Review of Margining with respect to Exchange Traded Funds (ETFs)
Summary
SEBI mandates the use of Value at Risk (VaR) methodology for computing margins on index-based Exchange Traded Funds. The regulator introduces a cross-margining facility to allow offsetting positions between ETFs and their constituent stocks or futures. Stock Exchanges are instructed to implement these changes by updating systems, bye-laws, and notifying member brokers.
Text
VaR margin computation for ETFs that track an index shall be computed as higher of 5% or three times sigma of the ETF.
The revised margin framework is applicable to ETFs that tracks broad based market indices and does not include ETFs which track sectoral indices.
It has been decided to extend cross margining facility to ETFs based on equity index and its constituent stocks for following off-setting positions in cash market segment.
ETFs and constituent stocks (in the proportion specified for the ETF) to the extent they offset each other.
ETFs and constituent stocks futures (in the proportion specified for the ETF) to the extent they offset each other.
ETFs and relevant Index Futures to the extent they offset each other.
In the event of a suspension on creation / redemption of the ETF units, the cross-margining benefit shall be withdrawn.
Take necessary steps and put in place necessary systems for implementation of the above.
Make necessary amendments to the relevant bye-laws, rules and regulations for the implementation of the above decision.
Bring the provisions of this circular to the notice of the member brokers of the stock exchange and also to disseminate the same on the website.
This circular is being issued in exercise of powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992.
Source: SecMarx — Review of Margining with respect to Exchange Traded Funds (ETFs). Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.