Cross-margins in futures: Traders need to ensure adequate funding

Participation may be limited, particularly in basket trading, as higher margins are needed. Therefore, participation is primarily restricted to proprietary desk traders, with fewer retail clients involved- Dhirender Singh Bisht, associate vice-president (technical research) at SMC Global Securities Ltd

Hyderabad: With cross margins in futures with varied expiries coming into effect, derivatives analysts say that traders building positions across different expiry periods should ensure they have adequate margins, as full margin requirements apply to the first expiring contract.

“Traders building positions across different expiry periods should ensure they have adequate margins, as full margin requirements apply to the first expiring contract. Participation may be limited, particularly in basket trading, as higher margins are needed. Therefore, participation is primarily restricted to proprietary desk traders, with fewer retail clients involved,” Dhirender Singh Bisht, Associate Vice-President (Technical Research) at SMC Global Securities Ltd, told Bizz Buzz.

Cross margins enhance traders’ liquidity and financing flexibility for brokerage firms as it facilitates reducing margin requirements and lowering net settlements. Traders need not rush for unwarranted liquidation of positions and it’ll reduce potential losses through cross margining, observe analysts. Sebi’s latest decision, which is effective from July 23, 2024, on extending cross margin benefits enable derivatives traders to offset positions in contracts with different expiry dates.

“In discussion with stock exchanges, clearing corporations and risk management review committee of Sebi, it has been decided to extend the cross margin benefit on offsetting positions having different expiry dates,” Sebi said in a circular.

The market regulator’s new decision enables derivatives traders to make use of their available margin across all of their accounts. This raises the liquidity by reducing margin requirements and lowering net settlements. NSE commenced cross-margining facility in January 2020.

Capital markets regulator Sebi has extended the cross margin benefit between index futures position and constituent stock futures position in the derivatives segment for offsetting positions with different expiry dates. At present, the cross margin benefits are provided if both the correlated indices or an index and its constituents, as the case may be, have the same expiry day. Cross margining enhances liquidity and financing flexibility for entities by reducing margin demands and decreasing net settlement obligations.

This is subject to certain conditions including a 40 per cent spread margin will apply for offsetting positions in correlated indices with different expiry dates, while the existing 30 per cent margin stays for positions with the same expiry date. For offsetting positions in an index and its constituents with different expiry dates, a 35 per cent spread margin applies, while the existing 25 per cent margin stays for positions with the same expiry date.

“When offsetting correlated indices with different expiry dates, a spread margin of 40 per cent will be applied, while for those with the same expiry, it will be 30 per cent. Similarly, a spread margin of 35 per cent will be applied when offsetting positions in an index and its constituents in different expiries, compared to 25 per cent for those with the same expiry. However, spread margin benefits will be revoked upon the expiry of the first contract of indices or their constituents. This adjustment is not anticipated to significantly impact liquidity, given the existing cross margin benefit for contracts with the same expiry,” further expounds Bisht.

The spread margin benefit ends on the expiry day of the first expiring position if the expiry dates are different. Sebi said that stock exchanges and clearing corporations will monitor cross margin activities of participants. The new framework would be effective three months from the date of issue of this circular.

“The existing cross margin benefit within the system has been added in a new circular from Sebi, expanding its application to different expiries. Now, traders can avail spread margin benefits by offsetting positions in indices and correlated constituents or correlated indices with different expiries dates,” remarked Bisht.