Abstract
On February 13, 2026, the Reserve Bank of India (RBI) issued the Commercial Banks – Credit Facilities Amendment Directions, 2026, fundamentally restructuring bank financing for capital market intermediaries. Effective April 1, 2026, the rules prohibit bank lending for proprietary trading outright and mandate full (100%) collateralisation for all other credit extended to securities firms, with a 40% haircut on equity pledged as collateral. These measures constitute the most structurally disruptive regulatory intervention in India’s derivatives market since the Securities and Exchange Board of India (SEBI) introduced derivatives trading itself. This case study examines the regulatory rationale, the mechanics of the new framework, first-order impacts on the domestic trading ecosystem, and the second-order implications for Singapore — a jurisdiction directly exposed through infrastructure linkages (GIFT Connect / SGX-NSE), a resident community of India-focused trading firms, and ongoing competition with India’s GIFT City International Financial Services Centre (IFSC) for offshore capital flows.
- Background and Policy Context
1.1 The Structural Anomaly in India’s Derivatives Market
India’s equity derivatives market has grown to an extent that is, by international standards, structurally anomalous. The National Stock Exchange (NSE) accounts for approximately 70% of global index options trades by volume — a concentration that exceeds what any single venue commands in equity options globally. More significantly, the notional value of India’s derivatives market has grown to more than double the size of its underlying cash market. In major developed markets — the United States, European Union, Japan — this ratio typically sits at 2–3%. The Indian ratio thus represents an outlier of extraordinary magnitude.
Proprietary trading firms have been central to this growth. By early 2026, proprietary desks accounted for approximately 50% of equity options turnover on the NSE by value, with high-frequency trading (HFT) firms constituting roughly half of all proprietary trading activity (Jefferies, 2026). The business model of these firms has historically depended on cheap, semi-secured bank funding to leverage relatively modest balance sheets into large market positions.
1.2 The Leverage Architecture Under the Pre-April 2026 Regime
Prior to the RBI’s intervention, Indian banks could extend credit to brokers and trading firms through working capital lines partially or wholly secured by corporate guarantees, personal guarantees, or equity collateral at unadjusted market value. Bank guarantees issued on behalf of brokers to stock exchanges — a standard mechanism for posting margins — could be obtained at a marginal cash cost of 1–2% of face value. A firm could therefore generate ₹1,000 crore in exchange exposure by pledging as little as ₹10–20 crore in cash. This extraordinary leverage ratio, combined with the informational and technological advantages of sophisticated trading systems, allowed proprietary firms to systematically outmanoeuvre retail investors.
The consequences for retail participation were severe. An official study cited by SEBI found that approximately 90% of retail derivative traders incurred losses. Policymakers became increasingly concerned about spillover risks to household finances and, by extension, to macroeconomic stability — particularly given the rapid growth of retail participation following the COVID-19 pandemic.
1.3 Prior Regulatory Attempts and Their Limitations
Regulatory efforts prior to the RBI’s 2026 intervention proceeded incrementally. SEBI increased trading fees for derivative contracts, reduced the menu of available contracts offered by exchanges, and the Union Finance Ministry raised the Securities Transaction Tax (STT) on futures (to 0.05% from 0.02%) and options (to 0.15% from 0.10%) in the Union Budget 2026. While these measures succeeded in reducing the number of contracts traded, they failed to reduce the total capital deployed in the market. Sophisticated participants adapted by concentrating on higher-notional, higher-margin strategies. The volume-weighted signal that concerned policymakers — total capital at risk — remained elevated. - The Regulatory Framework: Key Provisions
2.1 Core Provisions of the Amendment Directions, 2026
The RBI’s Commercial Banks – Credit Facilities Amendment Directions, 2026 introduce four structurally significant changes:
Provision Pre-April 2026 Rule Post-April 2026 Rule
Bank lending for proprietary trading Permitted (via working capital lines) Explicitly prohibited
Collateral requirement for all CMI credit Partial / flexible (guarantees accepted) 100% fully secured (mandatory)
Equity collateral haircut Typically 0–20% at bank discretion Minimum 40% mandated
Bank guarantees to exchanges Cash component: 1–2% 50% collateral, min. 25% in cash
Margin trading facility (client-facing) Partially secured permitted Fully secured by cash/liquid securities only
The practical effect of these provisions is to sever the link between bank balance sheets and speculative derivatives activity. All broker credit is now classified within banks’ Capital Market Exposure (CME) limits, imposing an additional systemic ceiling on the quantum of bank capital that can flow into the trading ecosystem.
2.2 Regulatory Genealogy and International Comparators
The RBI’s framework finds clear precedents in post-2008 financial crisis reforms in advanced economies. The Volcker Rule (Section 619 of the Dodd-Frank Act, United States, 2010) prohibits deposit-taking institutions from engaging in proprietary trading. The United Kingdom’s ring-fencing regime (Financial Services (Banking Reform) Act, 2013) structurally separates core retail banking from investment banking, with ring-fenced banks prohibited from proprietary trading. India’s measures are narrower in scope — they do not prohibit trading firms themselves from proprietary trading, only bank financing of such activity — but the underlying logic is identical: insulate the banking system from capital market volatility by eliminating the transmission channel through leveraged lending.
- First-Order Domestic Market Impacts
3.1 Proprietary Trading Firms
The immediate impact falls disproportionately on smaller domestic proprietary trading firms. IIFL (2026) characterises these firms as those that “lack large balance sheets or alternate credit access” — precisely the attributes that made cheap bank funding a structural necessity rather than a preference. Industry estimates suggest profit margins could be cut by as much as 50%, with derivative trading volumes potentially declining by up to 20%. Several mid-sized proprietary firms have characterised their business models as rendered obsolete.
Larger domestic firms and well-capitalised HFT operations face a more complex adjustment. They possess sufficient internal capital to continue operations but will see significantly constrained growth trajectories. The effective cost of capital for funding market positions will rise sharply, compressing returns on strategies that previously depended on leverage ratios that are no longer accessible.
3.2 Retail Brokerage and Margin Trading
The 40% equity haircut and full collateralisation requirement for margin trading facilities (MTF) — a market that had grown to over ₹1 trillion ($11 billion) — will materially increase the cost of broker-financed retail leverage. Firms such as Angel One, which rely heavily on MTF revenue, face immediate funding model disruptions. Zerodha, which operates with zero external financing, has explicitly stated its customers will be unaffected — a structural advantage that illustrates the bifurcated impact of the regulations.
3.3 Market Liquidity and Execution Quality
The systemic consequence of reduced proprietary desk activity is a potential deterioration in market liquidity. Proprietary traders and HFT firms function as de facto market makers, continuously providing buy and sell quotes and absorbing order flow. If these participants scale back activity in response to higher capital costs, bid-ask spreads are likely to widen — particularly in less liquid stocks and derivative contracts. The Association of NSE Members of India (ANMI) has flagged this explicitly in its correspondence to SEBI, noting that foreign portfolio investors (FPIs) and domestic institutions rely on tight spreads for efficient execution. Rising impact costs could reduce India’s attractiveness for global allocations. - The Singapore Dimension: Channels of Exposure and Opportunity
4.1 Structural Linkages Between Singapore and Indian Derivatives Markets
Singapore’s exposure to India’s regulatory shift operates through multiple, overlapping channels. The most institutionally significant is the GIFT Connect — a cross-border trading and clearing arrangement between the Singapore Exchange (SGX) and NSE International Exchange (NSE IX) within GIFT City. Following the migration of SGX Nifty futures to GIFT Nifty in July 2023, all open positions (valued at approximately $7.5 billion at the time of transition) moved to NSE IX, with SGX retaining a connectivity and distribution role. As of February 2026, GIFT Nifty’s daily notional turnover stands at approximately $2.6 billion — a substantial India-linked derivatives flow that Singapore participates in through its exchange infrastructure.
4.2 Singapore as a Preferred Offshore Relocation Destination
Three categories of trading firm are now evaluating offshore options in response to the RBI’s measures:
Firm Category Relocation Incentive Singapore’s Comparative Advantage
Foreign trading firms with India operations Cheaper financing offshore restores competitive edge vs. domestic players MAS regulation, English law, deep interbank market, zero capital gains tax on trading
Large domestic HFT firms Offshore entity can access cheaper capital and trade Indian indices via GIFT Nifty / SGX Operational infrastructure for India-linked derivatives already exists (GIFT Connect)
Mid-sized proprietary firms Business model unviable onshore; offshore operation under lower capital cost regime may preserve viability Lower incorporation costs, proximity to India, established community of India-focused traders
Singapore’s advantages for this cohort are well-documented: over 80 double taxation avoidance agreements including with India, no capital gains tax, MAS’s principles-based regulatory approach, and the physical and digital infrastructure of SGX’s offshore connectivity network. The city-state imposes no trading restrictions on foreign-owned stockbrokers and no cap on foreign investment in SGX member dealers — a deliberately open posture designed to attract precisely the kind of sophisticated trading operations being displaced from Mumbai.
4.3 The GIFT City Competitive Dynamic: Friend or Rival?
A critical complication for Singapore is that India has been simultaneously tightening its domestic derivatives market and building GIFT City as an offshore alternative. This dual-track strategy — restricting onshore speculation while positioning GIFT City as a global derivatives destination — mirrors China’s approach to onshore/offshore bifurcation (domestic A-shares versus Hong Kong). NSE IFSC launched daily Nifty 50 options in October 2025, and from April 2026, mutual funds and ETFs may relocate to GIFT City without incurring capital gains tax, a measure explicitly designed to attract funds currently domiciled in Singapore and Mauritius.
The competitive calculus for trading firms displaced by the RBI’s measures is therefore not straightforward. GIFT City offers the same Indian market access as Singapore, with zero STT on most IFSC trades, a 10-year tax holiday (extendable to 2030), and 100% foreign ownership permitted for eligible participants. However, GIFT City remains operationally immature in several dimensions: legal system familiarity, depth of financial talent, breadth of banking and prime brokerage services, and regional connectivity to non-India markets. Singapore, by contrast, is the most liquid offshore market for Indian, Chinese, and Japanese benchmark equity index derivatives — a breadth of access that GIFT City cannot currently replicate.
4.4 Second-Order Implications for Singapore’s Financial Sector
Prime brokerage and custody services: Singapore-based prime brokers are positioned to gain from Indian prop trading firms seeking offshore financing. The structures that Indian banks can no longer provide — leverage against equity collateral, working capital lines for market positions — are standard prime brokerage products in Singapore. The SGX’s offshore connectivity infrastructure facilitates the back-end settlement that such arrangements require.
Asset management talent flows: The displacement of smaller Indian prop trading firms may generate a talent migration. Quantitative researchers, HFT engineers, and derivatives structurers whose domestic employers face viability challenges may seek positions with Singapore-based funds and trading firms. Singapore’s Financial Sector Incentive scheme, MAS’s ongoing support for the Variable Capital Company (VCC) structure, and Budget 2026’s second S$1.5 billion tranche for the SGX Anchor Fund collectively signal a receptive environment.
SGX product development opportunities: Reduced NSE domestic volumes may increase the relative attractiveness of SGX’s India-linked derivatives offerings. While GIFT Nifty is the dominant offshore vehicle, SGX retains connectivity advantages and may benefit from volume migration if GIFT City’s regulatory environment is perceived as insufficiently differentiated from the onshore framework.
Regulatory arbitrage risk: From Singapore’s perspective, there is a legitimate concern that it may become a conduit for regulatory arbitrage — where firms incorporate in Singapore primarily to access cheaper financing for strategies that target Indian markets, circumventing the RBI’s intended deleveraging. MAS will need to monitor this dynamic carefully, as being perceived as a facilitator of Indian regulatory arbitrage could complicate bilateral financial regulatory relations with India.
- Analytical Framework: Regulatory Spillover Typology
The RBI’s measures illustrate a broader phenomenon in regulatory economics: the spillover effects of national financial regulation on interconnected offshore financial centres. We propose a three-channel framework for analysing Singapore’s exposure:
Channel Mechanism Singapore Impact Direction
Capital Flow Channel Tighter domestic regulation → offshore capital deployment → Singapore as destination for displaced capital Positive (increased AUM, prime brokerage, fund management activity)
Talent Mobility Channel Domestic firm viability stress → skilled talent seeking offshore employment Positive (human capital accumulation in quant finance)
Infrastructure Competition Channel India’s GIFT City actively competing for the same offshore flows Singapore targets Negative (reduced market share in India-linked offshore derivatives)
Regulatory Relationship Channel Risk of being seen as facilitating regulatory arbitrage against RBI’s policy intent Ambiguous (bilateral sensitivity; MAS-RBI relationship implications)
- Conclusion and Outlook
The RBI’s April 2026 lending curbs represent a structurally significant intervention in India’s capital markets — one that aligns India with post-2008 international norms regarding the separation of deposit banking from proprietary trading, while addressing specific domestic concerns about retail investor harm and systemic leverage. The policy is likely to achieve its primary objective of reducing leveraged speculative activity in the NSE derivatives market, though at the cost of domestic market liquidity and the competitiveness of domestic trading firms relative to their well-capitalised foreign peers.
For Singapore, the regulatory shift presents a complex set of opportunities and risks. The most immediate opportunity lies in capturing displaced trading activity, talent, and capital — and Singapore’s existing infrastructure, regulatory framework, and proximity to India position it well for this role. The most significant risk, however, is structural: India’s GIFT City represents an increasingly credible alternative to Singapore for India-linked offshore financial activity, and the April 2026 reforms — in tightening the onshore market while extending GIFT City’s regulatory advantages — are likely to accelerate rather than retard GIFT City’s development as a competing hub.
The medium-term competitive equilibrium between Singapore and GIFT City will be determined less by regulatory cost differentials than by the depth and breadth of financial ecosystem services each can provide. Singapore currently leads on breadth, talent depth, legal infrastructure, and non-India regional connectivity. GIFT City leads on tax efficiency for India-linked strategies, growing NSE IFSC product suite, and proximity to the domestic market. The outcome of this competition has material consequences not only for the two jurisdictions but for the broader architecture of Asian capital markets.
References
Association of NSE Members of India (ANMI). (2026, February). Letter to SEBI seeking six-month suspension of RBI lending curbs. Reviewed in Reuters, February 19, 2026.
Jefferies & Co. (2026). India derivatives market structure: Proprietary trading composition analysis. Cited in Reuters, February 23, 2026.
IIFL Securities. (2026, February). Impact note on RBI Commercial Banks Credit Facilities Amendment Directions, 2026.
Reserve Bank of India. (2026, February 13). Commercial Banks – Credit Facilities Amendment Directions, 2026. RBI/2025-26/[Circular No.].
World Federation of Exchanges. (2025). Global equity derivatives statistics: NSE market share analysis.
NSE International Exchange (NSE IX). (2026, February). GIFT Nifty daily turnover data. grokipedia.com/GIFT_Nifty.
Singapore Exchange (SGX). (2024). SGX Outlook 2024: GIFT Connect cross-border initiative. world-exchanges.org.
International Financial Services Centres Authority (IFSCA). (2026). Regulatory framework for capital market intermediaries at GIFT City IFSC.
Bloomberg / Business Standard. (2026, February 15). RBI curbs loans extended to brokers in blow to proprietary trading volumes.
Reuters. (2026, February 23). India’s new lending curbs seen squeezing trading firms. Reporting: Upadhyay, Kalra, Rajeswaran.