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Sebi’s cross-margining move to ensure big margin benefits on derivative trade

By Piyush Chourasia

Sebi issued a circular on November 8, 2019, on “Introduction of cross-margining facility in respect of offsetting positions in corelated equity indices,” laying down the criteria for the domestic equity indices to become eligible for cross-margining benefit of up to 70 per cent.

What does it mean?

Cross margining is a concept whereby a trader can transfer excess margin from one account to another account to satisfy margin maintenance requirements to offset positions. Clearing Corporations provide this margin benefit on positions, which show a high degree of dependence or correlation.

In India, cross-margining was earlier permitted only between index futures and underlying constituents/futures, stock futures and underlying stocks; and ETFs and their underlying constituents. However, this benefit was not available among the highly correlated indices.

Internationally, cross-margining is available on various products, including between Indices.

In India, index derivatives are the most traded contracts. Index derivatives on popular indices like Sensex and Nifty are available for trading on BSE and NSE, respectively.

Sensex and Nifty are broadbased indices computed by BSE and NSE and move in tandem. These indices share a high level of overlap and positive correlation.

Till early this year, creating arbitrage positions in such contracts was inefficient and expensive, since trades on BSE were margined and settled separately than the trades done on NSE, through the exchanges’ own clearing corporations.

With the introduction of interoperability, members’ positions are margined and settled at the clearing corporation of their choice on a net basis for their trades across exchanges. However, even for arbitrage positions between such highly correlated indices, no margin offset was available, and members had to pay margin money equal to the sum of the two positions, as if they were independent.

The latest Sebi circular changed that and moved to a risk-based margining framework which allowed margin offset for opposite positions in such indices.

So, if you have a portfolio consisting of a long Sensex futures position and a short Nifty futures position, one of those positions would typically be in profit and the other in loss, thus the overall mark-to-market settlement for the portfolio would be close to zero.

The margin requirement would now drop from approximately Rs 2.15 Lakh to Rs 0.65 lakh, resulting in a reduction of around Rs 1.5 Lakh or 70 per cent on the portfolio.

Source: Author handout

This circular came close on the heels of the implementation of interoperability of clearing corporations undertaken by Sebi to increase efficiency and access for market participants.

Currently, Sensex – Nifty and Bank Nifty – Bankex are some of the main index pairs that are likely to benefit from cross-margining circular.

(Piyush Chourasia is the Chief Risk Officer of Indian Clearing Corporation. Views are his own)

Source: Economic Times