The Commodity Participants Association of India (CPAI) has urged the Finance Ministry to support a regulatory framework that formally recognises liquidity providers (market makers) and provide interim relief ahead of the Reserve Bank of India’s revised bank-financing norms for capital market intermediaries, which take effect from July 1.
The new RBI framework requires bank funding for proprietary trading to be backed entirely by cash or cash-equivalent collateral, while recognised market-makers continue to receive regulatory relief.
CPAI said liquidity providers, despite carrying out a similar function, are currently treated on par with proprietary traders (prop-traders) as they are not recognised separately under the SEBI framework.
In its representation, the association said liquidity providers continuously quote buy and sell prices to improve market depth, narrow bid-ask spreads and aid price discovery. Since their positions are largely hedged, they carry significantly lower risk than proprietary traders, who take directional bets on market movements.
To help banks distinguish the two, CPAI has proposed using SPAN margin utilisation as an objective risk metric. It has suggested that entities with SPAN utilisation below 50 per cent of their total margin should be treated as performing a market-making-equivalent function for bank-credit purposes. Since the data is already available with clearing corporations, the metric can be monitored without further assessments by banks.
The association said it has already approached SEBI through the Industry Standards Forum and has also initiated discussions with the RBI. However, as any regulatory change could take time, it has sought an interim arrangement to ensure liquidity providers continue to have access to bank funding after the revised norms come into force.
Separately in its representation, CPAI has also proposed measures to strengthen the Electronic Gold Receipt (EGR) ecosystem. It has sought a time-bound capital gains tax exemption on appreciation earned after gold is converted into an EGR, provided the receipt is held for at least three years. It has also recommended allowing lending against EGRs, permitting their use as collateral and addressing GST provisions that currently block input tax credit on such conversions.
It also recommended rationalisation of transaction taxes as the simultaneous levy of Securities Transaction Tax (STT) and capital gains tax amounts to double taxation. It has recommended phasing out STT now that capital gains tax has been reinstated, or alternatively restoring the Section 88E rebate to allow STT to be adjusted against tax liability.