**Executive Summary:**
SEBI's circular introduces cross margin benefits between commodity index futures and the futures of their underlying constituents or variants to improve margin capital efficiency and liquidity. A 75% cross margin benefit on Initial Margin may be allowed for eligible offsetting positions. Clearing Corporations must apply to SEBI for approval to provide the cross margin benefit, including back testing data.
**Key Points / Main Content:**
* **Cross Margin Benefit Computation:**
* A cross margin benefit of 75% on Initial Margin may be allowed for eligible offsetting positions.
* Extreme Loss Margin and Mark to Market Margin will continue to be levied.
* Cross margin benefit is computed client-level, online, and in real-time, and must be passed on to the client.
* **Separate Accounts:**
* Clients may maintain arbitrage and non-arbitrage accounts to convert partially replicated portfolios into fully replicated portfolios.
* Positions across both accounts are considered together for compliance and reporting.
* **Eligibility:**
* Eligible contracts must belong to the same or nearest expiry month and be among the first three expiring contracts.
* Cross margin benefit is withdrawn by the start of the tender period for constituent futures or the expiry day, whichever is earlier.
* Clearing Corporations/Exchanges must back test cross margin adequacy for six months; initial margin after the cross margin benefit should cover MTM on at least 99% of the days.
* **Default:**
* In case of default, the Clearing Corporation can hold positions in the cross margin account until expiry or liquidate positions and collateral.
* **Agreement:**
* Exchanges/Clearing Corporations must have an agreement with trading members/clearing members, laying out liability distribution in case of default.
* **Approval:**
* Clearing Corporations must apply to SEBI for approval, including back testing data.
**Impact Analysis:**
**Clearing Corporations:**
* *Impact:* Must implement changes to facilitate cross margining, conduct back testing, and apply to SEBI for approval.
* *Action Required:* Conduct back testing, develop necessary systems and procedures, create an agreement for defaults, and submit an application to SEBI for approval.
**Trading Members/Clearing Members:**
* *Impact:* Must provide cross margin benefits to clients and enter into agreements with Clearing Corporations.
* *Action Required:* Update systems to provide cross margin benefits and enter into agreements with Clearing Corporations.
**Clients:**
* *Impact:* Can avail of reduced margin requirements through cross margining, potentially lowering trading costs.
* *Action Required:* May need to open separate arbitrage accounts and understand the terms and conditions of cross margining.
**SEBI:**
* *Impact:* Responsible for approving cross margin benefit provisions.
* *Action Required:* Review applications from Clearing Corporations.
Key Entities Referenced
SEBI: Securities and Exchange Board of India, the regulatory body for securities markets in India.
Commodity Derivatives Segment: Refers to the segment of the financial market dealing with derivative contracts based on commodities.
Clearing Corporations: Organizations that provide clearing and settlement services for financial transactions, particularly in the context of commodity derivatives.
Commodity Index futures: Futures contracts based on a commodity index, representing the value of a basket of commodities.
Securities and Exchange Board of India Act 1992: The legislation that established SEBI and defines its powers and functions.
Extreme Loss Margin: A type of margin required to cover potential losses due to extreme price movements.
Mark to Market Margin: Margin calculated based on the current market value of an asset or position.
Vishal V. Nair: Deputy General Manager, Division of Risk Management, Commodity Derivatives Market Regulation Department at SEBI.
SEBI/HO/CDMRD/CDMRD_DRM/P/CIR/2021/586 June 29, 2021
To,
The Managing Directors / Chief Executive Officers,
All Clearing Corporations having Commodity Derivatives Segment
Sir / Madam,
Sub: Cross Margin in Commodity Index Futures and its underlying constituent
futures or its variants
1. SEBI has prescribed norms, inter-alia, for providing margin benefit on spread
positions in commodity futures contracts, vide various circulars. In order to improve
the efficiency of the use of the margin capital by market participants, it has been
decided to introduce cross margin benefit between Commodity Index futures and
futures of its underlying constituents or its variants. This shall reduce the cost of
trading and may lead to enhanced liquidity in both the Commodity index futures
and its underlying constituent futures or its variants.
2. Therefore, based on the consultation with the stakeholders, the following
provisions shall be applicable in this regard;
2.1. Computation of cross margin benefit:
2.1.1. Cross margin benefit of 75 % on Initial Margin may be allowed for eligible
offsetting positions of index futures and futures of its underlying
constituents or its variants. The Extreme Loss Margin and Mark to
Market Margin shall continue to be levied.
2.1.2. Cross margin benefit shall be computed at the client level on an
online real time basis and provided to the trading member / clearing
member, as the case may be. This benefit in turn shall be passed on to
the client.
2.2. Separate Accounts
2.2.1. Clients may be allowed to maintain two accounts with trading
member/clearing member, viz arbitrage account (which holds fully
replicated portfolio) and a non-arbitrage account. This is for the purpose
of allowing clients to convert a partially replicated portfolio into a fully
replicated portfolio by taking opposite positions in two accounts. A fully
Page 1 of 3replicated portfolio is one which has exact offsetting positions of index
futures contract and all its constituent futures contracts or its variants.
2.2.2. However, for the purpose of compliance and reporting requirements, the
positions across both the accounts shall be taken together and the client
shall continue to have a unique client code.
2.3. Eligibility
2.3.1. 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.
2.3.2. Cross Margin benefit on the eligible positions shall be entirely withdrawn
latest by the start of the tender period for the constituent futures of the
index or its variants or start of the expiry day, whichever is earlier.
2.3.3. Clearing Corporations/Exchanges may introduce cross margin benefit,
after back testing for adequacy of cross margin to cover Mark to Market
losses (MTM) for a minimum period of six months. Initial margin after
cross margin benefit should be able to cover MTM on at least 99% of the
days as per back testing.
2.4. Default
2.4.1. In the event of a default by a trading member / clearing member, as the
case may be, whose clients have availed cross margin benefit, the
Clearing Corporation shall have the option to:
2.4.1.1. Hold the positions in the cross margin account till expiry, in its own
name.
2.4.1.2. Liquidate the positions / collateral and use the proceeds to meet
the default obligation.
2.5. Agreement
2.5.1. The Exchange / Clearing Corporation shall enter into an agreement with
the trading member / clearing member, as the case may be, clearly laying
down the distribution of liability / responsibility in the event of a default.
3. Clearing Corporations shall apply to SEBI for approval for provision of cross margin
benefit on the indices. The application shall be accompanied with the back testing
data as mentioned at para 2.3.3.
Page 2 of 34. This circular is issued in exercise of the powers conferred under Section 11(1) of
the Securities and Exchange Board of India Act 1992, to protect the interests of
investors in securities and to promote the development of, and to regulate the
securities market.
5. This circular is available on SEBI website at www.sebi.gov.in.
Yours faithfully,
Vishal V. Nair
Deputy General Manager
Division of Risk Management
Commodity Derivatives Market Regulation Department
vishaln@sebi.gov.in
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