The RBI just made it far more expensive to be a proprietary trader — and the ripples will reach every Indian investor who has never heard of a bank guarantee.
Picture a small, intensely focused office somewhere in Lower Parel or Powai. A dozen quants stare at multi-screen setups. Algorithms fire orders in milliseconds. No client calls, no relationship managers, no branch network. Just the firm's own capital, working the market around the clock. This is a proprietary trading desk — a "prop desk" — and most retail investors have never thought twice about who these people are or what they do.
They should. Because as of July 1, 2026, the Reserve Bank of India has changed the economics of prop trading so fundamentally that the very liquidity you rely on when you buy or sell a Nifty option may quietly — and permanently — thin out.
To understand what the RBI just did, you first need to understand what prop traders actually do and why they matter.
Unlike a mutual fund that manages your money, or a broker who routes your orders, a proprietary trading firm puts up its own capital and trades for its own profit. The strategies range from high-frequency arbitrage — exploiting tiny price gaps between instruments in microseconds — to market-making, where the firm continuously quotes both a buy and a sell price, pockets the spread, and keeps the market liquid for everyone else.
Proprietary traders accounted for more than half of options turnover on the National Stock Exchange last year. In index options specifically — the Nifty and Bank Nifty contracts that millions of retail traders use every week — prop desks play the market-maker role that keeps bid-ask spreads tight and execution swift. NSE itself ranks number one worldwide in equity derivatives contracts traded, with roughly 51% global share. The invisible lubricant keeping that engine running has largely been prop traders. Now the RBI has decided to change how they're fuelled.
Here is the mechanism that made the old world work — and this is where the story gets interesting.
A prop desk wanting to trade needs to post margin — a deposit of sorts — with the exchange's clearing corporation (the entity that guarantees all trades settle, even if one party defaults). The clearing corporation accepts cash, but it also accepts something called a bank guarantee (BG): essentially a letter from a bank promising, "if this trader defaults, we'll pay up."
The elegant part: until July 1, a prop firm didn't need to hand over full cash to obtain a bank guarantee. Under the earlier framework, banks providing guarantees for proprietary trading positions only needed to hold 50% cash collateral against such guarantees. So a firm could deposit ₹50 crore with its bank, receive a ₹100 crore guarantee, submit that guarantee to the clearing corporation as margin, and trade against a ₹100 crore margin base — a leverage multiplier of 2x on the capital deployed, at a commission of roughly 1% per annum.
Approximately ₹1,20,000 crore in bank guarantees are currently outstanding across exchanges, with no reported invocation even during periods such as the 2008 financial crisis and the COVID-19 volatility phase. The industry's point: this has been a clean, well-functioning arrangement for years. The RBI's point: "so far" is not the same as "forever."
Starting July 1, the Reserve Bank of India requires bank guarantees issued to firms trading in capital markets to be fully backed by collateral, with at least half in cash. But the rule actually has two tiers, and the distinction matters.
Banks can continue to issue guarantees for brokers in favour of stock exchanges and clearing corporations — typically used for security deposits and margin requirements. For general broker activity, these guarantees must now carry at least 50% collateral, of which at least 25% must be in cash. But if the guarantee is specifically for proprietary trading, it must be fully secured, with at least 50% of the collateral in cash. The prop desk, in other words, faces the toughest standard.
There is a second sting. Equity shares pledged as collateral now attract a minimum 40% haircut — meaning ₹100 crore worth of listed equity yields only ₹60 crore in margin value. Banks are also barred from financing proprietary trading by brokers directly, though funding may continue for legitimate activities such as market-making and short-term warehousing of debt securities.
The RBI originally deferred these stricter rules from April 1 to July 1, 2026, following representations from banks, capital market intermediaries, and industry associations who flagged operational complexity and sought interpretational clarity. They got three extra months. The rules kicked in anyway on July 1.
Let's make this concrete.
Before July 1: A prop desk deposits ₹50 crore with a bank → receives a ₹100 crore BG → posts it as margin → trades on a ₹100 crore margin base. Cost: roughly 1% per annum.
After July 1: That same desk must now deposit ₹100 crore (at least ₹50 crore in cash) to get the same ₹100 crore BG. If it doesn't have the idle cash, it must borrow it — from NBFCs, commercial paper markets, or other expensive windows — at rates that are dramatically higher than the old 1% BG commission.
Requiring guarantees to be fully backed by collateral ties up more capital, leaving less available for trading. Effective trading capacity will shrink from roughly 1.7 times to about 0.85 times a firm's capital base under the new framework. That isn't just tightening — it's a structural flip from being leveraged above 1x to operating below it.
The higher funding costs come on top of the government's February 1 hike in securities transaction taxes on equity derivatives, and may reduce returns from cash-futures arbitrage, options market-making, and index arbitrage. Per market participants, the net additional funding cost lands somewhere in the range of 300–500 basis points — 3 to 5 percentage points — annually. For firms that were already running on post-tax returns in the high single digits, that is the difference between a viable business and an unviable one.
ANMI estimates that the move to full cash collateralisation would reduce overall collateral availability by roughly ₹22,500 crore — equivalent to about 2.5% of total exchange collateral — potentially constraining firms that provide liquidity and arbitrage services in the market. The number sounds modest in isolation. But it is concentrated where it hurts: among the mid-tier domestic prop desks that drive a disproportionate share of market volume.
The RBI's objective is clear: eliminate the transmission of capital market shocks to bank balance sheets. The central bank wants to reduce systemic risk and ensure that bank exposure to capital market entities is properly secured, with stronger collateral and stricter monitoring.
Consider what happens in a flash crash or a sudden liquidity evaporation. If prop firms have borrowed against 50% collateral and suddenly post large losses, banks are left holding guarantees they may have to honour — with markets in freefall and collateral values falling in tandem. The RBI is plugging a hole before the storm arrives, not after.
The body noted that banks have not invoked these guarantees even during periods of extreme volatility, including the global financial crisis of 2008 and the COVID-19 market turmoil. The industry's argument — essentially, "nothing bad has happened so far" — is not the same as saying nothing bad can happen. Historically clean credit performance is a good sign. It is not a guarantee.
The measure is also the latest step to cool a derivatives boom that turned India into a global options hub. That boom has had a dark underbelly: SEBI's July 2025 study found that over 91% of individual F&O traders lost money in FY25, with aggregate net losses of ₹1,05,603 crore, and unique F&O traders falling 20%. Regulators have been systematically adding friction to a derivatives market that had begun to resemble a casino as much as a price-discovery mechanism.
What makes this particularly brutal for prop desks is that this isn't a single blow — it's the third gut punch in quick succession.
Round 1 — SEBI's structural curbs (late 2024): Weekly expiry products were curtailed, option premiums had to be collected upfront, and margins on short options were raised. Fewer weekly expiries meant fewer arbitrage opportunities, and prop desks saw revenues compress sharply in the second half of FY25.
Round 2 — Budget 2026-27 STT hike (April 1, 2026): STT on the sale of futures rose from 0.02% to 0.05% of contract value — a 150% increase. In the options segment, the tax on premiums increased to 0.15% from 0.10%. For high-frequency traders and scalpers operating on razor-thin margins, this cost escalation makes several previously profitable strategies unviable.
Round 3 — RBI's BG collateral rules (July 1, 2026): The story you're reading right now.
Each of these three interventions is defensible on its own. Stacked together, they represent a structural dismantling of one sub-industry's business model in the span of twelve months.
Smaller firms with limited capital are expected to be hit the hardest. A large, well-capitalised prop desk — think the India arms of Jane Street, Citadel Securities, Jump Trading, or Optiver — can absorb the capital drag. They have deep balance sheets and global investor backing that doesn't rely on Indian bank lines.
The firms facing an existential reckoning are mid-tier Indian prop shops: well-run and profitable in the old framework, but without the capital buffers to absorb a 300–500 basis point cost shock.
Here is the structural asymmetry that the industry finds most galling — and that is conspicuously absent from the official rationale: the new RBI framework does not apply to foreign high-frequency trading firms operating through the foreign portfolio investor route or the GIFT International Financial Services Centre. The regulatory change disproportionately affects Indian proprietary trading desks while leaving overseas HFT firms relatively insulated. Foreign firms can access standby letters of credit from their parent entities, providing them with a funding advantage over domestic competitors.
ANMI pointed out that foreign entities may have an advantage since they can meet margin obligations using standby letters of credit supported by overseas banks — creating an uneven competitive landscape between domestic intermediaries and foreign players. In a market India has spent two decades trying to make competitive with global exchanges, this is an own goal worth examining.
The volume signal is already flashing. Since the circular was introduced, the share of proprietary traders across NSE's cash, futures, and options segments has declined marginally. Some traders have reportedly been laid off in anticipation of the new norms.
The Association of National Exchanges Members of India requested SEBI to keep in abeyance the RBI amendment mandating 100% cash collateral — submitting its representation on February 18, 2026, urging SEBI to defer implementation. ANMI emphasised the likely implications for market liquidity, trading costs, and foreign investor interest. SEBI hasn't moved. The RBI didn't blink. The rules are live.
Here is the chain reaction that matters to anyone who trades — or even invests through mutual funds:
Prop traders shrink. With higher funding costs, firms either reduce trading size or exit strategies entirely. The new requirement is expected to reduce leverage available to domestic proprietary trading firms, increase capital commitments, and raise the cost of executing market strategies.
Market-making thins out. Prop desks in options act as continuous market-makers — the willing counterparty to your trade. Fewer market-makers means fewer buyers and sellers at any given moment.
Bid-ask spreads widen. ANMI believes this could result in more volatile spreads and lower intraday participation across market segments. A wider spread is a hidden tax you pay every time you enter or exit a position.
Volumes fall, impacting exchanges. Analyst estimates put the likely drop in derivatives volumes at 8–15%, as leverage tightens and marginal strategies become unviable. Lower volumes hit exchange revenues — and exchanges like NSE, which is now pursuing what could be India's largest-ever IPO, surpassing Hyundai Motor India's ₹27,858 crore record set in 2024, are publicly valued entities whose performance matters to millions of mutual fund investors holding financial sector funds.
FPI pullback risk. ANMI has warned that lower liquidity and higher execution costs could make Indian markets less attractive for foreign portfolio investors. In a market already navigating global uncertainty, that is a risk worth watching.
Here's the uncomfortable truth the prop industry doesn't advertise: much of the "liquidity" it provides is circular. High-frequency traders quote tight spreads partly because they also capture those spreads — from each other and from retail investors at millisecond speed.
The impact is structural rather than temporary. What emerges is a regime of higher funding costs, lower effective leverage, and greater reliance on internal accruals — making capital strength a competitive advantage rather than an afterthought. This is not the end of trading. It is the end of easy bank-funded leverage.
Firms with ample capital or diversified funding sources should be better placed to absorb the changes, while those that rely on bank funding may seek alternatives or tap internal capital. The sector may shift from a high-leverage growth model to a more stability-focused one — which, depending on your vantage point, is either a regrettable contraction or a long-overdue correction.
There is a reasonable case that India's derivatives market grew too fast, too furiously, on too much borrowed firepower. The RBI — whose job is to protect the banking system, not to maximise market volumes — has decided the risk is asymmetric. If markets turn savage, fully-collateralised guarantees mean banks survive intact. Under the old framework, that outcome was much less certain.
India set out in the early 2000s to build deep, liquid capital markets. It succeeded — perhaps too well. NSE is now seeking to list in what could be its largest-ever IPO, partly on the back of a derivatives ecosystem that became globally dominant. But that ecosystem was running, in part, on subsidised risk. Banks were extending guarantees with 50% coverage when the underlying activity arguably warranted much more.
The RBI looked at the full balance sheet of the financial system and decided the plumbing needed fixing — even if the water pressure drops for a while. The prop desks being squeezed today are not victims of regulatory incompetence. They are the incidental cost of a very deliberate choice: that the next time global markets crack, Indian banks should not go down with the trading firms they backed.
The irony is sharp: India's regulators spent two decades building the liquidity that made the market world-class. Now they are spending it down, deliberately, in pursuit of stability. And the firms least affected by the new rules are the foreign ones — the very players that India once struggled to attract.
Whether that trade-off was worth making — and whether SEBI can soften the competitive asymmetry through its own parallel review — is the question that will define the shape of Indian capital markets for the next decade.