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| Sebi extends cross-margin facility to all categories of investors | |
| BS Reporter / Mumbai December 3, 2008, 0:50 IST | |
 The Securities and Exchange Board of India (Sebi) on Tuesday extended the cross-margin facility to all categories of market participants. Earlier this year, the market regulator had introduced this facility only for institutional investors.
Cross margin means if an investor is buying a stock in which s/he already has a short position in the futures segment, s/he will not have to pay the margin twice over.
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Now, if an investor is buying a stock in which s/he already has a short position in the futures segment, s/he will not have to pay the margin twice over
But, the extreme loss margin and the mark-to-market margin would continue to be levied on the entire cash market positions
Also, the near month stock futures positions — three days prior to expiry — would not be considered for cross-margin benefits
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The rule also says that for positions in the cash market that have corresponding offsetting positions in the futures market, the value at risk (VaR) margin shall not be levied on the former positions. However, it will only be to the extent of the offsetting stock futures market positions.
For instance, if an investor wants to buy 1,200 shares of ICICI Bank and s/he already holds a short position of 1,000 ICICI Bank shares in the futures segment, then any losses due to an intra-day fall in the price of the bank shares will be neutralised by gains on the corresponding short positions held by the investor in the futures market.
This means that the value of the transaction, that faces potential volatility risk, is of only those 200 shares (1,200 shares minus 1,000 futures) that do not have a corresponding short position. Accordingly, the exchange will levy the VaR margin only on those 200 shares.
So far, this facility was only available to institutional investors, while derivatives and cash market trades were treated as separate transactions for all other categories of investors.
Ashok Jainani, the institutional business head of the Mumbai-based Khandwalla Securities, said, “This move will now provide a level-playing field for retail investors. Also, the overall cost for arbitrageurs would come down, giving a boost to trading activities.”
Cross margin benefits shall be computed at the client level on an online, real-time basis and provided to the trading member/clearing member/custodian, as the case may be. These people, in turn, shall pass on the benefits to the client. For institutional investors, however, cross margin benefits shall be provided after confirmation of trade.
Arbitrageurs, who take advantage of trading on the difference between cash and futures markets, were out of business as transaction costs increased after a change in the securities transaction tax (STT) regime announce by the finance ministry.
However, the extreme loss margin and the mark-to-market margin would continue to be levied on the entire cash market positions. Further, the near month stock futures positions — three days prior to expiry — would not be considered for cross margin benefits.
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