India F&O Volumes Cool 20-25% After RBI’s Tighter Collateral Rule

India F&O volumes dropped 20-25 percent in the first five trading sessions of July, the opening read on a Reserve Bank of India collateral rule that took effect on July 1. Industry estimates point to a one-month slide driven by tighter bank funding for proprietary desks, softer India VIX, and a heavier securities transaction tax, all three pressures landing at prop desks in the same week. Brokers told Moneycontrol that each of the three cools activity on its own.

The new rule, in force from July 1, forces banks that issue guarantees for proprietary trading positions to back those guarantees with 100 percent collateral, with at least 50 percent in cash, and proprietary desks account for almost 50 percent of options trading volumes on Indian exchanges. That combination is what brokers are now pricing in.

India’s F&O Volumes Cool 20-25 Percent in Early July

Derivatives volumes in the first five trading sessions of July “appear to be 20-25 percent lower than June levels,” according to industry estimates reported by Moneycontrol. Tuesday of the truncated first week was a weekly expiry session, a calendar feature that complicates any clean read on the broader slowdown. Brokers told Moneycontrol that the moderation in activity is not a one-cause story. The same week has brought three separate pressures on the same set of trading desks.

Brokers expect less leverage in options selling by prop traders, with volumes set to fall and a visible hit on liquidity, particularly in options trading during weekly expiry sessions. Prop books accounted for more than half of options turnover on the National Stock Exchange last year, by Bloomberg’s tally. The impact is expected to land hardest on firms that rely on bank-backed funding to amplify returns through bank-backed leverage.

• ~50%: share of options trading volumes on Indian exchanges attributed to proprietary desks
• 100%: minimum collateral banks must hold against proprietary trading guarantees
• ~17 to ~11.5: India VIX drop between early June and early July 2026

“This is a body blow to the entire domestic prop industry,” Karthik P, a partner at Karna Stock Broking LLP, told Bloomberg. Smaller firms with limited capital are expected to take the hardest hits from the higher collateral bill, since they have less internal balance sheet to absorb the cost. BSE separately expects its derivative volumes to decline as the rule’s first month plays out.

The Collateral Framework Now in Force

The RBI’s final directions on bank funding to capital market intermediaries took effect on July 1. Under the framework, banks issuing guarantees for proprietary trading exposures must obtain 100 percent collateral, with a minimum 50 percent in cash and the remainder in cash, cash equivalents or government securities. The structure of the rule maps to who is doing the trading and how the guarantee is collateralised.

For client-related bank guarantees, the requirement is less stringent. Banks must hold a minimum 50 percent collateral, including at least 25 percent in cash. Brokers say the split means the immediate impact falls disproportionately on proprietary trading desks. Client-focused broking businesses remain largely unaffected by the framework, Relli noted, and client-based funding channels are unchanged. For proprietary desks, Relli added, the rule forces a rewrite of the bank funding model they had been relying on.

The framework also creates a new avenue for banks to fund brokers against margin trading facility (MTF) receivables. Relli expects the immediate impact to stay concentrated on proprietary trading activity. He said in the broker commentary on the new rule that prop desks will feel the squeeze first, before any collateral-driven slowdown reaches client books. The MTF opening is the mirror image of that pattern.

Margin requirements in India were already among the highest in the world for derivatives trading, per Bloomberg. The new rule layers that framework with stricter cash-margin treatment for the prop segment specifically. That targeted layer is the structural reason prop desks absorb the hit first.

Why Proprietary Desks Absorb the Hit

It is easy for client-based brokers, as nothing changes for them. But it is tough on proprietary brokers.

Relli explained in the same interview that the framework is “negative for prop traders.” Many were running positions using leverage backed by bank guarantees, he said. “Those guarantees have to be 100 percent collateralised” under the new rule. With more capital tied up against each guarantee, prop desks deploy less of their own balance sheet per position.

Ashish Nanda, President and Digital Business Head at Kotak Securities, framed the math in plainer terms. “The guidelines relate to proprietary trading, not margin funding,” Nanda said. “For proprietary positions, the collateral requirement has effectively increased from 50 percent to 100 percent, which significantly reduces the leverage available,” he added. Karthik told Bloomberg that effective trading capacity at prop firms will shrink from 1.7x to 0.85x under the new framework, a near-halving of the leverage prop books could previously deploy against their collateral base.

Cooler Volatility and Heavier Tax Add to the Slowdown

The RBI rule is not the only pressure on derivatives desks this month. India VIX, the benchmark measure of expected volatility in Indian equities, has cooled to around 11.5 from nearly 17 in early June. Lower readings cut volatility-driven trading opportunities and compress options premiums. When the VIX is lower, the options sellers that dominate prop desks in India earn less on each contract.

A higher securities transaction tax on derivatives trades, in force since April 1, has raised costs for active market participants in parallel. STT is charged on turnover rather than profit, so the bite lands hardest on high-frequency and intraday books. Those are the same prop strategies the new RBI collateral framework hits.

Of the three forces, the VIX leg is the most reversible. The STT hike and the collateral rule are scheduled to stay in place, and neither regulator has signalled an imminent reversal. Brokers told Moneycontrol that the combination is what is tempering F&O activity in the near term. The collateral framework is the only one of the three that targets prop books by name.

The GIFT IFSC Carve-Out for Foreign Firms

Foreign high-frequency trading firms that operate through the foreign portfolio investor route or through GIFT IFSC, a tax-favoured financial zone in Gujarat, are unlikely to be affected by the new RBI rules. The framework does not apply to them, according to Tanmay Kurkoti, founder of QCAlpha Advisors. The carve-out leaves the offshore and GIFT routing channels as a quieter competitor set for Indian prop desks at the moment their leverage is being compressed. It also shifts the broker funding mix on the desk competing for the same weekly options book.

Firms including Jane Street Group, Citadel Securities, Jump Trading Holdings and Optiver Holding BV have expanded local operations in India over the past year, drawn in part by the country’s options market. Kurkoti argued the asymmetry is sharper than the headline fix implies. “This norm hits Indian prop desks at brokers far harder than it hits foreign HFTs,” he said. “The market is underpricing how lopsided that asymmetry is.” Foreign firms with Indian operations can also tap standby letters of credit from parent companies, a funding advantage domestic prop desks do not have, Kurkoti noted, and single-stock trading could be among the biggest casualties under the new regime.

How Brokers Are Reading the July Drop

Brokers say the open question is whether the moderation in derivatives volumes reflects an initial adjustment or a structural shift in proprietary participation. One signal both groups pointed to is volatility. Trading activity could recover if India VIX climbs back toward the levels seen in early June, restoring the premium compression that keeps options sellers in the market. The other two pressures are scheduled to stay in place, so a full rebound would need the VIX alone to do the heavy lifting.

The collateral framework itself is harder to undo. BSE, one of India’s two major exchanges, is bracing for transaction fee revenue, a segment that contributes over 50 percent of its earnings, to take a double-digit contraction in coming quarters. Kurkoti, who also trades proprietary books, put a sharper timeline on the visible damage: “As a market maker and a trader, I expect the visible damage to show up by the September quarter.”

Even on the recovery path, the leverage baseline has shifted. Brokers believe the new framework is likely to keep leverage lower for proprietary books than in the past. The weekly-expiry book on Indian derivatives will have to clear that lower ceiling before any rebound can take hold. That is the read Kurkoti flagged for the September quarter and beyond.

Frequently Asked Questions

Does the new RBI rule directly affect retail F&O traders?

For client-related bank guarantees, the RBI requires only a minimum 50 percent collateral with at least 25 percent in cash, half the cash share of the prop trading threshold. Relli said the rules mean ‘nothing changes’ for client-based brokers, the channel through which most retail traders access the F&O market.

When did the RBI’s collateral rule take effect?

The RBI’s final directions on bank funding to capital market intermediaries took effect on July 1, 2026. Moneycontrol and Bloomberg both cited the date in their reporting on the regime’s start.

Could F&O volumes recover quickly?

Brokers told Moneycontrol that trading activity could recover if market volatility picks up, since the India VIX cooled to around 11.5 from nearly 17 in early June, compressing options premiums. The collateral framework itself is harder to reverse, and brokers expect leverage to stay lower for prop books than in the past.

How big a hit are proprietary traders taking on capacity?

Karthik told Bloomberg that effective trading capacity at prop firms will shrink from roughly 1.7 times to about 0.85 times under the new framework, a near-halving of the leverage prop books could previously deploy against their collateral base. The shift lands on a market where margin requirements were ‘already among the highest in the world.’