World markets thrive on liquidity and it is the essence of any deep and open market. In India, liquidity in the stock and commodity derivatives markets – where financial contracts like futures and options are traded daily – depends on certain participants who continuously offer to buy and sell these contracts, keeping the market active and prices fair. These participants are called liquidity providers (LPs).
Right now, LPs do this vital job without any official recognition from the market regulator, SEBI (Securities and Exchange Board of India). So, the Commodity & Capital Market Participants Association of India (CPAI) has asked for a structured framework that officially recognises LPs.
What triggered this proposal? In February 2026, the Reserve Bank of India (RBI) introduced new rules for banks that lend money to market participants. Here is the problem they created: trading on behalf of clients required a bank guarantee of 50 per cent and cash collateral of 50 per cent, thus, with 100 per cent of cash and guarantees, they are treated like speculative traders, trading entirely on their own account. In short, an LP keeping markets stable is being penalised and treated the same way as a risky speculative trader – simply because there is no official SEBI recognition for what they do.
The CPAI is asking for three things. One for an official recognition where SEBI should formally define and register LPs, similar to how stock exchanges around the world (Hong Kong, Chicago, Singapore) already do. Second, create a separate trading code: each LP should get a dedicated account code at the stock exchange, clearly separating their LP activity from any other speculative trading they might do. Third, a fairer bank treatment, as once SEBI recognises LPs officially, banks should be allowed to treat them more like market makers – with less stringent cash collateral requirements. With SEBI recognition, banks can treat LP bank guarantees the same way as market-maker guarantees – requiring only 50 per cent cash collateral instead of 100 per cent.
This is not new. Taking a leaf from global practices is a must. India would not be the first. Major markets already have LP frameworks: Hong Kong (HKEX), USA (CME, CBOE), Europe (Eurex, ICE), Singapore (SGX) among others. This proposal is about market quality, proportionate regulation, and aligning India with global best practices. Business India has sent questions to RBI and SEBI but received no response.
This is a problem that Business India has highlighted more than once. India cannot expect to be a global player, with markets that attract global capital if both SEBI and RBI think up new rules that do not exist in other global markets. With the constant micro-managing and new circulars, both constantly indulge in, they significantly reduce the ease of doing business the government is constantly striving for. At one stage, SEBI was issuing a new circular almost every working day. They create rules seen in no other major markets in the world. They strive to create solutions to problems that do not exist. We have said it before, that if RBI and SEBI follow the best international practices, and let go of micro-managing, each could add one per cent growth to the economy!