Unit study guide · NISM Series IV
Regulatory Framework for Interest Rate Derivatives
8 questions in this unit
What this unit covers
- Which statement is consistent with the Securities Contracts (Regulation) Act’s definitions of securities and derivatives?
- Under 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?
- Who prescribes market timings for exchange-traded rupee interest-rate derivatives under paragraph 4.6 of the current RBI Directions?
- An 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?
- Under the current RBI framework, a floating interest rate, price or index used in an exchange-traded IRD must be which of the following?
- Under NSE’s published membership eligibility criteria, which statement about a limited liability partnership (LLP) is correct?
- A 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?
- What purpose does paragraph 4.3 of the current RBI IRD Directions specify for a non-resident’s transactions in exchange-traded IRDs?
Key ideas
From the practice bank · 1
Which statement is consistent with the Securities Contracts (Regulation) Act’s definitions of securities and derivatives?
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 Common mistake: Confusing inclusion in a legal definition with blanket product or participant approval.
IV-133From the practice bank · 2
Under 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?
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 Common mistake: Assuming standardisation or exchange listing makes prior product approval unnecessary.
IV-134From the practice bank · 3
Who prescribes market timings for exchange-traded rupee interest-rate derivatives under paragraph 4.6 of the current RBI Directions?
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 Common mistake: Importing OTC dealing hours or broker availability into exchange-traded market rules.
IV-135From the practice bank · 4
An 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?
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 requirements must still be checked separately. Remember: Apply a gross-short limit to its expressly defined eligible long base.
Hint Common mistake: Netting positions informally or overlooking another type of long holding included in the rule.
IV-136From the practice bank · 5
Under the current RBI framework, a floating interest rate, price or index used in an exchange-traded IRD must be which of the following?
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 Common mistake: Treating an informal quoted estimate as equivalent to the prescribed reference benchmark.
IV-137From the practice bank · 6
Under NSE’s published membership eligibility criteria, which statement about a limited liability partnership (LLP) is correct?
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 Common mistake: Assuming that either incorporation or a certification alone grants exchange membership.
IV-138From the practice bank · 7
A 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?
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 Common mistake: Treating accreditation as a blanket exemption from other regulations.
IV-139From the practice bank · 8
What purpose does paragraph 4.3 of the current RBI IRD Directions specify for a non-resident’s transactions in exchange-traded IRDs?
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 Common mistake: Assuming an OTC permission automatically gives the same permission on an exchange.
IV-140Margin is the money a participant must keep in place to carry a leveraged position.
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