RBI curbs loans extended to brokers in blow to proprietary trading volumes

By Chiranjivi Chakraborty

India’s central bank tightened rules for loans taken by firms that undertake proprietary trading in shares and commodities and offer leverage to clients, the latest measure aimed at reducing speculative market activity in the South Asian nation.

All credit facilities to securities firms will have to be backed by collateral, while lending for trading on their own account or investments by brokers will be prohibited, according to a statement published on the Reserve Bank of India’s website late Friday. The so-called prudential rules for capital market intermediaries such as stock and commodity brokers will come into effect from April 1, the central bank said. 

Proprietary trading firms accounted for more than 50 per cent of equity options turnover on the National Stock Exchange of India Ltd. — the country’s biggest stock bourse — last year, according to data. In cash equities trading, their share hit a 21-year high on the NSE at around 30 per cent.

The latest step comes just days after India sharply raised transaction tax on trading of single-stock and index derivatives in a bid to reduce speculative trading. Combined with the central bank’s new rules, market participants fear the rules will hurt volumes.

The RBI has also asked banks to demand that guarantees extended by them on behalf of a broker for proprietary trades to be fully secured, with 50 per cent of collateral being in cash and rest as cash equivalents and government securities. The new rule will narrow the type of securities trading firms can offer as collateral to banks.    

The central bank also tightened lending rules for margin trading facility under which stock brokers offer leverage to their clients. Loans given by banks for the product will have to be fully secured by cash and other liquid securities. Stocks offered as collateral by brokers will be considered at a 40 per cent valuation discount. 

Margin trading facility has grown rapidly into a more than ₹1 trillion ($11 billion) market for stock brokers, where clients can get leverage of upto five times their capital.