Sebi's cross-margining move to increase liquidity, trading volume in market

Markets regulator Sebi on Friday introduced cross margining facility for offsetting positions in co-related equity indices, a move that will increase liquidity and trading volumes in stock markets.

Cross margining allows market participants to reduce the total margin payment required, if they are taking two mutually offsetting positions. The move helps market participants transfer excess margin from one account to another.

The regulator, in December 2008, allowed cross margining across cash and exchange traded equity derivatives segments.

"In order to facilitate efficient use of collateral by market participants, it has been decided to extend cross margining facility to offsetting positions in highly co-related equity indices," the Securities and Exchange Board of India (Sebi) said in a circular.

Cross margin benefit will be provided on offsetting positions in futures on equity indices pairs if at least 80 per cent of constituents of one of the indices is present in the other index and constituents of smaller index based on free float market capitalisation need to have at least 80 per cent weightage in the larger index.

A positive correlation of more than 0.90 for a period of six months between the values of the equity Indices was important in order to avail the facility.

For cross margining benefit to continue, Clearing Corporations will have to check the eligibility criteria on a monthly basis on the 15th of every month and on the day of change in the constituents of the equity indices.

If the equity indices pairs fail to fulfil any of the eligibility criteria, Sebi said that cross margining benefit will not be given after the upcoming monthly expiry.

To begin with, a spread margin or cross margining of 30 per cent of the total applicable margin on the eligible off-setting positions, will be levied.

Cross margining benefit shall be computed at client level on an online real time basis and provided to the trading member or clearing member, as the case may be, who, in turn, shall pass on the benefit to the client.

Clearing corporations will have to apply to Sebi for approval for providing of cross margining benefit on correlated equity indices which fulfil the eligibility criteria.