RBI Prop Trading Curbs May Give Edge to Foreign Firms

The Reserve Bank of India (RBI) has tightened bank lending norms for proprietary (prop) traders. Market participants say the move may unintentionally favour foreign trading firms.

What Has RBI Changed?

• From April 1, bank guarantees (BGs) issued to proprietary traders must be:
  • Fully secured
  • At least 50% cash collateral
  • Remaining backed by eligible securities
• Earlier, traders could use:
  • Small cash margin
  • Personal or corporate guarantees

Eligible Non-Cash Collateral

• Government bonds
• Sovereign gold bonds
• Listed shares
• Listed convertible debt securities
• Mutual fund units

(Banks apply haircuts before issuing guarantees.)

Stand-By Letters of Credit (SBLCs)

• Some banks may accept stand-by letters of credit (SBLCs) issued by global banks for foreign prop firms as collateral.
• SBLCs are not explicitly listed in RBI’s eligible collateral framework.
• Domestic prop traders usually do not have access to such global banking arrangements.

What is an SBLC?

• A guarantee issued by a global bank promising payment if its client defaults.
• Used as a form of credit support or collateral.