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In order to improve use of margin, Sebi has decided to allow cross margin benefit between Commodity Index futures and its underlying constituents futures.
The move will reduce cost of trading and enhance liquidity in both the commodity index futures and its underlying constituent trading.
Cross margin benefit of 75 per cent on initial margin will be allowed for eligible offsetting positions of index and underlying constituents futures.
However, the extreme loss margin and market-to-market margin shall continue to be levied, said Sebi.
Cross margin benefit will be computed at the client level on real time basis and the benefits will be passed on to clients by members, said Sebi.
Clients have to open arbitrage and non-arbitrage accounts to convert a partially replicated portfolio into a fully replicated portfolio by taking opposite positions in two accounts.
The fully replicated portfolio is one which will have exact offsetting positions of index futures contract and all its constituent, said Sebi.
However, it said for the purpose of compliance and reporting requirements, the positions across both the accounts shall be taken together and the client shall continue to have a unique client code.
The cross margin benefit will be available for contracts belonging to index futures and underlying constituents of same or nearest month expiry and should be from the first three expiring contracts.
Exchanges can introduce cross margin benefit, after back testing for adequacy of cross margin to cover Mark-to-Market losses for six months.
Initial margin after cross margin benefit should be able to cover MTM on at least 99 per cent of the days as per back testing it said.
In the event of a default by a member whose clients have availed cross margin benefit, the Clearing Corporation shall have the option to hold the positions in the cross margin account till expiry in its own name and liquidate the positions to meet the default obligation.
Clearing Corporations have to seek Sebi approval for providing cross margin benefits.
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