A Reserve Bank of India clampdown on bank guarantees threatens to squeeze the proprietary traders powering India’s derivatives market, putting trading volumes and the rich valuations of NSE, BSE and MCX under pressure.
The fault line is a bank-guarantee funding pool estimated at Rs 1.3 lakh crore to Rs 1.5 lakh crore, according to Dolat Capital. Proprietary trading firms earlier used these guarantees to secure market exposure of as much as twice their capital. Revised RBI norms have effectively reduced that leverage to one time, leaving traders searching for considerably more expensive funding alternatives.
