Interest Rate Derivatives
Code of conduct, KYC, RDD, arbitration, ODR, IPF and DvP
Detailed notes
Equity Derivatives
SEBI board = appointed by Central Government
NISM Series VIII — Equity Derivatives | 5% weightage | ~5 exam questions
Pure regulatory knowledge — acts, rules, who has authority over what, eligibility criteria for membership, and what happens when someone breaks the rules. Five questions, all definitional. No calculations. Read once, remember the key facts, score full marks.
Key legislation:
SC(R)A — Securities Contracts (Regulation) Act, 1956
SEBI Act, 1992
Key regulations for derivatives:
SEBI's powers:
Derivatives trading rules:
Stock eligibility for F&O: For a stock to be eligible for futures and options trading:
Membership eligibility — key numbers:
Penalties and suspension: A broker can be penalised or suspended if they:
Default procedure:
Stock exchange outage:
AML/CFT (Anti-Money Laundering / Combating Financing of Terrorism):
NSE has received SEBI approval for its F&O bye-laws. When NSE wants to add a new stock to F&O (say, a newly eligible mid-cap stock), it checks: 1. Does the stock's MWPL exceed ₹1,500 crores? ✓ 2. Is average daily delivery ≥ ₹10 crores? ✓ 3. Is it in the top 500 by market cap? ✓
NSE can now launch F&O on that stock without going back to SEBI for separate approval — the bye-law framework already covers it.
Trap 1: "SEBI board members are appointed by the stock exchanges" → FALSE SEBI board members are appointed by the Central Government. Stock exchanges have nothing to do with SEBI appointments.
Trap 2: "A broker registered for equity can automatically trade derivatives" → FALSE Derivatives require SEPARATE SEBI registration. An equity broker cannot trade derivatives without additional registration specifically for derivatives.
Trap 3: "Suspicious transactions are reported under SEBI Insider Trading Regulations" → FALSE Suspicious transactions are reported to FIU-IND under AML/CFT Regulations — not insider trading rules, not FEMA.
Trap 4: "Clearing Corporation needs SEBI's prior approval to transfer client positions during default" → FALSE The CC transfers positions immediately (to protect the market), then reports to SEBI. It does NOT wait for SEBI approval — that would defeat the purpose of rapid response.
Trap 5: "Stock exchange derivatives trading follows open outcry method" → FALSE All derivatives trading in India = screen-based electronic trading. SEBI mandated this. No open outcry, no kerb trading.
5% = ~5 questions. All straightforward regulatory facts. SEBI board appointment, broker registration, MWPL threshold, AML reporting, and broker suspension grounds are the five most likely topics. 30 minutes on this chapter maximum.
Equity Derivatives
F&O income = Business Income (NOT capital gains)
NISM Series VIII — Equity Derivatives | 5% weightage | ~5 exam questions
Most students dread this chapter — accounting and tax sounds complicated. But for the exam, it's actually 5 very specific, very memorisable facts. The questions are almost always the same: how do you account for option premiums, what's the STT rate, how many years can you carry forward derivative losses? Know these cold and move on.
Taxation of Derivatives — the big picture:
STT Rates — must memorise:
| Transaction | STT Rate | |------------|---------| | Sale of futures (index or stock) | 0.02% on turnover | | Sale of options (index or stock) | 0.1% on premium | | Exercise of options | 0.125% on settlement price |
The most tested: futures STT = 0.02%
Loss treatment — carry forward rules:
Accounting for options:
*For the option BUYER:*
*For the option SELLER (writer):*
Accounting for forward contracts (hedging):
Trader buys 2 lots of Nifty futures at 24,000 and sells at 24,500. Lot size = 75.
Profit = (24,500 − 24,000) × 75 × 2 = ₹75,000
This ₹75,000 is BUSINESS INCOME, taxed at applicable income tax slab (30% if he's in highest bracket = ₹22,500 tax).
STT on sale = 24,500 × 75 × 2 × 0.02% = ₹3,675 × 0.02% = ₹735
Loss scenario: If he made a ₹2 lakh loss in F&O this year. He has ₹5 lakh salary income and ₹3 lakh income from a business.
Trap 1: "F&O losses can be carried forward for 5 years" → FALSE F&O losses carry forward for 8 assessment years. Not 5, not 10. 8.
Trap 2: "F&O income is taxed as capital gains" → FALSE F&O income = BUSINESS INCOME. Capital gains applies to delivery-based equity transactions.
Trap 3: "Option seller treats premium received as a liability" → FALSE Option seller treats premium received as INCOME (credit to P&L immediately).
Trap 4: "Option buyer treats premium paid as income" → FALSE Premium paid by buyer = EXPENSE/ASSET (debit). Income comes only on favourable exercise.
Trap 5: "STT on futures is 0.1%" → FALSE STT on futures = 0.02% on turnover. 0.1% is for options premium. Don't mix these up.
Trap 6: "Forward contract premium for hedging is recognised upfront" → FALSE For hedging forwards, the premium/discount is AMORTISED over the contract life — not recognised all at once.
5% = ~5 questions. Typically 2 questions on tax/carry forward, 2 on option accounting, 1 on STT rates. All very specific facts — know the numbers exactly (8 years, 0.02%) and you score full marks.
Equity Derivatives
RDD (Risk Disclosure Document) = must be signed at registration, BEFORE trading
NISM Series VIII — Equity Derivatives | 5% weightage | ~5 exam questions
The "ethics and conduct" chapter. How should brokers behave? What complaints can investors raise? What documents must be signed? What is SCORES? Five questions, all about knowing the rules of conduct and the investor protection framework. Easy marks if you read this carefully once.
Know Your Client (KYC) — brokers must understand their client's:
Risk Disclosure Document (RDD):
Segregation of funds:
Running account settlement:
Ethical sales practices — what brokers MUST do:
Investor Grievance Redressal:
SCORES (SEBI Complaints REdress System) — SEBI's web-based centralized complaint system. Tracks complaints and their resolution status.
What complaints can exchanges take up for redressal: ✅ Non-receipt of funds or securities ✅ Non-receipt of documents (member-client agreement, contract notes, settlement accounts) ✅ Non-receipt of funds/securities kept as margin ✅ Trades executed without adequate margins ✅ Delay/non-receipt of funds ✅ Squaring up of positions without client consent ✅ Unauthorized transactions in client's account ✅ Excess brokerage charged by Trading Member/Sub-broker ✅ Unauthorized transfer of funds from commodities to other accounts
What exchanges CANNOT take up: ❌ Complaints regarding land dealings between client and broker ❌ Transactions already subject to arbitration proceedings ❌ Claims for notional losses (loss that didn't actually happen) ❌ Claims for opportunity loss
AML/CFT — Anti-Money Laundering:
No investment is risk-free:
A sales agent at a brokerage approaches a retired school teacher with no market experience. She has ₹10 lakh in savings. The agent convinces her to trade Nifty options, promising "guaranteed 20% monthly returns."
This violates multiple NISM conduct rules:
If she loses money and complains:
Trap 1: "Complaints regarding notional losses can be taken up by the exchange" → FALSE Notional losses (theoretical losses that didn't actually crystallise) are NOT covered. Only actual losses from specific violations.
Trap 2: "Complaints in arbitration proceedings can be taken up by exchange" → FALSE If a matter is already before arbitration, the exchange cannot also take it up. One forum at a time.
Trap 3: "Land dealings between client and broker can be taken up by exchange" → FALSE Completely outside the exchange's jurisdiction. Land dealings are a civil/court matter.
Trap 4: "Risk disclosure can be conveyed verbally to the client" → FALSE Must be a SIGNED DOCUMENT at the time of registration. Verbal communication is not sufficient.
Trap 5: "Client money can be used by the broker to meet his own obligations in an emergency" → FALSE NEVER. Client money is completely ring-fenced. The broker's proprietary obligations have zero claim on client funds.
Trap 6: "All types of investors should invest some portion in derivatives" → FALSE Derivatives are NOT suitable for everyone. Senior citizens, risk-averse investors, and those without understanding should NOT be pushed into derivatives.
Trap 7: "SCORES is the exchange's risk management system" → FALSE SCORES = SEBI's web-based COMPLAINT REDRESSAL system. Nothing to do with risk management.
5% = ~5 questions. Typically: 1 on SCORES, 1-2 on which complaints exchange can/cannot handle, 1 on client fund segregation, 1 on risk disclosure document. All definitional, no calculations.
Currency Derivatives
SEBI-RBI framework, FEMA, AD Category I, FPIs
NISM Series I — Currency Derivatives | ~8% weightage | ~52 questions
The biggest difference between Series I and Series VIII — currency derivatives are regulated by BOTH RBI AND SEBI jointly. Equity derivatives have only SEBI. This dual regulation creates a unique set of rules around who can trade, what committees exist, and how permissions work. The exam tests the AD Category I bank eligibility criteria obsessively — know all four conditions cold.
SEBI regulates the exchange and trading members (same as equity). RBI regulates the foreign exchange aspect — who can hold, deal in, and trade foreign exchange under FEMA.
FEMA (Foreign Exchange Management Act): Under Section 10 of FEMA, stock exchanges and clearing corporations must get RBI permission to deal in currency futures. This is unique to currency derivatives.
SEBI Act 1992: Establishes SEBI, gives it powers to regulate, investigate, penalise.
SC(R)A 1956: Securities Contracts (Regulation) Act — governs trading of securities (foundational legislation).
Committee on Fuller Capital Account Convertibility: → FIRST recommended introducing exchange-traded currency futures in India
SEBI-RBI Standing Technical Committee on Exchange Traded Currency: → Recommends product design, margin requirements, membership norms, surveillance mechanism, dissemination of market information on an ongoing basis → This is the JOINT committee — not "SEBI special committee" or "RBI internal committee"
RBI Working Group on Currency Futures: → Set up by RBI in 2007-08 following the Annual Policy Statement → Studied international experience, suggested implementation framework
Authorised Dealer Category I banks are permitted to become trading AND clearing members of currency derivatives exchanges.
All FOUR conditions must be met: 1. Minimum net worth of Rs 500 crores 2. Minimum Capital Adequacy Ratio (CRAR/CAR) of 10% 3. Net NPA must not exceed 3% 4. Net profit for last 3 years
What they can do: Trade on own account (proprietary) AND on behalf of clients.
What disqualifies them: Net NPA > 3% is the most commonly tested disqualifier.
Common trap: "Minimum networth Rs 300 crores" → FALSE. It's Rs 500 crores. "Maximum net NPA 2%" → FALSE. It's 3%.
| Participant | Can Trade? | |------------|-----------| | Residents in India (individuals) | Yes | | Companies/corporates | Yes | | NRIs | Yes | | Foreign Portfolio Investors (FPIs) | Yes | | AD Category I Banks | Yes (own + client account) | | Non-residents (other than FPIs/NRIs) | Limited |
Without underlying exposure: Residents and FPIs can take positions up to USD 100 million equivalent across all INR-based currency pairs (combined across all exchanges) without proving underlying FX exposure. Beyond this, underlying exposure must be demonstrated.
Minimum networth for a company to be eligible to become a recognised currency exchange: Rs 100 crores
RBI CAN intervene in the Exchange Traded Currency Derivatives (ETCD) segment "as and when required" to maintain orderly market conditions and reduce excessive volatility. (RBI press release 2015-16, December 2015.)
Separate membership required: Currency derivatives segment membership is SEPARATE from equity/cash segment. An equity broker cannot automatically trade currency derivatives without separate registration.
For non-bank members (individuals/corporates): Same SEBI registration process as equity segment but specifically for currency derivatives.
For OTC forward contracts (with banks), residents need to demonstrate underlying FX exposure. The forward can be booked only up to the amount AND maturity of the underlying exposure.
Example: Export order for USD 25 million with payment due in 3 months → can book OTC forward up to USD 25 million for maximum 3 months maturity.
FBIL (Financial Benchmarks India Private Limited):
Trap 1: "SEBI-RBI special committee recommends norms" — WRONG It's the "SEBI-RBI Standing Technical Committee" — not a "special committee formed by SEBI."
Trap 2: "AD Category I banks need net worth of Rs 300 crore" — FALSE Rs 500 crores minimum. This trap appears repeatedly.
Trap 3: "Currency futures regulated only by SEBI" — FALSE Both RBI AND SEBI regulate — dual regulation is the defining feature of Series I.
Trap 4: "Equity broker can trade currency derivatives without additional registration" — FALSE Separate registration required for currency derivatives segment.
Trap 5: "Fuller Capital Account Convertibility Committee = SEBI committee" — FALSE It was an independent government committee. The SEBI-RBI Standing Technical Committee is the ongoing body that recommends norms.
~8% = ~52 questions. AD Category I conditions appear in 3-4 questions per exam — sometimes as "all of the above" and sometimes testing individual conditions. The Fuller Capital Account Convertibility vs SEBI-RBI committee distinction appears 2-3 times. FEMA and dual regulation appears 2-3 times. Know every number precisely.
Currency Derivatives
ICAI accounting, taxation, carry forward, hedge accounting
NISM Series I — Currency Derivatives | ~6% weightage | ~42 questions
Almost identical to Series VIII CH9 — same tax treatment, same carry forward rules, same ICAI guidance. The key differences: currency derivatives have additional accounting standards (AS 30 for hedging), and the presumptive taxation rates are 6%/8% (same as equity F&O). Know the speculative vs non-speculative distinction cold — it's the most tested concept here.
Exchange traded currency derivatives = NON-SPECULATIVE BUSINESS INCOME
Even though physical delivery doesn't happen (cash-settled), exchange-traded currency derivatives are specifically excluded from the definition of "speculative transaction" under Section 43(5) of the Income Tax Act.
This means:
What IS speculative: A transaction settled otherwise than through actual delivery or transfer — EXCEPT derivatives on recognised exchanges. Intraday equity trading is speculative.
| Type | Carry Forward Period | Can set off against | |------|---------------------|---------------------| | Non-speculative business loss (F&O) | 8 assessment years | Non-speculative business income only | | Speculative loss (intraday equity) | 4 assessment years | Speculative income only | | Capital loss (short-term) | 8 assessment years | Capital gains only |
For small traders with turnover ≤ Rs 2 crores, can declare profit as percentage of turnover instead of calculating actual P&L:
This declared profit is treated as taxable income without requiring detailed books of accounts.
ICAI (Institute of Chartered Accountants of India) issues guidance notes on accounting for derivatives contracts. NOT SEBI, NOT RBI, NOT ICSI.
Key accounting principles:
All derivatives recognised on balance sheet at fair value — derivatives cannot remain off-balance-sheet items.
For speculative/trading derivatives:
For hedging derivatives: Three types of hedge accounting recognised: 1. Fair value hedge — hedging changes in fair value of recognised assets/liabilities or firm commitments 2. Cash flow hedge — hedging cash flow risk of future transactions or foreign currency firm commitments 3. Net investment hedge — hedging net investment in a foreign operation
Accounting heads for clients: Two separate accounting heads must be maintained: 1. Initial margin — Currency futures (the margin deposit) 2. Mark to market — Currency futures (the daily P&L)
For brought forward futures positions: Computational methodology = difference between PREVIOUS day's settlement price and CURRENT day's settlement price × contract size × number of contracts.
NOT using original trade price for brought forward positions — always prior day's settlement vs current day's settlement.
A Hyderabad exporter uses USDINR futures to hedge USD receivables. They sell 100 lots at Rs 84. By end of quarter, the position is up Rs 5 lakhs (favourable MTM). This Rs 5 lakhs is:
If instead they had a Rs 3 lakh loss:
Trap 1: "F&O loss can be set off against salary income" — FALSE F&O losses are non-speculative business losses. Cannot set off against salary. Only against other business income.
Trap 2: "F&O loss carry forward = 4 assessment years" — FALSE F&O = 8 assessment years. Speculative (intraday equity) = 4 years. Don't mix these up.
Trap 3: "All derivatives = speculative transactions" — FALSE Exchange-traded derivatives on recognised stock exchanges = NON-speculative. OTC cash-settled = potentially speculative.
Trap 4: "SEBI issues guidance notes on accounting" — FALSE ICAI issues guidance notes on accounting. SEBI issues regulations, not accounting guidance.
Trap 5: "Derivatives remain off-balance-sheet" — FALSE All derivatives must be recognised on balance sheet at fair value per ICAI guidance.
Trap 6: "Presumptive taxation = 8% for digital receipts" — FALSE Digital receipts = 6%. Cash receipts = 8%. The higher rate is for cash.
~6% = ~42 questions. Speculative vs non-speculative appears 2-3 times per exam. Carry forward period (8 years) appears 1-2 times. ICAI accounting guidance appears 1-2 times. Presumptive taxation rates appear 1-2 times. Hedge accounting types appear occasionally as harder questions.
Currency Derivatives
KYC, code of conduct, grievance, ODR, investor protection
NISM Series I — Currency Derivatives | ~11% weightage | ~73 questions
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.
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: 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.
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.
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.
Maximum brokerage:
Stamp duty: Collected by Clearing Corporation from members.
AML risk classification: As per SEBI Master Circular on AML:
Exchanges CAN handle:
Exchanges CANNOT handle:
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.
SEBI introduced ODR for faster dispute resolution in securities market:
Key timelines:
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.
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: 1. Guaranteed against losses → Code of conduct violation 2. 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 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).
~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.
Interest Rate Derivatives
RBI-SEBI framework, participants, FPI limits, SCORES and SCRA
NISM Series IV — Interest Rate Derivatives | ~5% weightage | ~20 questions
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:
Bank participation:
Insurance companies: LONG HEDGE only (cannot short sell / take short positions for speculation)
Non-residents and FPIs:
Primary Dealers:
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.
Interest Rate Derivatives
AS 30, fair value, hedge accounting, taxation and stamp duty
NISM Series IV — Interest Rate Derivatives | ~3% weightage | ~12 questions
ICAI (Institute of Chartered Accountants of India) issues guidance notes on accounting for derivative contracts under Accounting Standard 30 (AS 30).
Key accounting principles:
Three hedge accounting models (same as Series I): 1. Fair value hedge — hedging changes in fair value of recognized assets/liabilities 2. Cash flow hedge — hedging variable future cash flows 3. Net investment hedge — hedging net investment in foreign operations
For hedging transactions: Fair value changes may go to equity (through Other Comprehensive Income) instead of directly to P&L.
Non-hedging (speculative/trading) derivatives: Fair value changes always go to P&L directly.
Derivatives held for trading: Reported as CURRENT ASSETS and CURRENT LIABILITIES.
Derivatives as hedge of recognized assets/liabilities: Classified as current or non-current based on the classification of the HEDGED ITEM.
Exchange-traded derivatives = NON-SPECULATIVE BUSINESS INCOME (same as Series I currency derivatives)
Income head: Profits and Gains from Business and Profession.
Loss set-off:
Loss carry forward:
Presumptive taxation (Section 44AD):
FPI taxation (if position held < 12 months):
Stamp duty on exchange-traded IRDs: Levied on the BUYER only (not seller).
Trap 1: "Derivatives remain off-balance-sheet" — FALSE All derivatives ON balance sheet at fair value.
Trap 2: "Fair value = book value" — FALSE Fair value = current mark-to-market (liquidation) value.
Trap 3: "Fair value always goes to P&L" — FALSE For qualifying hedging transactions, it may go to equity (OCI).
Trap 4: "IRD losses can be set off against salary" — FALSE Non-speculative business losses: can set off against business income and other sources but NOT salary.
Trap 5: "IRD losses carry forward = 4 years" — FALSE Exchange-traded IRDs = 8 years. Speculative = 4 years.
Trap 6: "Presumptive taxation 8% for digital receipts" — FALSE Digital = 6% | Cash = 8%.
Trap 7: "Stamp duty = both buyer and seller" — FALSE Stamp duty on exchange-traded IRDs = BUYER ONLY.
Interest Rate Derivatives
Code of conduct, KYC, RDD, arbitration, ODR, IPF and DvP
NISM Series IV — Interest Rate Derivatives | ~5% weightage | ~20 questions
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.
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 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 = SEBI Complaint Redress System
Exchanges handle: Service complaints, unauthorized trades, non-receipt of funds, excess brokerage charged.
Exchanges CANNOT handle:
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.
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.
Definition: Investing in a variety of assets to MINIMIZE MARKET RISK (not eliminate, not insure against). Reduces unsystematic risk, partially reduces market risk.
Delivery versus Payment (DvP): Simultaneous exchange of cash and securities. If one party fails, other withholds. Eliminates settlement risk.
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
Next: revise cards and rules across the same chapters.
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