MUMBAI: A recent move by the Reserve Bank of India to tighten bank lending to proprietary (prop) traders for speculative trading could unintentionally favour foreign trading firms, as global bank-backed competitive funding that they can access is unavailable to domestic prop traders.
From 1 April, bank guarantees issued to proprietary traders must be fully secured, requiring at least 50% cash collateral, with the remainder backed by certain securities. Earlier, traders could back a bank guarantee with a small cash or cash-equivalent margin along with personal or corporate guarantees.
However, market participants say that in the amended regime, some banks may accept stand-by letters of credit (SBLCs) issued by global banks on behalf of foreign firms as non-cash collateral — a facility Indian prop traders typically cannot access.
Experts said this could provide an edge to foreign prop traders relative to domestic prop who have to pay 100% collateral, potentially skewing competition in India’s equity derivatives market. They added that prop would effectively be locked out of the banking system if 100% collateral was to be provided.
“The RBI’s directive to banks on curbing loans to proprietary traders, or brokers who trade for themselves, is perfectly justified, but from a rules perspective, it gives an edge to foreign prop traders,” said Sagar Lakhani, partner, accounting and reporting consulting, Uniqus Consultech.
An email sent to RBI on Wednesday remained unanswered.
New collateral rules
On 13 February, the central bank had consolidated lending to capital market intermediaries under banks’ overall capital market exposure framework, to prevent banks from lending depositor money for speculative trading, especially in weekly index options.
Under the amended rules, while both domestic and foreign proprietary traders must provide a 50% cash margin to secure a bank guarantee, for the remaining 50% non-cash collateral, proprietary traders need to furnish certain eligible securities.
These include government bonds, sovereign gold bonds, listed shares, listed convertible debt securities and mutual fund units — to which banks apply prescribed haircuts while issuing guarantees.
Banks may accept an SBLC, which is not explicitly listed as eligible non-cash collateral in the directives, issued by a reputed global bank on behalf of the parent of a foreign proprietary trading firm, as collateral for issuing a bank guarantee.
Domestic proprietary traders typically do not have access to such arrangements with global banks, putting them at a disadvantage.
An SBLC issued by a global bank guarantees payment to a beneficiary—in this case the Indian bank issuing the bank guarantee—in case of default by its client, the foreign prop trader.
Market participants said acceptance of SBLCs as non-cash collateral could give foreign proprietary traders an advantage in terms of opportunity cost, since capital that would otherwise be locked in cash collateral remains available for deployment elsewhere.
Bankers, however, said regulatory interpretation remains unclear.
“If the wording says collateral of cash or cash equivalent, unless specified anywhere else, I would be very surprised if a bank could include SBLC,” said a senior private sector banker on condition of anonymity. “The concept of an SBLC is not accepted across the board... There are some SBLCs which are allowed by RBI for certain clients of the bank. My sense is that RBI is unlikely to allow an SBLC in for a prop trader.”
However, senior securities lawyer Chirag Shah said that banks issuing a BG could accept an SBLC from foreign prop, if the same is issued by a reputed global bank, in lieu of the non-cash collateral specified.
Traders and brokers provide the bank guarantee to an exchange’s clearing corporation to secure trading limits. At any given time, the broker must maintain a mix of cash or cash-equivalent collateral such as a bank guarantee, along with other non-cash collateral such as eligible shares and bonds with the clearing corporation.
For brokers operating both proprietary and client businesses under a hybrid model, firms will need to furnish proof to banks that bank guarantees secured against 50% collateral are used exclusively for client trades and not for prop activity, which attracts 100% under the amended directives .
“While this might raise administrative costs for both brokers and banks, it is something they will have to contend with and I don't see this as an unscalable hurdle,” said Lakhani of Uniqus Consultech.
Funding advantage
Globally, SBLC commissions typically range from 10–25 basis points to about 100 basis points, depending on the bank-client relationship and credit profile, while bank guarantees in India usually cost 50-100 basis points, said securities lawyer Shah. He added that banks overseas do not distinguish between capital market and non-capital market lending.
Experts Mint spoke to said that though not specified by RBI, banks will accept SBLCs from foreign prop traders.
Bank guarantees worth about ₹1.2 trillion remain outstanding across exchanges, with few instances of invocation in the past, according to the Association of NSE Members of India (ANMI). Bank guarantees are contingent liabilities of the bank, triggered only if the client defaults in favour of the beneficiary.
“The acceptance of SBLCs by banks for funding foreign prop will put domestic prop at a disadvantage relative to them in terms of easier access to bank capital,” said K. Suresh, national president of ANMI.
Suresh said this was among the issues represented by the broker forum to the finance ministry recently. He said that prop traders impart liquidity to markets, ensuring price discovery and reducing impact cost for investors.
“I estimate that RBI directives on curbing funding to prop could dent market volumes by as much as 30%,” he added.
Rising prop share
Capital market participants are broadly divided into four segments. These are retail and high-net-worth investors, domestic institutional investors or DIIs, foreign institutional investors or FIIs, and proprietary traders — both foreign and domestic.
Prop traders accounted for 50.7% market share of equity options on the NSE, which, in turn, held 71.8% of the equity options segment as of January-end, with BSE accounting for the remainder. A year earlier, proprietary traders held 48% market share on NSE.
In the NSE equity cash segment, proprietary traders held a 30.1% market share, second only to individual investors at 33.9% as of January-end 2026. A year earlier, prop share in the cash segment stood at 29%.