Brokers flag liquidity risks in RBI’s new credit curbs on capital market intermediaries, likely to make representation to regulators

Brokers flag liquidity risks in RBI’s new credit curbs on capital market intermediaries, likely to make representation to regulators

• RBI's new norms may hurt market liquidity and trading volumes
• Brokers warn higher collateral rules will raise funding costs
• Proposed changes set to take effect from April 1, 2026

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Brokers have raised concerns over the Reserve Bank of India’s proposed tightening of bank lending norms to brokers and other capital market participants, warning that the measures, may have serious consequences for liquidity and market depth. The biggest impact is seen on proprietary trading firms, the impact can also be seen on intra-day trade funding also.

Significant Impact on Proprietary and HFT traders

Under the amended RBI (Commercial Banks – Credit Facilities) Directions, brokers will be required to provide full collateral against loans for proprietary trading. The framework also bars bank funding for acquisition of securities on a broker’s own account, except for limited market-making activities, and mandates that most exposures be backed by 100 percent collateral, including a significant cash component. Circular states, “Banks shall not provide finance to a CMI for acquisition of securities on its own account, including for proprietary trading or investments”.

Industry participants said the intent of the Reserve Bank of India to safeguard the banking system is understandable, but argued that a blanket approach could disrupt core liquidity functions performed by proprietary and arbitrage desks. These desks play a key role in cash–futures arbitrage, options market making and index arbitrage—low-margin, high-volume strategies that help narrow spreads and improve price discovery.

Former ANMI President and Joint Managing Director, Share India, Kamlesh Shah, says, “While the intent of the Reserve Bank of India to strengthen prudential risk management, curb systemic vulnerabilities and ring-fence the banking system is widely acknowledged, but certain provisions may have unintended consequences. In particular, the move towards near-100 percent collateralisation and the effective bar on bank funding for proprietary positions could adversely affect market liquidity, depth, employment and tax revenues. "

Impact on F&O and Arbitrage trades

The recent STT hike proposal on Futures & Options (F&O) trades in the Union Budget and the RBI’s moves to curb funding for speculative trades are expected to dampen speculative trading volumes on exchanges. With higher collateralisation and limited access to bank funding, brokers warn that proprietary trading capacity could shrink sharply. This may reduce arbitrage participation, widen bid-ask spreads, and lower trading volumes across both cash and derivatives segments, especially in less liquid stocks. The impact could be most pronounced during volatile periods, when professional liquidity providers typically absorb risk.

Currently, brokers obtain bank guarantees at a fee of around 1–2 percent of the exposure. For instance, for an Rs 1,000 crore bank guarantee (BG), a broker’s own contribution would typically be in the range of Rs 10–20 crore. So, the broker’s cost is largely limited to that fee. This bank guarantee is used to obtain limits from the clearing corporation. Once the new rules kick in, brokers will have to provide at least 50 percent cash and the rest as collateral for such funding, which will increase the cost of funding.

Based on cheap funding from banks, brokers used to provide limits to professional traders at 8–10 percent. Business models where brokers employ professional traders to trade will be impacted, as brokers will now be charged a higher cost of capital. This will first put pressure on professional traders, who provide liquidity to the market.

Intermediaries also flagged potential spillover effects on institutional investors. Foreign portfolio investors and domestic institutions rely on tight spreads and deep order books for efficient execution. If proprietary liquidity providers scale back activity, execution costs may rise, leading to higher impact costs and slippage between indicative and realised prices. Over time, this could weigh on India’s attractiveness for global allocations and increase trading costs for domestic funds.

At the same time, brokers argue that India’s capital markets already operate under stringent safeguards overseen by exchanges and the Securities and Exchange Board of India (SEBI), including upfront margining, real-time risk monitoring and tight collateral norms. They contend that additional bank-level constraints may be disproportionate to incremental systemic risks.

Another key concern is the practical viability of 100 percent collateralisation under existing margin regimes, which already require significant cash margins and conservative utilisation buffers. Brokers say the new framework could render certain arbitrage and proprietary strategies commercially unviable rather than merely more conservative.

One banker with capital market exposure business, on the condition of anonymity said, “The proposed rules may affect banks’ fee income from custody, clearing and financing businesses, while reduced liquidity may dampen valuations and raise the cost of capital for issuers”. Retail traders, who benefit from tight spreads and efficient arbitrage, may face higher transaction costs. Banking sources say, proprietary book funding is close to Rs 22,000 crore market for banks.

Intra-day funding norms tightened

Not only proprietary brokers, but client-based brokers may also be impacted. The biggest impact is expected on intraday funding for routine client business, which banks used to extend to select brokers with around 50 percent collateral. The intent to move the collateral requirement to 100 percent has come as a shock to brokers. The proposed regulations also state that such funding can be used only for settlement purposes and not as margin for trading.

Brokers require intraday funding to support large institutional trades in the derivatives segment, including order entry and other operational requirements. It is also needed to meet the 50 percent cash margin requirement at the client level, especially for high exposures near or on expiry day. Brokers also use intraday funding to meet pay-in related settlement obligations.

Market participants said brokers may no longer seek intraday funding from banks if they are required to provide full collateral, as they could instead deploy the same funds directly with clearing corporations. Banking sources estimate that intraday funding to brokers is a Rs 7,000–8,000 crore business for lenders.

Roop Bhootara, CEO, Investment Services, Anand Rathi Shares and Stock Brokers, said,  “Recent directions by the RBI on banks’ capital market exposure allow intra-day limits only for meeting settlement obligations related to pay-ins. These limits are not available for other requirements, particularly margin-related needs. This is likely to increase the cost of arranging funds, as intra-day margin funding was earlier available at a lower cost through the banking system. The change may lead to higher impact costs and a reduction in market turnover”.

Banks allowed for MTF but effectively of no use

With the growth of the Margin Trading Funding (MTF) book, currently around 1,00,000 crore, brokers were expecting some clarity on bank funding against MTF receivables. However, the RBI’s proposed regulations require collateral in the form of cash, cash equivalents, or government securities. Broking sources said this defeats the purpose, as brokers would have little incentive to seek bank funding if they already have to provide funds or high-quality collateral.

Previously, there were no clear guidelines for banks on Margin Trading Funding (MTF). The proposed norms clarify that banks can provide such funding, but only against full collateral, which makes it a non-starter for brokers.

However, brokers remain hopeful that the issue may be reviewed by the RBI. They had made representations to the banking regulator on this matter when the draft policy proposal was floated last year.

Impact on Professional Clearing Members

The proposed regulations will also impact professional clearing members, earlier there was no clarity in the guidelines so professional clearing members could access funding without margin requirements, as such exposure was not defined as capital market exposure. Now the proposed regulations state that for professional clearing members, bank guarantees will be secured by a minimum collateral of 50 percent, out of which 25 percent shall be in cash only.

Uttam Bagri, Managing Director, BCB Brokerage Private Limited, says, ‘The banking regulator has historically been very cautious about capital markets, and these latest directions continue that trend. We await the day when capital markets businesses are treated as a ordinary normal business activity, rather than being viewed primarily as a space for speculation’.

Way forward

Brokers are expected to hold discussions with their lending banks to assess operational implications before making formal representations to regulators, seeking refinements in the regulation.

To address these concerns, market participants are seeking a calibrated approach, including joint consultations between the RBI, SEBI and broker associations. Suggested alternatives include exposure caps linked to net worth and risk history, a different norm for well-capitalised intermediaries and phased implementation or grandfathering of existing facilities.

Immediate BG Renewals may be useful  

The proposed directions are set to take effect from April 1, 2026, with existing exposures allowed to run until maturity. Brokers, whose bank guarantees are coming for renewal before April 1, may get the benefit of the existing regulations, depending their commercial relationship with the banks.