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Last Updated : Aug 13, 2020 06:06 PM IST | Source: Moneycontrol.com

Sebi rejects MCX, NCDEX demand for cross margin facility on commodity indices

A cross margin facility allows traders to hedge their positions at the same margin while taking opposite positions on indices

The Securities and Exchange Board of India (SEBI) has rejected Multi Commodity Exchange (MCX) and National Commodity Derivative Exchange (NCDEX) demand for a cross margin facility on commodity indices, sources told Moneycontrol. This facility allows traders to hedge their positions at the same margin while taking opposite positions on indices.

So, why is Sebi against the cross margin facility?

A source close to development told Moneycontrol, "The cross margin facility may increase risk in the commodity market. Assume that a trader is short in gold and silver, but with same margin he/she goes long on bullion indices. Though not a perfect hedge, it increases risk in the system as the weightage of gold and silver will be different in indices."

MCX and NCDEX have not responded to a query sent by Moneycontrol.

What’s at stake?

MCX is also planning to launch bullion indices on August 14. However, a source told Moneycontrol: "The exchange has postponed the launch of indices till August 24 given Sebi’s rejection of the cross margin facility."

Why are exchange demanding this facility?

"The cross margin facility may increase volumes in indices in the initial days itself. If cross margin is allowed, then indices may see liquidity in the short term as trader can hedge their positions without offering a separate margin. This method works as market maker for indices," a source at one of the exchanges mentioned above said.

Here what traders have to say?

A Mumbai-based broker feels Sebi is taking the right step by not allowing cross margin facility for indices. “As indices are not a perfect hedge for a commodity, the same margin may increase market risk.”

He cited a recent instance of the fall in silver prices by 25 percent but where the decline in gold was just 10 percent. “One, if Sebi had allowed cross margin facility, the risk would have increased significantly as the composition of indices might be not same as one’s position. Two, liquidity in indices will not be high initially. Three, if traders are not able to exit their positions due to surfeit of liquidity, it will only add to Sebi’s concerns," he explained.

But market veteran Chirag M Shah differs. "If the cross margin pertains to a long-short strategy, wherein the participant is long/short the index and takes a contra position in the underlying, then it should be allowed. The same is allowed in equities. It will be a good liquidity enhancement tool without increasing the systemic risk."
First Published on Aug 13, 2020 04:04 pm