Codes of Conduct and Investor Protection Measures

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• Market, Limit and Stop OrdersLesson
• Position size calculatorCalculator
• Drawdown RecoveryLesson

More units in NISM Series I

• Introduction to Currency Markets16
• Foreign Exchange Derivatives13
• Exchange Traded Currency Futures15
• Exchange Traded Currency Options20
• Strategies Using Exchange Traded Currency Derivatives19
• Trading Mechanism in Exchange Traded Currency Derivatives13
• Clearing, Settlement and Risk Management in Exchange Traded Currency Derivatives18
• Regulatory Framework for Exchange Traded Currency Derivatives12
• Accounting and Taxation11

Practise all of NISM Series I

Exam format

All 13 questions on Codes of Conduct and Investor Protection Measures, with answers

1. Q1A client otherwise completes all mandatory onboarding requirements but declines to execute a Power of Attorney or a DDPI. Which statement about the broker’s response is correct?

   • A

     Option A. The broker must not deny services solely because the client refuses these voluntary authorisations. — Correct answer

   • B

     Option B. The broker may require one of these authorisations as a mandatory condition for every account.

     Why it is wrong: Requiring at least one of two voluntary documents still makes the authorisation compulsory.

   • C

     Option C. The broker may treat the client’s silence as consent to grant a Power of Attorney.

     Why it is wrong: Silence is not an executed authorisation and cannot be treated as permission to act.

   • D

     Option D. The broker may replace these authorisations by asking the client to disclose account passwords.

     Why it is wrong: Sharing passwords is not a lawful substitute for a voluntary authorisation or a proper client instruction.

   Answer: A. This follows the rule against making PoA or DDPI compulsory or denying services solely for their refusal. SEBI’s DDPI circular states that a stock broker or broker-depository participant must not compel execution of PoA or DDPI or deny services because the client refuses. The question already states that mandatory onboarding is complete. The correct response must therefore preserve the voluntary choice rather than invent another form of consent. Remember: Separate mandatory onboarding from optional authority to act on a client’s behalf.

   Hint, shown before you answer in practice mode: Common mistake: Believing that a broker may force a voluntary document by offering a choice between two optional authorisations.

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2. Q2A salaried applicant has completed identity, address and bank-account verification for currency-derivatives activation. Which document most directly supplies the additional evidence of income or financial status?

   • A

     Option A. A copy of the applicant’s PAN card

     Why it is wrong: PAN identifies the taxpayer. The card by itself does not show salary or financial standing.

   • B

     Option B. A copy of the applicant’s electricity bill

     Why it is wrong: An electricity bill can support an address. It does not directly evidence income.

   • C

     Option C. A signed acknowledgement of the risk disclosure

     Why it is wrong: Acknowledging risk is important but does not provide evidence of the applicant’s income or financial status.

   • D

     Option D. A recent salary slip or Form 16 — Correct answer

   Answer: D. A recent salary slip or Form 16 directly supports the stated financial-evidence requirement. SEBI’s investor KYC material lists proof of income for clients choosing derivatives, including currency derivatives. For a salaried person, a recent salary slip or Form 16 is listed as such evidence. The other choices serve different onboarding purposes. Remember: Choose the document that proves the missing fact, not just any document used during onboarding.

   Hint, shown before you answer in practice mode: Common mistake: Treating a completed identity check or risk acknowledgement as a substitute for financial evidence.

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3. Q3A client loses money because USD-INR moves against an authorised futures position. The broker executes and settles the trade correctly and is not a defaulter. What follows about compensation from the exchange’s Investor Protection Fund for this loss alone?

   • A

     Option A. It is payable because the client completed the required KYC.

     Why it is wrong: KYC compliance does not convert an authorised trading loss into a compensable default claim.

   • B

     Option B. It is payable because the trade was cleared through a clearing corporation.

     Why it is wrong: Clearing supports settlement obligations. It does not insure the client against adverse prices.

   • C

     Option C. It is payable if the client’s loss exceeds the initial margin collected.

     Why it is wrong: A loss exceeding the initial margin is still a market loss on these facts. Its size does not by itself create IPF eligibility.

   • D

     Option D. It is not payable merely to reimburse the loss caused by the market move. — Correct answer

   Answer: D. The fund is not a general reimbursement mechanism for correctly executed trades that lose money. The stated loss comes from market movement, not from an admitted default-related claim against a broker. NSE’s IPF description concerns eligible admitted claims where a defaulter’s assets are insufficient, subject to the fund’s conditions. The facts given do not make an ordinary market loss compensable under that framework. Remember: Identify the source of a loss before applying an investor-compensation mechanism.

   Hint, shown before you answer in practice mode: Common mistake: Confusing protection against eligible intermediary default claims with protection against market risk.

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4. Q4An investor has complained to a SEBI-registered broker and then lodged the unresolved grievance in SCORES. What is the principal role of SCORES in this case?

   • A

     Option A. Decide the dispute by issuing an arbitral award

     Why it is wrong: An arbitral award belongs to arbitration. Filing a complaint in SCORES is not that adjudicatory step.

   • B

     Option B. Act as the conciliator negotiating the parties’ settlement

     Why it is wrong: A conciliator facilitates a negotiated settlement. That is distinct from the complaint-lodging and tracking role being tested.

   • C

     Option C. Record and track the grievance and its handling — Correct answer

   • D

     Option D. Admit a compensation claim against a defaulter under the Investor Protection Fund

     Why it is wrong: An Investor Protection Fund claim against a defaulter has its own eligibility and admission process. It is not the principal purpose of SCORES.

   Answer: C. SCORES provides an online record and tracking process for the investor grievance. The investor has already approached the intermediary and is now using the SEBI complaint system. SCORES records the grievance and supports tracking of its handling. The filing is not itself an arbitral award, the appointment of a conciliator or the admission of an Investor Protection Fund claim. Those functions require their respective processes. Remember: Identify whether the investor is lodging a complaint, seeking an agreed settlement, obtaining an award or pursuing a default claim.

   Hint, shown before you answer in practice mode: Common mistake: Treating every investor-protection process as though it automatically performs the others.

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5. Q5In a securities-market dispute, a neutral person first helps the parties seek an agreed settlement. That process fails, and the dispute then moves to a process in which an arbitrator determines the outcome. What are the two stages, respectively?

   • A

     Option A. Conciliation and arbitration — Correct answer

   • B

     Option B. Arbitration and conciliation

     Why it is wrong: This reverses the facilitating stage and the decision-making stage.

   • C

     Option C. Complaint registration and conciliation

     Why it is wrong: Registering a complaint is not the described facilitated negotiation, and conciliation does not describe the arbitrator’s decision in the second stage.

   • D

     Option D. Conciliation and complaint registration

     Why it is wrong: The first label is right, but registering a complaint is not the arbitrator’s determination described in the second stage.

   Answer: A. Facilitating a mutually agreed settlement is conciliation, followed here by arbitration to determine the dispute. In the first stage, the neutral person helps the parties reach their own agreement rather than deciding the outcome. This describes conciliation. The next described stage involves an arbitrator’s decision. SEBI’s online dispute-resolution explanation distinguishes that adjudicatory role from the conciliator’s facilitating role. Remember: Identify whether the neutral party facilitates an agreement or determines the dispute.

   Hint, shown before you answer in practice mode: Common mistake: Assuming the neutral person plays the same role at every stage of the dispute.

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6. Q6A broker recommends repeated reversals of a client’s currency-futures position solely to earn more brokerage. Each commission charge is within the permitted rate. Which assessment is correct?

   • A

     Option A. The conduct is improper even though each commission charge is within the permitted rate — Correct answer

   • B

     Option B. The conduct is acceptable because compliance depends only on the commission rate charged

     Why it is wrong: A permissible fee rate does not cure a prohibited purpose for inducing transactions.

   • C

     Option C. The conduct is acceptable whenever the client’s overall account remains profitable

     Why it is wrong: An overall profit does not change the stated commission-only purpose of the recommendations.

   • D

     Option D. The conduct is improper only if an exchange later cancels one of the resulting trades

     Why it is wrong: The duty applies to the inducement itself and does not depend on an exchange cancelling a trade.

   Answer: A. The prohibition concerns inducing trades solely to generate brokerage, not just the size of the charge. The question expressly states that the sole purpose is to generate brokerage, rather than a genuine change in the client’s hedge requirement. Regulation 37(e) of the SEBI Stock Brokers Regulations, 2026 prohibits encouragement of purchases or sales solely for brokerage or commission. Neither a permitted rate, a profitable account nor valid exchange execution removes that conduct problem. Remember: A lawful fee rate does not justify inducing transactions solely to earn that fee.

   Hint, shown before you answer in practice mode: Common mistake: Checking only whether a fee cap was exceeded while ignoring why the broker induced the trades.

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7. Q7A broker shares a named client’s currency positions and account details with an outside marketing firm for its own commercial benefit. There is no client authorisation or legal reporting requirement. Which client duty is directly breached?

   • A

     Option A. Giving one client priority over another client’s order at the same price

     Why it is wrong: This concerns order execution priority, not the confidentiality of positions and account data.

   • B

     Option B. Collecting the applicable margin before accepting a new trade

     Why it is wrong: The scenario concerns sharing information, not a failure to collect margin for a new trade.

   • C

     Option C. Using the designated settlement benchmark for an expiring contract

     Why it is wrong: A settlement-price rule does not address the disclosure of named client account information.

   • D

     Option D. Protecting the client’s confidential information from disclosure or improper use — Correct answer

   Answer: D. The data were obtained through the broker-client relationship and are being improperly disclosed for an unrelated commercial purpose. The positions and account details are identifiable client information acquired in the course of the business relationship. The stated commercial disclosure is not a permitted regulatory report or an authorised client service in this scenario. Regulation 37(d) addresses disclosure and improper use of confidential client information. The other options concern different operational duties. Remember: Access to client information for brokerage work is not permission to reuse it for unrelated commercial purposes.

   Hint, shown before you answer in practice mode: Common mistake: Treating confidential trading data as the broker’s unrestricted commercial asset.

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8. Q8Only 30 of a client’s 50 ordered currency-futures contracts have traded. The broker tells the client that all 50 are executed, although the remaining 20 are still pending. What should the broker report?

   • A

     Option A. Fifty executed, because order acceptance is equivalent to execution

     Why it is wrong: An accepted order can remain wholly or partly unfilled. Acceptance is not a trade confirmation.

   • B

     Option B. Thirty executed and twenty pending, reflecting the actual order status — Correct answer

   • C

     Option C. Thirty executed and twenty cancelled, even though no cancellation occurred

     Why it is wrong: This replaces one false report with another. The stated balance remains pending.

   • D

     Option D. No execution information until all fifty contracts have traded

     Why it is wrong: The reporting duty is not postponed merely because the order is only partly filled.

   Answer: B. The client needs an accurate distinction between completed trades and the unexecuted balance. Thirty contracts are completed trades. The remaining twenty have not executed and have not been cancelled. The broker should promptly report that actual status, rather than treating acceptance of the original order as complete execution. Regulation 37(b) addresses informing the client about execution or non-execution. The client’s decision to keep, change or cancel the remainder depends on reliable information. Remember: Report what has actually traded separately from what is still pending.

   Hint, shown before you answer in practice mode: Common mistake: Using an order acknowledgement as though it confirmed the entire requested quantity had executed.

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9. Q9A stock broker discloses a conflict to a client, then gives its own interests preference over that client’s interests in the conflicted service. It argues that disclosure alone made this acceptable. Under regulation 38 of the Stock Brokers Regulations, 2026, which statement is correct?

   • A

     Option A. Disclosure does not remove the duties against self-advantage and client subordination. — Correct answer

   • B

     Option B. Disclosure alone permits the broker to prefer its own interests over the client’s interests.

     Why it is wrong: It treats one duty as permission to ignore the other duties in the same conflict framework.

   • C

     Option C. The conflict duties apply only if the broker’s own trade ends up making a loss.

     Why it is wrong: The rule is not conditioned on whether the broker’s transaction later loses money.

   • D

     Option D. The conflict duties cease once the client has received a contract note for the trade.

     Why it is wrong: A contract note reports a transaction. Its issue does not cancel the conflict-of-interest duties.

   Answer: A. This answer recognises that disclosure does not replace the separate restrictions on conflicted self-advantage and priority. The facts state both disclosure and preference for the broker’s own interests. These must be evaluated separately. Regulation 38 addresses conflicts, disclosure and the prohibition on seeking personal advantage or placing the broker’s interests above the client’s. The fact of disclosure therefore does not establish that the later preferential conduct complies with those duties. Remember: Check how a conflict is handled as well as whether it is disclosed.

   Hint, shown before you answer in practice mode: Common mistake: Assuming a disclosed conflict automatically authorises conduct that favours the broker over the client.

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10. Q10A stock broker proposes using client A’s funds to meet client B’s margin shortage and restoring them before the day ends. No authorised transaction of A supports the transfer. Which statement is consistent with the client-asset segregation duty?

    • A

      Option A. The transfer is allowed whenever repayment occurs before the day ends.

      Why it is wrong: The proposed intraday duration does not create an exception to the stated segregation duty.

    • B

      Option B. The transfer is allowed if A’s account currently has surplus cash.

      Why it is wrong: A surplus is still A’s money, not a general funding pool for other clients.

    • C

      Option C. A’s funds must not be used to finance B’s margin shortage. — Correct answer

    • D

      Option D. The transfer is allowed if the broker records the amount as receivable from B.

      Why it is wrong: Bookkeeping can record a transfer but cannot itself authorise use of another client’s funds.

    Answer: C. This answer preserves the distinction between A’s assets and B’s obligations. The proposed use belongs to client B’s obligation, not to an authorised transaction for client A. Regulation 18(2)(c) requires client money and securities to be segregated from the broker’s own assets and other clients’ assets and used only for authorised purposes. Neither a promise of quick repayment nor an internal receivable entry changes whose funds are being used. Remember: Another client’s margin obligation does not make a client’s surplus funds available for use.

    Hint, shown before you answer in practice mode: Common mistake: Confusing temporary use or a repayment promise with lawful segregation and authority.

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11. Q11While a complaint is pending on SCORES, the complainant opts for Online Dispute Resolution for the same matter. According to the SCORES FAQ, how should the resulting SCORES status be interpreted?

    • A

      Option A. The broker automatically becomes liable to pay the full amount claimed.

      Why it is wrong: A change of complaint platform does not itself establish liability for the claimed amount.

    • B

      Option B. The complaint is treated as disposed on SCORES, not automatically decided on its merits. — Correct answer

    • C

      Option C. SCORES must remain a parallel adjudication until an arbitration award is made.

      Why it is wrong: The FAQ states that the pending SCORES complaint is treated as disposed in this situation, rather than requiring the parallel process described here.

    • D

      Option D. The complainant automatically loses the right to pursue the selected ODR process.

      Why it is wrong: The status change occurs because ODR has been selected. It does not itself cancel access to that chosen process.

    Answer: B. This answer follows the specified FAQ and does not add an unsupported merits decision. Investor FAQ 35 states that choosing ODR while the complaint is pending results in the complaint being treated as disposed on SCORES. That disposition follows the move to the other process. It does not say that the client has won a payment award or that the claim has been rejected on its merits. The selected ODR process must be distinguished from SCORES complaint tracking. Its outcome is not determined merely by the SCORES status change. Remember: Disposed on SCORES does not, by itself, mean compensation was awarded or the dispute was adjudicated.

    Hint, shown before you answer in practice mode: Common mistake: Treating an administrative closure label as a judgment on who won the dispute.

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12. Q12A client instructs a broker to buy a currency future at a maximum of 88.20. Without any authorised change or discretionary mandate, the broker instead submits and executes a buy at 88.35. The position later makes a profit. Which statement is correct?

    • A

      Option A. The later profit makes the departure from the limit compliant

      Why it is wrong: A profitable outcome does not alter the original instruction or supply missing authority.

    • B

      Option B. A general risk disclosure replaces the client’s specific price instruction

      Why it is wrong: A disclosure of trading risks is not the stated authorisation to replace a specific price limit.

    • C

      Option C. The broker departed from the instruction despite the eventual profit — Correct answer

    • D

      Option D. A broker may exceed any price limit to improve the chance of a fill

      Why it is wrong: A desire to obtain a fill does not provide unrestricted authority to disregard the client’s limit.

    Answer: C. The execution price exceeded the authorised maximum without a permitted change. The instruction capped the purchase price at 88.20. Buying at 88.35 exceeds that maximum. No authorised modification or discretion is present, so the broker cannot substitute a higher limit under the facts given. A later profit does not retrospectively change what was authorised when the order was executed. Remember: Evaluate execution against the instruction and authority in force at the time of the trade.

    Hint, shown before you answer in practice mode: Common mistake: Using a later profitable outcome to justify an unauthorised departure from the order.

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13. Q13A broker assigns currency-derivatives client servicing to employees whose training does not match their responsibilities. Every client has signed the risk disclosure document. Which statement reflects the broker’s competence obligation?

    • A

      Option A. The broker must still take reasonable steps to give training suited to those responsibilities — Correct answer

    • B

      Option B. Signed client risk disclosures remove the broker’s need to give employees appropriate training

      Why it is wrong: A client’s risk acknowledgement does not replace the broker’s employee-training responsibility.

    • C

      Option C. Training is required only after an employee has caused a loss in a client’s account

      Why it is wrong: The requirement is not made conditional on a loss having already occurred.

    • D

      Option D. Giving an employee access to the trading system is sufficient evidence of appropriate training

      Why it is wrong: Technical permission to use a system does not show that an employee has been adequately trained for the assigned duties.

    Answer: A. The obligation concerns reasonable steps to maintain competence appropriate to the work assigned. The inspected broker regulations require reasonable steps to ensure employees are trained to a level commensurate with their responsibilities. The fact that clients signed risk disclosures does not establish employee competence or satisfy that training obligation by itself. Nor must the broker wait for a loss before addressing an identified training gap. Remember: Keep client risk disclosure separate from the broker’s responsibility for staff competence.

    Hint, shown before you answer in practice mode: Common mistake: Treating a signed disclosure or system login as a substitute for appropriate training.

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Try a paper on all of NISM Series I

This is the last unit of Currency Derivatives. The series page runs one quiz across every unit.