The Hindu Business Line : Cross margining may help arbitrageurs

The Securities and Exchanges Board of India’s move to extend cross-margining facility to all categories of market participants across the cash and derivative segments is beneficial to arbitrageurs and brokers. But the move is not likely to boost turnover on the bourses in the near-term.

Cross margining reduces the margin that needs to be paid by market participants. It allows offsetting open positions across related products and between the cash and derivative markets, where a gain from one transaction is likely to be offset by the loss from another transaction. SEBI had allowed institutional traders to avail themselves of this facility from May 5, 2008.

Now this facility has been extended to other categories of investors as well. Though clarity is awaited on the margins that this circular will cover, it is highly likely that the entire array of margins including the value at risk margin and mark-to-market margin will be covered.

The current move will principally benefit traders who arbitrage between spot and futures market since they would not have to pay the margin twice on offsetting positions.

The funds thus freed can be utilised to execute additional trades. That said, it is very doubtful if this move will provide a significant boost to the turnover in the near-term since many traders have lost heavily due to the volatile market conditions and have retreated from the market altogether.

Margin benefits are already available to market participants who hold counter positions in the same underlying in futures and options. Similarly, calendar spreads where the arbitrageurs execute trades in the same futures with varying maturity also already enjoy cross-margin benefits.

The other category of market participants who will benefit by this measure are brokers. Since a third of the transactions in the derivative and cash segment are executed through the proprietary books of brokers, reduction in margin requirements will free up funds.

Since brokers are facing difficulty in raising funds to finance working capital needs, the funds freed through these measures will help them tide over the current liquidity crisis.

The other measure announced simultaneously by SEBI to adjust the market lots for contracts, will however counter most of the benefits that will accrue through cross-margining since the margin requirements for most future contracts would rise following the increase in market lots.

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SEBI extends cross margin facility to all

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