NISM Series III A – Securities Intermediaries Compliance: Introduction to the Financial System
NISM Series III A – Securities Intermediaries Compliance (Non-Fund) is one of the key NISM certification courses that every compliance officer and securities market professional must clear. This blog is Part 1 of our 13-part short notes series designed to help you pass the NISM III A exam with confidence.
In this post, we cover the Introduction to the Financial System — the very first chapter of the NISM Series III A study material. Whether you are preparing for the NISM exam or simply want to understand how India's financial system is structured, this guide covers everything you need.
What Is the Financial System?
The financial system is the complete set of organized arrangements through which money moves from those who have more than they currently need (surplus units) to those who need it (deficit units), at terms that both sides find acceptable.
An efficient financial system is critical to economic development. It is made up of three core components:
- Financial Markets
- Financial Instruments
- Financial Intermediaries
Its primary role is to pool money from surplus units and allocate those funds to deficit units — either for consumption or investment purposes.
Types of Financial Markets
A financial market is a platform where financial assets like equities, bonds, currencies, and derivatives are created or transferred. It allows traders to deal in financial securities and commodities at low costs, reflecting market efficiency.
1. Money Market
The money market deals in short-term funds and financial instruments with a maturity period of one year or less. These instruments are close substitutes for money.
2. Capital Market
The capital market is where businesses and governments raise long-term funds — typically for periods exceeding one year. Equity shares, bonds, and debentures are common capital market instruments.
3. Forex Market
The foreign exchange (Forex) market handles multicurrency requirements through the exchange of currencies. Fund transfers happen based on applicable exchange rates.
4. Credit Market
Banks, Financial Institutions (FIs), and Non-Banking Financial Companies (NBFCs) provide short, medium, and long-term loans to individuals and corporates through the credit market.
5. Insurance Market
The insurance market facilitates the transfer of various risks — from individuals, businesses, and corporates — to insurance companies.
Financial Intermediaries in India's Securities Market
Financial intermediaries are institutions or entities that facilitate the flow of funds in the financial system. Under the SEBI regulatory framework, the following key intermediaries operate in India's securities market:
Merchant Bankers
These are specialized entities that assist companies in originating and managing security issuances — for example, managing IPOs and rights issues.
Bankers to Issues
Scheduled banks appointed by companies to accept application money, allotment or call money, handle refunds, and pay dividends or interest warrants.
Registrars to an Issue
Persons registered under the SEBI (Registrars to an Issue) Regulations, 1993. They provide services related to public or rights issues — including collecting applications and dispatching allotment letters.
Transfer Agents
Entities that maintain records of securities holders, handle share transfers, manage dividend payouts, and handle other corporate action communications.
Depositories
Institutions that hold investors' securities in electronic (dematerialized) form for a fee. The investor remains the beneficial owner of the securities. In India, NSDL and CDSL are the two depositories.
Stock Exchange
A body of individuals or a company incorporated under the Companies Act to assist, regulate, or control the buying, selling, or dealing in securities. NSE and BSE are the major stock exchanges in India.
Stock Brokers
SEBI-registered entities that undertake secondary market transactions on behalf of their clients. They act as the link between investors and the stock exchange.
Clearing House
The clearing house performs two critical functions:
- Aggregates transactions over a trading period and nets positions to determine member liabilities, ensuring proper movement of funds and securities
- Guarantees trades in case of default by either buyer or seller
Portfolio Managers
Individuals or firms that manage the investment portfolios of clients for a fee, a share of profits, or both.
Mutual Funds
Organizations that mobilize money from investors by issuing units or shares, and invest that money according to a specified investment objective.
Custodians
Entities that hold securities, gold, or gold-related instruments on behalf of institutional investors for safekeeping.
Warehouse
Premises where a warehouseman takes custody of deposited goods, including storage under controlled temperature and humidity conditions. Relevant in the context of commodity derivatives and e-warehouse receipts.
Credit Rating Agencies (CRAs)
Body corporates engaged in rating securities offered through public or rights issues. Examples: CRISIL, ICRA, CARE.
Debenture Trustees
Trustees of a trust deed that secures any debenture issuance by a company. They protect the interests of debenture holders.
Financial Securities – Key Definitions for NISM III A Exam
Understanding the types of financial securities is essential for the NISM Series III A exam. Here is a quick reference:
| Security | Definition |
|---|---|
| Stock | Signifies ownership in a corporation and a claim on its assets and earnings |
| Equity Shares | Represent ownership interest in a company |
| Preference Shares | Have preferential rights to dividend and capital repayment |
| Debentures | Debt securities with a fixed life, paying coupon interest at regular intervals |
| Warrants | Long-term call options issued by a company, giving holders the right to buy equity at a specified price |
| Derivatives | Contracts that give holders the right to buy or sell an underlying asset |
| Futures | Contracts guaranteeing delivery of a specific asset at a future date and current price |
| ADR | American Depository Receipt – USD-denominated security traded at US exchanges, representing shares of a foreign company |
| GDR | Global Depository Receipt – foreign currency instrument allowing foreign investment in shares listed in another country |
| IDR | Indian Depository Receipt – Rupee-denominated security traded at Indian stock exchanges, representing shares of a foreign company |
| ETFs | Exchange-Traded Funds – open-ended mutual funds allowing intraday trading of units |
| Currency Derivatives | Contracts where value is derived from the underlying currency amounts |
Interest Rate Instruments – Important for NISM Exam
- Interest Rate Derivatives: Contracts allowing investors or borrowers to hedge against adverse interest rate movements
- Interest Rate Futures: Futures contracts where the underlying is a debt security like T-Bills, CP, or Government Securities
- Interest Rate Swaps: Agreements between two or more parties to exchange series of cash flows in the same currency over an agreed period
- Interest Rate Options (Cap and Floor): A cap limits floating-rate borrowing costs; a floor ensures a minimum return on floating-rate investments
- Forward Rate Agreement (FRA): A forward contract where a borrower locks in a specific interest rate for a future period
- Securities Lending and Borrowing (SLB): Short selling involves selling a stock the seller does not own at the time of the trade
- E-Warehouse Receipts: Electronic acknowledgements issued by a warehouseman for goods stored, not owned by the warehouseman
Quick Revision Table – Financial Markets vs Instruments
| Market Type | Time Horizon | Key Instruments |
|---|---|---|
| Money Market | Up to 1 year | T-Bills, Commercial Paper, Call Money |
| Capital Market | More than 1 year | Equity Shares, Debentures, Bonds |
| Forex Market | Depends on transaction | Currency Pairs, Forward Contracts |
| Derivatives Market | Fixed expiry | Futures, Options, Swaps, FRAs |
Internal Links for Further Reading
- NISM Series III A Exam – Complete Details, Fees and Registration
- All NISM Certification Courses – List and Eligibility
- NISM Series III A Free Mock Test
- NISM Study Material – All Series
Frequently Asked Questions (FAQs) What is NISM Series III A?
NISM Series III A is the Securities Intermediaries Compliance (Non-Fund) certification examination conducted by the National Institute of Securities Markets. It is mandatory for compliance officers working in non-fund securities intermediaries like stock brokers, merchant bankers, and depositories.
What topics are covered in NISM III A?
The NISM Series III A syllabus includes Introduction to the Financial System, Regulatory Framework, SEBI Act, SCRA, Compliance Officer roles, Insider Trading regulations, AML/KYC guidelines, and regulations for various intermediaries like stock brokers, merchant bankers, and credit rating agencies.
What is the validity of the NISM certificate?
The NISM certification is valid for 3 years from the date of grant. It can be renewed for another 3 years by completing a Continuing Professional Education (CPE) program specified by NISM.
Who needs NISM Series III A certification?
Compliance officers of securities intermediaries (non-fund) such as stock brokers, sub-brokers, depository participants, merchant bankers, credit rating agencies, and research analysts are required to hold this certification.
This is Part 1 of the NISM Series III A Short Notes series on PassNISM.in. Continue reading Part 2: Regulatory Framework and Role of SEBI.