SEBI allows cross-margin across cash and derivative mkts

The security and exchange board of India (SEBI) on Monday has allowed cross margining across cash and derivatives markets, so that investors can utilise their margins respectively better. But, initially this facility will be available only for institutional traders.

In another positive move to help the institutional investors, SEBI has granted permission to swap corresponding margins between cash and debts market for better utilisation of their money and to cut off their occasional heavy losses. Earlier, SEBI has extended the facility of direct market access for the institutional investors.

In this regard, SEBI on Monday has issued a circular for all stock exchanges describing the norms and guidelines to be followed by the investors and market operators.

“In order to improve the efficiency of the use of the margin capital by market participants and as an initial step towards cross margining across cash and derivatives Markets, margins shall be levied on cash market positions which have off-setting stock futures positions in the derivatives market,” said SEBI in the released circular.

Describing about the cross-margin facility, SEBI said, “Value at Risk (VaR) margin shall not be levied on the cash market position, but, it will be only to the extent of the off-setting stock futures market position.”

However, SEBI also stated that no cross-margin benefit would be allowed in near month stock futures positions before three days of expiry and ‘Extreme Loss Margin’ and ‘Mark to Market Margin’ would be charges as per before on the entire cash market position, not future market while SEBI made no changes in the Future & Option position.

AS per SEBI guidelines, it means, if any institutional investor is buying a stock that it already has a short position in the futures segment would need not to pay margin for both cash and debts.

For example: if investor purchase 6000 Share of any stock scrip in the cash market, but already have 5000 shares in future segment then in case of intra-day lose, investor would have to bear the loss of 6000-5000=1000 shares only. Because, the profit of the 5000 shares would neutralise the loss of same number of share in future segment.

Earlier in February 2008, the finance minister P Chidambaram had made it tough for the arbitrageurs in terms of levied taxes by making a change in security transaction tax (STT). This move of SEBI will provide some relief to the investors.