By Kushan Shah
The Association of NSE Members of India (ANMI) has written a letter to the Securities and Exchange Board of India’s (Sebi) top brass requesting a six-month delay for the Reserve Bank of India’s (RBI) 100% cash collateral rule on bank guarantees. The letter was marked to Sebi chairman Tuhin Kanta Pandey, whole-time director Sandip Pradhan and executive director Jeevan Sonparote.
The recent regulations by the RBI, which are scheduled to come into effect on April 1, had increased the cash collateral requirement for bank guarantee facilities from 50% to 100% and banned lending by banks for proprietary trading by brokers. It is to be noted that proprietary trading constitutes about 30% of the participation in cash and futures market and close to 50% in the equity options segment as of December 2025, which raised concerns among brokers and the markets on their possible impact.
ANMI has explained its concerns on the impact of these regulations. It believes that the increase in collateral requirement will constrain proprietary market makers and arbitrage desks which provide liquidity and price efficiency, possibly impacting market depth, widening of bid-ask spreads and increase in impact costs for end investors, without any proportionate incremental stability benefits.
Liquidity Engine at Risk
Further, the letter also cites an adverse impact on FPI participation in Indian markets due to reduced liquidity and higher trading costs and a shift of market share from domestic proprietary firms to foreign participants who will be able to continue meeting their margin requirements through SBLC (Standby Letter of Credit) from foreign banks as possible consequences of the regulations.
The association has argued that proprietary traders play an important role in market making and the capital market intermediary segment has lower credit risk and NPA. The regulations will also have an impact on the fee income of banks and given the existing regulations which manage risk and market stability through clearing corporations, the increase in collateral requirements are disproportionate to their risk profile.
South Korean Cautionary Tale
In order to explain the possible long-term impact of the new regulations, the association has shared a market case study of a similar such rise in margin requirements and transaction levy in South Korean markets in 2011 which resulted in an 83% decline in daily volume in a short time period of eight months. The move also resulted in a 70% reduction in collateral by retail accounts with further 60% reduction by market makers and 40% decline in collateral posted by foreign entities.
The association also cautions that despite a total policy reversal in 2019, the daily volumes in the South Korean markets had only reached only 27% of their 2011 peak by 2024. Additionally, the letter notes that the risk in Indian markets is higher compared to South Korea due to higher participation by FPIs, offshore venues, instant technological migration through API and higher cost differential.
Further, the letter also adds that RBI’s consultation paper related to the regulations released in October 2025 did not give any indication of an increase in collateral requirements for bank guarantees, which led to the market participants having no opportunity to provide their feedback or assess the impact of the move.