Indian brokers sought a carve-out for market-making activities after the Reserve Bank of India ordered banks to require full collateral for credit facilities used by brokers for proprietary trading.
REGULATORY ACTION AND INDUSTRY RESPONSE
Under the RBI norms, bank guarantees and intraday funding facilities used for proprietary trading must be backed by 100% cash or cash-equivalent collateral. Broker associations, including the Commodity & Capital Markets Participants Association of India (CPAI), the Association of NSE Members of India and the BSE Brokers' Forum, made a representation to the RBI and proposed to the Industry Standards Forum that bank funding be allowed for the substantially hedged, non-speculative portion of brokers' proprietary trading. The RBI norms, which take effect on 1 July, already contain concessions for market makers, but SEBI's market-maker framework covers only the SME platform, so the brokers asked for liquidity providers to be formally defined and registered so that banks could treat them like market makers.
The industry proposed a separate category under which hedged liquidity-providing and arbitrage positions could access bank facilities against 50% collateral instead of 100%, Business Standard reported. "Nobody is asking for speculative activity to be funded by banks. The issue is that liquidity providers, who are largely hedged and facilitate efficient market functioning, are being treated at par with directional traders," CPAI member Ketan Marwadi was quoted as saying.
Under the RBI's credit facilities amendment directions issued in February, all bank credit to capital market intermediaries must be fully secured, and banks may not finance a broker's purchase of securities on its own account, including for proprietary trading, except for market making. Implementation was deferred in March from 1 April to 1 July.
FUNDING AT STAKE
Bank guarantees account for about ₹1.2 trillion of the ₹11–12 trillion collateral pool, with intraday funding contributing a further ₹80,000 crore, according to Business Standard.
Sources: BusinessLine; Business Standard; Reserve Bank of India