Sebi’s circular on cross margin benefits. Details here
Capital markets regulator SEBI has released a circular on cross margin benefits for offsetting positions having different expiry dates.
Capital markets regulator Securities Exchange Board of India (SEBI) has released a circular on extending cross margin benefits for offsetting positions having different expiry dates.
The circular would be effective three months from its date of issuance i.e., July 23, 2024. The regulator further stated that the circular is being issued to protect the interests of investors in securities and to regulate the securities market.
Currently, the cross-margin benefits are provided if both the correlated indices or an index and its constituents have the same expiry day.
What is the cross margin benefit?
Cross margining is a process wherein excess margin in a trader’s margin account is moved to another one in order to satisfy the maintenance margin requirements.
This process enables market participants to use all of their available margin across all of their accounts. This raises the liquidity by reducing margin requirements and lowering net settlements. NSE had started a cross-margining facility in January 2020.
Sebi's circular details
Situation I: Correlated indices having different expiry dates: When position is to be offset in case of correlated indices having different expiry dates, a spread margin of 40 percent would be levied. Spread margin of 30 percent would continue to get levied in case of the same expiry date.
Situation II: Index and constituents having expiry date different from index: A spread margin of 35 percent would be levied in this case in order to offset positions.
While the expiry date of index futures can be different from that of its constituents, the expiry date of futures contracts of constituents should be the same in order to obtain the cross-margin benefit.
Further, spread margin of 25 percent would continue to be levied in case of the same expiry date of index and constituents (i.e., existing requirement).
The regulator also said that the spread margin benefit would be revoked at the start of the expiry day of the position which expires first (which is the first of the expiring indices or constituents) in case the expiry dates of both legs of the position are different.
Exchanges/ clearing corporations are directed to put in place suitable monitoring mechanisms to keep track of cross margin activities of participants.
The remaining requirements pertaining to cross margin remain unchanged and applicable.
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