Introduction of Cross-Margining facility in respect of offsetting positions in correlated equity Indices

SEBI/HO/MRD/DOP1/CIR/P/2019/128 · 2019-11-08 · SEBI

Summary

SEBI extends the cross-margining facility to offsetting positions in highly correlated equity indices to facilitate efficient collateral use. Clearing Corporations must verify eligibility criteria monthly and upon index constituent changes, applying a spread margin of 30% on eligible positions. Stock Exchanges and Clearing Corporations are directed to implement necessary systems, amend bye-laws, and communicate these provisions to market participants.

Text

In order to facilitate efficient use of collateral by market participants, it has been decided to extend cross margining facility to off-setting positions in highly co-related equity indices.

Cross margin benefit shall be provided on off-setting positions in futures on equity indices pairs which satisfy the below mentioned conditions: i. A positive correlation of more than 0.90 for a period of six months between the values of the equity Indices and ii. At least 80% of constituents of one of the index is present in the other index and iii. The constituents of smaller index based on free float market capitalization shall have at least 80% weightage in the larger index based on free float market capitalization.

For cross margining benefit to continue the abovementioned eligibility criteria shall be checked by Clearing Corporations as under: i. on a monthly basis on the 15th of every month ii. on the day of change in the constituents of the equity indices

If the equity indices pairs fail to fulfil any of the abovementioned eligibility criteria, cross margining benefit shall not be given after the upcoming monthly expiry.

To begin with, a spread margin of 30% of the total applicable margin on the eligible off-setting positions, shall be levied.

Cross margining benefit shall be computed at client level on an online real time basis and provided to the trading member / clearing member, as the case may be, who, in turn, shall pass on the benefit to the client.

All other conditions as specified in circular SEBI/DNPD/Cir-44/2008 dated December 02, 2008 shall continue to be applicable on off-setting positions in futures on equity indices pairs.

Clearing Corporations shall apply to SEBI for approval for providing of cross margining benefit on co-related equity indices which fulfil the eligibility criteria. The application shall be accompanied with the data on eligibility criteria specified above.

Stock Exchanges and Clearing Corporations are directed to: put in place the adequate systems and issue the necessary guidelines for implementing the above decision.

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

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

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.

Source: SecMarx — Introduction of Cross-Margining facility in respect of offsetting positions in correlated equity Indices. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.