Legal and Regulatory Environment
14 questions. Each answer is explained.
Question 1 of 10Practice · Series XIII — Common Derivatives
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Learn these topics
More units in NISM Series XIII
- Basics of Derivatives (Equity, Currency and Interest Rate)6
- Introduction to the Underlying Markets24
- Introduction to Forwards and Futures20
- Strategies Using Futures24
- Introduction to Options – Options on Equities and Currencies22
- Option Trading Strategies – Strategies using Equity Options and Currency options4
- Introduction to Trading, Clearing, Settlement & Risk Management25
- Accounting and Taxation of Derivatives6
- Sales Practices, Code of Conduct and Investor Protection Measures5
Exam format
| Questions | 150 · 1 mark each |
|---|---|
| Duration | 180 min · 3 hours |
| Pass mark | 60% · 90 of 150 marks |
| Negative marking | 25% · 0.25 marks off per wrong answer |
| Certificate validity | 3 years · from the date of the examination |
| Marks for this unit | Not published by NISM |
NISM Series XIII Common Derivatives
Exam rules read on NISM's site on 17 October 2026. Check the current rules on NISM's site (opens in a new tab)
What these answers assume, and when it was last checked
Each question uses the rules listed below. We last checked them on 5 September 2026. A Budget or SEBI circular can change a rate, lot size or expiry day. If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.
- NSE uses Tuesday expiry and BSE uses Thursday expiry. This applies from 1 September 2025.
- The January 2026 index lot sizes are NIFTY 65, BANKNIFTY 30, FINNIFTY 60, MIDCPNIFTY 120 and NIFTYNXT50 25.
- The October 2024 SEBI framework sets a minimum index contract value of Rs 15–20 lakh. Each exchange may list one weekly benchmark index.
- Option buyers pay the premium upfront from 1 February 2025. A short index option has an extra 2% Extreme Loss Margin on expiry day from 20 November 2024.
- Equity short-term capital gains are taxed at 20%. Long-term gains are taxed at 12.5% above Rs 1.25 lakh. Both rates apply from 23 July 2024.
- F&O income is non-speculative business income in ITR-3. NSE equity derivatives trade from 9:15 a.m. to 3:40 p.m.
- The final ten-minute session began on 3 August 2026. It aligns with the cash market Closing Auction Session.
- Most Securities Transaction Tax questions test the base and who pays. On an option sale, it is the premium and the seller pays. On a futures sale, it is the traded value and the seller pays.
- On exercise, Securities Transaction Tax uses intrinsic value: settlement price minus strike price. The buyer pays it.
- Two questions test the current rate. From 1 April 2026, option sales carry 0.15% on the premium and futures sales carry 0.05% on traded price. The earlier rates were 0.10% and 0.02% from 1 October 2024.
- This section uses the T+1 rolling settlement cycle. Obligations are fixed on T+1. A short delivery goes to buy-in auction on T+1 and settles on T+2.
- The trade-for-trade surveillance segment uses direct close-out. Funds pay in by 10:30 a.m. and pay out on or after 1:30 p.m. on settlement day.
- Securities pay in to the settlement pool by 10:30 a.m. They pay out directly to the client’s demat account by 3:30 p.m.
- The 3:30 p.m. deadline replaced 1:30 p.m. under SEBI’s 10 October 2024 circular. Direct client credit was required by SEBI’s 5 June 2024 circular.
- The optional T+0 cycle trades until 1:30 p.m. Obligations are fixed by 2:30 p.m. on the trade day. An early pay-in shortage is closed out directly.
- Cash-market Value at Risk margin is six times exponentially weighted moving-average volatility. It has a 9% floor for Group I, a 21.5% floor for Group II, and a fixed 50% or 75% level for Group III.
- Extreme Loss Margin is 3.5% for a share and 2% for a broad-market-index exchange traded fund. Mark-to-market margin is collected before the next day’s trading. The trade-for-trade segment has 100% upfront margin.
- Close-out uses the higher of the highest price from trade day to auction day and 20% above the auction day’s official close.
- A funds shortage costs 0.07% a day. The trading facility is withdrawn at a shortage of Rs 5 lakh or more.
- SCORES allows 21 calendar days, then two 15-day review levels. Online Dispute Resolution moves from conciliation to arbitration after the market participant and SCORES steps.
- At NSE, the Investor Protection Fund limit is Rs 35 lakh per investor for each defaulting or expelled member. This applies to claims arising after 13 August 2024.
- A Basic Services Demat Account has no annual maintenance charge up to Rs 4 lakh of holdings. It costs up to Rs 100 above that, until the Rs 10 lakh eligibility ceiling. These slabs apply from 1 September 2024.
- The rupee pairs are USD-INR, EUR-INR, GBP-INR and JPY-INR. The cross-currency pairs are EUR-USD, GBP-USD and USD-JPY.
- Each contract covers 1,000 units of the foreign currency, except JPY-INR. JPY-INR covers 100,000 yen and is quoted in rupees per 100 yen.
- The tick is 0.25 paise, or Rs 0.0025. It equals Rs 2.50 a contract.
- Rupee pairs trade from 9:00 a.m. to 5:00 p.m. A monthly contract stops trading at 12:30 p.m. two working days before the expiry month’s last business day.
- Final settlement is in cash at the FBIL reference rate on expiry day. FBIL, Financial Benchmarks India, has published this rate in place of the Reserve Bank since 2018. Premium-style European options are quoted in rupees. The buyer pays the premium in cash on T+1.
- Daily settlement is on T+1 and final settlement is on T+2.
- NSE Clearing circular 026/2020 sets SPAN margin plus Extreme Loss Margin. The futures margin is 0.50% for USD-INR, 0.15% for EUR-INR, 0.25% for GBP-INR and 0.35% for JPY-INR. A short option has 0.75%. These figures apply from 1 June 2020.
- A USD-INR client may hold 6% of total open interest or USD 20 million, whichever is higher. A trading member may hold 15% or USD 100 million.
- A resident user has one USD 100 million equivalent limit across all rupee pairs and exchanges. No document is needed below that limit, but a valid underlying contracted exposure must still exist. This clarification applies from 3 May 2024.
- The currency segment has no Securities Transaction Tax.
The exam figures (questions, time, pass mark, negative marking and certificate validity) come from NISM's own pages, read on 17 October 2026. Timed practice uses the same figures. Study with the official workbook as well.
The written-out answers on this page are hidden while your timed set runs.
All 14 questions on Legal and Regulatory Environment, with answers
Q1Which Indian regulator is responsible for regulating the securities-market derivatives segment under the SEBI framework?
Option A. Income Tax Department
Why it is wrong: The Income Tax Department administers taxes rather than market trading rules.
Option B. Registrar of Companies alone
Why it is wrong: Company registration alone does not govern exchange derivatives.
Option C. SEBI — Correct answer
Option D. Local municipal authority
Why it is wrong: Municipal authorities do not regulate securities-market derivatives.
Answer: C. The Securities and Exchange Board of India regulates securities markets and their derivative segments under applicable laws. Remember: SEBI oversees securities-market intermediaries and trading.
Hint, shown before you answer in practice mode: Common mistake: Do not confuse tax administration with market regulation. Identify the primary securities-market regulator.
XIII-126easyregulatory
Q2Which law focuses on regulating securities contracts and preventing undesirable securities transactions in India?
Option A. Securities Contracts (Regulation) Act, 1956 — Correct answer
Option B. Companies Act, 2013 alone
Why it is wrong: The Companies Act has a different central purpose.
Option C. Foreign Exchange Management Act, 1999 alone
Why it is wrong: FEMA primarily concerns foreign exchange management.
Option D. Income-tax Act, 2025 alone
Why it is wrong: The Income-tax Act mainly governs taxation.
Answer: A. The Securities Contracts (Regulation) Act, 1956 addresses regulation of securities contracts and undesirable transactions. Remember: The SCRA provides a securities-contract legal framework.
Hint, shown before you answer in practice mode: Common mistake: Different financial laws serve different purposes. Think about the legal foundation for securities contracts.
XIII-127easyregulatory
Q3Which Indian statute primarily governs the management of foreign exchange transactions?
Option A. Securities Contracts (Regulation) Act, 1956
Why it is wrong: The SCRA regulates securities contracts more broadly.
Option B. Foreign Exchange Management Act, 1999 — Correct answer
Option C. Companies Act, 2013
Why it is wrong: Company law is not the main foreign-exchange statute.
Option D. Income-tax Act, 2025
Why it is wrong: The Income-tax Act governs taxation rather than exchange controls.
Answer: B. The Foreign Exchange Management Act, 1999 provides the core foreign-exchange management framework. Remember: FEMA is central to foreign-exchange management.
Hint, shown before you answer in practice mode: Common mistake: Do not use securities contract law as a substitute for FEMA. Match the statute to the foreign-exchange subject.
XIII-128easyregulatory
Q4What does FIMMDA principally support within India's financial markets?
Option A. Fixed-income, money-market and derivatives market practices — Correct answer
Option B. Registration of ordinary equity shareholders
Why it is wrong: Shareholder registration is not its main mandate.
Option C. Collection of personal income taxes
Why it is wrong: Income tax collection is a government function.
Option D. Corporate dividend declarations for every listed company
Why it is wrong: Corporate dividends are company decisions.
Answer: A. FIMMDA supports conventions, development and market practices in fixed-income, money-market and derivatives segments. Remember: FIMMDA relates primarily to debt and related markets.
Hint, shown before you answer in practice mode: Common mistake: An industry association is not the same as a tax authority. Think about industry standards for debt-related markets.
XIII-129easyregulatory
Q5Which topic was central to the L. C. Gupta Committee's work on introducing derivatives in India?
Option A. Setting personal tax rates for every investor
Why it is wrong: It did not set personal income-tax slabs.
Option B. Fixing future index prices at a guaranteed level
Why it is wrong: A committee cannot guarantee future market prices.
Option C. A regulatory framework and market structure for derivatives — Correct answer
Option D. Mandating one uniform dividend for all listed shares
Why it is wrong: Dividend amounts are not set uniformly by this committee.
Answer: C. The L. C. Gupta Committee examined the framework for developing and regulating derivatives markets in India. Remember: Derivatives development requires market and regulatory design.
Hint, shown before you answer in practice mode: Common mistake: Do not confuse securities-market committees with taxation authorities. Recall India's development of an organized derivatives market.
XIII-130mediumregulatory
Q6Which area is especially associated with the J. R. Varma Committee's contribution to derivatives markets?
Option A. Setting corporation-tax rates for all businesses
Why it is wrong: Corporate tax rates are not derivatives risk management.
Option B. Determining every listed company's dividend amount
Why it is wrong: Company dividend decisions are separate.
Option C. Publishing a fixed daily price for every stock
Why it is wrong: Derivative trading prices are determined through market processes.
Option D. Risk management and margining arrangements — Correct answer
Answer: D. The J. R. Varma Committee is associated with derivatives risk-management recommendations, including margin-related systems. Remember: Derivatives risk management includes margin design.
Hint, shown before you answer in practice mode: Common mistake: Do not mistake margin standards for price guarantees. Think about keeping clearing markets financially resilient.
XIII-131mediumregulatory
Q7Why is coordination between RBI and SEBI important for exchange-traded currency derivatives?
Option A. Equity dividends must be fixed jointly each month
Why it is wrong: Dividend fixation is unrelated to currency derivative oversight.
Option B. Currency oversight overlaps with securities-exchange regulation — Correct answer
Option C. All exchange rates must be frozen on trading days
Why it is wrong: Currency prices generally move with market conditions.
Option D. Each derivative trade must first be approved by a tax officer
Why it is wrong: Individual trades are not routinely approved by tax officers.
Answer: B. RBI's foreign-exchange role and SEBI's securities-market role require coordination for listed currency derivatives. Remember: Currency derivatives involve both exchange and foreign-exchange frameworks.
Hint, shown before you answer in practice mode: Common mistake: One regulator does not replace every other applicable regulator. Identify the regulatory responsibilities that overlap.
XIII-132mediumregulatory
Q8What is the purpose of RBI directions concerning currency futures in recognized markets?
Option A. Set conditions for permitted currency-futures activity — Correct answer
Option B. Promise a minimum trading return to importers
Why it is wrong: Regulations do not promise profitable hedges.
Option C. Fix all foreign-exchange rates permanently
Why it is wrong: Currency rates are not permanently fixed through futures directions.
Option D. Replace every exchange clearing rule with a tax rule
Why it is wrong: Clearing regulation is not replaced by taxation provisions.
Answer: A. RBI directions establish relevant conditions for conducting currency-futures activity within its regulatory remit. Remember: Currency derivatives operate under applicable regulatory conditions.
Hint, shown before you answer in practice mode: Common mistake: Do not interpret permission to trade as a guarantee of profit. Think about eligibility and market conduct.
XIII-133mediumregulatory
Q9Why do exchange-traded derivatives rules contain position-limit and risk-control provisions?
Option A. To make every trader's profit equal
Why it is wrong: Equal profits cannot be created by position limits.
Option B. To eliminate all changes in market prices
Why it is wrong: Market prices can still change.
Option C. To help control concentrated exposure and systemic risk — Correct answer
Option D. To force every investor to trade identical quantities
Why it is wrong: Contract size is standardized, but participant position quantities differ.
Answer: C. Position and risk controls help limit excessive concentration and protect market integrity. Remember: Limits can support orderly risk management.
Hint, shown before you answer in practice mode: Common mistake: A limit does not eliminate underlying market volatility. Consider concentration and clearing safety.
XIII-134mediumregulatory
Q10Which institution has a central regulatory and market-development role in India's government-securities market?
Option A. Reserve Bank of India — Correct answer
Option B. Income Tax Department
Why it is wrong: Tax authorities do not primarily operate government-securities markets.
Option C. Corporate registrar alone
Why it is wrong: Company registrars do not manage sovereign debt markets.
Option D. Local stockbrokers' association
Why it is wrong: Industry associations do not replace the central bank.
Answer: A. The Reserve Bank of India has a central role in government securities and related money-market regulation and development. Remember: Government securities involve the RBI's market role.
Hint, shown before you answer in practice mode: Common mistake: Securities and banking market responsibilities may overlap. Think about the central bank's debt-market responsibilities.
XIII-135mediumregulatory
Q11Why do regulators require accurate reporting of specified interest-rate derivatives exposures?
Option A. To support oversight of market activity and risks — Correct answer
Option B. To guarantee that bond prices never decline
Why it is wrong: Reporting does not stabilize bond prices.
Option C. To allow traders to hide concentration from clearing members
Why it is wrong: Concealing concentration conflicts with oversight.
Option D. To replace all contractual confirmations with verbal promises
Why it is wrong: Reporting does not remove confirmation requirements.
Answer: A. Regulatory reporting supports monitoring of exposures, market activity and compliance. Remember: Reliable reporting improves risk oversight.
Hint, shown before you answer in practice mode: Common mistake: Reporting requirements are not optional merely because a trade is hedged. Think about transparency for supervisors.
XIII-136mediumregulatory
Q12A firm wants to trade currency futures through a recognized exchange. It meets its internal risk limits but has not checked membership and segment requirements. What should it do before trading?
Option A. Assume internal approval replaces all external eligibility rules
Why it is wrong: Internal risk approval does not override regulatory conditions.
Option B. Confirm applicable exchange membership and regulatory eligibility — Correct answer
Option C. Trade first because only realized losses need compliance checks
Why it is wrong: Compliance requirements apply before trading, not only after a loss.
Option D. Use an unrelated equity account to bypass segment conditions
Why it is wrong: Using an unrelated account does not solve eligibility requirements.
Answer: B. The firm must verify the applicable membership, eligibility and trading-segment requirements before participating. Remember: Derivative activity requires valid market access arrangements.
Hint, shown before you answer in practice mode: Common mistake: Do not confuse internal authorization with regulatory permission. Consider internal authority and external eligibility separately.
XIII-137hardapplication
Q13A non-resident institution wants to trade an Indian interest-rate derivative. It knows its exposure but is unsure about current participation conditions. Which response is sound?
Option A. Assume every non-resident has unlimited and unrestricted access
Why it is wrong: Access is not necessarily unlimited for all participants.
Option B. Check current RBI and exchange eligibility and position restrictions — Correct answer
Option C. Use a historical position limit without checking updates
Why it is wrong: Historical limits can change.
Option D. Treat an equity-derivatives rule as automatic approval
Why it is wrong: Rules for one product do not automatically authorize another.
Answer: B. The institution should verify current participation conditions and position limits from applicable RBI and exchange sources. Remember: Eligibility must match participant type and instrument.
Hint, shown before you answer in practice mode: Common mistake: Do not rely on an outdated regulatory limit. Focus on participant eligibility and current rules.
XIII-138hardapplication
Q14A clearing member's derivative exposures rise sharply during a volatile session. Risk controls demand additional collateral. Which response best fits prudent clearing practice?
Option A. Ignore the demand until every futures contract expires
Why it is wrong: Waiting until expiry can breach clearing obligations.
Option B. Replace the collateral request with a profit forecast
Why it is wrong: A profit forecast does not satisfy a collateral demand.
Option C. Provide required collateral or reduce risk in line with clearing rules — Correct answer
Option D. Transfer the margin obligation to an unrelated outside investor
Why it is wrong: Unrelated investors cannot automatically assume margin obligations.
Answer: C. The clearing member must meet applicable collateral requirements or reduce positions as permitted by risk rules. Remember: Clearing systems manage live exposures during market stress.
Hint, shown before you answer in practice mode: Common mistake: Margin obligations are not postponed simply because prices may reverse. Think about actual clearing obligations during stress.
XIII-139hardapplication
Legal and Regulatory Environment: common questions
How many practice questions are there on Legal and Regulatory Environment?
14 questions, all written out on this page with the correct answer and why each other option is wrong. This unit is one of the 10 practice topics for NISM Series XIII, which has 150 questions in total.
Are these real NISM Series XIII questions on Legal and Regulatory Environment?
No. LearnNifty wrote every question from NISM's public syllabus. NISM does not publish its question bank, so nobody can offer you the real paper. Use these questions to check that an idea has gone in. Use the official NISM workbook to see what is examined.
Does negative marking apply to NISM Series XIII?
Yes. NISM takes off 25% of a question's marks for a wrong answer. On a 1-mark question that is 0.25 marks off. A blank question earns nothing and loses nothing, so a wrong guess costs marks on this paper. Timed practice here uses the same rule.
Are these practice questions kept up to date?
Each question is written against the rules printed on this page, last checked on 5 September 2026. A Budget or a SEBI circular can change a rate, a lot size or an expiry day. If one of those rules changes before your exam, treat the questions that use it as out of date. Then check NISM's current workbook.
Accounting and Taxation of Derivatives
6 questions on Accounting and Taxation of Derivatives. Its quiz opens on that unit.
Open Accounting and Taxation of DerivativesPaper Trading Try it on the practice trading desk