A new benefit of horizon: Cross Margin

Indian exchanges have been struggling against other exchanges which offer Indian indices or stocks on derivatives to trade. While the Indian exchanges took steps like increasing market timings, stopping them from offering Indian products and so on, the impact was really not there. They were not addressing the real problems.

The edge which these offshore exchanges had were mainly in three areas; first, they offered these products in dollar terms, so currency hedging was automatic. Secondly, they would pay some interest on margins paid, which is not the case with Indian exchanges. And finally, they provided cross margin benefits. So, in case one buys one index and sells another index, they are charged cross margins.

Finally, SEBI has cleared that for Indian indices as well, where one would be given cross marginal benefit. This comes more than 10 years after the cash derivatives, cash margin benefit was given. The rules attached to cross margin among indices are as follows:

• Positive correlation of more than 0.90 for a period of six months between the values of the equity Indices was essential, and at least 80 per cent of constituents of one of the index is present in the other index.
• The constituents of smaller index based on free float market capitalization shall have at least 80 per cent weight-age in the larger index based on free float market capitalization, the markets regulator said.
• For cross margin benefit to continue such eligibility criteria shall 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.
• 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.
• Cross margin 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.

While right now it seems that it is restricted to Nifty and SENSEX, it may not be too far before Bank Nifty and CNXIT may also qualify as a pair with Nifty and SENSEX. This can be a big game changer as, the ROI from such trades would significantly improve.

Happy Trading.

Cheers!!!