Regulatory Framework for Interest Rate Derivatives
8 questions. Each answer is explained.
Question 1 of 8Practice · Series IV — Interest Rate Derivatives
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Learn these topics
More units in NISM Series IV
- Introduction to Interest Rate, Interest Rate Instruments and Fixed Income Market30
- Interest Rate Derivatives10
- Exchange Traded Interest Rate Futures20
- Exchange Traded Interest Rate Options22
- Strategies Using Exchange Traded Interest Rate Futures and Options24
- Trading Mechanism in Exchange Traded Interest Rate Derivatives10
- Clearing, Settlement and Risk Management of Interest Rate Derivatives16
- Accounting and Taxation of Interest Rate Derivatives4
- Code of Conduct and Investor Protection Measures in Interest Rate Derivatives6
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 IV Interest Rate 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 If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.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 Regulatory Framework for Interest Rate Derivatives, with answers
Q1Which statement is consistent with the Securities Contracts (Regulation) Act’s definitions of securities and derivatives?
Option A. Only equity-linked contracts, such as stock and index futures, can qualify as derivatives
Why it is wrong: The Act’s wording also mentions debt instruments and other named underlyings.
Option B. A security derived from a debt instrument can be a derivative, and derivatives count as securities — Correct answer
Option C. A debt-linked contract can never be a derivative, because its underlying debt is already a security
Why it is wrong: An underlying security and a derivative linked to it are two separate instruments. They differ both in law and in economic terms.
Option D. A derivative is excluded from the definition of securities whenever it is settled in cash
Why it is wrong: Cash settlement does not create that exclusion from the definition.
Answer: B. SEBI publishes the text of the Act. In that text, the definition of derivative includes securities derived from debt instruments. The definition of securities includes derivatives. So derivatives are not just equity options or equity-index futures. But being in a definition does not, by itself, approve every product. Nor does it allow every participant to trade it. Remember: Do not restrict the statutory derivative category to equity products.
Hint, shown before you answer in practice mode: Common mistake: Confusing inclusion in a legal definition with blanket product or participant approval.
IV-133mediumregulatory
Q2Under the RBI IRD Directions checked on 3 October 2026, a recognised exchange proposes a new standardised interest-rate derivative product. Whose prior approval is expressly required by these Directions?
Option A. Only the clearing member with the largest open interest
Why it is wrong: Clearing-member participation does not replace the prior approval specified by RBI.
Option B. Only the exchange’s internal product committee
Why it is wrong: Internal approval does not replace the approval expressly required by the direction.
Option C. FIMMDA alone
Why it is wrong: An industry association’s role is not a substitute for the specified RBI approval.
Option D. The Reserve Bank of India — Correct answer
Answer: D. Product design may be developed by a recognised exchange, but the direction requires RBI approval before a new IRD product is introduced or an existing design is modified. The question identifies one express requirement. It does not imply that exchange, clearing or other applicable SEBI obligations disappear once RBI approval is obtained. Remember: Regulatory approval and internal product design are separate steps.
Hint, shown before you answer in practice mode: Common mistake: Assuming standardisation or exchange listing makes prior product approval unnecessary.
IV-134mediumregulatory
Q3Who prescribes market timings for exchange-traded rupee interest-rate derivatives under paragraph 4.6 of the current RBI Directions?
Option A. FIMMDA without involvement of SEBI or RBI
Why it is wrong: The direction does not give FIMMDA sole authority over exchange trading hours.
Option B. SEBI, in consultation with RBI — Correct answer
Option C. Each broker independently for the entire exchange
Why it is wrong: A broker’s service hours do not set the exchange-wide regulatory trading session.
Option D. RBI alone, using the OTC dealing-hours provision for every exchange contract
Why it is wrong: The exchange-traded paragraph expressly specifies SEBI in consultation with RBI, not a direct import of the OTC hours rule.
Answer: B. The current direction allocates the exchange-traded timing prescription to SEBI in consultation with RBI. This should not be confused with a bank’s dealing-desk hours or the separate provisions for OTC trading. The item tests the source of authority without hard-coding a session schedule that could later change. Remember: Identify the market segment before applying its operational rule.
Hint, shown before you answer in practice mode: Common mistake: Importing OTC dealing hours or broker availability into exchange-traded market rules.
IV-135mediumregulatory
Q4An FPI has consolidated long holdings of ₹70 crore in Government securities and ₹20 crore in IRFs. Its gross short IRF position is ₹65 crore. Holding those long positions fixed and considering only RBI’s gross-short constraint, what additional short capacity remains?
Option A. ₹5 crore
Why it is wrong: This counts Government securities but omits the long IRFs in the specified consolidated base.
Option B. ₹25 crore — Correct answer
Option C. ₹45 crore
Why it is wrong: This subtracts the long IRF amount from the short position instead of calculating headroom.
Option D. ₹90 crore
Why it is wrong: This is the full permitted base before deducting the existing short position.
Answer: B. The current rule limits an individual FPI’s total gross short IRFs to its consolidated long position in Government securities and IRFs. Here the base is 70 + 20 = ₹90 crore, and 65 is already used. Remaining capacity under this constraint is ₹25 crore. Other limits and margin requirements must still be checked separately. Remember: Apply a gross-short limit to its expressly defined eligible long base.
Hint, shown before you answer in practice mode: Common mistake: Netting positions informally or overlooking another type of long holding included in the rule.
IV-136hardnumerical
Q5Under the current RBI framework, a floating interest rate, price or index used in an exchange-traded IRD must be which of the following?
Option A. An indicative dealer quotation, even where no FBA publishes it as a benchmark
Why it is wrong: An indicative dealer quote is not automatically an FBA-published benchmark.
Option B. A private index that only the two contracting traders calculate
Why it is wrong: A privately calculated bilateral reference does not satisfy the stated exchange-traded benchmark requirement.
Option C. An unpublished estimate made independently by each broker
Why it is wrong: A private broker estimate does not meet the stated benchmark requirement.
Option D. A benchmark published by a Financial Benchmark Administrator — Correct answer
Answer: D. The direction requires an eligible published benchmark for the floating reference used in the contract. This creates a defined reference rather than allowing each participant to choose a favourable personal estimate. It does not mean that all contracts use the same rate, that the benchmark is fixed forever, or that investors face no market risk. Remember: Contract references require an identified and properly administered benchmark.
Hint, shown before you answer in practice mode: Common mistake: Treating an informal quoted estimate as equivalent to the prescribed reference benchmark.
IV-137mediumregulatory
Q6Under NSE’s published membership eligibility criteria, which statement about a limited liability partnership (LLP) is correct?
Option A. A relevant NISM certificate on its own removes all of the LLP’s financial and designated-partner requirements
Why it is wrong: Certification is one requirement where the rules ask for it. It does not replace every other condition.
Option B. An LLP becomes an NSE trading member automatically on the day it is incorporated, with no further checks
Why it is wrong: Admission still depends on the rules of the exchange and of the regulators.
Option C. An LLP can never be eligible, because only individual proprietors may apply for NSE trading membership
Why it is wrong: The published rules include LLPs and other kinds of applicant.
Option D. An LLP may be eligible if it meets prescribed financial, designated-partner and other regulatory conditions — Correct answer
Answer: D. NSE’s eligibility page clearly covers LLP membership. It also sets out conditions about financial requirements, designated partners and disqualifications. So an LLP is a type of firm that may apply. But that is not the same as meeting every rule. The LLP must still meet all the admission rules. It must also meet the rules for each market segment it wants to trade in. This question does not assume any figure for minimum net worth. It does not assume any transitional rule for membership either. Remember: Entity eligibility, personal qualifications and actual admission are separate tests.
Hint, shown before you answer in practice mode: Common mistake: Assuming that either incorporation or a certification alone grants exchange membership.
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Q7A participant wants to use a broker for an OTC rupee interest-rate derivative. Under the current RBI direction, which statement correctly identifies a relevant FIMMDA role?
Option A. FIMMDA replaces RBI as the statutory authority issuing the Directions
Why it is wrong: Accrediting brokers does not pass the RBI’s legal powers to FIMMDA.
Option B. FIMMDA becomes the counterparty to every transaction arranged by an accredited broker
Why it is wrong: Accrediting a broker does not make FIMMDA the legal counterparty to each trade.
Option C. The direction requires OTC IRD brokers to be accredited by FIMMDA — Correct answer
Option D. FIMMDA approval removes all user-classification and product restrictions
Why it is wrong: The other rules in the direction still apply.
Answer: C. FIMMDA has an industry role in the fixed-income market. The RBI’s OTC direction names one part of that role. FIMMDA accredits brokers, which means it formally approves them. This role is not the same as issuing the RBI rules under the law. Nor is it the same as guaranteeing how contracts turn out. A participant must meet all the rules that apply. Using an accredited broker is not enough on its own. Remember: An industry body’s specific assigned role does not replace statutory supervision.
Hint, shown before you answer in practice mode: Common mistake: Treating accreditation as a blanket exemption from other regulations.
IV-139mediumregulatory
Q8What purpose does paragraph 4.3 of the current RBI IRD Directions specify for a non-resident’s transactions in exchange-traded IRDs?
Option A. Unrestricted speculation whenever sufficient initial margin is deposited
Why it is wrong: Paying margin does not remove the purpose rule set for non-residents.
Option B. Any purpose without qualification simply because the product is exchange traded
Why it is wrong: Trading on an exchange does not remove the stated purpose rule for non-residents.
Option C. Only market-making, with no hedging transactions permitted
Why it is wrong: This is the opposite of the purpose stated in the rule for exchange trading.
Option D. Hedging — Correct answer
Answer: D. This question is about the rule for IRDs traded on an exchange. That rule gives hedging as the purpose for non-residents who take part. Do not copy the separate OTC rules or user categories into this rule. A real participant should not rely on the purpose test alone. It should also check the FPI limits, eligibility and other rules that apply to it. Remember: Apply the rule for the specified participant and market venue.
Hint, shown before you answer in practice mode: Common mistake: Assuming an OTC permission automatically gives the same permission on an exchange.
IV-140mediumregulatory
Regulatory Framework for Interest Rate Derivatives: common questions
How many practice questions are there on Regulatory Framework for Interest Rate 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 IV, which has 150 questions in total.
Are these real NISM Series IV questions on Regulatory Framework for Interest Rate 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 IV?
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 Interest Rate Derivatives
4 questions on Accounting and Taxation of Interest Rate Derivatives. Its quiz opens on that unit.
Open Accounting and Taxation of Interest Rate Derivatives