SEBI Regulatory Framework for Derivatives — NISM Series VIII | PrepClever

The regulatory framework chapter covers the legal and compliance landscape that governs equity derivatives in India. SEBI, the relevant legislation, and the conduct expected of market participants are consistently tested in NISM Series VIII.
Series VIII · Chapter 8

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Key points

checkSEBI Act 1992 gives SEBI statutory power to regulate securities markets including derivatives
checkSC(R)A 1956 governs stock exchanges and contracts — derivatives added as 'securities' in 1999
checkSEBI permitted exchange-traded derivatives in June 2000 (L.C. Gupta Committee recommendation)
checkKey SEBI circulars: margining, position limits, product design, algorithm trading, short selling
checkCode of conduct: fair dealing, no market manipulation, no insider trading, client-first
checkSEBI can investigate, suspend, and cancel registration of derivatives dealers

Key Legislation

SEBI Act, 1992

Gives SEBI the power to regulate the securities market, protect investor interests, and develop the market. SEBI can make regulations, issue circulars, inspect intermediaries, and take enforcement action.

Securities Contracts (Regulation) Act, 1956 (SC(R)A)

Governs contracts in securities. In 1999, derivatives were explicitly included as "securities" under SC(R)A, clearing the legal path for exchange-traded derivatives. Section 18A was inserted to make OTC derivatives valid contracts.

SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992

Defines the registration, net worth requirements, and code of conduct for stock brokers who deal in derivatives.

L.C. Gupta Committee (1997)

This committee laid the foundational framework for derivatives in India, recommending:

Phased introduction starting with index futures
Cash settlement (not physical delivery)
Exchange-based trading with central counterparty clearing
SPAN margining system
Mandatory certification for derivatives market professionals (→ led to NISM exams)

Code of Conduct for Derivatives Dealers

Fair dealing: No misleading recommendations, no churning of client accounts
Margin collection: Must collect margins from clients before placing orders
No market manipulation: No wash trades, no painting the tape, no spoofing
Segregation of funds: Client funds must be segregated from own funds
KYC: Know Your Client norms mandatory before allowing derivatives trading
Risk disclosure: Must provide risk disclosure document to all derivatives clients

Insider Trading in Derivatives

SEBI (Prohibition of Insider Trading) Regulations, 2015 applies to derivatives. Trading in options/futures of a stock using unpublished price-sensitive information (UPSI) is a criminal offence with fines and imprisonment.

Practice questions on Regulatory Framework for Equity Derivatives in India

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FAQ

Can a retail investor trade derivatives without any certification?add

Retail investors can trade derivatives without NISM certification — the certification requirement is for market professionals (dealers, sub-brokers). However, investors must sign a risk disclosure document and meet SEBI's criteria for derivatives trading (e.g., minimum demat account age).

What is the penalty for market manipulation in derivatives?add

Under SEBI Act, market manipulation can attract penalties of up to ₹25 crore or 3x the profits, whichever is higher. Criminal prosecution under the Securities Laws (Amendment) Act 2014 can lead to imprisonment of up to 10 years.

The regulatory framework chapter covers the legal and compliance landscape that governs equity derivatives in India. SEBI, the relevant legislation, and the conduct expected of market participants are consistently tested in NISM Series VIII.
Series VIII · Chapter 8

lightbulb

Key points

checkSEBI Act 1992 gives SEBI statutory power to regulate securities markets including derivatives
checkSC(R)A 1956 governs stock exchanges and contracts — derivatives added as 'securities' in 1999
checkSEBI permitted exchange-traded derivatives in June 2000 (L.C. Gupta Committee recommendation)
checkKey SEBI circulars: margining, position limits, product design, algorithm trading, short selling
checkCode of conduct: fair dealing, no market manipulation, no insider trading, client-first
checkSEBI can investigate, suspend, and cancel registration of derivatives dealers

Key Legislation

SEBI Act, 1992

Securities Contracts (Regulation) Act, 1956 (SC(R)A)

SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992

Defines the registration, net worth requirements, and code of conduct for stock brokers who deal in derivatives.

L.C. Gupta Committee (1997)

This committee laid the foundational framework for derivatives in India, recommending:

Phased introduction starting with index futures
Cash settlement (not physical delivery)
Exchange-based trading with central counterparty clearing
SPAN margining system
Mandatory certification for derivatives market professionals (→ led to NISM exams)

Code of Conduct for Derivatives Dealers

Fair dealing: No misleading recommendations, no churning of client accounts
Margin collection: Must collect margins from clients before placing orders
No market manipulation: No wash trades, no painting the tape, no spoofing
Segregation of funds: Client funds must be segregated from own funds
KYC: Know Your Client norms mandatory before allowing derivatives trading
Risk disclosure: Must provide risk disclosure document to all derivatives clients

Insider Trading in Derivatives

Practice questions on Regulatory Framework for Equity Derivatives in India

Get a personalized plan and full-length mocks for Series VIII — free.

Start Practising Free

Regulatory Framework for Equity Derivatives in India

Key Legislation

SEBI Act, 1992

Securities Contracts (Regulation) Act, 1956 (SC(R)A)

SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992

L.C. Gupta Committee (1997)

Code of Conduct for Derivatives Dealers

Insider Trading in Derivatives

Related Topics

Trading, Clearing and Settlement

Introduction to Derivative Markets

Keep Exploring

Series VIII

Financial Glossary

All NISM Certifications

FAQ

Put these notes into practice

Regulatory Framework for Equity Derivatives in India

Key Legislation

SEBI Act, 1992

Securities Contracts (Regulation) Act, 1956 (SC(R)A)

SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992

L.C. Gupta Committee (1997)

Code of Conduct for Derivatives Dealers

Insider Trading in Derivatives

Related Topics

Trading, Clearing and Settlement

Introduction to Derivative Markets

Keep Exploring

Series VIII

Financial Glossary

All NISM Certifications

FAQ

Put these notes into practice