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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Legal and Regulatory Environment

Under the Securities Contracts (Regulation) Act, 1956, derivatives are included in the definition of 'securities'. Which consequence follows from this for a derivatives contract traded on a recognised stock exchange?

Because derivatives are included in the definition of securities under the SCRA, a derivatives contract traded on a recognised stock exchange is legally valid and enforceable, subject to SEBI regulation. It is not a void wagering contract, and physical delivery is not required for validity.

  1. AIt is treated as a wagering contract and is void
  2. BIt is legally valid and enforceable when traded on a recognised exchange, subject to SEBI regulationsCorrect
  3. CIt is valid only if traded over the counter
  4. DIt is valid only if it results in physical delivery of the underlying

Explanation

Since derivatives are 'securities' under the SCRA, contracts traded on a recognised stock exchange are legally valid and enforceable, and are regulated by SEBI. They are not void wagering contracts. Physical delivery is not a condition, and the validity attaches to exchange-traded contracts rather than to OTC ones.

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