Legal & Regulatory Environment of Commodity Derivatives
8 questions. Each answer is explained.
Question 1 of 8Practice · Series XVI — Commodity Derivatives
0 right · 0 wrong · 8 to go
A–D or 1–4 to answer · Enter or → for the next question · ← to go back
Learn these topics
More units in NISM Series XVI
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 If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.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 8 questions on Legal & Regulatory Environment of Commodity Derivatives, with answers
Q1Which regulator oversees India’s exchange-traded commodity derivatives market under the framework described by SEBI?
Option A. Food Safety and Standards Authority of India alone
Why it is wrong: Food-safety standards are about the food itself. They are not the full set of rules for derivatives traded on an exchange.
Option B. Securities and Exchange Board of India — Correct answer
Option C. An individual commodity assaying agency
Why it is wrong: An assayer is a testing service provider. It checks the quality of goods. It is not the regulator of the derivatives market.
Option D. Warehousing Development and Regulatory Authority alone
Why it is wrong: WDRA’s role covers warehouses and warehouse receipts. That role does not make it the only regulator of the derivatives market.
Answer: B. Regulating the derivatives market is one job. Regulating or supervising warehouses, food standards and testing services is not the same job. SEBI’s commodity-market FAQ names SEBI as the regulator of the commodity derivatives market. SEBI has held this role since 28 September 2015. Other authorities and service providers can have key roles in the physical market. That is the market where the real goods are bought and sold. But they do not take over SEBI’s job of regulating exchange-traded derivatives. Remember: Identify the relevant regulatory layer rather than treating all commodity-related activity as one legal function.
Hint, shown before you answer in practice mode: Common mistake: Confusing physical-goods oversight with exchange-derivatives oversight.
XVI-068easyregulatory
Q2Under the commodity-derivative description in SEBI’s FAQ discussing the Securities Contracts (Regulation) Act, which arrangement most clearly has derivative exposure rather than being only an immediate goods purchase?
Option A. An assayer charging a fixed fee for one completed quality test.
Why it is wrong: The fixed testing fee is payment for a service. It is not a payoff linked to a commodity index.
Option B. A buyer paying a fixed invoice and immediately receiving the purchased grain with no remaining price-linked contract.
Why it is wrong: As described, it is a spot purchase that is already complete. No separate derivative contract remains.
Option C. A cash-settled contract whose settlement amount is determined by a specified commodity price index. — Correct answer
Option D. A warehouse charging a fixed storage fee with no commodity-price-linked payment.
Why it is wrong: The fee for storage services is fixed. Its payoff does not come from the commodity price.
Answer: C. A commodity derivative does not always need the goods to change hands. It can be settled in cash, based on commodity prices. The cash-settled contract has an amount to be settled later. A commodity price index decides that amount. That link to commodity prices is what gives it derivative exposure. The other arrangements, as described, are different. One is a purchase where the buyer gets the goods at once. The other two are services for a fixed fee. None of them leaves a payment that depends on commodity prices. Remember: Examine what determines a contract’s payoff, not simply whether physical goods are delivered.
Hint, shown before you answer in practice mode: Common mistake: Assuming a contract cannot be a commodity derivative unless every settlement physically transfers the commodity.
XVI-069mediumregulatory
Q3Under SEBI’s 9 September 2026 amendment, an agricultural commodity is not in the sensitive category. Its past-five-year average deliverable supply is 9 lakh MT and ₹6,000 crore in value. Which classification test does it meet?
Option A. Broad only if its average value is also below the ₹5,000 crore threshold.
Why it is wrong: The monetary test is a minimum, not a maximum.
Option B. Narrow, because both the quantity and the value thresholds must be met together.
Why it is wrong: It changes the rule’s alternative tests into a requirement to meet both.
Option C. Broad, because the value threshold is met even though the quantity one is not. — Correct answer
Option D. Sensitive, because its supply is below the 10 lakh MT quantity threshold.
Why it is wrong: Falling below one broad-category threshold does not itself establish sensitive classification.
Answer: C. The revised broad-category definition combines exclusion from the sensitive category with alternative quantity or monetary thresholds. The commodity is expressly not sensitive. The rule uses at least 10 lakh MT or at least ₹5,000 crore for past-five-year average deliverable supply. ₹6,000 crore satisfies the monetary route even though 9 lakh MT falls short of the quantity route. This classification question does not determine its transitional position limit. Remember: Read “or” and the separate non-sensitive condition carefully when applying the revised broad-category definition.
Hint, shown before you answer in practice mode: Common mistake: Requiring both thresholds or inferring the initial position-limit percentage from category alone.
XVI-070mediumregulatory
Q4An agricultural commodity moves from narrow to broad solely because of SEBI’s 9 September 2026 definition change. Which statement correctly describes its initial client position-limit treatment under that circular?
Option A. Its limit automatically becomes 2% from the next trading day, with no transition period.
Why it is wrong: There is no automatic rise on the next day. The one-year transition applies instead.
Option B. It keeps the 1% limit for one year, with a later rise subject to exchange review and satisfaction. — Correct answer
Option C. Its limit becomes 0.5% for one year, whether or not the commodity is in the sensitive category.
Why it is wrong: The 0.5% figure is for the sensitive category. It is not the stated transition rule for moving from narrow to broad.
Option D. Its limit immediately becomes 2%, simply because the commodity’s category name has changed to broad.
Why it is wrong: It ignores the transition rule the circular spells out. That rule covers commodities that have just moved to a new category.
Answer: B. A client position limit is the largest position one client may hold. Each commodity category has a general percentage for this limit. A transition rule can change how that percentage applies. The circular has a rule for this exact case. It covers commodities that move from narrow to broad because the definition changed. At first, they keep the 1% limit for one year. After that, the exchange may raise the limit to 2%. It can do so only after a review, and only if it is satisfied. The circular does not say this rise happens by itself on a set date. Remember: Apply a specific transition before the general category rule.
Hint, shown before you answer in practice mode: Common mistake: Using the broad-category headline percentage without checking how the commodity entered that category.
XVI-071mediumregulatory
Q5Under the category percentages in SEBI’s 9 September 2026 circular, a commodity is already classified as sensitive and its applicable annual deliverable supply is 20 lakh MT. What is the percentage-based client limit before any further contract-specific application? The result is already a round quantity.
Option A. 20,000 MT
Why it is wrong: It applies the 1% narrow-category percentage.
Option B. 40,000 MT
Why it is wrong: It applies the 2% broad-category percentage.
Option C. 1,00,000 MT
Why it is wrong: It applies 5% rather than 0.5%, a tenfold conversion error.
Option D. 10,000 MT — Correct answer
Answer: D. The category percentage must be applied to the relevant deliverable supply with careful conversion from percent. Sensitive-category percentage = 0.5% = 0.005. 20 lakh MT = 20,00,000 MT. Percentage-based quantity = 20,00,000 × 0.005 = 10,000 MT. This question does not grant a position irrespective of other applicable limits. Remember: Confirm the category, supply basis and percentage conversion before applying other limits.
Hint, shown before you answer in practice mode: Common mistake: Using the broad-category number for every agricultural commodity.
XVI-144mediumnumerical
Q6Under the base monetary-penalty formula in SEBI’s 9 September 2026 circular, a client exceeds a 10,000-unit limit by 100 units for one day. Closing price is ₹20,000 per unit. No repeat-violation addition applies. What is the base monetary penalty on the member?
Option A. ₹10,000 — Correct answer
Option B. ₹2,00,000
Why it is wrong: It uses the cap associated with the more-than-2% band instead of this 1% breach.
Option C. ₹4,000
Why it is wrong: It applies 0.2% in the raw calculation rather than the prescribed 2% and fails to use the stated formula correctly.
Option D. ₹40,000
Why it is wrong: It reports the raw formula result but omits the applicable cap.
Answer: A. The formula requires identifying the percentage-breach band, calculating the raw amount and then applying that band’s lower-of cap. Breach percentage = 100 ÷ 10,000 × 100 = 1%, within the up-to-2% band. Raw amount = 100 × ₹20,000 × 1 × 2% = ₹40,000. For this band, the penalty is the lower of that amount and ₹10,000. Therefore it is ₹10,000. The question excludes any repeated-violation addition and does not imply that paying the penalty permits the breach to continue. Remember: Apply the breach-band test before choosing the monetary cap.
Hint, shown before you answer in practice mode: Common mistake: Using the same cap for all position-limit violations, or treating the cap as a fixed charge.
XVI-145hardnumerical
Q7Under SEBI’s 9 September 2026 revised position-limit provisions, what must the member ensure after a client-level violation, apart from the monetary penalty?
Option A. Bring the position within the prescribed limit by the next trading day after the violation. — Correct answer
Option B. Reclassify the excess as a different client’s position, even though there is no valid basis.
Why it is wrong: Client attribution cannot legitimately be changed merely to conceal the excess.
Option C. Wait for three further violations by the same client before reducing the first excess.
Why it is wrong: Rules on repeated incidents do not suspend the immediate correction requirement.
Option D. Keep the excess position open until expiry, as long as the monetary penalty is paid.
Why it is wrong: Penalty payment does not provide a right to continue beyond the limit.
Answer: A. Monetary consequences and the requirement to correct a position breach are separate obligations. The circular requires reduction to the prescribed limit by the next trading day after the day of violation. It also provides for exchange square-off of the excess if the violation continues. Paying the penalty does not replace the reduction requirement. Other repeated-violation provisions are not permission to retain an earlier excess. Remember: Correct the exposure as well as addressing the penalty.
Hint, shown before you answer in practice mode: Common mistake: Confusing a sanction for a breach with authorisation to maintain the breaching position.
XVI-146mediumregulatory
Q8A trader argues that exchange trading of a food commodity exempts its physical delivery from all applicable food-quality and other goods-related legal requirements. Which statement is most accurate?
Option A. A derivative contract automatically transfers all legal compliance duties to the assayer who tests the goods.
Why it is wrong: An assayer’s testing role does not automatically absorb every party’s legal obligations.
Option B. Derivatives market rules alone do not remove other requirements that apply to the physical goods. — Correct answer
Option C. Only the futures entry price decides whether the goods may legally be delivered or not.
Why it is wrong: A traded price does not establish compliance with physical-goods standards.
Option D. Every exchange-listed commodity is exempt from all food-quality laws once it starts trading.
Why it is wrong: No such blanket exemption follows from exchange listing.
Answer: B. Commodity transactions can involve securities-market rules and separate laws applying to the physical goods. The derivatives framework governs the market and contract, but physical delivery can also involve goods standards, storage and other applicable requirements. A listing or hedge does not itself create a blanket exemption. Legal applicability must be checked for the particular commodity and transaction. Remember: Consider the physical commodity’s legal requirements as well as the derivative-market rules.
Hint, shown before you answer in practice mode: Common mistake: Assuming securities-market oversight is the only law relevant to a physically delivered commodity.
XVI-147mediumconceptual
Legal & Regulatory Environment of Commodity Derivatives: common questions
How many practice questions are there on Legal & Regulatory Environment of Commodity Derivatives?
8 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 Legal & Regulatory Environment of Commodity Derivatives?
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.
Code of Conduct and Investor Protection Measures
7 questions on Code of Conduct and Investor Protection Measures. Its quiz opens on that unit.
Open Code of Conduct and Investor Protection Measures