NISM Series I · Unit 8 of 10 · about 5% of the paper
Regulatory framework: NISM Series I notes and practice questions
The authorities and rules that govern currency derivatives.
What to know in Unit 8
- RBI and SEBI roles.
- FEMA.
- Eligibility and limits.
Key terms, examples and exam traps
RBI role
The RBI regulates foreign exchange and the currency derivatives framework along with SEBI.
Example. The RBI issues rules on forex and eligible participants.
Exam trap. This statement is false: The RBI has no role in currency derivatives.
SEBI role
SEBI regulates exchange-traded currency derivatives, including exchanges, brokers and trading rules.
Example. SEBI approves contract specifications.
Exam trap. This statement is false: SEBI regulates only mutual funds.
FEMA
The Foreign Exchange Management Act governs foreign exchange transactions in India.
Example. Cross-border payments follow FEMA rules.
Exam trap. This statement is false: FEMA is a tax law.
Underlying exposure
Residents may hold positions in some pairs freely, while in others positions beyond limits require proof of underlying exposure.
Example. A trader with no exposure stays within the cap.
Exam trap. This statement is false: Exposure proof is never required.
Eligible pairs
Exchange traded contracts are available only in pairs permitted by the RBI and SEBI, including INR pairs and certain cross-currency pairs.
Example. USD-INR and EUR-INR contracts are listed.
Exam trap. This statement is false: Any currency pair can be listed.
Position limits for clients
Limits for individual clients are set at a set dollar amount of gross open position per currency pair.
Example. Retail position caps apply.
Exam trap. This statement is false: There are no client-level limits.
Broker obligations
Brokers must follow KYC, risk disclosure and record-keeping rules under SEBI and exchange regulations.
Example. A broker gives the client a risk disclosure document.
Exam trap. This statement is false: Brokers may skip KYC for small clients.
Grievance redressal
Investors can approach the broker, then the exchange and SEBI to resolve complaints.
Example. A client escalates an unresolved complaint to the exchange.
Exam trap. This statement is false: Clients cannot complain about brokers.
6 practice questions
Read each question and choose your answer before opening the free mock, which shows the correct answer and the reason.
Q1. Which statement best describes “Position limits for clients”?
- Futures lock the rate but remove favourable moves; options keep favourable moves at the cost of premium.
- Traders should maintain contract notes, margin statements and ledgers to substantiate returns.
- As expiry approaches, the futures price converges to the spot price.
- Limits for individual clients are set at a set dollar amount of gross open position per currency pair.
Q2. Which statement best describes “Broker obligations”?
- Brokers must follow KYC, risk disclosure and record-keeping rules under SEBI and exchange regulations.
- Rho measures the sensitivity of option price to changes in interest rates.
- A bear put spread buys a higher strike put and sells a lower strike put to profit from a moderate fall.
- Profits and losses from exchange traded currency derivatives are generally treated as non-speculative business income.
Q3. Which term is described here? Residents may hold positions in some pairs freely, while in others positions beyond limits require proof of underlying exposure.
- Trading members and clients
- Underlying exposure
- Bear put spread
- Direct and indirect quote
Q4. Which statement best describes “FEMA”?
- The Foreign Exchange Management Act governs foreign exchange transactions in India.
- In a default, the clearing corporation closes positions, uses the defaulter's margin and then other resources as per a waterfall.
- Products should match the client's needs and understanding, and mis-selling is a violation.
- Open interest is the total number of outstanding contracts not yet closed or settled.
Q5. Which statement best describes “RBI role”?
- The tick is 0.0025 rupee, so one tick on a lot of 1,000 dollars is worth ₹2.50.
- The exchange maintains a fund to compensate investors in case of a broker default up to specified limits.
- The RBI regulates foreign exchange and the currency derivatives framework along with SEBI.
- Futures are standardised, exchange traded, daily settled and guaranteed by the clearing corporation, while forwards are customised and carry counterparty risk.
Q6. Which statement about “SEBI role” is correct?
- SEBI regulates only mutual funds.
- SEBI regulates exchange-traded currency derivatives, including exchanges, brokers and trading rules.
- Client codes can be changed any time.
- An importer protects herself by selling dollar futures.
Frequently asked questions
How much of NISM Series I comes from Unit 8?
Unit 8 (Regulatory framework) usually carries about 5% of the questions. The whole exam has 100 questions and the pass mark is 60%.
What should I study in NISM Series I Unit 8?
RBI and SEBI roles. FEMA. Eligibility and limits.
Are these NISM Series I practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
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