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NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Derivatives

Under SEBI's framework, which statement about a portfolio manager's use of derivatives for a discretionary PMS client is most accurate?

A portfolio manager may use derivatives only to the extent permitted by the PMS agreement, and must stay within the disclosed investment approach and risk disclosures. Derivatives are neither banned outright nor freely usable without client consent.

  1. ADerivatives may be used only if permitted by the PMS agreement, and the portfolio manager must follow the investment approach and disclosed risksCorrect
  2. BDerivatives can be freely used regardless of the client agreement
  3. CDerivatives are completely banned in all PMS portfolios
  4. DDerivatives may be used only for hedging if the client is a non-resident

Explanation

A portfolio manager must act within the investment approach and the terms in the agreement and disclosure document. Use of derivatives is permitted when specified there, with risks disclosed; it is not banned outright nor unrestricted, and no residency condition applies.

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