SEBI opens the door for Sensex, Nifty futures arbitrage

Our Bureau Mumbai | Updated on November 08, 2019 Published on November 08, 2019

Market regulator SEBI. File Photo   -  BusinessLine

In a move that is likely to revive derivative trading in Sensex futures, SEBI has now allowed cross-margining for off-setting positions in highly co-related equity indices in order to facilitate efficient use of collateral. Simply put, there can now be arbitrage opportunity between Sensex and Nifty futures since both indices have a 99.9 per cent correlation. The actual settlement can be close to zero if a trader has offsetting positions on both the BSE and the NSE, experts told BusinessLine.

There is already interoperability between stock exchanges and clearing corporations in India. Under interoperability, a separate margin to trade stocks on the NSE and the BSE is not required. One choose a clearing corporation of an exchange and execute trades on the other exchange platform that gives best ‘spread’ without dual margin. The system along with cross margining in correlated indices can now increase arbitrage volumes between Sensex and Nifty, brokers said.

Brokers charge a margin of between ₹60,000 and ₹68,000 for trading in Nifty futures. Since Nifty futures generate high volume, the BSE will have to tailor its Sensex futures in order to align it with Nifty futures margin, brokers said.

The SEBI criteria that makes arbitrage between Sensex and Nifty possible is that there should be a positive correlation of more than 0.9 for a period of six months between the values of the equity indices and at least 80 per cent of constituents of one of the index should be present in the other. NSE has all the 30 share as its constituents that form the Sensex index.

For computation of cross margins, to begin with, a spread margin of 30 per cent of the total applicable margin on the eligible off-setting positions will be levied, according to SEBI. For cross-margining benefit to continue, eligibility criteria will be checked by clearing corporations on a monthly basis on the 15th of every month and on the day of change in the constituents of the equity indices, SEBI said. Cross-margining benefit will 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, will pass on the benefit to the client.

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Published on November 08, 2019
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