Code of Conduct and Investor Protection Measures
7 questions. Each answer is explained.
Question 1 of 7Practice · Series XVI — Commodity Derivatives
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Exam format
| Questions | 100 · 1 mark each |
|---|---|
| Duration | 120 min · 2 hours |
| Pass mark | 60% · 60 of 100 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 XVI Commodity Derivatives
Exam rules read on NISM's site on 3 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 If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.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 3 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 7 questions on Code of Conduct and Investor Protection Measures, with answers
Q1A broker urges a hedger to repeatedly close and reopen unchanged commodity exposure solely to generate extra brokerage, with no identified client purpose. Which conduct concern is most directly raised?
Option A. Using a price quotation expressed per unit instead of per lot.
Why it is wrong: Quotation units do not address why the broker is recommending unnecessary transactions.
Option B. Inducing transactions solely to generate brokerage. — Correct answer
Option C. Allowing a client to use any futures contract rather than only options.
Why it is wrong: Choosing futures rather than options is not itself the described conduct breach.
Option D. Failing to convert every hedge into compulsory delivery.
Why it is wrong: A hedge need not always be carried to physical delivery.
Answer: B. Client-facing conduct rules distinguish a legitimate trading service from inducing unnecessary activity purely to earn charges. The stated sole objective is additional brokerage, not a client risk-management or other identified purpose. Regulation 37(e) addresses encouraging transactions solely to generate brokerage or commission. The concern is the inducement, not simply that a futures hedge is rolled. Remember: Evaluate the client purpose of a recommended transaction, not merely its ability to generate fees.
Hint, shown before you answer in practice mode: Common mistake: Treating frequent trading as automatically suitable because it is operationally possible.
XVI-072mediumconceptual
Q2A metals hedger tells its broker the timing and size of an upcoming order. An unrelated market participant asks the broker for those details to trade ahead of it. No client permission or lawful disclosure requirement applies. What should the broker do?
Option A. Maintain client confidentiality and refuse the request. — Correct answer
Option B. Publish the client’s name and intended order to prove transparency.
Why it is wrong: Publishing the private order would reveal more information rather than preserve client confidentiality.
Option C. Share the details because the order will eventually affect a public market.
Why it is wrong: A future public trade does not justify disclosure of private intent and identity beforehand.
Option D. Share the details only if the other participant promises not to mention the source.
Why it is wrong: A promise of secrecy does not create client consent or a lawful disclosure basis.
Answer: A. Client order information is not made freely disclosable merely because execution may later occur on an exchange. The request concerns non-public client information and the facts exclude permission or a legal disclosure obligation. The broker should protect the information rather than help another participant exploit it. Anonymous public market data is different from disclosing a named client’s intended order. Remember: Distinguish public market information from confidential client instructions.
Hint, shown before you answer in practice mode: Common mistake: Assuming a financial-market setting makes every customer communication public.
XVI-073mediumconceptual
Q3A broker discloses that it has a proprietary commodity position. It then deliberately delays a client’s valid order to favour that position, contrary to the client’s interest. Does the disclosure alone make this acceptable?
Option A. Yes. Any disclosed conflict permits the broker to prefer its own position over the client’s order.
Why it is wrong: Disclosure does not grant permission to disadvantage a client.
Option B. No. Disclosure does not remove the duty to handle the conflict fairly and protect the client. — Correct answer
Option C. Yes. Proprietary positions always rank before client instructions once they are disclosed.
Why it is wrong: No such universal priority follows from holding a proprietary position.
Option D. No, but only because brokers are never allowed to have any proprietary exposure at all.
Why it is wrong: It reaches the right rejection for an unsupported blanket reason instead of addressing the actual conflict handling.
Answer: B. Disclosure is one part of conflict management, not an unlimited waiver of other conduct duties. The facts describe deliberate client disadvantage to favour the broker’s own exposure. The inspected regulations require appropriate handling of conflicts and do not permit personal advantage merely because a conflict was disclosed. The issue is the unfair conduct, not an unsupported blanket claim that all proprietary activity is prohibited. Remember: A disclosed conflict still requires proper handling.
Hint, shown before you answer in practice mode: Common mistake: Treating a disclosure form as consent to any later disadvantage.
XVI-074mediumconceptual
Q4A new commodity trader signs a risk-disclosure document. Which statement about that document is appropriate?
Option A. It makes every instruction by an unregistered intermediary exchange-protected.
Why it is wrong: A disclosure document does not establish the registration or protection status of an unrelated intermediary.
Option B. It removes the need to understand delivery and settlement obligations.
Why it is wrong: Delivery and settlement risks remain relevant and should be understood.
Option C. It makes losses beyond the initial margin impossible.
Why it is wrong: A document signature does not impose a premium-style cap on futures losses.
Option D. It communicates relevant trading risks and does not guarantee a profitable result. — Correct answer
Answer: D. Risk disclosure informs the client about risks rather than eliminating the risks or legitimising unrelated activity. SEBI’s investor guidance asks clients to obtain and read the risk-disclosure document. Signing it does not alter a futures payoff, remove physical-settlement duties or turn an unregistered service into a regulated one. Remember: Read risk disclosure as information to understand, not an insurance certificate.
Hint, shown before you answer in practice mode: Common mistake: Equating completion of paperwork with removal of economic and settlement risk.
XVI-075easyconceptual
Q5A client finds an unexplained commodity brokerage debit and has the contract note and account statement. Under the approach stated on SEBI’s SCORES portal, what should the client generally do first?
Option A. Raise the grievance with the concerned intermediary and preserve the supporting records. — Correct answer
Option B. Delete the contract note so that only the disputed balance remains.
Why it is wrong: Removing evidence makes a charge dispute harder to verify.
Option C. Treat an unverified social-media promise as the formal resolution process.
Why it is wrong: An unverified promise is not a substitute for the formal grievance route.
Option D. Assume SCORES automatically reverses the debit without approaching the intermediary.
Why it is wrong: It wrongly assumes automatic reversal and skips the stated first step.
Answer: A. The official grievance approach starts with the regulated entity concerned and uses records that allow the issue to be examined. The SCORES portal tells investors to first approach the entity against which they have a grievance. The client should describe the disputed debit and retain relevant statements and contract notes. If unresolved, the appropriate escalation can then be pursued. SCORES is not described here as an automatic payment-reversal mechanism. Remember: Use a documented complaint and the proper escalation channel.
Hint, shown before you answer in practice mode: Common mistake: Expecting a grievance portal to reverse a transaction automatically without examining the underlying issue.
XVI-148easyregulatory
Q6A client receives an unexpected commodity trade alert. Which response best supports verification of what occurred?
Option A. Send the account password to an unknown caller who phones, says they are from the exchange and offers to investigate the trade for you.
Why it is wrong: Giving credentials to an unknown party can compromise the account and is not evidence verification.
Option B. Ignore the alert if the trade happens to be profitable, because a profitable trade cannot have harmed the account in any way.
Why it is wrong: Profit does not establish that the client authorised the trade.
Option C. Quietly change the personal spreadsheet so that it matches the alert, without asking the broker for the official trade records.
Why it is wrong: A private edit does not correct or verify the broker and exchange records.
Option D. Compare the alert, contract note, client code and orders, and promptly report any mismatch through the broker’s official channel. — Correct answer
Answer: D. An execution dispute requires reconciliation of reliable records, not a decision based only on the trade’s profit or loss. The alert and contract note should be checked against the correct client code and actual order instructions. The broker’s official process and exchange verification facilities, where applicable, help establish what was executed. A favourable result does not resolve an unauthorised-order concern, and sharing credentials can introduce additional risk. Remember: Check execution records against instructions and identity, then document any discrepancy.
Hint, shown before you answer in practice mode: Common mistake: Using profit as proof of authorisation or replacing official reconciliation with informal promises.
XVI-149mediumconceptual
Q7A broker assigns an employee to explain commodity option exercise and delivery obligations. The employee has not been trained in those products and routinely confuses options on futures with options on goods. Which action best addresses the competence concern?
Option A. Avoid recording client questions, so that no incorrect explanation is ever documented or reviewed later.
Why it is wrong: Avoiding records does not correct the knowledge problem or protect the client.
Option B. Rely only on the employee’s general experience of placing equity orders for clients over many years.
Why it is wrong: Equity order-entry experience does not establish understanding of commodity delivery structures.
Option C. Ensure the employee is suitably trained and competent for the role before relying on their explanations. — Correct answer
Option D. Let the employee invent delivery rules on the spot whenever a client asks a difficult question about delivery.
Why it is wrong: Inventing terms would increase the risk of misleading the client.
Answer: C. Competence must match the responsibilities performed and the product-specific risks explained to clients. The scenario identifies repeated errors in a material product distinction. The inspected broker regulations include suitable training and competence of employees for their responsibilities. General order-entry experience does not prove knowledge of commodity exercise and delivery. Training and effective supervision address the weakness more directly than concealing or improvising information. Remember: Match staff competence to the product and responsibility, especially where settlement can create new obligations.
Hint, shown before you answer in practice mode: Common mistake: Assuming all derivatives have identical exercise, margin and delivery mechanics.
XVI-150mediumconceptual
Code of Conduct and Investor Protection Measures: common questions
How many practice questions are there on Code of Conduct and Investor Protection Measures?
7 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 XVI, which has 150 questions in total.
Are these real NISM Series XVI questions on Code of Conduct and Investor Protection Measures?
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 XVI?
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.
Try a paper on all of NISM Series XVI
This is the last unit of Commodity Derivatives. The series page runs one quiz across every unit.
Open the NISM Series XVI practice page