Cross Margin Benefits are Allowed in Commodity Futures Trades

Securities and Exchange Board of India(SEBI ) announced that it has prescribed new norms allowing market participants to use margins deposited for commodity index futures to offset exposures held in their underlying constituent futures.

In the circular, SEBI said the move is part of efforts to improve the efficiency of the use of the margin capital by participants and enhance market liquidity.

"Cross margin benefit of 75 percent on Initial Margin may be allowed for eligible offsetting positions of index futures and futures of its underlying constituents or its variants," the circular says. "The Extreme Loss Margin and Mark to Market Margin shall continue to be levied."

The cross margin benefit should be computed at the client level on an online real-time basis and provided to the trading or clearing member to be passed on to the client.

To be eligible for cross margin benefit, contracts belonging to index futures and underlying constituents or its variants shall belong to same expiry month or to the nearest expiry month and should be from amongst the first three expiring contracts only.

Clearing corporations need to apply for SEBI approval to provide cross margin benefits on the indices. The application should be accompanied with the back testing data that demonstrates the adequacy of cross margin to cover mark-to-market losses for at least six months.