Module: General Practice
Q12: Consider the following statements regarding Capital Market Exposure (CME) limits:
Statement 1: Capital Market Exposure (CME) limits dictate the maximum percentage of a bank's net worth that can be invested in or loaned against capital market instruments.
Statement 2: The 2026 amendment heavily restricts banks from issuing guarantees on behalf of brokers to stock exchanges in lieu of margin requirements unless backed by specific liquid assets.
Statement 3: The aggregate Capital Market Exposure (CME) of a commercial bank on a solo basis is capped at 40% of its net worth as of March 31 of the previous year.
Statement 4: Banks are given a strict transition period of 90 days from the date of the circular to comply with the revised collateral mandate for all existing broker credit lines.
Which of the above statements is/are correct?
Statement 2: The 2026 amendment heavily restricts banks from issuing guarantees on behalf of brokers to stock exchanges in lieu of margin requirements unless backed by specific liquid assets.
Statement 3: The aggregate Capital Market Exposure (CME) of a commercial bank on a solo basis is capped at 40% of its net worth as of March 31 of the previous year.
Statement 4: Banks are given a strict transition period of 90 days from the date of the circular to comply with the revised collateral mandate for all existing broker credit lines.
Which of the above statements is/are correct?
✅ Correct Answer: D
🎯 Quick Answer:
All statements are correct. (Option D)If a broker fails to meet their market obligations, the exchange invokes the bank guarantee, instantly turning it into a funded liability for the bank.
Historical / Static Context: The statutory limit for a bank's total exposure to the capital market (CME) is structurally locked to its net worth, ensuring that even a total market wipeout won't bankrupt the institution.
The Dynamic Update (NEW) & Data: Qualitatively, the new directions restrict the reckless issuance of bank guarantees to exchanges without solid liquid backing (Statement 2). The hard data points tested include the static, overarching CME cap of 40% of net worth (Statement 3) and the dynamic compliance deadline giving banks exactly 90 days to restructure their existing broker loan books to match the new 100% collateral rule (Statement 4).