RBI New Rules: Proprietary trading banned, 100% secured funding required; New rules of RBI create panic in the market; After all, what will be the effect? – market

Funding stopped for proprietary trading

RBI has made it clear that banks will no longer be able to provide funds for proprietary trading (trading by investing their own money) of brokers. However, market making activities may continue. Funding is possible for short-term warehousing of debt securities. Loans to clients under margin trading can continue, but banks will have to impose clear conditions for margin calls. Collateral will have to be monitored continuously. All these loans will now be added to the capital market exposure limit of banks. This may limit the total bank funding available to the capital markets sector.

Let’s understand through easy questions and answers

Question 1: What has RBI changed?

answer: The Reserve Bank of India (RBI) has made a major change in the rules and decided that now brokers will have to maintain 100% secured funding. Earlier, for a bank guarantee of Rs 100, an FD of Rs 50 and an unsecured guarantee (like promoter guarantee) of Rs 50 could suffice. Now it will be mandatory to have solid and real security behind the entire bank guarantee.

Question 2: What does the new rule say on bank guarantee?

answer: If a bank guarantee is given in favor of an exchange or clearing corporation, a minimum of 50% collateral will be required. And out of that 50%, at least 25% should be in the form of cash. This simply means that brokers will have to block more cash or stronger assets than before.

Question 3: What is the 40% haircut on equity collateral?

answer: If you have pledged a share worth Rs 100, the bank will now consider it worth only Rs 60. That means there will be a haircut of 40%. Due to this, brokers will have to give more shares or higher value of collateral than before.

Question 4: What will be the impact on prop trading?

answer: Now funding for prop trading will not be available from banks. Only certain special cases such as market making or limited debt warehousing are exempted. This means that brokers will not be able to use the bank’s funds for their own trading activities.

Question 5: What is meant by “all exposure capital market exposure”?

answer: Now whatever funding banks provide to brokers will be considered as capital market exposure. The exposure limit fixed by banks will be applicable on this. This may limit the lending capacity of banks and they will be more cautious while providing funding.

Question 6: Why constant collateral monitoring and margin calls?

answer: Now the value of collateral will be continuously monitored. If its price falls, a margin call will be issued immediately.

This will reduce system risk, but brokers will have to maintain more discipline and additional capital.

Question 7: What effect will this have on common investors?

answer: Brokers’ leverage will be less.

Bank guarantees can be expensive.

Pressure on small brokers may increase.

Big and strong companies can benefit.

The system will be more secure and stable.

What will change for investors?

For the common investor, these rules simply mean that the broking system will be more secure and disciplined than before, but some things may also become expensive and strict. Because brokers will have less leverage and will have to block more money, their costs may increase. This may impact brokerage charges, margin requirements or trading conditions. Pressure on small brokers will increase, while larger companies with strong balance sheets will remain more stable.