CIRCULAR

General Manager

Derivatives and New Products Department

SEBI/DNPD/Cir- 44/2008

December 02, 2008

To

The Managing Director / Executive Director of Derivative Segment of NSE and BSE and their Clearing Houses / Corporations.

Dear Sir,

Sub: Cross Margining across Exchange traded Equity (Cash) and Exchange traded Equity Derivatives (Derivatives) segments

This is in continuation of SEBI Circular No. MRD/DoP/SE/Cir-13/2008 dated May 05, 2008 on the cross margining facility across cash and derivatives segments for institutional trades. In order to improve the efficiency of the use of the margin capital by market participants, it has now been decided to revise the existing facility of cross margining and to extend it across cash and derivatives segments to all categories of market participants. The features of the revised cross margining facility are detailed below:

1. Positions eligible for cross margining benefit

a. The positions of clients in both the cash and derivatives segments to the extent they offset each other shall be considered for the purpose of cross margining as per the following priority:

i. Index futures position and constituent stock futures position in derivatives segment

ii. Index futures position in derivatives segment and constituent stock position in cash segment

iii. Stock futures position in derivatives segment and the position in the corresponding underlying in cash segment

b. A basket of positions in index constituent stock/stock futures, which is a complete replica of the index in the ratio specified by the Exchange/Clearing Corporation, shall be eligible for cross margining benefit.

c. The positions in the derivatives segment for the stock futures and index futures shall be in the same expiry month to be eligible for cross margining benefit.

2. Computation of cross margin

a. To begin with, a spread margin of 25% of the total applicable margin on the eligible off-setting positions, as mentioned in para 1 (a) above, shall be levied in the respective cash and derivative segments.

b. Cross margining benefit shall be computed at client level on an online real time basis and provided to the trading member / clearing member / custodian, as the case may be, who, in turn, shall pass on the benefit to the client. For institutional investors, however, the cross margining benefit shall be provided after confirmation of trades.

3. Separate accounts

To avail the facility of cross margining, a client may maintain two accounts with the trading member / clearing member, namely arbitrage account and a non-arbitrage account, to allow converting partially replicated portfolio into a fully replicated portfolio by taking opposite positions in two accounts. However, for the purpose of compliance and reporting requirements, the positions across both accounts shall be taken together and client shall continue to have unique client code.

4. Settlement

To begin with, a client may settle through a trading member / clearing member / custodian, as the case may be, who is clearing in both the segments or through two trading members / clearing members / custodians, one of whom is a trading member / custodian in the cash segment and the other is a clearing member in the derivatives segment. However, in course of time, a client will settle through only one clearing member who is a member in both the segments.

5. Default

In the event of default by a trading member / clearing member / custodian, as the case may be, whose clients have availed cross margining benefit, the Stock Exchange / Clearing Corporation shall have the option to:

a. Hold the positions in the cross margin account till expiry in its own name.

b. Liquidate the positions / collateral in either segment and use the proceeds to meet the default obligation in the other segment.

6. Agreement

The Exchange / Clearing Corporation shall enter into agreement with client / clearing member / trading member / custodian, as the case may be, clearly laying down the inter-se distribution of liability / responsibility in the event of default.

7. The Stock Exchanges are advised to:

a. put in place the adequate systems and issue the necessary guidelines for implementing the above decision.

b. make necessary amendments to the relevant bye-laws, rules and regulations for the implementation of the above decision.

c. specify the legal agreements between the clearing entities for the purpose of margin utilisation in case of liquidation/default etc.

d. bring the provisions of this circular to the notice of the trading members / clearing members / custodians and also to disseminate the same on the website.

8. This circular is being issued in exercise of powers conferred by sub-section (1) of section 11 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.

9. This circular is available on SEBI website at www.sebi.gov.in, under the category “Derivatives – Circulars”.

Yours faithfully,

Sujit Prasad

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