Brokers are not opposing the objective of reducing systemic risk but are concerned about near-term disruption. | Photo Credit: PAUL NORONHA

The RBI has tightened rules governing how banks lend to capital market intermediaries, raising concern among brokerage firms, particularly those with large proprietary trading operations. While the move is aimed at curbing excessive leverage and strengthening financial stability, here’s an explainer on why brokers say the transition could disrupt funding and trading activity. 

What has the RBI changed?

The RBI has mandated that all bank lending to capital market intermediaries must be fully backed by eligible collateral and subject to continuous monitoring. Crucially, banks are now barred from financing brokers’ proprietary trading or investment positions. However, lending for operational requirements, such as working capital, settlement mismatches and market-making, is still permitted. Banks are also explicitly allowed to fund margin trading undertaken by clients through stockbrokers.

Why does the proprietary trading restriction matter so much?

For many brokers, bank credit was a relatively low-cost source of leverage for proprietary trading desks. With this route shut, brokers will have to either cut back positions, deploy more internal capital or shift to alternative funding sources, which are typically more expensive. This directly impacts leverage, trading volumes, and short-term profitability, especially for firms where prop trading is a meaningful contributor to earnings.

What do the new collateral rules do?

The RBI has introduced standardised collateral haircuts, 40 per cent on listed equities; 25 per cent on sovereign gold bonds, mutual funds, and REITs/ETF units; and 15–40 per cent on debt mutual funds and debt instruments. While this brings clarity and consistency for banks, it may reduce the effective borrowing value of pledged assets for brokers, tightening funding further in some cases.

Are client-facing brokers affected?

Brokers focused on client-driven businesses such as cash equities, derivatives broking, advisory and wealth management are expected to see limited impact on core operations. The clear regulatory backing for bank funding of client margin trading is positive for this segment, removing a long-standing grey area for lenders.

Why are brokers planning representations to the RBI?

Brokers are not opposing the objective of reducing systemic risk but are concerned about near-term disruption. Industry representations are expected to focus on transition timelines, operational clarity, and the cumulative impact of higher funding costs. In the short run, brokers warn of selective unwinding of proprietary positions and some pressure on market liquidity. Over the longer term, the rules are likely to push the industry toward lower leverage, stronger balance sheets, and more conservative business models.

Published on February 18, 2026