Sales Practices and Investor Protection
5 questions. Each answer is explained.
Question 1 of 5Practice · Series VIII — Equity Derivatives
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More units in NISM Series VIII
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 | 2 of 100 marks (2%) |
Source: Unit 10: Sales Practices and Investors Protection Services
NISM Series VIII Equity Derivatives
Exam rules read on NISM's site on 3 October 2026. Test objectives in force from 1 May 2022. 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 If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.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 5 questions on Sales Practices and Investor Protection, with answers
Q1What is the primary purpose of the mandatory Risk Disclosure Document (RDD) provided to a derivatives client?
Option A. To explain key risks and features so the client can make an informed choice — Correct answer
Option B. To guarantee that the client will never lose money in derivatives trading
Why it is wrong: Risk disclosure cannot guarantee an investment outcome.
Option C. To replace KYC and identity verification when opening the account
Why it is wrong: KYC and risk disclosure perform different compliance functions.
Option D. To promise the client a fixed return as long as margin is maintained
Why it is wrong: Maintaining margin does not create a promised return.
Answer: A. The RDD is an investor-protection disclosure. It is intended to communicate significant risks and features of trading so that the client understands that derivatives can generate losses and other obligations. It does not guarantee returns and does not replace KYC. Remember: RDD informs. It does not insure the client against market losses.
Hint, shown before you answer in practice mode: Common mistake: Treating disclosure as a guarantee of suitability or profitability.
VIII-096easyconceptual
Q2What is a core purpose of an exchange Investor Protection Fund (IPF) in the context of a trading member declared a defaulter?
Option A. To reimburse every trading loss that investors suffer from an adverse market move
Why it is wrong: Ordinary market losses are not insured by the IPF.
Option B. To guarantee the value of every listed security on the exchange
Why it is wrong: It does not guarantee market prices.
Option C. To finance speculative positions for clients who have no margin
Why it is wrong: The IPF is not a source of trading margin.
Option D. To pay eligible investor claims when the defaulter's assets fall short — Correct answer
Answer: D. An exchange IPF is not a general loss-insurance scheme. One of its important functions is to provide compensation for eligible admitted investor claims arising from a defaulting/expelled member when the member's available assets are insufficient, subject to the applicable rules, verification and compensation limits. Remember: IPF protection is rule-based compensation in specified member-default situations, not insurance against bad trades.
Hint, shown before you answer in practice mode: Common mistake: Assuming any trading loss can be claimed from the IPF.
VIII-097mediumconceptual
Q3Under the stock-broker framework, a contract note for executed trades is generally required to be issued to the client within:
Option A. 30 days
Why it is wrong: Thirty days is not the standard issue timeline.
Option B. 7 calendar days
Why it is wrong: Seven days is too late for the ordinary contract-note requirement.
Option C. 24 hours of execution — Correct answer
Option D. Only when the client specifically asks for one
Why it is wrong: Issuance is a regulatory obligation, not merely an on-request service.
Answer: C. The contract note is a key trade-confirmation document and is generally required to be issued within 24 hours of execution in the prescribed manner. It records essential trade details and charges. Remember: Contract notes provide prompt documentary confirmation of executed transactions.
Hint, shown before you answer in practice mode: Common mistake: Confusing periodic account statements with the much quicker contract-note timeline.
VIII-098mediumregulatory
Q4A securities intermediary concludes that a client's transaction is suspicious under its AML procedures. Which statement best reflects the reporting framework?
Option A. The intermediary should file an STR with FIU-IND without alerting the client — Correct answer
Option B. The intermediary should warn the client first that an STR is going to be filed
Why it is wrong: Tipping off is prohibited.
Option C. Suspicious non-cash securities transactions can never be reportable
Why it is wrong: Suspicious transactions can be cash or non-cash.
Option D. Only transactions that have already resulted in a criminal conviction may be reported
Why it is wrong: STR reporting is based on suspicion under the framework. It does not wait for a criminal conviction.
Answer: A. SEBI's AML/CFT framework requires intermediaries to identify and report suspicious transactions through the prescribed process to the Financial Intelligence Unit-India (FIU-IND), with the Principal Officer/designated structure responsible for reporting. The client must not be tipped off that an STR or related information is being filed. Remember: AML controls combine monitoring, reporting and confidentiality. 'do not tip off' is a core principle.
Hint, shown before you answer in practice mode: Common mistake: Assuming only large cash deposits can create an STR obligation.
VIII-149hardregulatory
Q5A new client has little derivatives experience, limited ability to absorb losses and says she believes option selling provides 'guaranteed monthly income'. Why is understanding the client's risk profile important before facilitating derivative activity?
Option A. It allows the intermediary to promise a minimum return tailored to the client
Why it is wrong: An intermediary cannot turn derivatives into a guaranteed-return product.
Option B. It shows if her knowledge, goals and ability to bear losses suit the risks — Correct answer
Option C. It eliminates the need for KYC and risk disclosure for this client
Why it is wrong: Risk profiling complements rather than replaces KYC/RDD duties.
Option D. It guarantees that any derivative strategy selected will make money
Why it is wrong: No risk assessment can guarantee trading profits.
Answer: B. Derivatives can involve leverage, margin calls and potentially large losses. Understanding a client's knowledge, objectives and financial ability to bear risk helps the intermediary communicate risks and meet investor-protection responsibilities. Risk profiling cannot guarantee performance and does not replace KYC or mandated disclosures. Remember: Investor protection starts with understanding whether the client appreciates and can bear the risks involved.
Hint, shown before you answer in practice mode: Common mistake: Treating margin availability as proof that a client understands derivatives or can tolerate losses.
VIII-150mediumapplication
Sales Practices and Investor Protection: common questions
How many practice questions are there on Sales Practices and Investor Protection?
5 questions, all written out on this page with the correct answer and why each other option is wrong. This unit is one of the 11 practice topics for NISM Series VIII, which has 150 questions in total.
Are these real NISM Series VIII questions on Sales Practices and Investor Protection?
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.
How much of the NISM Series VIII exam is Sales Practices and Investor Protection?
NISM's published syllabus outline gives it 2 of the paper's 100 marks, or 2% of the exam. It is quoted from the outline, not estimated. The published unit it comes from: Unit 10: Sales Practices and Investors Protection Services
Does negative marking apply to NISM Series VIII?
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 VIII
This is the last unit of Equity Derivatives. The series page runs one quiz across every unit.
Open the NISM Series VIII practice page