The Commodity Participants Association of India (CPAI) is asking the government to ensure new RBI funding rules distinguish between market makers and proprietary traders. Without this, firms that provide essential market liquidity could face reduced access to bank credit starting July 1.
What Happened
The Commodity Participants Association of India (CPAI) has approached the Finance Ministry to seek regulatory changes ahead of the Reserve Bank of India’s (RBI) new financing norms for capital market intermediaries. These rules are scheduled to take effect on July 1, 2026. The association is requesting that "liquidity providers," often known as market makers, be treated differently from proprietary traders under these upcoming banking regulations.
Why The Distinction Matters
The core of the issue lies in how banks lend money to these market participants. Under the impending RBI framework, bank funding for proprietary trading must be secured exclusively by cash or cash-equivalent collateral. However, the CPAI argues that current regulations do not properly separate market makers from proprietary traders.
Proprietary traders often take directional bets, meaning they bet on whether prices will go up or down, which involves higher risk. In contrast, market makers are firms that continuously provide buy and sell quotes. By doing so, they keep the market moving, ensure prices are discovered efficiently, and keep the difference between buying and selling prices (bid-ask spreads) narrow. Because their positions are usually hedged—meaning they are protected against sudden price swings—their risk profile is significantly lower than that of directional traders. The association fears that if they are grouped with prop traders, they could lose essential access to bank credit, which would hurt overall market liquidity.
The Proposed Solution
To help banks easily identify who is a market maker, the CPAI has proposed using an existing metric: SPAN margin utilization. This is data already held by clearing corporations. The association suggests that if an entity’s margin usage is below 50% of its total margin, it should be recognized as performing a market-making function. This would provide an objective way for banks to differentiate these entities without needing complex, separate assessments.
Other Proposals for Gold Receipts
In addition to the liquidity provider issue, the CPAI has also made several recommendations to improve the Electronic Gold Receipt (EGR) ecosystem. These include:
- Providing a time-bound capital gains tax exemption for gold converted into EGRs, provided they are held for at least three years.
- Allowing banks to provide loans against EGRs and permitting these receipts to be used as collateral.
- Addressing tax issues related to Goods and Services Tax (GST) that currently prevent companies from claiming input tax credits on such conversions.
- Reviewing transaction taxes, arguing that the combination of Securities Transaction Tax (STT) and capital gains tax results in double taxation.
What Investors Should Track
The key monitorable is how the Finance Ministry and the RBI respond to these requests before the July 1 deadline. If the authorities accept the proposal to use margin utilization metrics, it could ensure that liquidity providers maintain their bank funding, keeping market operations stable. Conversely, if no distinction is made, market makers may face tighter credit conditions, which could potentially impact liquidity in the segments they support.