NISM Series XIV: Internal Auditors for Stock Brokers Certification Examination

 Test Objectives

PART A: Regulatory Framework

Unit 1: Introduction to Internal Audit

1.1 Learn about the Scope of Internal Audit

1.2 Understand the Objectives of Internal Audit

1.3 Know who can conduct Internal Audit

1.4 Know about the Submission of Internal Audit Reports


Unit 2: Understand the financial system and the regulatory framework

2.1 Describe the Financial System & Explain the role of Financial Markets in an economy.

2.2 Know about the Financial Market Intermediaries and the role played by each of them

2.2.1 Stock Exchanges

2.2.2 Clearing House / Corporation

2.2.3 Depositories

2.2.4 Depository Participant

2.2.5 Stock Brokers

2.2.6 Clearing Member

2.2.7 Custodians

2.2.8 Registrars & Transfer Agents

2.2.9 Merchant Bankers

2.2.10 Investment Advisors

2.2.11 Bankers to an Issue

2.2.12 Mutual Funds

2.2.13 Portfolio Managers

2.3 Understand types of Financial Securities and the definition of Security as per the SC(R)A, 1956

2.3.1 Equity Shares

2.3.2 Preference Shares

2.3.3 Debentures

2.3.4 Warrants

2.3.5 Derivatives

2.3.6 ADR/GDR

2.3.7 IDR

2.3.8 ETF

2.3.9 Currency Derivatives

2.3.10 Interest Rate Derivatives

2.4 Understand the Regulatory System in India

2.5 Know the role of the Financial Market Regulators

2.5.1 Securities and Exchange Board of India

2.5.2 Reserve Bank of India

2.5.3 Insurance Regulatory & Development Authority

2.5.4 Pension Fund Regulatory & Development Authority

2.5.5 Forward Market Commission

2.6 Understand the Role of Other Regulators in the Financial Market

2.6.1 Registrar of Companies

2.6.2 Economic Offences Wing

2.6.3 Financial Intelligence Unit – India

2.7 Know the role of Securities Appellate Authority


Unit 3: SEBI Act, SCRA and SCRR

3.1 Understand the SEBI Act, 1992

3.1.1 Salient Features of SEBI Act, 1992

3.1.2 Powers and Functions of SEBI

3.1.3 Penalties and Adjudication process

3.1.4 Appellate Tribunal

3.1.5 Registration of Intermediaries

3.1.6 Prohibition of Manipulative and Deceptive Devices, Insider Trading

3.2 Understand the SC(R)A, 1956

3.2.1 Call for Periodical Returns

3.2.2 Contracts and Options in Securities

3.2.3 Penalties and Procedures

3.3 Understand the following Rules of the SC(R)R 1957

3.3.1 Eligibility criteria for membership of a recognized stock exchange

3.3.2 Contracts between members

3.3.3 Audit of accounts of members

3.3.4 Books of account


Unit 4: SEBI (Prohibition of Insider Trading) Regulations

4.1 Understand the Definitions in SEBI (Prohibition of Insider Trading) Regulations, 2015 related to

4.1.1 Compliance Officer

4.1.2 Connected Person

4.1.3 Immediate Relative

4.1.4 Generally Available Information

4.1.5 Insider

4.1.6 Trading

4.1.7 Unpublished Price Sensitive Information



4.2 Know the Restriction on Communication and Trading by Insiders

4.2.1 Communication or procurement of unpublished price sensitive information

4.2.2 Trading when in possession of unpublished price sensitive information

4.2.3 Trading Plans

4.3 Learn about the Disclosure of trading by insiders

        4.3.1 Disclosure by certain persons

4.4 Learn about the Code of Disclosure and Conduct

4.4.1 Code of Fair Disclosure

4.4.2 Code of Conduct


Unit 5: SEBI (Fraudulent and Unfair Trade Practices) Regulations

5.1 Understand the (Fraudulent and Unfair Trade Practices) Regulations

5.1.1 Know the definition of Fraud and Fraudulent

5.1.2 Learn about Prohibition of Fraudulent and Unfair Trade Practices

5.1.3 Power of the Board to order investigation

5.1.4 Submission of report and enforcement

5.1.5 Suspension or cancellation of registration



Unit 6: The Prevention of Money Laundering Act, 2002 (PMLA)

6.1 Define Money Laundering

6.2 Know the Prevention of Money Laundering provisions

6.2.1 Obligations of Banking companies, financial Institutions and Intermediaries

6.2.2 Maintenance of Records

6.2.3 Procedure for maintaining and furnishing records

6.2.4 Verification of the records of the identity of clients

6.2.5 Maintenance of records of the identity of clients

6.3 Know the Offences of money-laundering

6.3.1 Procedures relating to money – laundering

6.3.2 Attachment of property

6.3.3 Power of survey

6.3.4 Search and seizure

6.4 Learn about the Adjudicating Authorities, their composition and powers

6.4.1 Adjudication

6.4.2 Power of the Adjudicating Authority

6.4.3 Appellate Tribunal

6.4.4 Appeal to High Court

6.5 Learn about the Agreement with foreign countries

6.6 Describe the SEBI Procedures related to

6.6.1 Policies and Procedures to Combat Money Laundering and Terrorist Financing

6.6.2 Written Anti Money Laundering Procedures

6.6.3 Record Keeping

6.6.4 Information to be maintained

6.6.5 Retention of Records

6.6.6 Monitoring of transactions

6.6.7 Suspicious Transaction Monitoring & Reporting

6.6.8 List of Designated Individuals/Entities

6.6.9 Procedure for freezing of funds, financial assets or economic resources or related services

6.6.10 Reporting to Financial Intelligence Unit-India

6.6.11 Designation of an officer for reporting of suspicious transactions

6.6.12 Employees’ Hiring/Employee’s Training/ Investor Education


Unit 7:   SEBI Stock Brokers and Sub-Brokers Regulations

7.1 Understand the SEBI (Stock Broker and Sub-Broker) Regulations related to

7.1.1 Registration of Stock Brokers and Sub-brokers

7.1.2 General Obligations and Responsibilities

7.1.3 Procedure for Inspection

7.1.4 Action in case of Default

7.1.5 Code of conduct

7.1.6 Fees payable by Stock Brokers and Sub-brokers

7.1.7 Regulation of transactions between clients and brokers

7.1.8 Direct Market Access

7.1.9 Algorithmic Trading


PART B: Operations

Unit 8: Introduction to Stock Broking Operations

8.1 Understand the Trade Life Cycle

  • Describe the activities of Front Office Operations

8.2.1 Client On-Boarding process

        - Account Opening Process

        - Know Your Client (KYC) and In Person Verification (IPV)

        - KRA Agency and the Guidelines as per SEBI (KRA) Regulation

        - Rights and Obligations (Member-Client Agreement)

        - Unique Client Code

        - Risk Disclosure Document

8.2.2 Order Management

        - Internet Based Trading (IBT) and Securities Trading using Wireless Technology (STWT)

        - Order Placement and Trade Matching 

  • Understand the Middle Office Operations

- Risk Management Procedures

- Different Risks in the stock market



8.4 Describe the Back Office Operations with regards to

8.4.1 Trade activities

        - Trade Enrichment

        - Trade Allocation            

8.4.2 Brokerage

8.4.3 Contract Note

8.4.4 The Settlement Process

        - Procedure for receipt/payment of funds and securities from / to clients

- Settlement of Funds & accounts – Running Account

- Statement of Accounts for funds and securities

- Banking and Demat account operations-

8.4.5 Margins

        - Client Margin – Cash Segment

        - Client Margin – Derivatives Segment

        - Margin Report to Clearing Corporation

        - Margin report to Clients

        - Collateral Management             

8.4.6 Books of Accounts

        - Register of Transactions

        - Client Ledger

        - General Ledger

        - Security Ledger

8.4.7 Types of Transactions

        - Principal to Principal Transactions

        - Negotiated Deals / Cross Deals

        - Proprietary Trading

        - Pro-Account Trading Terminal

8.4.8 Role of Information Technology


8.5 Describe Margin Trading

8.5.1 Securities Eligible

8.5.2 Brokers eligible

8.5.3 Funding for margin trading

8.5.4 Margins – Initial & Maintenance

8.5.5 Liquidation of securities by the broker in case of default by the client

8.5.6 Maintenance of Records

8.5.7 Disclosures of exposure


8.6 Describe the Securities Lending & Borrowing Program (SLB) with respect to

8.6.1 Client on boarding

8.6.2 Transaction cycle and market timing

8.6.3 Settlement

8.6.4 Short delivery

8.6.5 Risk Management

8.6.6 Margins

        - First Leg transaction

        - Reverse Leg Transaction            

8.6.7 Corporate action

8.6.8 Early recall / early repayment

8.6.9 Other points


8.7 Learn about the use of Computer-assisted Audit Techniques (CAAT) for analyzing unusual transaction      trends


Unit 9: Risk Management

9.1 Learn about the Risk Management Framework for Cash Segment with respect to

        9.1.1 Margin

        - Value at Risk

        - Mark to Market

        - Extreme Loss

        9.1.2 Liquid Assets

                - Liquidity Categorisation of Securities

                - Calculation of Mean Impact Cost

                - Margining of Institutional Trades in Cash Market

        9.1.3 Shortfall of Margins / Pay-in of funds

        9.1.4 Base Minimum Capital

        9.1.5 Additional Margins

        9.1.6 Margins from the Client

        9.1.7 Provision of early pay-in

        9.1.8 Pre-trade Risk Controls

        - Order Level Checks

        - Dynamic Price Bands   

        9.1.9 Risk Reduction Mode

9.2 Learn about the Risk Management Framework for F&O Segment

        9.2.1 Types of Margins

                - Initial Margin

                - Exposure Margin

                - Premium Margin

                - Assignment Margin

        9.2.2 Initial margin requirement

        9.2.3 Reporting and Disclosure

        9.2.4 Liquid Net Worth and Exposure Limits of a Clearing Member related to

                - Liquid Assets                  

9.3 Understand the Annual Compliance Requirements related to

        9.3.1 Insurance Cover

        9.3.2 Annual returns

        9.3.3 Appointment and change of compliance officer

        9.3.4 Trading through other trading members

        9.3.5 Internal Audit Report

        9.3.6 Networth Certificate

        9.3.7 Networth certificate for margin trading

        9.3.8 System Audit Report

9.4 Understand the Quarterly Compliance Requirements related to

        9.4.1 Disclosure by trading members of their holdings in listed companies

        9.4.2 Quarterly compliance certificate on order limits

        9.4.3 Client-wise funding report

        9.4.4 Guidelines for execution of Power Of Attorney

9.5 List the Other Compliances related to

        9.5.1 Operations at Branch and Sub Broker Locations

        9.5.2 Client Code Modification


Unit 10: Clearing and Settlement Process

10.1 Understand the Clearing & Settlement Process for Cash Market

10.1.1 Clearing Corporation / Clearing House

10.1.2 Participants and their role

- Clearing Member

- Clearing Bank

- Depository

- Custodian                

10.1.3 Clearing Process

                    - Obligation Determination

    - Institutional Confirmation

10.1.4 Settlement Process

- Settlement Schedule

- Settlement of Funds

- Settlement of Securities

- Auction and Close out

10.1.5 Broker internal netting and shortage

10.2 Understand the Clearing & Settlement Process for Futures & Options Market with respect to

        10.2.1 Participants and their role

        10.2.2 Clearing Process – obligation / open position determination

        10.2.3 Settlement Period

        10.2.4 Daily mark to market and final Settlement

        10.2.5 Premium settlement for options contract

        10.2.6 Exercise and assignment

        10.2.7 Corporate Action Adjustments

10.3 Discuss the Core Settlement Guarantee fund

        10.3.1 Corpus

        10.3.2 Contribution to Core SGF

        10.3.3 Default waterfall

        10.3.4 Stress testing and back testing

10.4 Discuss Investor Protection Fund (IPF)

        10.4.1 Guidelines for IPF / Customer Protection Fund (CPF) at Stock Exchanges

10.5 Discuss the SEBI Investor Protection and Education Fund

10.6 Know the Activities for Outsourcing by Brokers

10.6.1 Activities not to be outsourced

10.6.2 Other Obligations

10.6.3 Guidelines for outsourcing for intermediaries

- Comprehensive Policy for Outsourcing

- Outsourcing risk management program

- Outsourcing arrangements with respect to obligations to customers and regulatory supervision

- Selection and monitoring of third party

- Outsourcing contract/ agreement

- Contingency Plans

- Protection of Confidential Information

- Risks Due to Concentration


Unit 11: Investor Grievance Redressal

11.1 Learn about the Measures undertaken for Investor Protection

11.2 Discuss the Investor Grievance Redressal Mechanism

11.3.1 Investor Grievance mechanism at the Brokerage House / Listed Company

11.3.2 Stock Exchange Investor Grievance redressal mechanism

11.3.3 SEBI Investor Grievance Handling Mechanism

11.3.4 SEBI Complaints Redress System (SCORES)

11.4 Describe the Arbitration Mechanism

11.4.1 Panel of Arbitrators

11.4.2 Code of Conduct for Arbitrators

11.4.3 Arbitration Process

11.4.4 Record and Disclosures

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