ANMI Urges SEBI to Defer RBI’s 100% Cash Collateral Rule for Capital Market Intermediaries

High | RBI & Monetary Policy, Banking Sector

The Association of National Exchanges Members of India (ANMI) has urged the Securities and Exchange Board of India (SEBI) to keep in abeyance a Reserve Bank of India (RBI) amendment that mandates banks to maintain 100% cash collateral for bank guarantee (BG) facilities extended to capital market intermediaries (CMIs) engaged in proprietary trading. The requirement has been raised from the earlier 50% threshold and is scheduled to take effect from April 1. In a representation dated February 18, ANMI sought a six-month deferment of the RBI circular, warning the measure could have “unintended consequences” for market liquidity and depth. ANMI argued the rule would constrain proprietary market makers and arbitrage desks — described as key providers of liquidity and price efficiency — and could widen bid-ask spreads, raise transaction costs for investors, and curb access to bank financing for proprietary positions. The association also flagged implications for foreign portfolio investor participation, noting that foreign entities could continue financing via overseas banks or standby letters of credit, potentially shifting market share away from domestic firms and creating an uneven playing field. Around ₹1.2 lakh crore in bank guarantees are currently outstanding across exchanges, with no reported invocation even during the 2008 global financial crisis or the Covid period.

Perspective & Context:

  • CMIs (Capital Market Intermediaries) are entities like stockbrokers, clearing members, and proprietary trading firms that facilitate transactions on stock exchanges — they are the plumbing of financial markets
  • Bank Guarantee (BG) facilities are a credit instrument where a bank promises to pay an exchange or counterparty if the CMI defaults; CMIs use these instead of tying up actual cash, allowing them to deploy capital more efficiently in trading
  • Proprietary trading means a firm trades with its own money (not clients’) to profit from market movements — these desks are major providers of liquidity, meaning they stand ready to buy or sell, narrowing the gap between buy and sell prices for everyone
  • What RBI is asking: When a bank issues a guarantee on behalf of a trading firm, it must now hold cash equal to 100% of that guarantee amount — up from 50% earlier. In effect, for every ₹100 guarantee a bank issues, it must park ₹100 in cash rather than lending or deploying it elsewhere, making such guarantees far more expensive to issue
  • ANMI estimates the rule would reduce total exchange collateral availability by about ₹22,500 crore — roughly 2.5% of the entire collateral pool
  • The 100% cash requirement doubles the existing 50% threshold, effectively locking up twice as much capital for the same guarantee transactions
  • With ₹1.2 lakh crore in outstanding bank guarantees and zero invocations even during major stress events like the 2008 crisis and Covid, ANMI contends the higher standard addresses a risk that has never materialized
  • A six-month pause would allow market participants to submit feedback, conduct impact assessments, and engage with regulators before the April 1 deadline