RBI broker funding rules could give foreign proprietary traders an edge

traders could back a bank guarantee with a small cash or cash-equivalent margin along with personal or corporate guarantees.Under the amended framework, both domestic and foreign proprietary traders must provide a 50% cash margin to secure a bank guarantee (BG). For the remaining collateral, RBI directions require customers to furnish eligible securities such as government bonds, sovereign gold bonds, and listed shares, among others.

Banks apply prescribed haircuts to these securities while issuing guarantees.However, banks may accept a stand-by letter of credit (SBLC), which is not explicitly listed as eligible non-cash collateral in the directives, issued by a reputed global bank on behalf of the parent of a foreign proprietary trading firm, as collateral for issuing a bank guarantee.Domestic proprietary traders typically do not have access to such arrangements with global banks, putting them at a disadvantage.Traders and brokers provide the bank guarantee to an exchange’s clearing corporation to secure trading limits. At any given time, the broker must maintain a mix of cash or cash-equivalent collateral such as a bank guarantee, along with other non-cash collateral such as eligible shares and bonds with the clearing corporation.An SBLC issued by a global bank guarantees payment to a beneficiary—in this case the Indian bank issuing the bank guarantee—in case of default by its client, the foreign prop trader.Market participants said acceptance of SBLCs as non-cash collateral could give foreign proprietary traders an advantage in terms of opportunity cost, since capital that would otherwise be locked in cash collateral remains available for deployment elsewhere.The RBI has specified that the remaining 50% non-cash