Derivatives

What is commodity cross margin

Akhil Nallamuthu BL Research Bureau | Updated on July 03, 2021

Initial margin requirements will come down for traders taking offsetting positions

Market regulator SEBI (Securities and Exchange Board of India) through a circular last week allowed cross margining in commodity index futures and its constituents. Hence, the initial margin requirements will come down for traders taking offsetting positions. This will increase the efficiency of the use of margin capital and decrease the cost of trading.

While Extreme Loss Margin (ELM) and the Mark-to-Market (MTM) margin will be continued to be levied, there will be 75 per cent benefit on the initial margin provided if there is offsetting positions of index futures and futures of its underlying constituents. So, margin obligation for such trades will come down to 25 per cent.

For instance, you create a position by shorting Bulldex futures and simultaneously buy gold and silver futures. The initial margin requirement will be approximately ₹8 lakh (₹50,000 for Bulldex futures short, ₹4.5 lakh for gold futures long and ₹3 lakh for silver futures long). With cross margining, margin obligation will be 25 per cent of ₹8 lakh i.e., ₹2 lakh. But remember, if one leg is liquidated, cross margining benefit may not be available.

Importantly, the contracts belonging to the index futures and futures of underlying constituents should belong to the same expiry month or to the nearest expiry month and should be from amongst the first three expiring contracts only to be eligible for margin benefit. Notably, the benefit shall be withdrawn latest by the start of the tender period for the constituent futures of the index or start of the expiry day, whichever is earlier.

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Published on July 03, 2021

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