With the RBI’s revised deadline for tightened bank lending norms for brokers’ proprietary trading coming into effect from July 1, the leading brokers associations have submitted a proposal to the Industry Standards Forum (ISF) to allow bank funding only for non-speculative portion of their proprietary trading that is substantially hedged.
ISF is a forum that formulates standards for implementation of regulations in consultation with SEBI.
Raising concern over banks’ funds being used for speculations in equity markets, RBI has directed banks to seek full collateral against credit facilities for proprietary trading by brokers.
Interestingly, RBI has provided concessions for market makers in the new lending norms. However, capital market regulator SEBI’s market-maker framework is restricted to boost liquidity in SME platform and does not apply to equity derivatives markets.
Following the development, the Commodity & Capital Markets Participants Association of India, Association of NSE Members of India and Bombay Stock Exchange Brokers’ Forum have submitted a representation to RBI. Subsequently, CPAI also submitted a note to the ISF requesting it to formally define and register liquidity providers (LP) like in global equity markets.
Under the proposed framework, each LP can be assigned a dedicated unique trading code exclusively for LP activity, said sources privy to the development.
Once SEBI recognises LPs officially, banks can treat them more like market makers — with less stringent cash collateral requirements, they added.
A proprietary trader qualifies as an LP only if its trading portfolio is substantially hedged and carries limited market risk.
LP risk can be measured using the ratio of SPAN (Standard Portfolio Analysis of Risk) margin to total margin. To qualify as an LP, the SPAN margin should be less than 50 per cent of the total margin requirement.
A trading on the equity cash and derivatives markets in India attracts SPAN Margin and Extreme Loss Margin (ELM).
For instance, a trader taking a long NIFTY position at 25,000 may require to maintain a total margin of 11.3 per cent, comprising 9.3 per cent SPAN margin and 2 per cent ELM. In this case, SPAN represents about 82 per cent of the total margin, indicating a largely unhedged position with significant market exposure. To qualify as an LP, the SPAN component needs to be less than 2 per cent (ie, below 50 per cent of the total margin). Such a low SPAN is possible only with substantially hedged portfolio, sources said.
With SEBI recognition, banks can treat LP as market-maker whose guarantees require only 50 per cent cash collateral instead of 100 per cent as newly proposed.
The CPAI has requested the ISF to recommend this framework. LPs benefit the market by improving liquidity, narrowing bid-ask spreads and enabling more efficient price discovery.
Major markets such as Hong Kong (HKEX), USA (CME, CBOE), Europe (Eurex, ICE) and Singapore (SGX) already have LP frameworks.
Published on June 7, 2026
