Sebi revises norms for calculating ETF margins

Method revised to bring in more efficiency

Market regulator Sebi today revised norms for computing the margins applicable for exchange traded funds (ETFs) that track broader stock indices.

Index ETFs are generally a basket of securities that track a particular index.

To bring in more efficiency on calculating margins of index ETFs, Sebi in a circular said it has changed the method of computation.

For computing margins on ETFs, they are treated at par with stocks and margins that are applicable on stocks are applied.

"In order to bring efficiency in margining of index ETFs, it has been decided that VaR (Value at Risk) margin computation for ETFs that track an index shall be computed as higher of five% or three times sigma of the ETF," the circular said.

Generally, VaR helps to understand the risks related to an investment portfolio.

According to Sebi, the revised margin framework would be only for ETFs that track broad-based market indices and does not include ETFs related to sectoral indices.

Further, to facilitate efficient use of margin capital by market participants, the regulator would extend cross margining facility to ETFs based on equity index and its constituent stocks for offsetting certain positions in cash market segment segments.

The facility would be for ETFs and constituent stocks, ETFs and constituent stocks futures besides ETFs and relevant Index Futures. In all the three cases, it would be applicable to the extent of offsetting the positions of each other.

In the event of a suspension on creation/redemption of the ETF units, the cross-margining benefit would be withdrawn, the circular noted.

Sebi has asked all stock exchanges to take necessary steps for implementing the revised framework.