HDFC Securities sees limited impact from RBI's new prop trading rules, expects firms to adapt

India's new Reserve Bank of India (RBI) guidelines on funding for capital market intermediaries are expected to increase funding costs for proprietary trading firms, but the broader broking industry is unlikely to face major disruption, according to HDFC Securities Managing Director and CEO Dhiraj Relli.

The new rules, which came into effect on July 1, require bank guarantees issued for proprietary trading to be fully backed by collateral, with at least half in cash or cash-equivalent assets. While the move has drawn criticism from some market participants, Relli believes the impact will be gradual rather than immediate.

Relli added, “It will have an impact on the option volume to the extent of 10 to 15% but not immediately knee-jerk reaction, that's well factored in. My take is that the prop brokers will be able to find a way to navigate this as well. We have been navigating many changes. I don't see a significant problem with this.”

According to him, client-facing brokers will see only a limited impact, mainly on intraday funding requirements, as their existing funding practices are already largely aligned with the new framework. The bigger challenge will be for proprietary trading firms, which must now provide full collateral against fresh bank guarantees instead of the earlier 50% margin requirement.

However, the transition is expected to happen over time because the new norms will apply when existing bank guarantees are renewed, rather than immediately across all outstanding guarantees.

Relli said the three-month implementation window provided sufficient time for market intermediaries to reassess their funding models. While firms may not be completely ready, he believes they are adequately prepared to adapt, given the industry's experience in handling regulatory changes over the years.

He expects proprietary traders to continue operating by exploring other funding avenues. He also noted that the RBI's framework standardises funding practices that were previously left to individual banks' credit assessments.

Abizer Diwanji, founder of NeoStrat Advisors LLP, pushed back on the idea that the RBI is targeting capital markets directly, noting that market regulation is SEBI's — the Securities and Exchange Board of India's — job, not the RBI's. Instead, he said, the central bank's goal is to prevent bank funding from inflating asset prices in ways that create systemic risk.

Diwanji pointed to a broader narrative that domestic proprietary buying has propped up Indian stock prices, contributing to outflows by foreign institutional investors (FIIs) — overseas funds that invest in Indian markets. In his view, the RBI wants valuations to reflect real, sustainable capital rather than short-term trading positions.

"To say that you please collateralise with the level of capital that you have... If you don't have it, then don't play in the market," Diwanji said, adding that durable market support should come from long-term, systemic investors rather than proprietary trading books focused on short-term price swings.

For the entire discussion, watch the accompanying video

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