SEBI modifies rules for computing index ETFs margins

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SEBI modifies rules for computing index ETFs margins
The Securities Exchange Board of India on Wednesday set new rules for calculating margins with respect to Exchange Traded Funds (ETFs).

In order to bring efficiency in margining of index ETFs, it has been decided that Value at Risk (VaR) margin computation for ETFs that track an index shall be computed as higher of 5% or three times sigma of the ETF.

The revised margin framework is applicable to ETFs that tracks broad based market indices and does not include ETFs which track sectoral indices

SEBI also said that in order to facilitate efficient use of margin capital by market participants, it has been decided to extend cross margining facility to ETFs based on equity index and its constituent stocks for following off-setting positions in cash market segment, as follows:

  • ETFs and constituent stocks (in the proportion specified for the ETF) to the extent they offset each other, 
  • ETFs and constituent stocks futures (in the proportion specified for the ETF) to the extent they offset each other and
  • ETFs and relevant Index Futures to the extent they offset each other.

In the event of a suspension on creation / redemption of the ETF units, the cross-margining benefit shall be withdrawn

SEBI had advised Stock Exchanges to take necessary steps and put in place necessary systems for implementation and make necessary amendments to the relevant bye-laws, rules and regulations for
the implementation of the above decision.

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