SEBI, the capital markets regulator in India, has issued a new circular. As per the new regulation, SEBI expands cross margin benefits to include offsetting positions with different expiry dates. This change, which will be effective from July 23, 2024, aims to safeguard investor interests and regulate the securities market. Let us take an in-depth look at the latest updates on the cross margining.
Key Highlights of SEBI Circular on Cross Margin Benefits
- Cross-margin benefits extended to offsetting positions with different expiry dates.
- Spread margin of 40% for correlated indices with varying expiry dates.
- Spread margin of 35% for offsetting positions in the index and its constituents with different expiry dates.
- Revocation of spread margin benefit at the start of expiry day for the first expiring position.
- Exchanges and Clearing Corporations tasked with monitoring cross margin activities.
- Effective date of the circular set three months from issuance to allow for implementation
What is Cross Margining?
Cross-margining involves using extra margin from one account to fulfil requirements in another. It plays a vital role in risk management.
Cross-margining allows traders to utilise their available margin across all accounts. It helps traders enhance liquidity by reducing margin requirements and net settlements. The National Stock Exchange (NSE) initiated a cross-margining facility in January 2020.
The SEBI circular specifies spread margin rules for related indices and their constituents with different expiry dates. Thus improving market efficiency and lowering margin requirements for traders.
Some Additional Things You Must Know
- Cross Margin is a risk management technique that allows traders to use excess margin from one trading account to cover margin requirements in another related account. In simpler terms, it allows for offsetting risks across different positions or accounts.
- Spread Margin is an additional margin that is required when trading offsetting positions (positions that partially or fully hedge each other) with different characteristics or expiry dates. The purpose of spread margin is to cover the potential risk associated with the differences between these positions.
Exploring SEBI Circular Details
The Securities and Exchange Board of India (SEBI) has issued a new circular regarding cross-margin benefits for derivative positions held in the stock market.
This SEBI circular now allows investors to offset positions in different types of contracts. This was not allowed before, especially if the contracts had different expiry dates.
Existing Rules
As of now, investors could only receive cross-margin benefits if the positions being offset had the same expiry date.
New Rules
- Extension of Cross-Margin Benefit
Previously, cross-margin benefits were only available if positions had the same expiry date. Now, SEBI has extended this benefit to offsetting positions with different expiry dates, allowing investors more flexibility in managing their positions.
- Revised Spread Margin Rules
- Correlated Indices
If you’re offsetting positions in correlated indices with different expiry dates, you will need to pay a spread margin of 40% instead of the usual 30% if they have the same expiry date.
- Index and Constituents
If you’re offsetting positions in an index and its constituents with different expiry dates, a spread margin of 35% will be applied. This is up from 25% for same expiry date positions.
- Revocation of Spread Margin Benefit
The cross margin benefit will end at the beginning of the expiry day of the position that expires first if the expiry dates of both legs are different.
- Effective Date
These changes will come into effect three months from the date of issuance of the circular.
What is the Purpose of the SEBIs Circular?
This circular aims to protect investors’ interests. It focuses on promoting the orderly functioning of the securities market in India.
It implies a potential reduction in margin requirements when holding offsetting positions with different expiry dates. Thus allowing for more efficient use of capital.
However, you must be mindful of the spread margin requirements.
Conclusion
SEBI’s circular on cross-margin benefits marks a significant step for market efficiency and risk management in India’s securities market. Investors must understand the specific spread margin requirements. You must also monitor mechanisms set by exchanges and clearing corporations.
Source– livemint.com, sebi.gov.in
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Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.