Risk Management and Client Protection
Risk Management and Client Protection
This domain tests the controls that keep a commodity derivatives market safe and the rules that protect clients from member default or misconduct. Expect questions on margins, position limits, segregation, dispute resolution and the limits of investor protection.
Exchange and member controls
Exchanges use upfront margins (initial, exposure and additional), daily MTM, price bands, position limits and surveillance. A settlement guarantee fund and a default waterfall handle member default. Members must obtain client registration, issue a risk disclosure document, collect margins before executing orders, segregate client funds from own funds, report client margins and monitor client positions. Authorised persons act under the member's responsibility.
Client protection
Client funds cannot be used for the member's proprietary trading or for another client's obligations. Assured returns are prohibited. Grievances go first to the member, then to exchange arbitration and SEBI's SCORES platform. The Investor Protection Fund may compensate eligible clients for specified defaults, but it does not cover trading losses or every unauthorised trade.
Worked example
A client pledges ₹2,00,000 as collateral and wants a position requiring ₹2,50,000 margin. The member must not execute the order unless it collects the ₹50,000 shortfall or reduces the position. If the member allows the shortfall, the member bears the risk, must report the shortfall and faces exchange penalties. The client cannot claim that the broker's error created a guaranteed profit.
Traps
Do not say one client's funds can cover another client's margin. Do not treat the IPF as insurance against market losses. Do not assume arbitration is unavailable after a small dispute. Do not confuse a member's risk disclosure with a guarantee. Do not ignore the distinction between client-level and member-level limits.