Cross margining
Also written Cross margin
Reduced margin on a client's positions in the cash and equity derivatives segments that offset each other, with only a spread margin of 25% to 40% of the normal margin charged.
In plain language
Suppose a client buys shares of a company in the cash market and sells the same company's futures. If the price falls, the shares lose but the futures gain. The combined risk is small, yet if each segment margins its own leg separately, the client pays full margin twice.
Cross margining fixes that. SEBI introduced cross margin across the cash and equity derivatives segments, available to all categories of market participants, so that positions which offset each other are margined together. Instead of full margin on both legs, the client pays a spread margin, a fraction of the total applicable margin.
How it works
Eligible offsetting positions (Chapter 4, section 4.1.2.1; SEBI circular of December 02, 2008)
a. Index futures and constituent stock futures (F&O) b. Index futures and constituent stock positions (cash) c. ETF and constituent stock futures (F&O) d. ETF and constituent stock positions (cash) e. Index futures and ETF (cash) f. Stock futures and the corresponding underlying stock (cash) g. Index futures on eligible equity index pairs h. Offsetting positions in highly correlated indices: correlation above 0.90; at least 80% of one index's constituents in the other; and the smaller index's constituents carry at least 80% weight in the larger index by free-float market cap.
A basket of constituents must be a complete replica of the index in the ratio set by the exchange/CC.
Spread margins
| Offsetting positions | Spread margin |
|---|---|
| Eligible positions, same expiry month (items a–f) | 25% of total applicable margin, levied in each segment |
| Correlated index futures, same expiry | 30% of applicable upfront margin |
| Correlated indices, different expiries | 40% |
| Index and its constituents, different expiry from the index | 35% (constituent futures must share one expiry) |
For different-expiry offsets, the benefit is revoked at the beginning of the expiry day of whichever leg expires first.
Mechanics. The benefit is available whether the same clearing member or different clearing members clear the client's cash and derivatives positions. It is computed at client level, online and in real time, and passed on through the TM/CM/custodian to the client. Institutional investors get it only after trade confirmation. Related: from November 30, 2022, stock derivative positions converted to delivery on expiry get margin benefit to the extent they offset cash-market obligations.
A worked example
Margin amounts are illustrative; the 25% spread margin is the workbook's.
Ravi buys 1,000 shares of a company in the cash segment and sells an equivalent 1,000-share stock futures position in the current month (eligible category f).
Without cross margining:
- Cash segment margin: Rs 1,50,000
- F&O segment margin: Rs 2,50,000
- Total: Rs 4,00,000
With cross margining, a spread margin of 25% is levied in each segment:
- Cash: 25% × Rs 1,50,000 = Rs 37,500
- F&O: 25% × Rs 2,50,000 = Rs 62,500
- Total: Rs 1,00,000
Ravi's margin falls by Rs 4,00,000 − Rs 1,00,000 = Rs 3,00,000. His broker must pass that benefit on to him, and the benefit is computed at client level in real time.
Why NISM asks about it
Chapter 4, section 4.1.2.1 (Types of Margins, derivatives) carries the eligible position list, the correlated-index criteria, the 25%, 30%, 35% and 40% spread margins and the revocation rule. The "Cross margining facility" also appears in the list of salient features of the clearing corporation risk management system in section 4.1. Expect questions pairing each type of offset with its spread margin, and on who gets the benefit (all participants; institutions only after confirmation).
Common exam traps
- 25% is for same-expiry eligible offsets; 30% for correlated index pairs; 35% index vs constituents with different expiry; 40% correlated indices with different expiry.
- The benefit is available even if different CMs clear the two segments.
- Stock futures and index futures legs must be in the same expiry month for the basic 25% benefit.
- Different-expiry benefit ends at the start of the first leg's expiry day, not at its close.
- Institutional investors get the benefit only after trade confirmation.
- A partial basket does not qualify. It must be a complete replica of the index.
Where this is taught
- Series VII · Chapter 4: Risk Managementintroduced here
- Series VIII · Chapter 7: Clearing, Settlement and Risk Managementintroduced here
Related terms
- Calendar spread chargeThe reduced margin on offsetting positions in the same underlying across different expiries: 1.75% of the far-month contract for index derivatives, 2.2% for single stock derivatives.
- Net Settlement of cash and F&OSEBI's mechanism, from November 30, 2022, of netting cash-segment obligations with physical-settlement obligations of expiring stock derivatives into one settlement.
- SPANThe scenario-based system clearing corporations use to compute initial margin — it revalues a client's whole derivatives portfolio under sixteen what-if scenarios and charges the worst loss.
- Initial marginThe deposit both the buyer and the seller of a futures contract must place before the position is accepted, sized to cover a 99% worst-case one-day loss on that position.
- Cross margin benefitA margin offset of up to 75% for a client holding opposite positions in index futures and futures on that index's own constituents, similar to the crush margin benefit, allowed by SEBI's circular of 29 June 2021.
- Ban periodThe state a derivative security enters once its market-wide Open Interest exceeds 95% of the Market Wide Position Limit, during which members and clients may only trade to reduce their positions.
- Value at Risk (VaR) marginThe cash-market margin set as a multiple of a stock's volatility and expressed as a percentage of its price, so more volatile shares need a bigger upfront deposit; rates update at least five times a day.