The immediate impact of the Reserve Bank of India's (RBI) bar on bank funding for proprietary (prop) traders is likely to be felt in trading volumes of weekly Nifty and Sensex options contracts, according to brokers. They added the measure would result in exporting volumes to foreign traders over time.
The impact stems from the RBI's stricter collateral norms, which effectively require proprietary traders to provide 100% collateral to access bank funding for stock market trading.
The revised norms, which came into effect on 1 July, affect overdraft facilities used by proprietary traders. Earlier, traders could access overdraft by providing part cash collateral (25%) and the balance through shares as collateral.
For example, a prop trader could previously obtain an overdraft of ₹100 by pledging ₹25 in cash and the remaining amount in stock collateral.
Such overdraft facilities were widely used as trading margin, particularly on weekly options expiry days. However, with the effective funding bar now in place, accessing overdraft facilities for trading has become significantly more difficult. The trader will now have to put up 50% in cash and the rest in specified collateral like government bonds and mutual fund or ETF units.
Expiry volumes
Expiry days see higher volumes than most other trading days.
For instance, Nifty options expiry-day volumes this Tuesday accounted for nearly two-fifths of the week's (Wednesday -Tuesday ) trading volumes.
For BSE, whose weekly Sensex options expire every Thursday, expiry-day volumes accounted for almost half of the week's trading volumes last Thursday.
"With overdraft for prop literally being withdrawn, thanks to full collateral requirement, the weekly options volumes could get impacted," said Ketan Marwadi, MD of Marwadi Share & Finance Pvt Ltd.
Foreign advantage
According to market experts, the loss of leverage (being able to take large positions by paying small margins) for domestic prop traders will be exploited by foreign high-frequency traders.
"FPIs will put up 50% cash and an SBLC (stand-by letter of credit) issued by a foreign bank to acquire bank credit , giving them an edge over domestic prop traders," said Rajesh Baheti, director of Crosseas Capital, which does both prop and client broking .
An SBLC is a guarantee issued by a foreign bank that covers the obligations of its client in case he or she defaults on their agreement with the beneficiary.
The RBI issued the circular on 13 February and had initially planned to implement it from 1 April. However, it deferred the rollout to 1 July to give banks time to upgrade their systems.
The new norms also require bank guarantees—widely used by traders as margin—to be backed by full collateral. Earlier, traders could obtain bank guarantees by providing 50% collateral. However, the existing BGs will mature over time and so the impact may not be felt immediately.
Industry pushback
Proprietary traders, through broker associations including the Association of NSE Members of India (ANMI), BSE Brokers Forum and Commodity and Capital Market Participants Association of India (CPAI), urged the RBI to withdraw the measures, but to no avail.
An industry expert, speaking on condition of anonymity, said the RBI tightened the collateral norms after inspections of a few banks revealed that bank guarantees had been issued repeatedly to the same group of traders.
An earlier email sent to the RBI seeking confirmation remained unanswered.
Weekly options remain the most actively traded derivative instruments in India. This is reflected in market leader NSE's business, where options trading (index largely) contributed 59%-64% of transaction charge revenue during FY24-FY26, according to the exchange's draft IPO documents. Cash equities and equity futures accounted for the remainder.