The Reserve Bank of India's new collateral requirements for trading firms have drawn sharp criticism from industry leaders. Rajesh Baheti, Managing Director of Crosseas Capital Services, described the rules as 'the most significant death knell to the prop trading industry since the NSE came into existence', as reported by CNBC TV18. Baheti estimated that Indian broking houses and domestic high-frequency trading (HFT) firms account for 30% to 35% of total exchange turnover, and warned that the new collateral rule could reduce that segment's activity by a similar 30% to 35% — translating to roughly a 10% to 12% hit to overall daily volumes. The new framework, which came into effect on July 1, 2026, requires bank guarantees for capital market trading to be fully backed by collateral, with at least half in cash, designed to reduce risk for lenders but expected to curb leverage among local trading firms.
The new framework will have substantial implications for trading operations across India's capital markets. As reported by The Hindu BusinessLine and Business Standard, effective trading capacity will shrink from roughly 1.7 times to about 0.85 times under the new framework. Baheti explained that the new framework will make proprietary trading less efficient by increasing the amount of capital that firms must set aside for trading activities. He noted that if the return on equity goes below a certain threshold, the whole business becomes unviable, considering the risk. The higher funding costs come on top of the government's February 1 hike in securities transaction taxes on equity derivatives, which may reduce returns from cash-futures arbitrage, options market making, and index arbitrage. Smaller firms with limited capital are expected to be hit the hardest by these changes, while brokerages are likely to adjust their funding models to adapt to the new requirements.
Proprietary traders accounted for more than half of options turnover on the National Stock Exchange last year, making them a significant force in India's derivatives markets. According to The Hindu BusinessLine and Business Standard, the impact is expected to fall hardest on firms that rely on bank-backed funding to amplify returns. Until now, firms could use bank guarantees to increase the amount they could trade against pledged collateral, but requiring those guarantees to be fully backed with collateral will tie up more capital, leaving less available for trading. Brokerages are likely to adjust their funding models, with firms having ample capital or diversified funding sources better positioned to absorb the changes, while those relying on bank funding may seek alternatives or tap internal capital. As Baheti noted, foreign trading firms and foreign high-frequency traders can secure funding directly from banks overseas, where the RBI has no jurisdiction, creating an uneven playing field where foreign firms may continue to access funding through overseas banking channels.
Foreign high-frequency trading firms operating through the foreign portfolio investor route or GIFT IFSC are unlikely to be affected by these new rules. As reported by The Hindu BusinessLine and Business Standard, Tanmay Kurkoti, founder of QCAlpha Advisors, noted that foreign HFTs with Indian operations can obtain standby letters of credit from their parent companies, offering a real funding cost edge over domestic proprietary trading firms. Major foreign HFTs including Jane Street Group, Citadel Securities LLC, Jump Trading Holdings LLC, and Optiver Holding BV have expanded local operations, drawn in part by India's options market. Kurkoti emphasized that "this norm hits Indian prop desks at brokers far harder than it hits foreign HFTs," with Baheti adding that foreign firms will continue to thrive at the cost of Indian firms, with 'we are exporting our income that will be converted into dollars and taken out of the country'. Clearing corporations don't accept bank guarantees issued by non-banking financial companies, so any bank-guarantee-based funding must come from a bank, making non-bank lenders unable to fill the funding gap.
The market impact is expected to be significant in the near term. According to The Hindu BusinessLine and Business Standard, Kurkoti expects the visible damage to show up by the September quarter, with single stocks being the biggest casualty because the cost of warehousing single-stock inventory becomes uneconomical at current spreads. Baheti questioned the rationale behind the RBI's decision, stating 'There's no credit risk. There are no NPAs in the system' while questioning the need for the new restrictions. The rules do not apply to foreign HFTs operating through tax havens, creating an asymmetric impact where Indian prop desks at brokers face far greater restrictions than their foreign counterparts. Baheti anticipates that as a market maker and trader, the visible damage will show up by the September quarter, with the changes potentially creating an uneven playing field between Indian and overseas firms.
