Market Regulator SEBI was determined to propose a cross margin advantage between commodity index futures and their underlying constituents futures, a move that will lessen the cost of trading and support liquidity in such products.
The move is part of Sebi's attempt to improve the efficiency of the use of the margin capital by market participants, the regulator announced in a circular.

To be qualified for the cross margin benefit, Sebi stated contracts about index futures and underlying constituents or their variants will relate to the same expiry month or the most expected expiry month and should be from amongst the leading three expiring contracts only.
Cross margin advantage on the desirable positions will be completely withdrawn latest by the origin of the tender period for the constituting futures of the index or its variants or the source of the expiry day, whichever is immediate.

Clearing corporations/exchanges can propose cross margin benefit, after backtesting for the competence of cross margin to cover Mark to Market losses (MTM) for the merest period of six months.
Initial margin after cross margin benefit should be able to satisfy MTM on at least 99 percent of the days as per backtesting.
In the event of a default by a trading member or clearing member, whose clients have availed cross margin benefit, the clearing corporation will have the right to hold the positions in the cross margin account till expiry, in its name, the market regulator said.
Also, clearing corporations will have the option to liquidate the positions or collateral and utilize the profits to meet the default obligation, SEBI added.
According to SEBI, exchanges or clearing corporations will have to access into an agreement with the trading or clearing member placing down the allocation of liability and responsibility in the situation of a default.

Clearing corporations need to practice SEBI for approval for the provision of cross margin benefit on the indices. The application requires to be supplemented by the backtesting data.
Cross margining enables market participants to overcome the total margin payment required if they are using two mutually offsetting positions. The move helps market participants assign excess margin from one account to another. Concerning computation of cross margin benefits, SEBI stated cross margin benefit of 75 percent on initial margin may be allotted for eligible offsetting positions of index futures and futures of its underlying constituents or its variants.

The ultimate loss margin and market-to-market margin will proceed to be levied. Cross margin benefit will be estimated at the client level on an online real-time basis and presented to the trading or clearing member. This advantage in turn will be reached on to the client.
Clients will be provided to control two accounts with trading or clearing member, an arbitrage account (which holds a fully replicated portfolio) and a non-arbitrage account. This is to permit clients to convert a partially replicated portfolio into a fully replicated portfolio by exercising opposite positions in two accounts.
A full replicated portfolio has specific offsetting positions of the index futures contracts and all its constituent futures contracts or their variants.
However, for a target of compliance and reporting requirements, the positions beyond both the accounts will be held together and the client will proceed to have a unique client code.

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