NISM Series IV: Accounting, Taxation, Code of Conduct & Investor Protection – Complete Notes

NISM Series IV: Accounting, Taxation, Code of Conduct & Investor Protection – Complete Notes

This is the final blog post in our NISM Series IV Interest Rate Derivatives complete exam preparation series. In this post, we cover Chapters 9 and 10 of the NISM Series IV syllabus — Accounting and Taxation for derivatives, SEBI's Code of Conduct for Brokers, Investor Grievance Redressal, and Online Dispute Resolution. These chapters are often underestimated but carry marks in the exam. Do not skip them.

Chapter 9: Accounting and Taxation Accounting Guideline and Disclosure Requirements

RBI Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2019 has specified that for both OTC and Exchange-traded interest rate derivatives, accounting, valuation, and capital requirements shall be as per the applicable accounting standards and valuation methods prescribed by:

• ICAI (Institute of Chartered Accountants of India)
• Other standard-setting organizations
• Respective regulators of participants

ICAI Guidance Notes on Accounting for Derivatives Contract (Revised 2021)

The Institute of Chartered Accountants of India (ICAI) has issued guidance notes on Accounting for Derivatives Contract (Revised 2021).

Entities required to follow the accounting treatment for derivative contracts as prescribed by their respective regulators include:

• Banking entities and NBFCs — Regulated by RBI.
• Housing Finance Companies — Regulated by NHB (National Housing Bank).
• Insurance entities — Regulated by IRDAI.

Recognition of Derivatives on the Balance Sheet at Fair Value

All derivatives must be recognised on the balance sheet and measured at fair value, since a derivative contract represents a contractual right or obligation.

Hedge Accounting

An entity is permitted (but not required) to designate a derivatives contract as a hedging instrument. Where it designates a derivative contract as a hedging instrument, it must comply with the specified conditions.

The ICAI Guidance Note recognises three types of hedge accounting:

Presentation of Derivatives in Financial Statements

How derivatives are classified as current or non-current in financial statements:

• Derivatives intended for trading or speculative purposes — Reflected as current assets and liabilities.
• Derivatives that are hedges of recognised assets or liabilities — Classified as current or non-current based on the classification of the hedged item.
• Derivatives that are hedges of forecasted transactions and firm commitments — Classified as current or non-current based on the settlement/maturity dates of the derivative contracts.
• Derivatives with periodic or multiple settlements (e.g., interest rate swaps) — Should NOT be bifurcated into current and non-current elements. Classification should be based on when a predominant portion of their cash flows are due for settlement.

Computation of Turnover for Tax Purposes

The Income Tax Act does not contain any specific provision or guidance for computation of turnover in exchange-traded derivatives trading. However, the Guidance Note on Tax Audit issued by ICAI prescribes the following method:

1. The total of favourable and unfavourable differences is taken as turnover.
2. Premium received on sale of options is also to be included in turnover. However, where the premium received is already included for determining net profit for transactions, the same should not be separately included.
3. In respect of any reverse trades, the difference thereon should also form part of the turnover.

Chapter 10: Code of Conduct and Investor Protection Measures SEBI's Code of Conduct for Brokers

Schedule II of the SEBI (Stock Brokers) Regulations, 1992 prescribes a code of conduct for securities brokers. It includes three broad categories of duties:

1. General Duties
   • Integrity
   • Exercise of Due Skill and Care
   • Manipulation
   • Malpractices
   • Compliance with Statutory Requirements
2. Duty Towards the Investor
3. Duty Towards Other Stock Brokers

Investor Grievance Redressal Mechanism

Investors are the backbone of the securities market. Protection of investor interests is of paramount importance. The various stages of the investor grievance redressal mechanism are:

1. Investor Grievance Handling at the Trading Member Level — The first point of redressal.
2. Investor Grievance Handling at the Stock Exchanges and SEBI — Escalated level.

SEBI Complaints Redressal System (SCORES)

SCORES (SEBI Complaints Redress System) is SEBI's web-based, centralized system to capture investor complaints against listed companies and registered intermediaries. Key features:

• Available 24x7.
• Investors can lodge complaints and track status online.
• Market intermediaries and listed companies can receive complaints electronically.
• SEBI encourages investors to lodge complaints through the electronic mode via SCORES.

Online Resolution of Disputes (ODR) in the Indian Securities Market

Disputes between investors/clients and listed companies (including their registrar and share transfer agents) or specified intermediaries/regulated entities in the securities market will be resolved by harnessing online conciliation and/or online arbitration as per SEBI's circular on ODR.

Common Online Dispute Resolution Portal

Market Infrastructure Institutions (MIIs) shall, in consultation with their empanelled ODR Institutions, establish and operate a common Online Dispute Resolution Portal (ODR Portal). Key points:

• MIIs will make joint efforts to develop and operationalize the ODR Platform.
• MIIs shall enter into an agreement outlining responsibilities, costs of development, operating, upgradation, maintenance (including data security), and inspection/audit of the ODR Platform.
• SEBI may periodically undertake inspections to ensure proper functioning of the ODR Portal.
• MIIs shall provide complete cooperation to SEBI in this regard.

Complete NISM Series IV Exam Summary

Now that you have completed all 9 chapters of the NISM Series IV study notes, here is a final summary of every chapter:

Final Tips to Clear NISM Series IV in First Attempt

1. Understand, don't just memorise — Especially for topics like duration, convexity, and option Greeks. Try to understand the logic behind each concept.
2. Know all formulas — Effective interest rate, duration, modified duration, futures bond price formula, hedge ratio formula, Black-Scholes.
3. Focus on tables and comparisons — FRA vs IRF, OTC vs ETD, types of yield curves, option strategy payoffs, hedge accounting types.
4. Revise regulatory guidelines carefully — Especially participant-wise restrictions (Banks, Insurance, FPIs, NBFCs).
5. Attempt mock tests — At least 3-4 full mock tests before your exam. Mock tests help you identify weak areas and improve your speed.
6. Read the official NISM workbook — These short notes are excellent for revision, but for full depth of understanding, also refer to the NISM official workbook.

Quick Recap for NISM Series IV Exam — Chapters 9 & 10

• Derivatives are recognised on balance sheet at fair value.
• 3 types of hedge accounting: Fair value hedge, Cash flow hedge, Net investment hedge.
• Turnover for tax = total favourable + unfavourable differences.
• Premium from option sales must be included in turnover.
• SEBI broker code: 3 duties — General Duties, Duty towards Investor, Duty towards other brokers.
• SCORES = SEBI Complaints Redress System, available 24x7.
• ODR Portal = Online Dispute Resolution Portal operated by MIIs.

We Hope These Notes Help You Clear the NISM Series IV Exam!

These complete chapter-wise notes for the NISM Series IV Interest Rate Derivatives Certification Exam have been prepared to give you a strong foundation. Cover these concepts, understand the logic, and back it up with practice questions.

For complete mock test series, question banks, and detailed practice for the NISM Series IV Interest Rate Derivatives exam, visit passnism.in — India's trusted NISM exam preparation platform.

All the Very Best for Your NISM Exam!