SEBI’s Cross Margin Extension for Offsetting Positions with Different Expiry Dates

Introduction

The Securities and Exchange Board of India (SEBI) has announced an extension of cross margin benefits for offsetting positions in derivative markets. Previously, cross margin was allowed for positions in correlated indices or an index and its constituent stock futures when both had the same expiry date. This new development allows cross margin benefits for offsetting positions even when the expiry dates are different, with specific conditions. Let’s dive into what this means for traders and how it impacts their margin requirements.

In discussions with stock exchanges, Clearing Corporations, and the Risk Management Review Committee of SEBI, the following points were outlined regarding cross margin benefits for offsetting positions with different expiry dates:

A. Spread Margin for Correlated Indices with Different Expiry Dates

A spread margin of 40% will be applied for offsetting positions in correlated indices when they have different expiry dates. However, if the expiry dates are the same, the existing spread margin of 30% will still apply.

B. Spread Margin for Index and Its Constituents with Different Expiry Dates

A spread margin of 35% will be applied for offsetting positions when an index has a different expiry date from its constituents. It’s important to note that while the index’s expiry date can differ from that of its constituent futures, the futures contracts for all constituents must have the same expiry date to qualify for the cross-margin benefit. For offsetting positions with the same expiry dates for the index and its constituents, the existing spread margin of 25% will continue to apply.

C. Revocation of Cross Margin Benefit

The cross-margin benefit will be revoked at the beginning of the expiry day of the first position that expires, whether it be the index or one of its constituents. This applies when the expiry dates of both legs of the offsetting position are different.

D. Monitoring Mechanism

Exchanges and Clearing Corporations are responsible for implementing a suitable monitoring mechanism to keep track of cross-margin activities among market participants.

E. Applicability and Duration

This extension will come into effect from April 23, 2024, for a period of three months. All other requirements related to cross-margin remain unchanged.

Conclusion

The extension of cross-margin benefits to offsetting positions with different expiry dates is a significant step for derivative traders. It offers greater flexibility and may lead to more efficient use of capital. However, traders should be aware of the higher spread margins involved and the conditions under which cross-margin benefits are revoked. As always, a robust risk management strategy is essential in the derivatives market.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.