From July 1, Leverage Won't Come Cheap For Trading Firms - Here's Why

From July 1, 2026, proprietary trading firms and stock brokers will find it costlier to access bank-backed funding with the Reserve Bank of India’s (RBI’s) new lending rules for capital market intermediaries coming into effect.

The new framework requires bank guarantees used for proprietary trading to be fully backed by collateral, with at least half of it in cash or fixed deposits (FDs). At the same time, RBI has barred banks from extending loans to brokers and trading firms for buying securities on their own account, including proprietary trades. The changes are aimed at reducing leverage in the financial system and limiting banks’ exposure to risks arising from speculative market activity.

While the rules are unlikely to affect retail investors directly, they could make it more expensive for proprietary trading firms to operate by increasing the amount of cash they need to keep aside. That, in turn, could reduce the leverage available to some firms and weigh on trading volumes in certain market segments.

The changes are part of a new chapter introduced in the RBI's Commercial Banks – Credit Facilities Amendment Directions, 2026 (Revised), which creates a dedicated framework for banks lending to capital market intermediaries, such as stock brokers, clearing members and proprietary trading firms.

What Is Changing

The RBI has tightened the rules for bank guarantees used by proprietary trading firms.

From July 1, banks can issue these guarantees only if they are backed by 100 per cent collateral, with at least 50 per cent of the collateral in cash or FDs. Previously, guarantees generally required 50 per cent collateral, of which only 25 per cent had to be in cash.

A bank guarantee allows a trading firm to meet exchange margin requirements without depositing the entire amount in cash.

Why Does This Matter?

From July 1, proprietary trading firms will have to lock in more cash to obtain bank guarantees. That means less capital will be available for trading, and funding costs will increase. The impact will be greatest on firms that rely on leverage, or borrowed money, to take larger positions in the market. Some firms may reduce the size of their trades, as the new rules make leveraged trading more expensive.

Why Has RBI Tightened The Rules

India’s derivatives market, especially options trading, has grown rapidly over the past few years. Proprietary trading firms now account for a large share of trading volumes in this segment.

India remained the world’s largest derivatives exchange in FY26, with 3,696 crore contracts traded, accounting for more than half of all derivatives contracts traded globally, according to NSE’s Market Pulse (June 2026).

Proprietary traders have also become the biggest participants in the market. They accounted for 59.30 per cent of equity derivatives turnover in FY26 and 49 per cent of equity options premium turnover, making them the single-largest participant category in these segments.

With the new rules, RBI wants to reduce the risks associated with excessive leverage and ensure banks are better protected if a trading firm defaults. By requiring stronger collateral and restricting bank funding for proprietary trading, the central bank is limiting banks’ exposure to high-risk market activity.

The revised directions were issued in March 2026 after the RBI deferred their implementation from February. The rules take effect from July 1. Existing loans and guarantees can continue until maturity, but all fresh facilities and renewals from July 1 onwards must comply with the new norms.