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Unit study guide · NISM Series VIII

Legal and Regulatory Environment

17 questions in this unit

What this unit covers

Key ideas

From the practice bank · 1

Which authority is the principal securities-market regulator for exchange-traded equity derivatives in India?

SEBI regulates the securities market in India, including the framework governing exchange-traded equity derivatives. Exchanges and clearing corporations operate within the regulatory framework and their own approved rules, but SEBI is the securities-market regulator. Remember: Separate the market regulator from the exchange and clearing corporation that operate the market infrastructure.

Hint Common mistake: Naming NSE or a clearing corporation as the regulator.

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From the practice bank · 2

For the legal framework tested in NISM Series VIII, derivatives are included within the definition of 'securities' under which statute?

The Securities Contracts (Regulation) Act, 1956 (SCRA) defines 'securities' and includes derivatives within that statutory framework. This legal recognition is central to the regulation of exchange-traded derivatives. Remember: Remember the legal chain: SCRA defines securities/derivatives. SEBI regulates the securities market under its statutory framework.

Hint Common mistake: Confusing corporate law with securities-contract law.

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From the practice bank · 3

Under the current NSE market-wide position limit (MWPL) framework for an individual stock, when aggregate open interest across exchanges exceeds what level of MWPL does the security enter the ban framework for the next trading day?

When aggregate across exchanges in the security exceeds 95% of the market-wide position limit, the security enters the ban framework. During the ban, participants are permitted to trade only to reduce positions through offsetting until normal trading resumes under the prescribed threshold. Remember: Memorise the two different MWPL thresholds: above 95% for entry into the ban framework. At or below 80% for resumption.

Hint Common mistake: Using the 80% resumption threshold as the 95% ban-entry threshold.

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From the practice bank · 4

A stock is in the F&O ban period because aggregate open interest has breached the MWPL trigger. Which new trade is permitted under the ban framework?

During the ban period, participants may trade in the derivative contracts of that stock only for the purpose of decreasing their positions through offsetting positions. Trades that increase open positions are not permitted merely because they are intraday. Remember: F&O ban does not freeze all trading. It allows risk-reducing offsets but not position increases.

Hint Common mistake: Thinking 'ban' means every order is prohibited, including exits.

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From the practice bank · 5

Under SEBI's strengthened equity-index derivatives framework introduced in October 2024, which statement correctly describes the contract-value requirement used for new index-derivative contracts and lot-size review?

SEBI strengthened the index-derivatives framework by increasing the minimum contract-size framework. NSE implementation reflects a contract value of not less than ₹15 lakh at introduction, with lot-size review designed to keep the contract value broadly within the prescribed ₹15–20 lakh band. Market prices can move after a is fixed, so the contract value is not literally fixed at one exact rupee amount every day. Remember: Differentiate a regulatory sizing band/review rule from an exact daily notional value.

Hint Common mistake: Treating ₹15–20 lakh as a guaranteed daily value rather than a contract-design/review framework.

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From the practice bank · 6

Under the rationalisation of weekly index derivatives, how many benchmark indices may each exchange offer with weekly expiry contracts?

The rationalised framework allows each exchange to provide weekly-expiry index derivatives on one benchmark index. The measure was intended to reduce the proliferation and concentration of very short-dated index contracts. Remember: The current framework permits weekly index derivatives on one benchmark index per exchange.

Hint Common mistake: Remembering the old availability of multiple weekly index expiries.

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From the practice bank · 7

Which statement best describes position-limit controls in the equity-derivatives market?

Equity-derivatives risk controls use multiple layers of position limits. Depending on the contract and participant, limits may apply at client, trading/clearing-member, institutional and market-wide levels. They are not one universal number for every market participant. Remember: Position limits are layered risk controls rather than a single universal ceiling.

Hint Common mistake: Memorising one MWPL percentage and assuming it is the only position limit.

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From the practice bank · 8

Which of the following is one current NSE eligibility measure used for stocks in the equity F&O segment?

Current stock-derivative eligibility uses and market-depth measures. NSE lists, among other criteria, a median quarter-sigma order size over the previous six months of at least ₹75 lakh, alongside MWPL, deliverable value, activity and other requirements. Remember: F&O eligibility is based on liquidity, market depth, trading activity and position-limit measures—not arbitrary corporate characteristics.

Hint Common mistake: Using old eligibility thresholds or non-existent conditions.

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From the practice bank · 9

Before enabling a client for equity-derivatives trading, which combination is most consistent with the investor-protection framework?

Derivatives access is not based only on the ability to post . Intermediaries must comply with client-registration/KYC requirements, provide mandated risk disclosure, and maintain the required information for clients opting for derivatives, including applicable financial information under the framework. Remember: Client onboarding for derivatives combines identity/KYC, risk disclosure and appropriate client information—not merely margin collection.

Hint Common mistake: Assuming a signed trading form alone is enough for derivatives activation.

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From the practice bank · 10

Which action is inconsistent with the conduct expected of a registered stock broker?

A broker is expected to act with integrity, due skill and care and must not engage in manipulative, fraudulent or deceptive conduct. Spreading false information to induce trading or create a false market is inconsistent with these duties. Remember: Broker conduct rules target integrity and fair dealing, not just mechanical order execution.

Hint Common mistake: Thinking a broker violates conduct rules only when client money is directly stolen.

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From the practice bank · 11

An investor has first complained to the stock broker about a trading dispute but remains dissatisfied with the response. Which route is consistent with the current securities-market grievance framework?

The normal grievance path begins with the concerned market participant. If the matter remains unresolved or the investor is dissatisfied, securities-market mechanisms include SEBI's SCORES and the SMART ODR framework, which provides structured dispute-resolution processes such as conciliation and arbitration where applicable. Remember: Know the escalation logic: approach the market participant first. Unresolved matters can move to formal securities-market grievance/ODR channels.

Hint Common mistake: Jumping directly to an old or obsolete grievance route without checking the current framework.

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From the practice bank · 12

A person trades derivatives on a listed company's shares while in possession of unpublished price sensitive information (UPSI), and no applicable statutory exception or defence applies. How is this conduct treated under the insider-trading framework?

SEBI's insider-trading framework prohibits an insider from trading in securities while in possession of UPSI, subject to specified exceptions/defences. Equity derivatives on the relevant securities do not provide a loophole simply because the exposure is created through a derivative. Remember: UPSI restrictions concern trading while in possession of sensitive information. Using a derivative does not automatically avoid the rule.

Hint Common mistake: Assuming insider-trading restrictions apply only to cash shares.

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From the practice bank · 13

Under the current NSE F&O stock framework, once a stock has been excluded from derivatives trading, which statement describes re-introduction?

NSE's current selection-criteria page states that once a stock is excluded from the F&O list, it is not considered for re-inclusion for one year. For re-introduction it must again satisfy the applicable eligibility criteria for six consecutive months, subject to the prescribed approval process. Remember: Derivatives eligibility is continuously monitored. Exclusion and re-entry follow defined criteria rather than price performance alone.

Hint Common mistake: Assuming F&O eligibility, once obtained or lost, is permanent.

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From the practice bank · 14

Which baseline criterion is part of NSE's current eligibility framework for introducing futures and options on an index?

NSE's index-eligibility framework requires that stocks contributing at least 80% of index weight be individually eligible for derivatives trading and that no single ineligible constituent carry more than 5% weight. Additional current criteria can also apply. Remember: Index-derivative eligibility considers whether most of the index is built from derivative-eligible, sufficiently tradable constituents.

Hint Common mistake: Assuming a popular cash-market index is automatically eligible for derivatives.

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From the practice bank · 15

A stock entered the F&O ban after aggregate open interest exceeded 95% of MWPL. Under the current framework, normal trading in its derivatives resumes when aggregate open interest falls to:

NSE's position-limit framework uses a lower re-entry threshold than the ban trigger. After a stock enters the ban framework, normal trading resumes when aggregate open interest across exchanges falls to 80% or below of MWPL. Remember: Ban entry and ban exit use different thresholds: >95% entry. ≤80% resumption.

Hint Common mistake: Using the same percentage for entering and leaving the ban framework.

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From the practice bank · 16

From 1 October 2025, what is the position limit for an individual client in the derivatives of a single stock?

From 1 October 2025 a client may hold up to 10% of the stock's MWPL. A trading member's own proprietary position may reach 20%, and a member's combined positions, Category I FPIs and mutual funds may reach 30%. The old limit, the higher of 1% of free float or 5% of open interest, no longer applies. Remember: From 1 October 2025, an individual client's position limit in a single stock's derivatives is 10% of that stock's MWPL.

Hint Common mistake: Using the older client limit that applied before October 2025.

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From the practice bank · 17

According to NSE's current membership-category framework, how may Futures & Options segment membership be taken?

NSE's current membership-types page states that F&O segment membership has to be taken in combination with the Cash segment. Eligibility, capital, fit-and-proper and other requirements also apply according to the membership category. Remember: Derivative-segment membership has structural eligibility requirements beyond simply opening a client account.

Hint Common mistake: Confusing exchange membership rules with client eligibility to trade.

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Open InterestRead more
Lot SizeRead more
LiquidityRead more
MarginRead more