Chapter X: Codes of Conduct and Investor Protection Measures

This chapter outlines the ethical standards, regulatory obligations, and investor protection mechanisms established by the Securities and Exchange Board of India (SEBI) and exchanges to ensure a fair, transparent, and orderly trading environment in the currency derivatives market.

1. SEBI Code of Conduct for Brokers and Sub-Brokers

All registered market intermediaries must adhere strictly to SEBI-mandated codes of conduct to prevent market distortion and protect retail and institutional participants.

A. General Obligations of Brokers

Brokers have a primary duty to uphold market integrity and professional standards:

• Integrity: A broker must maintain high standards of integrity, promptitude, and fairness in the conduct of all investment business.
• Exercise of Due Skill and Care: Brokers must act with appropriate diligence, care, and professional skill in all client interactions and trade executions.
• Prevention of Market Manipulation: A broker is strictly prohibited from indulging in any manipulative, fraudulent, or deceptive transactions or schemes. They must not spread rumors designed to distort market equilibrium or achieve personal gains.
• Prevention of Malpractices: Brokers are forbidden from creating a false market, whether acting individually or in concert with others. They must refrain from any act detrimental to investors' interests or any activity that interferes with the fair and smooth functioning of the financial markets.
• Compliance with Statutory Requirements: All brokers must comply with the statutory rules, regulations, and guidelines issued by SEBI and other regulatory bodies.

B. Duty of Brokers to Clients

Brokers owe a fiduciary duty to their clients, characterized by transparency and fairness:

• Execution of Orders: Brokers must execute client orders promptly and at the best available market price.
• Issue of Contract Note: Brokers are legally obligated to issue contract notes to their clients within the prescribed timeline, detailing transaction prices, brokerage charges, and statutory levies.
• Avoidance of Breach of Trust: Brokers must maintain a high level of trust and must not breach the confidence reposed in them by their clients.
• Unbiased Business and Commission Practices: A broker must never encourage unnecessary sales or purchases of securities with the sole objective of generating brokerage fees or commission.
• Restrictions on Dealing with Defaulting Clients: A broker must not knowingly, directly or indirectly, transact business or execute orders for a client who has failed to carry out their commitments in relation to securities transactions with another broker.
• Fairness to Client: All clients must be treated fairly, without preferential or discriminatory treatment that could harm one client over another.
• Objective Investment Advice: Any investment advice or research provided to clients must be objective, grounded in solid analysis, and suited to the client's risk profile.

C. Duty of Brokers to Other Brokers

To maintain systemic stability, brokers must cooperate with their peers:

• Cooperation: Brokers must extend the fullest cooperation to other brokers to protect the overall interests of clients in the market.
• Settlement Obligations: A broker must execute transactions with other brokers in good faith and comply fully with all clearing and settlement obligations.

Note on Sub-Brokers: The SEBI code of conduct applicable to sub-brokers is majorly similar to the code of conduct mandated for brokers, maintaining the same ethical and professional requirements.

2. Codes of Conduct Specific to the Currency Derivatives Segment

In addition to general broker rules, specific regulations govern trading members and participants operating within the currency derivatives segment to address the unique complexities of forex risk and leverage.

A. General Principles

Trading members in the currency derivatives segment must manage their operations based on six core principles:

B. Trading Principles and Fiduciary Duties

Trading principles ensure that members prioritize client protection and systemic integrity:

• Staff Responsibility: Trading Members and participants must ensure that all staff members fully understand and adhere to the fiduciary and regulatory obligations imposed on them.
• Action Accountability: A Trading Member is held legally responsible for all actions, including trades, originating through their terminals or accounts.
• No Improper Use of Funds/Securities: No Trading Member or associated person may make improper use of a constituent's funds, securities, or derivatives positions. Client collateral must be strictly segregated.
• No Misrepresentation: When arranging or entering into a transaction, members must take great care not to misrepresent the nature, risk, or structure of the derivatives contract in any way.

C. General Guidelines for Trading Members

Members must actively guard against irregularities and unethical practices:

• No Shielding or Assisting: Members must not shield or assist any person or entity in violating exchange regulations or SEBI guidelines.
• No Trading in Suspended Contracts: Members are strictly prohibited from dealing in or arranging transactions for derivative contracts that have been suspended by the exchange or regulator.
• Avoidance of Misleading Transactions: Members must not enter dummy transactions, circular trades, or wash sales designed to create a misleading impression of market volume or liquidity.
• Fiduciary Information Protection: Members must never misuse confidential client or transaction information obtained in a fiduciary capacity for proprietary trading or personal gain.

3. Investor Grievance Redress System (SCORES)

A. What is SCORES?

The SEBI Complaints Redress System (SCORES) is a centralized, web-based complaints redress platform launched by SEBI. It serves as a digital bridge between investors, market intermediaries, listed companies, and the regulator.

B. Core Features of SCORES

• Centralized Tracking: Investors can lodge their complaints online, follow up on progress, and track the real-time status of redressal from anywhere in the world.
• Intermediary Accountability: Listed companies and market intermediaries (such as brokers) receive complaints directly through the portal, redress the grievances, and submit an Action Taken Report (ATR) directly on the system.
• Fully Automated Lifecycle: All activities—from the initial lodging of a complaint to its final disposal by SEBI—are processed online in an automated, paperless environment.
• Physical Complaint Scanning: For investors unfamiliar with digital systems or lacking internet access, physical complaints are still accepted. SEBI scans and uploads these physical complaints into the SCORES database so they are tracked with the same automated efficiency.
• 24x7 Accessibility: The system is fully web-enabled and remains accessible 24 hours a day, 7 days a week.

4. Dispute Resolution Mechanism: Arbitration

When disputes, claims, or differences arise between trading members, clearing members, sub-brokers, and investors, the exchange provides a structured Arbitration mechanism.

A. Key Concepts of Exchange Arbitration

• Quasi-Judicial Process: Arbitration is a formal, quasi-judicial process designed to resolve financial disputes out of court in an efficient, cost-effective, and timely manner.
• Governing Authority: The process is strictly governed by Exchange Bye-laws and SEBI directives.
• Scope of Disputes: Settles differences and claims between:
  • Trading Members and Investors.
  • Sub-brokers and Clearing Members.
  • Investors and Issuers (Listed Companies).

B. Step-by-Step Arbitration Process

1. Filing the Application: The aggrieved party must file an arbitration application at the designated Arbitration Centers established by the stock exchanges.
2. Selection of Arbitrator: The parties to the dispute select a neutral arbitrator from a predefined panel of independent market experts provided by the Exchange.
3. Conducting Proceedings: The arbitrator reviews the submitted documents, conducts formal hearings with both parties, and evaluates the evidence.
4. Passing the Award: After completing the hearings, the arbitrator passes a binding decision called the "Arbitration Award".
5. Strict Timeline: The arbitrator is required to complete the proceedings and pass the final award normally within four months from the date of the initial hearing.

5. Key Takeaways & Exam Summary

• Fiduciary Duty: A broker cannot execute trades for the sole purpose of earning commission (churning).
• SCORES Workflow: Physical complaints are not ignored; they are scanned and digitized to ensure they follow the same automated tracking workflow as electronic complaints.
• Arbitration Centers: Applications cannot be filed in generic courts; they must be submitted directly to the exchange's dedicated Arbitration Centers.
• Arbitration Timeline: The standard period for passing an arbitration award is 4 months from the date of the first hearing.

6. Important Terms Glossary

• Churning: The unethical practice of a broker encouraging excessive buying and selling in a client's account solely to generate brokerage commissions.
• False Market: An artificial market price created by manipulative trading practices (e.g., wash sales, rumors, or circular trading) rather than organic demand and supply.
• SCORES: SEBI Complaints Redress System, the centralized 24x7 online platform for grievance redressal.
• Quasi-Judicial: A non-judicial body (like an arbitration panel) that has been granted public administrative or dispute-resolution powers similar to a court of law.
• Contract Note: The legally binding document issued by a broker to a client confirming the execution of a trade and detailing all transaction economics.