Cross margin benefit

If a trader is long a commodity index future and short the futures of the individual commodities that make up that index, the two positions largely offset each other's risk — a move in the index is, almost by definition, a move in its constituents.

Charging full margin on both legs separately, as if they were unrelated risks, would tie up far more capital than the trader's actual net risk. Cross margin benefit lets the clearing corporation recognise that offset and charge less.

As per SEBI's circular dated 29 June 2021, cross-margin benefit is allowed on index futures positions, similar to the crush margin benefit already available between two related commodities such as oilseeds and their vegetable oils. Where a client holds opposite positions in index futures and futures of constituents of the same index, cross-margin benefit is available up to 75%, subject to conditions.

The conditions: MTM loss and the Extreme Loss Margin (ELM) continue to be levied and collected in full — cross-margining offsets only part of the initial margin, not the full risk charge. The benefit is available only at the client level, for cross positions taken by that client — it is neither applicable nor calculated at the broker level. To qualify, the index futures and the underlying constituent contracts (or their variants) must belong to the same expiry month or the nearest expiry month, and must be among the first three expiring contracts only. Clearing corporations and exchanges may introduce the benefit only after back-testing its adequacy to cover MTM losses.

A client holds a long position in MCX iCOMDEX Bullion Index futures and a matching short position in gold futures and silver futures — the two constituents of that index — both in the nearest expiry month, which is also among the first three expiring contracts. Because the positions are opposite and offsetting, the clearing corporation grants cross-margin benefit of up to 75% on the eligible margin.

If the standalone initial margin on the two legs combined would have been, say, Rs 8,00,000, a 75% offset could reduce the margin requirement to roughly Rs 2,00,000 for the overlapping risk — while MTM losses and ELM continue to be charged in full regardless, since those cover risks the offset does not eliminate.

Chapter 7, section 7.12.1 (Additional Procedures for Other Commodity Products), under Index Futures, sets out the cross-margin benefit with its 75% figure, the June 2021 circular date, and the same-index and first-three-expiring-contracts conditions. Expect a question on the maximum percentage offset (75%) and on which margin components remain payable in full despite the benefit (MTM loss and ELM).

• 75% is a ceiling, not a guaranteed offset — the actual benefit depends on back-tested adequacy and exchange/clearing corporation policy.
• MTM loss and ELM are never offset by cross-margining — only certain other margin components are reduced.
• The benefit applies at the client level only, never at the broker level — a broker cannot net different clients' offsetting positions against each other to claim this benefit.
• Eligible contracts must be in the same or nearest expiry month, and among the first three expiring contracts — a client holding a far-dated index future against a near-dated constituent future outside this window does not qualify.