A Reserve Bank of India clampdown on bank guarantees threatens to squeeze proprietary traders powering India's derivatives market, putting trading volumes and exchange valuations under pressure. According to Dolat Capital, the fault line centers on a bank-guarantee funding pool estimated at ₹1.3 lakh crore to ₹1.5 lakh crore. Proprietary trading firms earlier used these guarantees to secure market exposure of as much as twice their capital, but revised RBI norms have effectively reduced that leverage to one time, leaving traders searching for considerably more expensive funding alternatives.
Replacing bank guarantees with commercial paper could push funding costs to about 11% from just 1%, making several trading strategies unviable, as reported by Dolat Capital analysts led by Punit Bahlani. A recent increase in securities transaction tax (STT) has compounded that pressure by raising trading costs and diluting returns. The brokerage warns of a potential liquidity squeeze in segments dominated by proprietary traders and high-frequency trading firms, with the primary bottleneck likely to be capital availability.
Proprietary desks, including HFT firms, contribute more than 45% of NSE's index-options volumes, a business that generates 53% of its revenue. According to Dolat Capital, the regulatory changes are expected to reduce NSE's index-options average daily turnover by 8% from its base-case estimate in FY27 and by 18% in FY28. Futures turnover could be 3% and 6% lower, respectively. The brokerage set a target price of ₹1,550 for NSE, implying a 26% downside from current levels.
Proprietary books, including HFT firms, contribute more than half of BSE's index-options volumes, with the segment itself accounting for about 60% of BSE's revenue. Dolat Capital estimates BSE's index-options turnover could be 10% below its earlier base case in FY27 and 20% lower in FY28. The exchange is still expected to benefit from improving cash-market share and further gains in index options, with Dolat forecasting a 20% profit CAGR between FY26 and FY29. However, the brokerage sees BSE's valuation of 44 times estimated FY28 earnings as failing to provide sufficient protection against weaker proprietary volumes.
Bank-guarantee-backed activity accounts for about 15% to 20% of MCX's futures and options volumes, with proprietary traders relying on bank guarantees contributing around 20% of overall derivatives activity. When commercial users are included alongside proprietary traders and HFT firms, their combined contribution rises to between 45% and 50%. Dolat Capital estimates MCX's futures and options turnover could be 6% below its base case in FY27 and 13% lower in FY28. The brokerage assigned MCX a target of ₹2,400, equivalent to 36 times estimated FY28 earnings.
