Code of Conduct and Investor Protection Measures

Chapter 10: Code of Conduct and Investor Protection Measures

NISM Series IV — Interest Rate Derivatives | ~5% weightage | ~20 questions

What this chapter is about

Same framework as Series I CH10 and Series VIII CH10. Code of conduct, grievance redressal, arbitration, ODR, investor protection fund. IRD-specific: SCORES 21-day timeline, diversification definition, and KRA for KYC uploads. Near-identical to currency derivatives conduct chapter — know the same three violations (guarantee losses, advertise without permission, contract notes) plus the same arbitration and ODR timeline rules.

Three core code violations (same across all NISM exams)

1. Guaranteeing losses: No trading member or associated person shall guarantee a client against a loss. STRICTLY PROHIBITED. Appears in virtually every exam.

2. Advertising without exchange permission: Broker must obtain EXCHANGE's approval before advertising publicly. Cannot advertise just because license held for 5 or 10 years.

3. Contract notes: Must be issued WITHOUT DELAY in the FORMAT SPECIFIED BY THE EXCHANGE.

KYC and client documentation

KYC Registration Agency (KRA): After completing KYC, broker must upload KYC information to the KRA system.

Power of Attorney: OPTIONAL. Cannot be insisted upon by broker for account opening.

Rights and Obligations document: Given to clients explaining their rights and obligations.

Risk Disclosure Document (RDD): Provides crucial information about risks of trading in equities and derivatives on a stock exchange.

SCORES — investor complaints

SCORES = SEBI Complaint Redress System

• 21 calendar days from date of receipt to resolve
• If unsatisfied: escalated to first-level review with designated body

Investor Grievance Redressal

Exchanges handle: Service complaints, unauthorized trades, non-receipt of funds, excess brokerage charged.

Exchanges CANNOT handle:

• Notional loss or opportunity loss claims
• Complaints in arbitration proceedings (already sub-judice)
• Claims for mental agony/harassment expenses
• Claims of authorized persons for private commercial dealings

Arbitration

Nature: Quasi-judicial process (not fully judicial, not informal).

Timeline: Arbitrator passes award normally within 4 months from first hearing.

Appeal: Appellate panel of arbitrators. If still unsatisfied → Court of competent jurisdiction under Section 34 of Arbitration and Conciliation Act, 1996.

Cannot: Go to SEBI, go back to exchange.

ODR (Online Dispute Resolution)

• Arbitrator appointed within 5 calendar days of receiving application + fees
• After award: losing party must submit intention to challenge under Section 34 within 7 calendar days in ODR Portal

Investor Protection Fund (IPF)

Created by exchanges. Covers legitimate investment claims (non-speculative) of clients of DEFAULTED or EXPELLED trading members. Does NOT cover speculative claims. Only clients are eligible — not brokers themselves.

Diversification

Definition: Investing in a variety of assets to MINIMIZE MARKET RISK (not eliminate, not insure against). Reduces unsystematic risk, partially reduces market risk.

Settlement Risk mitigation

Delivery versus Payment (DvP): Simultaneous exchange of cash and securities. If one party fails, other withholds. Eliminates settlement risk.

Trap Alert

Trap 1: "Guarantee losses = violation only if client loses" — FALSE Guaranteeing against losses is ALWAYS a violation, regardless of outcome.

Trap 2: "Broker can advertise after 5 years of licensing" — FALSE No time-based exception. Always need exchange permission.

Trap 3: "SCORES = 30 days" — FALSE SCORES = 21 calendar days.

Trap 4: "Unsatisfied with arbitration → appeal to SEBI" — FALSE Appeal to Court under Section 34 (not SEBI, not exchange).

Trap 5: "Diversification eliminates market risk" — FALSE Diversification MINIMIZES market risk (not eliminates). Eliminates unsystematic risk.

Trap 6: "IPF covers brokers who have suffered losses" — FALSE IPF covers CLIENTS of defaulted members only. Not brokers.

Trap 7: "ODR arbitrator appointment = 7 days" — FALSE Appointment = 5 days | Challenge intent = 7 days

Must-remember rules

• Three violations: guarantee losses | advertise without permission | wrong/late contract note
• KYC → uploaded to KRA system
• Power of attorney = optional, cannot be insisted
• SCORES = 21 calendar days to respond
• Arbitration: 4 months for award | Appeal: Court Section 34
• ODR: arbitrator in 5 days | challenge intent in 7 days
• IPF: covers clients of defaulted/expelled members (non-speculative claims only)
• Diversification = minimizes market risk (not eliminates)
• DvP = eliminates settlement risk
• Exchanges cannot handle: notional loss, arbitration matters, harassment

Quick revision — 60 second scan

• Three violations: guarantee | advertise without permission | wrong/late contract note
• KYC → KRA | POA = optional
• SCORES = 21 calendar days
• Arbitration: 4 months | Court Section 34
• ODR: 5 days appoint | 7 days challenge
• IPF: clients of defaulted members, non-speculative only
• Diversification = minimize (not eliminate) market risk
• DvP = eliminates settlement risk