Sales practices and investor protection services: NISM Series VIII notes and practice questions

Q1. Which statement best describes “Conflict of interest”?

1. The tick size is the minimum price movement allowed for a contract, such as ₹0.05 for futures on equity.
2. On the expiry date the futures price converges to the spot price of the underlying.
3. Margin can be given in cash, bank guarantees, fixed deposit receipts or approved securities, subject to haircuts.
4. A dealer must avoid or disclose conflicts, such as trading ahead of client orders (front running), which is prohibited.

Q2. Which statement best describes “Know your client”?

1. A clearing member is authorised to clear and settle trades with the clearing corporation, for itself or for trading members.
2. Intermediaries must know the client's identity, financial position and investment objectives before allowing derivative trades.
3. The call seller (writer) receives the premium and must sell the underlying at the strike if exercised. The maximum profit is the premium and the loss is potentially unlimited.
4. OTC derivatives are privately negotiated and tailor-made but carry higher counterparty and liquidity risk.

Q3. Which statement best describes “Complaint handling”?

1. STT is charged on derivatives transactions, for example on the sale of options on the premium and on futures sale, at rates set by law.
2. The clearing corporation becomes the counterparty to every trade through novation, guaranteeing settlement and managing risk.
3. On the expiry date the futures price converges to the spot price of the underlying.
4. Intermediaries must have a grievance mechanism and resolve client complaints promptly, and escalate to the exchange or SEBI if not resolved.

Q4. Which term is described here? Dealers should explain leverage, margin calls and potential loss and avoid pushing high-risk strategies to unsuitable clients.

1. Base value
2. Futures versus forwards risk
3. Appropriate advice
4. Mark-to-market

Q5. A broker must not promise assured profits. Which idea does this illustrate?

1. Conflict of interest
2. Complaint handling
3. Know your client
4. Code of conduct

Q6. Which term is described here? Intermediaries must know the client's identity, financial position and investment objectives before allowing derivative trades.

1. Code of conduct
2. Complaint handling
3. Know your client
4. Conflict of interest