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Sebi introduces cross margin facility on commodity futures

NEW DELHI: Sebi on Tuesday decided to introduce cross margin benefit between commodity index futures and its underlying constituents futures, a move that will reduce the cost of trading and boost liquidity in such products.

The move is part of Sebi’s effort to improve the efficiency of the use of the margin capital by market participants, the regulator said in a circular.

To be eligible for cross margin benefit, Sebi said contracts belonging to index futures and underlying constituents or its variants will belong to the same expiry month or to the nearest expiry month and should be from amongst the first three expiring contracts only.

Cross margin benefit on the eligible positions will be entirely withdrawn latest by the start of the tender period for the constituent futures of the index or its variants or the start of the expiry day, whichever is earlier.

Clearing corporations/exchanges can introduce cross margin benefit, after backtesting for adequacy of cross margin to cover Mark to Market losses (MTM) for a minimum period of six months.

Initial margin after cross margin benefit should be able to cover MTM on at least 99 per cent of the days as per backtesting.

In the event of a default by a trading member or clearing member, whose clients have availed cross margin benefit, the clearing corporation will have the option to hold the positions in the cross margin account till expiry, in its own name, Sebi said.

Also, clearing corporation will have the option to liquidate the positions or collateral and use the proceeds to meet the default obligation, it added.

According to Sebi, exchanges or clearing corporations will have to enter into an agreement with the trading or clearing member clearly laying down the distribution of liability and responsibility in the event of a default.

Clearing corporations need to apply to Sebi for approval for the provision of cross margin benefit on the indices. The application needs to be accompanied by the backtesting data.

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.

With regard to computation of cross margin benefits, Sebi said cross margin benefit of 75 per cent on initial margin may be allowed for eligible offsetting positions of index futures and futures of its underlying constituents or its variants.

The extreme loss margin and market-to-market margin will continue to be levied.

Cross margin benefit will be computed at the client level on an online real-time basis and provided to the trading or clearing member. This benefit in turn will be passed on to the client.

Clients will be allowed to maintain two accounts with trading or clearing member, — an arbitrage account (which holds a fully replicated portfolio) and a non-arbitrage account. This is for the purpose of allowing clients to convert a partially replicated portfolio into a fully replicated portfolio by taking opposite positions in two accounts.

A full replicated portfolio is one that has exact offsetting positions of the index futures contracts and all its constituent futures contracts or their variants.

However, for the purpose of compliance and reporting requirements, the positions across both the accounts will be taken together and the client will continue to have a unique client code.

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