NSE brokers' forum approaches Sebi to seek deferment of RBI's proprietary funding norms

The plea dated 18 February states that the RBI’s norms would impact both price efficiency and liquidity and may even give an edge to foreign proprietary desks over their India counterparts.

The RBI’s consultation paper in October last year did not indicate any increase in bank guarantee collateral requirements to 100% from the current 50%, the Association of NSE Members of India (ANMI) said in a letter to the Securities and Exchange Board of India.

“Therefore, market participants had no opportunity to provide their feedback or impact analysis on this measure,” K Suresh, national president of the ANMI, said in the letter. In view of this, the association asked for the implementation of the RBI directions to be kept in abeyance for six months to allow market participants to submit feedback and impact assessments and engage in constructive consultation.

The RBI stipulated that from 1 April, banks must provide bank guarantees to proprietary traders only against 100% collateral, of which half should be in cash margin and the rest in cash equivalent such as government bonds, sovereign gold bonds and listed securities.

Proprietary traders held a 50.7% market share in equity options turnover, 30.1% in the cash market and 31.7% in equity futures as of January end, according to data from the National Stock Exchange. They are on the winning side in the highly popular equity options segment, wherein nine out of 10 individual traders lose money, as per Sebi.

Unintentional constraint

“The recent direction of increasing the cash collateral requirement for bank guarantee (BG) facilities from 50% to 100% effectively restricts access to bank finance for proprietary trading positions. This will unintentionally constrain proprietary market makers and arbitrage desks, which are key providers of liquidity and price efficiency,” ANMI said.

Limiting their ability to access these facilities may reduce market depth, widen bid-ask spreads, and increase impact costs for investors, without delivering proportionate incremental stability benefits, ANMI stated.

It added that the capital market intermediary segment has historically exhibited exceptionally strong credit performance, with non-performing asset levels that are virtually negligible within the banking system. With about ₹1.20 lakh crore of bank guarantees outstanding across exchanges, the segment’s NPA ratio has remained near zero over the past two decades – significantly lower than that observed across most other sectors to which banks extend credit.

There was no invocation of bank guarantees during the highly volatile period of covid and the 2008 financial crisis.

“NSE Clearing Ltd (NCL) currently has ₹9 lakh crore of total collateral, of which about ₹90,000 crore collateral is in the form of BGs. An estimated ₹45,000 crore of this relates to proprietary trading firms, against which they have already furnished around ₹22,500 crore as cash collateral,” ANMI said.

Increasing the bank guarantee collateral requirement from 50% to 100% would reduce overall collateral by only about ₹22,500 crore – roughly 2.5% of the total collateral, Suresh said. This marginal reduction must be weighed against the critical role proprietary trading firms play in providing liquidity, maintaining tight bid-ask spreads and supporting efficient price discovery through arbitrage and market-making, he added.

Suresh claimed that the restriction on domestic bank funding may shift market share from domestic proprietary firms to foreign participants, which can continue meeting margin requirements through standby letters of credit from overseas banks backed by their foreign parent’s balance sheet, creating an uneven playing field between domestic and foreign firms.