Cross Margin benefits for offsetting positions having different expiry dates

SEBI has allowed Cross Margin benefits for offsetting positions having different expiry dates. Cross margining allows traders to offset positions in correlated assets, thereby reducing margin requirements and enhancing capital efficiency. However, traditionally, cross margining was limited to positions with the same expiry date.

The circular introduces provisions for extending cross margin benefits to offsetting positions with different expiry dates, subject to specific stipulations aimed at safeguarding market integrity and investor interests.

Expanding Cross Margin Benefits

  1. Diverse Expiry Dates, Unified Benefits: Traditionally, cross margin benefits were confined to assets with identical expiry dates. However, recognizing the need for flexibility and efficiency, the regulatory authorities have decided to extend these benefits to positions with varying expiry dates.
  2. Structured Spread Margin: To mitigate associated risks, a structured spread margin regime has been introduced. For offsetting positions in correlated indices with different expiry dates, a spread margin of 40% will be levied, while positions with the same expiry date will continue to attract a 30% spread margin. Similarly, for index and constituent positions with divergent expiry dates, a spread margin of 35% will be applicable, with a 25% margin for positions with identical expiry dates.
  3. Dynamic Adjustment: The circular mandates the revocation of spread margin benefits at the beginning of the expiry day of the position that expires first. This ensures that margin requirements are adjusted in accordance with evolving market conditions and expiries.
  4. Regulatory Oversight: Exchanges and Clearing Corporations are tasked with implementing suitable monitoring mechanisms to oversee cross margin activities of participants. This ensures compliance with regulatory guidelines and maintains market integrity.
  5. Enhanced Capital Efficiency: By allowing traders to offset positions with varying expiry dates, capital efficiency is significantly enhanced. Traders can optimize margin requirements and deploy capital more effectively across diverse assets.
  6. Risk Mitigation: The structured spread margin regime ensures that associated risks are appropriately managed. By levying margin requirements commensurate with the risk profile of offsetting positions, market stability is preserved.
  7. Flexibility and Adaptability: Market dynamics are inherently dynamic, with asset correlations and expiry dates constantly evolving. The flexibility offered by extended cross margin benefits enables traders to adapt to changing market conditions more effectively.
  8. Regulatory Alignment: The regulatory framework outlined in the circular underscores the commitment to investor protection and market development. By promoting efficient risk management practices, investor interests are safeguarded, fostering confidence in the derivatives market.

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