In a detailed post on X, Kamath said the industry is still interpreting the RBI circular, but the broad direction is that funding for brokers and proprietary traders will become more expensive from April 1.
“We’ve been trying to understand RBI’s new lending rules for brokers,” Kamath wrote, adding that he had spoken to industry participants to gauge the implications. “Quite a bit” is changing, he said, even though “nothing changes for any of our customers” at Zerodha.
The RBI on Friday issued revised norms governing banks’ exposure to capital market entities. The changes include a ban on bank funding for proprietary trading by brokers, tighter collateral requirements for bank guarantees issued in favour of exchanges and clearing corporations, and a shift towards fully secured funding structures.
Proprietary trading, where brokers trade using their own capital rather than on behalf of clients, is a large part of the derivatives ecosystem. According to Jefferies, prop trading accounts for about 50% of equity options premium turnover. Any disruption in funding for such desks could therefore alter market liquidity dynamics.
Kamath explained how bank funding had been structured earlier. Prop desks would place a fixed deposit of Rs 50 crore and obtain a bank guarantee of Rs 100 crore. This guarantee would then be used with the clearing corporation to meet margin requirements, effectively allowing 2x leverage. “That’s now completely shut down,” he said, referring to the RBI’s explicit bar on lending for proprietary trading.
The regulator has clarified that banks cannot fund prop trading activities, except for limited functions such as market making and certain debt warehousing roles. All such exposures will now be treated as capital market exposure, meaning they will count within banks’ overall limits for this category. This could further curb banks’ appetite for extending credit to the trading ecosystem.Another major change relates to Professional Clearing Members, or PCMs. These entities clear trades on behalf of brokers and earlier enjoyed relatively lower collateral requirements when seeking bank guarantees. Kamath noted that PCMs previously needed to provide only 25% collateral to obtain a Rs 100 bank guarantee, while other intermediaries had to provide 50%. That preferential structure has now been removed.
“PCMs also need 50% collateral going forward,” Kamath said. This will likely raise clearing costs for brokers who rely on PCMs instead of being self-clearing members.
Zerodha, he pointed out, clears its trades directly across segments and does not depend on external financing. “We have 0 external financing, and are a self-clearing member, so our charges for clients will also remain unaffected,” he wrote.
Bank guarantees issued in favour of exchanges or clearing corporations will require at least 50% collateral, of which a minimum 25% must be in cash. Equity shares used as collateral will be subject to a minimum haircut of 40%, reducing their effective value for margin purposes.
Kamath also flagged implications for retail traders who use leverage products. Intraday funding will get more expensive because of the new 100% collateral requirement, up from 50% earlier. Margin Trading Facility financing, commonly known as MTF, is also likely to cost more as banks will now need 100% collateral, with at least half in cash or cash equivalents.
“Costs are rising across the board for brokerages, and this may or may not get passed to you, the customer,” Kamath said.
