“We have been trying to understand RBI’s new lending rules for brokers,” Kamath wrote, adding that he had spoken to industry participants to gauge the implications. “There is quite a bit of change,” he said, even though there is “no change for any of our customers” at Zerodha.The RBI on Friday issued revised norms for banks’ exposure to capital market entities. The changes include a ban on bank financing for proprietary trading by brokers, stricter collateral requirements for bank guarantees issued in favor of exchanges and clearing houses, and a shift to fully secured financing structures.
Proprietary trading, where brokers trade with their own capital rather than on behalf of clients, is a large part of the derivatives ecosystem. According to Jefferies, prop trading accounts for about 50% of stock option premium revenue. Any disruption to the funding of such agencies could therefore change the dynamics of market liquidity.
Kamath explained how bank financing was previously structured. Propdesks would place a fixed deposit of Rs 50 crore and obtain a bank guarantee of Rs 100 crore. This guarantee would then be used at the clearing house to meet margin requirements, effectively allowing double leverage. “That has now been completely stopped,” he said, referring to the RBI’s explicit bar on lending for proprietary trading.
The regulator has clarified that banks cannot finance prop trading activities, except for limited functions such as market making and certain debt storage functions. All these exposures are now treated as capital market exposures, meaning they will count within banks’ general limits for this category. This could further curb banks’ willingness to lend to the trading ecosystem. Another big change concerns Professional Clearing Members, or PCMs. These entities transact on behalf of brokers and previously enjoyed relatively lower collateral requirements when applying for bank guarantees. Kamath noted that PCMs previously had to provide only 25% collateral to obtain a bank guarantee of Rs 100, while other intermediaries had to provide 50%. This preference structure has now been abolished.
“PCMs will also require 50% collateral in the future,” Kamath said. This will likely increase clearing costs for brokers who rely on PCMs rather than self-regulating members.
Zerodha, he pointed out, handles its transactions directly across segments and does not depend on external financing. “We have no external financing and are a self-clearing member, so our costs to customers also remain unaffected,” he wrote.
Bank guarantees issued in favor of stock exchanges or clearing houses require at least 50% collateral, of which at least 25% in cash. Shares used as collateral will be subject to a minimum haircut of 40%, reducing their effective value for margin purposes.
Kamath also noted implications for retailers who use leveraged products. Intraday financing will become more expensive due to the new 100% collateral requirement, compared to 50% previously. Financing the Margin Trading Facility, commonly known as MTF, is also likely to cost more as banks now require 100% collateral, at least half of which is in cash or cash equivalents.
“Broker costs are increasing across the board, and this may or may not be passed on to you, the customer,” Kamath said.
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