In yet another move to ease the liquidity pains and deepen the market and also perk up volumes, the Securities & Exchange Board of India (Sebi) is extending the cross margining norms to all participants across the market. Earlier on May 5, 2008, the regulator had allowed institutional investors to avail this facility.

The Sebi note says, ?In order to improve the efficiency of the use of the margin capital by market participants, it has now been decided to revise the existing facility of cross margining and to extend it across cash and derivatives segments to all categories of market participants.?

According to these norms, the positions of traders in both the cash and derivatives segments to the extent they offset each other shall be considered for the purpose of cross margining, as against having separate margins for both the categories. So earlier if you had bought shares of, say XYZ company in the cash market, and sold the same share it the futures market, then your margin would be calculated on both the positions separately. Now, they will be able off-setted and the 25% margin will be applicable on the netted position. Essentially, it will free the money locked in margins and these can then be used to undertake more trades.

?This will deepen the market as it will free a lot of resources for retail traders and also for proprietary trades. There will be more action in the arbitrage segment,? says Hasit Pandya, director with HPMG Shares & Stocks. Though institutional investors were allowed this facility, not much action was seen on this front. ?Most of the institutional investors, that is the overseas investors have been hedging against the falling rupee and this has led to creation of an artificial margin for them anyways,? says a trader with an overseas firm. Retail, that is high net worth individuals, traders, speculators and proprietary trades form more than third of the market and therefore there could be an improvement. However, at the moment, market participants would rather wait and watch the developments over a few days.

The volumes on the NSE have shrunk drastically over the year. Average volumes in the futures & options segment were around Rs 65,000 crore during the same time of the previous year and they have now shrunk to Rs 40,000 crore levels. Similarly, volumes in the cash segment have shrunk from Rs 25,000 to 30,000 crore to 10,000 crore levels in the current year.

According to the new norms, the facility is extended to the index futures position and constituent stock futures position in derivatives segment, the index futures position in derivatives segment and constituent stock position in cash segment and stock futures position in derivatives segment and the position in the corresponding underlying in the cash segment. This largely covers a variety of positions that a trader can take and get the cross margin benefit.

Importantly, now a basket of positions in index constituent stock or stock futures, which is a complete replica of the index in the ratio specified by the exchange or clearing corporation, shall be eligible for cross margining benefit. This means that traders can build index replicated portfolio and also use the cross margining facility incase they want to take counter positions.

?The positions in the derivatives segment for the stock futures and index futures shall be in the same expiry month to be eligible for cross margining benefit,? said the Sebi directive. To begin with, a spread margin of 25% of the total applicable margin on the eligible off-setting positions shall be levied in the respective cash and derivative segments, it further added.

Traders, in order to use this will have maintain two accounts with the broker or clearing member. These will an arbitrage account and a non-arbitrage account, to allow converting partially replicated portfolio into a fully replicated portfolio by taking opposite positions in two accounts. ?However, for the purpose of compliance and reporting requirements, the positions across both accounts shall be taken together and client shall continue to have unique client code?, Sebi clarified.