Introduction: The Securities and Exchange Board of India (SEBI) has issued a significant circular addressing cross margin benefits for offsetting positions with different expiry dates. This circular, impacting all stock exchanges and clearing corporations, introduces changes aimed at enhancing risk management practices in the derivatives segment.
Detailed Analysis
Previously, cross margin benefits were provided only when correlated indices or index constituents had the same expiry day. However, in consultation with stakeholders and SEBI’s Risk Management Review Committee, it has been decided to extend cross margin benefits to offsetting positions with different expiry dates.
Under the new provisions:
- A spread margin of 40% will be levied for offsetting positions in correlated indices with different expiry dates.
- A spread margin of 35% will be applied for offsetting positions in an index and its constituents with different expiry dates, provided all constituents have the same expiry date.
- The spread margin benefit will be revoked at the beginning of the expiry day of the position expiring first.
- Exchanges and clearing corporations are mandated to implement suitable monitoring mechanisms to track cross margin activities.
These changes aim to optimize risk management while providing flexibility to market participants. The circular emphasizes SEBI’s commitment to investor protection and market development.
Conclusion: SEBI’s circular on cross margin benefits reflects a proactive approach to enhancing risk management practices in the derivatives segment. By allowing cross margin benefits for offsetting positions with different expiry dates, SEBI aims to streamline operations while maintaining robust risk management frameworks. Market participants are urged to adhere to the new provisions, which will come into effect three months from the date of issuance. Overall, the circular underscores SEBI’s continuous efforts to safeguard investor interests and promote the orderly functioning of the securities market.
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April 23, 2024
SEBI/HO/MRD/TPD-1/P/CIR/2024/24
To
All Stock Exchanges
All Clearing Corporations
(Except Commodity Derivatives Exchanges/Clearing Corporations)
Sir/Madam,
Cross Margin benefits for offsetting positions having different expiry dates
1. Chapter 5 of SEBI Master Circular dated October 16, 2023 for Stock Exchanges and Clearing Corporations inter-alia provides stipulations for cross margin between index futures position and constituent stock futures position in derivatives segment (Clause 1.2.9) as well as cross margin in respect of offsetting positions in correlated equity indices (Clause 1.2.10). At present, the aforesaid cross margin benefits are provided if both the correlated indices or an index and its constituents, as the case may be, have same expiry day.
2. In discussion with stock exchanges, Clearing Corporations and Risk Management Review Committee of SEBI, it has been decided to extend the cross margin benefit on offsetting positions having different expiry dates subject to the following :
a. A spread margin of 40% would be levied in case of offsetting positions in correlated indices having different expiry dates. Spread margin of 30% would continue to get levied in case of same expiry date (i.e. existing requirement).
b. A spread margin of 35% would be levied in case of offsetting positions in index and its constituents having expiry date different from index. While the expiry date of index futures can be different from that of its constituents, the expiry date of futures contracts of all constituents should be same in order to obtain the aforesaid cross margin benefit. Further, spread margin of 25% would continue to get levied in case of same expiry date of index and constituents (i.e. existing requirement).
c. The aforesaid spread margin benefit would be revoked at the beginning of the expiry day of the position which expires first (i.e. first of the expiring indices or constituents) in case the expiry dates of both legs of the position are different.
d. Exchanges / Clearing Corporations to put in place suitable monitoring mechanism to keep track of cross margin activities of participants.
e. All other requirements pertaining to cross margin remain unchanged and applicable.
3. The circular would be effective three months from its date of issuance. The circular is being issued in exercise of powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992 to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.
Yours faithfully,
Ansuman Dev Pradhan
Deputy General Manager
Technology, Process Re-engineering, Data Analytics
Market Regulation Department
+91-22-26449622 Email: ansumanp@sebi.gov.in
