RBI Bank Guarantee Restrictions May Reduce Options Trading Volumes by Nearly 20% in FY28

India’s stock exchanges may experience moderation in derivatives trading volumes following regulatory restrictions on the use of bank guarantees for funding proprietary trading activities, according to a report by Dolat Capital.

The report estimates that options average daily turnover (ADTO) could fall by 8% in FY27 and 18% in FY28 compared with its earlier base-case projections. Futures turnover is projected to decline by 3% in FY27 and 6% in FY28.

The expected impact is linked to Reserve Bank of India regulations that restrict leverage obtained through bank guarantees. Proprietary trading firms have traditionally relied on these guarantees because of their relatively low funding cost. According to the report, shifting to commercial paper could raise the cost of funds from approximately 1% under the bank-guarantee route to nearly 11%, potentially making certain leveraged trading strategies less commercially viable.

The effect may be particularly significant in the index options segment due to the substantial participation of proprietary and high-frequency trading firms.

At the National Stock Exchange, proprietary traders reportedly account for more than 45% of index options turnover and approximately 28% of stock futures volumes. Index options generate around 53% of NSE’s revenue, making any sustained decline in this segment relevant to the exchange’s financial performance.

The Bombay Stock Exchange also has considerable exposure to proprietary trading activity. Such traders account for more than half of BSE’s index options volumes, while the segment contributes approximately 60% of the exchange’s revenue, according to the report.

Despite the projected volume pressure, the report noted that Indian stock exchanges have recorded strong profitability in recent years. Growth has been supported by rising index options activity, operating leverage and diversification into clearing services, colocation facilities and mutual fund transaction platforms.

The revised estimates indicate that exchanges with greater dependence on index options revenue and proprietary trading participation may face a comparatively higher impact from the funding restrictions. CA Sansaar