We need to break up the idea of cross margining in greater detail. You will recollect that SEBI has been allowing cross margining between cash equities and equity futures since 2008. The latest round of cross margining involves the introduction of cross-margining facility to offset positions in correlated equity indices. For example, if Bank Nifty and Nifty are highly correlated then to the extent of high correlation, the cross margin will reduce for offsetting positions in these two contracts.

Why is this so important? Cross margining allows market participants to reduce the total margin payment required, if they are taking two mutually offsetting positions. That means; one on the short side and one on the long side. The move helps market participants transfer excess margin from one account to another. In the middle of 2019, SEBI had permitted interoperability of margins between clearing corporations and this is a logical extension. Now this can also be applied between Nifty futures and Sensex futures since they have a correlation coefficient of close to 0.99.

Cross margin benefit will be provided on offsetting positions in futures on equity indices pairs if at least 80% of constituents of one of the indices are present in the other index. In case of smaller indices, the constituents based on free-float market capitalisation must have at least 80% 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 15th of every month and apply that formula for the next 30 days.

We need to break up the idea of cross margining in greater detail. You will recollect that SEBI has been allowing cross margining between cash equities and equity futures since 2008. The latest round of cross margining involves the introduction of cross-margining facility to offset positions in correlated equity indices. For example, if Bank Nifty and Nifty are highly correlated then to the extent of high correlation, the cross margin will reduce for offsetting positions in these two contracts.

Why is this so important? Cross margining allows market participants to reduce the total margin payment required, if they are taking two mutually offsetting positions. That means; one on the short side and one on the long side. The move helps market participants transfer excess margin from one account to another. In the middle of 2019, SEBI had permitted interoperability of margins between clearing corporations and this is a logical extension. Now this can also be applied between Nifty futures and Sensex futures since they have a correlation coefficient of close to 0.99.

Cross margin benefit will be provided on offsetting positions in futures on equity indices pairs if at least 80% of constituents of one of the indices are present in the other index. In case of smaller indices, the constituents based on free-float market capitalisation must have at least 80% 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 15th of every month and apply that formula for the next 30 days.