India Curbs Prop Trading Leverage

- The new rules, effective April 1, 2026, mandate that all credit facilities extended by banks to stock brokers must be 100% collateralized. This eliminates the previous flexibility for unsecured or partially secured credit lines. - Banks are now explicitly prohibited from financing brokers for their proprietary trading activities. This closes a loophole where short-term working capital loans were sometimes used for speculative trading by brokers. - For bank guarantees issued on behalf of brokers for proprietary trades, the collateral must fully secure the guarantee, with at least 50% of that collateral provided in cash. Guarantees for client trades must have at least 50% collateral, with a minimum of 25% in cash. - When equity shares are used as collateral, banks must apply a minimum "haircut" of 40%, meaning they will only recognize 60% of the shares' market value for lending purposes. - Proprietary trading desks are a significant source of market volume, accounting for over 50% of equity options turnover and about 30% of cash equities turnover on the National Stock Exchange (NSE) in the previous year. - The announcement had an immediate market impact, with shares of capital market companies like BSE Ltd. and Angel One falling by as much as 9.9% and 9.5% respectively on February 16, 2026. - This regulatory action follows other recent measures to curb speculative activity, including a transaction tax hike on equity derivatives. - The margin trading facility (MTF) market, which provides leverage to clients and is valued at over 1 trillion rupees, will also be affected as bank funding for it must now be fully secured with at least 50% cash or cash equivalents as collateral.