Cross-margining allows traders to transfer excess margin from one account to another account to satisfy margin maintenance requirements to offset positions.
Leading stock exchange BSE has said it will introduce cross-margining facility to offset positions in correlated equity indices from Wednesday, a move that will increase liquidity and trading volumes in the stock market. Cross-margining allows traders to transfer excess margin from one account to another account to satisfy margin maintenance requirements to offset positions. It allows market participants to reduce the total margin payment required, if they are taking two mutually offsetting positions.
Clearing corporations give this margin benefit on positions, which show a high degree of dependence or correlation. The facility will be made effective from Wednesday, January 15, 2020, BSE said in a circular. Rival bourse the National Stock Exchange (NSE) had already launched this facility from Friday.
The move comes after the markets regulator Sebi in November last year extended cross-margining facility for offsetting positions in highly correlated equity indices. Sebi, in December 2008, allowed cross-margining across cash and exchange-traded equity derivatives segments.
Under the norms, cross-margin benefit will be provided on offsetting positions in futures on equity indices pairs if at least 80 per cent of constituents of one of the indices is present in the other index and constituents of smaller index based on free-float market capitalisation need to have at least 80 per cent weightage in the larger index.
For cross-margining benefit to continue, clearing corporations will have to check the eligibility criteria on a monthly basis on the 15th of every month and on the day of change in the constituents of the equity indices.