NSE extends cross margins to ETFs

Move would primarily benefit ETF investors seeking to take counter positions

The National Stock Exchange (NSE) has extended cross margining to index-based exchange-traded funds (ETFs). So far, the facility was available only in the equity stocks, index futures and stock futures segments.

Cross margining helps market participants, as it reduces the margin requirement and trading costs.

“The positions of clients in both the capital market and F&O (futures and options) segments to the extent that these offset each other shall be considered for the purpose of cross margining,” NSE said in a circular.

Cross margining on ETFs has been allowed between ETFs and constituent stock futures in the F&O segment and the constituent stock position in the cash and index futures segments. “To avail of the cross margin benefit... the constituents and the number of units of the constituent stocks/stock futures required in the basket to be considered as a complete replica of the ETF shall be the same as that of the respective underlying index,” the circular added.

WHAT IS CROSS MARGINING?

• Existing position or holding of one category is used to offset margin requirement while dealing in another category
• For instance, if an investor, who already has 1,000 Infosys shares, wants to buy 500 Infosys stock futures, he’ll have to pay margin for just 500 shares
• Without cross margining, the investor would have had to pay margin for the entire 1,000 shares
• Cross margining reduces total margin payment required while trading
• It also helps reduce trading costs for market participants

NSE has said clients’ cross margin facility on ETFs will be automatically allowed for those who have already registered for it, under other segments.

Market players said cross margining for ETFs would primarily benefit ETF investors seeking to take counter positions.

Goldman Sachs Nifty ETF, Goldman Sachs Nifty Junior ETF and IIFL Nifty ETF will be the three ETFs eligible for cross margining. The move to allow cross margining, coupled with other recent regulatory measures, is expected to increase the popularity of ETFs as an investment instrument.

Earlier this year, the government had slashed securities transaction tax (STT) on equity ETF transactions to just 0.001 per cent. Previously, STT of 0.1 per cent was charged on both buying and selling ETFs. Now, the reduced rate is applicable only during selling; this translates into savings of about 99.5 per cent.

The Securities and Exchange Board of India has also allowed select ETFs under its securities lending and borrowing mechanism.

Globally, ETFs are a popular investment instrument, with assets under management of about $2 trillion. The combined assets under management of ETFs listed on exchanges in India stand at about Rs 10,000 crore.