RBI’s curbs on bank funding for proprietary trading could spur
trading firms to shift business offshore and may force smaller
players to shut down, executives and analysts said.
Proposed rule changes that prohibit banks from lending for
proprietary trading and require 100 per cent collateral for other
funding to brokers could see profit margins cut in half and a
drop of up to a fifth in derivative trading volumes, the
executives said.
Reuters spoke to executives at six trading firms, both
domestic and foreign. All declined to be identified as they are
not authorised to speak to the media.
The Reserve Bank of India’s initiative – due to take effect
from April 1 – follows a series of steps taken by the government
and market regulator to cool the explosive growth in the
country’s equity derivatives market, which has lured mom and pop
investors in droves, but with nearly 90 per cent of them suffering
losses, according to an official study.
Analysts say policymakers are wary of the spillover risks to
household finances and the wider economy.
LEVERAGE PANGS
Under the current rules, trading firms use bank
financing to ramp up leverage and reap big profits,
outmaneuvering retail investors with their much higher level of
sophistication. Having to tap other sources of capital that are
typically pricier will greatly erode margins, the executives and
analysts said.
“Domestic proprietary trading firms fear that their business
model has been rendered obsolete,” an executive at a domestic
mid-sized proprietary trading firm said.
“Large firms may still have some of their own capital to
deploy but this will impact their growth prospects,” said the
head of a large domestic high frequency trading (HFT) firm.
The National Stock Exchange of India (NSE) is the world’s
largest venue for equity derivatives, accounting for 70 per cent of
global index options trades, according to data from the World
Federation of Exchanges.
Proprietary trading makes up nearly half of overall
derivative trading on NSE by value. HFT firms make up about 50 per cent
of proprietary trading, according to Jefferies.
SMALLER TRADING FIRMS VULNERABLE
“Smaller proprietary firms that historically leveraged
broker funding will be squeezed hardest because they lack large
balance sheets or alternate credit access,” Mumbai-based
brokerage firm IIFL said in a note this week.
The pushback from trading firms echoes the reaction from the
brokers lobby, which on Thursday urged a six-month suspension of
the proposed rule changes to allow time for feedback and an
assessment of the impact.
The Reserve Bank of India and the Securities and Exchange
Board of India did not respond to emails seeking comment for the
story.
Policymakers have been vexed as India’s derivatives market
swelled to more than double the size of the underlying cash
market, a stark and worrying contrast to the 2-3 per cent ratio in major
global markets.
Efforts thus far have included increasing fees for trading
derivatives, reducing the number of contracts offered by
exchanges and raising taxes on profits from the trades.
But while these measures brought down the number of
contracts traded, the total value of the trades remains high,
suggesting substantial capital continues to be deployed.
The RBI’s new initiative to combat that may effectively
penalise domestic players, according to the trading firm
executives.
Foreign trading firms could pause plans to set up operations
in India and shift existing operations to offshore centres where
financing is cheaper, giving them a competitive edge, three of
the executives said.
Published on February 23, 2026