InvestorQ : What is cross margining that has just been introduced and how does it benefit me as a trader in F&O?
sara Kunju made post

What is cross margining that has just been introduced and how does it benefit me as a trader in F&O?

3 years ago

Firstly, cross margining has not been just introduced and has been existence for a long time. There have been 3 phases to cross margining and what has now been permitted is the third phase. Let us look at the 3 phases to understand the benefits better.

· The first cross margining that was permitted was between cash holdings and short future against that. This is called an arbitrage position and it was a largely low risk spread position. For example if your rare long on 700 shares of RIL and short on 1 lot of RIL then the spread is assured return. Loss on one position will be profit on the other. So the cash market position can be used as margin for short futures.

· The second type of cross margin was across exchanges that was due to the introduction of inter-operability that was permitted in July this year. Prior to that your margins placed with the BSE Clearing Corporation could not be used for positions in the NSE Clearing Corporation. With interoperability, you could use the margin in one exchange across other exchanges too. For example, if you are long on RIL in NSE and short on RIL futures in BSE, then it would be treated as a net position and not as a gross position.

· Recently, the SEBI has permitted cross margining across exchanges and also across indices where there is high correlation. For example, in the previous point, there was cross margining across the same stocks but cross margining between Nifty and Sensex was not possible. Now, if there is a high correlation between Sensex and Nifty, then you can cross margin across these two positions. Similarly, Bank Nifty and Nifty also have a high correlation so cross margining will work across these two positions also.

The idea of cross margining is to reduce your net margin liability by as much as 70% in such cases where it is a hybrid long/short. It helps you to use margins more economically and profitably.