NISM Equity Derivatives Exam | Full Course | Chp 8 : Legal & Regulatory Environment | Nism Exam

Summary

This video covers the 'Chapter 8 of NISM Equities Derivatives Exam' focusing on legal and regulatory environment. It discusses the Securities Contracts (Regulation) Act, 1956, defining 'securities' and derivatives, and the importance of SEBI regulations in protecting investors' interests. The video also touches on the responsibilities of clearing corporations and the Trade Guarantee Fund, aiming to ensure smooth market operations and investor protection.

Takeaways

• 📚 The video covers the chapter on 'Legal and Regulatory Environment', focusing on the Securities Contracts (Regulation) Act, which is crucial for understanding the regulatory framework in the financial sector.
• 🛡️ The primary aim of the Securities and Exchange Board of India (SEBI) is to protect the interests of investors and ensure fair trading practices, which is outlined in the Securities Contracts Regulation Act of 1956.
• 📈 Derivatives are defined under the Act, including various types such as futures, options, and contracts for differences, which are essential for understanding the financial instruments traded in the market.
• 🏦 The script discusses the role of clearing corporations in maintaining the integrity of trades and settlements, emphasizing their responsibilities for collecting margins and ensuring smooth market operations.
• 💼 Key regulations for trading include adherence to rules set by recognized stock exchanges, settlement through clearing houses, and the requirement for trades to be legal and valid.
• 🔍 SEBI's role in identifying and penalizing illegal trading activities is highlighted, with a focus on recent fines imposed on entities for such activities, which serves as a homework task for the viewers.
• 📉 The importance of maintaining a minimum contract value of INR 5 lakhs for derivative contracts is mentioned to ensure the seriousness and financial stability of market participants.
• 🏢 For exchanges, there is a requirement to have a minimum of 50 members and a minimum net worth for clearing members of INR 300 lakhs, which ensures the financial robustness of the exchange ecosystem.
• 📋 The necessity for clearing corporations to keep consistent records of client margins and to monitor positions in both the derivatives and cash segments for any manipulative or illegal activities is covered.
• 💰 The Trade Guarantee Fund (TGF) is explained as a crucial mechanism to guarantee the settlement of transactions and protect investors' interests in case of any mishap or illegal activities by brokers or the exchange.
• 🏷️ Eligibility criteria for membership in the derivatives segment, including net worth requirements and the need for clearing corporations and members to provide auditor certificates every six months, are detailed to ensure financial credibility.

Q & A

What is the main purpose of the SEBI Act?

The main purpose of the SEBI Act is to prevent undesirable transactions in the securities market, protect the interests of investors, and promote a healthy and fair market.

What does the term 'derivative' mean as defined in the SEBI Act?

A 'derivative' is defined as a security derived from an underlying asset, such as a derivative contract for difference, which includes options, futures, swaps, and forward contracts.

What is the significance of Section 18A of the SEBI Act?

Section 18A of the SEBI Act stipulates that all derivative contracts must be legal and valid, and it outlines the conditions that a contract must meet to be considered a legal derivative contract.

What are the three conditions that a derivative contract must meet as per Section 18A?

The three conditions are: it must be traded on a recognized stock exchange, settled on the clearing house of the recognized stock exchange, and must follow the rules and bye-laws of the stock exchange.

What is the role of the clearing corporation in the context of derivative trading?

The clearing corporation is responsible for the clearing and settlement of all transactions, ensuring smooth operation of the market and acting as a legal counterparty for every contract, thus reducing counterparty risk.

What is the Trade Guarantee Fund (TGF), and why is it important?

The Trade Guarantee Fund (TGF) is a fund maintained by SEBI to guarantee the settlement of transactions of the members of the exchange, protect the interests of investors, and provide a sense of security to market participants.

What are the eligibility criteria for membership on the derivative segment?

The eligibility criteria for membership on the derivative segment include maintaining a minimum net worth as specified by SEBI, providing an auditor's certificate for every six months, and ensuring that the trading members have appointed two individuals who have passed the certification program approved by SEBI.

What is the minimum net worth requirement for a clearing member and a self-clearing member?

The minimum net worth requirement for a clearing member is 3 crores, and for a self-clearing member, it is 1 crore as per the guidelines set by SEBI.

What is the significance of liquid net worth for clearing and self-clearing members?

Liquid net worth refers to assets that can be instantly converted to cash. Clearing and self-clearing members are required to maintain a minimum liquid net worth of 50 lakhs to ensure they can meet their obligations in case of any market fluctuations.

What are the responsibilities of a clearing corporation regarding margin collection?

The clearing corporation is responsible for the timely collection of margins on a daily basis, ensuring final settlement of all margins, and monitoring positions in both the derivative and cash segments to prevent manipulative or illegal activities.

What is the requirement for trading members to operate the derivatives trading terminal?

Trading members are required to be SEBI approved and registered to operate the derivatives trading terminal, ensuring that only approved users are permitted to operate in the derivatives market.