One Trump Remark, a 1,677-Point Crash — and the Liquidity Hole the RBI's Prop-T ...
Wednesday's market rout has reopened the industry's fight over the central bank's bank-guarantee rules. But behind the united front, brokers are deeply divided — and the RBI may have had good reason to act.Wednesday's market crash needed only one sentence. When US President Donald Trump declared the Iran truce "over," the Sensex plunged 1,677 points — its sharpest single-day fall in over three months — and the Nifty slid below 24,000, wiping out roughly Rs 8 trillion in investor wealth as India VIX spiked nearly 30%.
Geopolitics supplied the trigger. But what alarmed market participants was not the fall itself — it was how little stood in its way. Bids simply vanished. And a growing section of the broking industry believes it knows why: the Reserve Bank of India's new credit norms, effective April 1, which barred banks from funding brokers' proprietary trading and imposed stringent collateral requirements on bank guarantees furnished to clearing corporations.
The liquidity argument
Proprietary desks have long been the shock absorbers of Indian derivatives markets, particularly on the BSE and MCX, where prop trading accounts for the bulk of turnover. By choking bank funding to these desks, brokers argue, the RBI has thinned out precisely the layer of the market that steps in when volatility spikes.
"Liquidity is the key to dealing with high volatility," a senior industry official said. "On a day like Wednesday, there was simply no one on the other side."
The industry's other grievance is that the curbs were framed as risk management — yet, officials point out, there has not been a single recorded default on account of margin shortage in the past twenty years. If the system has worked flawlessly for two decades, they ask, what risk exactly is being managed?
Buoyed by that logic, brokers are preparing to make a fresh representation to the RBI and the Finance Ministry seeking a review — this time hoping to bring all stakeholders on board, including SEBI, the market infrastructure institutions and the broker associations. "What is good for the industry is good for all stakeholders," the official said.
The RBI's side of the ledger
The central bank's concerns, however, are not imaginary — and they go to the heart of how bank guarantees have been marketed and used.
A bank guarantee is typically issued against margins of just 10–25%. A broker putting up Rs 25 can obtain a BG of Rs 100. Deploy that guarantee in the derivatives segment — itself a leveraged product offering 30–40 times exposure — and the effective leverage compounds to 120–160 times the broker's own capital. As one market veteran put it bluntly: "It is speculation with someone else's money. Brokers don't want to put in their own capital — they want bank money. If there are profits, they belong to the broker. If there are losses, the broker declares default and the bank's money is gone."
That is not a hypothetical. Between 2019 and 2021, a string of brokers went bankrupt, and several banks refused to honour guarantees given to clearing houses, arguing they would first recover their own dues from the defaulting broker — dues that often equalled the entire BG amount.
Seen through that lens, the RBI's message is simple: if you want to speculate, bring 100% margins. Bank guarantees remain available — but backed by real collateral, at least 50% of it in cash for proprietary exposures, so that speculation in derivatives is no longer built on unsecured bank credit.
An industry divided
The united front the industry hopes to present may prove difficult to assemble, because the pain — and the benefit — of the old regime was never evenly distributed.
Small brokers complain that bank guarantees were, in practice, the preserve of large players — firms with Rs 1,000 crore-plus balance sheets that could command BG lines from banks — and grumble that even ANMI has taken the big brokers' side in the debate. "What is the fault of small brokers?" one asked. The loudest voices reaching journalists and policymakers, they note, belong to the same handful of large prop-trading houses that benefited most from leveraged bank money.
Regulatory scrutiny has also fallen on the structure of some large proprietary trading operations, a model concentrated among a handful of firms in Delhi, Mumbai and Gujarat with few parallels elsewhere in the industry. Market participants and people familiar with regulatory thinking allege that some of these firms classify independent traders as "employees" of the proprietary desk — an arrangement that can reduce margin obligations, STT and income tax liability, and that critics say blurs the line between genuine proprietary trading and pooled third-party speculation. These allegations, which the firms concerned have consistently denied where raised, form part of the backdrop against which the regulatory tightening — set in motion during Madhabi Puri Buch's tenure at SEBI — took shape.
The road ahead
Wednesday's crash has given the industry its most potent exhibit yet: a live demonstration of what happens to a leveraged, prop-dependent market when the prop money is switched off and a geopolitical shock arrives. Whether the RBI reads the same episode as vindication — proof that a market this leveraged had no business running on bank guarantees — is the question the coming representation will test.
For now, both sides are looking at the same fall and seeing opposite lessons.
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