The country's largest stock exchange, NSE, will introduce cross-margining facility on 10 January to offset positions in co-related equity indices. This move will increase liquidity and trading volumes in stock markets.
Cross margining is a facility that allows market participants (like traders) to transfer excess margin from one account to another to reduce the total margin payment required if they are taking two mutually offsetting positions.
In November, the Securities and Exchange Board of India (SEBI) extended cross margining facility to offsetting positions in highly co-related equity indices. It was earlier only between index futures and underlying constituents/futures, stock futures and underlying stocks; and ETFs and their underlying constituents.
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 percent of constituents of one of the indices is present in the other index and constituents of a smaller index based on free-float market capitalisation need to have at least 80 percent 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 15 of every month and on the day of change in the constituents of the equity indices.