Regulatory Framework
Regulatory Framework
This domain tests the legal perimeter around derivatives dealing in India: SEBI’s powers, exchange rules, eligibility of underlyings, registration and conduct obligations.
Core rules
- Derivatives are securities under the Securities Contracts (Regulation) Act, 1956; SEBI regulates the market under the SEBI Act, 1992 and its regulations. Exchange bye-laws and circulars supply contract-level detail.
- A dealer must be registered with SEBI as a stock broker/trading member through the exchange, and must satisfy net-worth, qualification and code-of-conduct requirements. Clearing membership is separate.
- SEBI and exchanges prescribe eligible underlyings, contract specifications, margining, position limits and disclosure. Single-stock derivatives are permitted only for eligible stocks; index derivatives depend on the index meeting eligibility norms.
- Fraudulent and unfair trade practices, insider trading and market manipulation are prohibited. Client-facing dealers must follow KYC/AML, client agreement, risk-disclosure and record-keeping rules.
- Proprietary dealing is not a way around client-protection rules: client funds and securities must be segregated from the dealer’s own.
Worked example
A firm wants to deal in Nifty options for its own book. It needs SEBI registration as a stock broker, exchange membership, and clearing arrangements through a clearing member. Its proprietary positions are subject to margin, position limits and audit; it cannot use client collateral to fund them. If it also advises clients, it must obtain KYC, execute a client agreement and give a risk disclosure before the first trade.
Traps
- Assuming exchange membership alone is SEBI registration.
- Applying cash-equity rules to F&O without checking derivative circulars.
- Ignoring position-limit disclosures.
- Treating proprietary and client funds as one pool.
- Overlooking PFUTP and insider-trading rules in dealer conduct.