Shares reflected the uncertainty on Monday, with BSE shares plummeting 10% to Rs 2,726.30, Angel One tumbling 6%, Multi Commodity Exchange of India (MCX) stock dropping as much as 7%, and Groww declining 4%.
The new guidelines, released February 13 and effective April 1, mandate that bank guarantees require 50% collateral with 25% in cash, while loans for margin trading facilities demand 50% cash margin. Analysts say the tightening will hit different market participants in vastly different ways.
Prop traders in the crosshairs
“We see prop traders as most affected as costs could increase on higher cash collaterals and the recent STT increase,” Jefferies said in a note. “We estimate new RBI norms could affect 10-12% of options turnover, resulting in a ~10% earnings impact for BSE.”
Proprietary traders, including high-frequency traders, account for roughly 50% of equity options premium turnover and 30% of cash turnover. While the split between prop desks and HFTs runs about 50-50, Jefferies said discussions with large prop desks suggest the stricter collateral requirements, particularly the 25% cash margin for bank guarantees, could significantly increase costs at a time when securities transaction tax has also been hiked.
If 50% of prop trading volumes excluding HFTs are affected by the regulation, it could impact 10-12% of options turnover, Jefferies estimates. BSE could partially offset the earnings hit with a price increase, the brokerage noted, given the exchange’s options charges run 7% below peers.
Retail brokers catch a break
“Retail brokers should see limited impact given they already meet collateral requirements, and MTF book is mostly self-funded,” Jefferies said, adding that Groww, a smaller player with 2% market share in margin trading, “uses its own equity to fund its MTF book, limiting the requirement for bank support.”Still, there could be “second-order impact on discount brokers if liquidity in cash and options declines” as prop traders pull back, the firm warned.
JM Financial struck a more cautionary note on certain retail brokers, particularly those heavily reliant on bank funding. “Among retail brokers, we expect Angel One to immediately relook at its funding for its MTF book (Rs 6100 crore),” the brokerage said, noting that 50% of Angel One’s March 2025 borrowings of Rs 3,400 crore came from banks. “Groww will need to come to markets as its MTF book scales up aggressively (given MTF book soared 4x to Rs 2300 crore in Q3).”
What’s changing
The amendment marks a fundamental shift toward fully secured funding for brokers. Only 100% secured funding will be permitted going forward, with limited exceptions such as intra-day settlement timing facilities. Previously, bank guarantees of Rs 100 could be structured with Rs 50 backed by fixed deposits and Rs 50 through unsecured instruments like personal or corporate guarantees. That flexibility is now gone.
Bank guarantees issued to exchanges or clearing corporations now require a minimum 50% collateral, of which at least 25% must be cash. Equity shares accepted as collateral face a minimum 40% haircut, a significant tightening of valuation norms.
Banks can no longer provide funding for proprietary trading activities, with narrow exceptions for market making and certain debt warehousing functions. All exposures will be classified as capital market exposure, meaning banks’ overall limits for such exposures apply, potentially crimping their lending appetite.
The framework also mandates ongoing collateral monitoring with explicit margin call provisions. Collateral cover must be maintained continuously, with facility agreements including clauses for margin calls in case of shortfalls.
JM Financial said the “100% collateral requirement for funding (out of which 50% must be cash for MTF) and 40% haircut on shares for collateral value calculations may reduce bank funding access and result in high trading cost for brokers.”
Investment implications
Jefferies said it prefers asset management companies, followed by brokers and registrar and transfer agents within capital markets, as AMCs and RTAs “carry lower regulatory risks and benefit from a structural shift in household savings.”
Also read: BSE, MCX, Angel One, Groww shares fall up to 10%. Here’s why
On Groww specifically, despite regulatory risks, 55% of its revenue comes from options. Jefferies believes “it will be able to diversify these risks over the next 3 years, unlike exchanges, as the share of MTF, commodities, wealth management, and cash equities scales up.”
The April 1 deadline gives market participants just six weeks to restructure funding arrangements that have underpinned years of aggressive growth in India’s booming retail trading market.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)