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SEBI reviews norms for calculating ETF margins

To bring efficiency in margining of index ETFs, the VaR margin computation for ETFs—that track an index—shall be computed as higher of 5% or three times sigma of the ETF

September 27, 2012 4:12 IST | India Infoline News Service
To bring in more efficiency in computing margins of exchange traded funds (ETFs), SEBI (Securities and Exchange Board of India) has changed the method of calculation. For calculating margins on ETFs, they are treated at par with stocks and margins that are applicable on stocks are applied.

ETFs are index funds listed and traded on exchanges like stocks. To bring efficiency in margining of index ETFs, the VaR (Value at Risk) margin computation for ETFs—that track an index—shall be computed as higher of 5% or three times sigma of the ETF.
Generally, VaR helps to understand the risks related to an investment portfolio. The revised margin framework is applicable to ETFs that tracks broad based market indices and does not include ETFs which track sectoral indices. 

 To facilitate efficient use of margin capital by market participants, the cross margining facility would be extended to ETFs based on equity index and its constituent stocks for off-setting positions in cash market segment.

The facility would be for ETFs and constituent stocks, ETFs and constituent stocks futures besides ETFs and relevant Index Futures. In all the three cases, it would be applicable to the extent of offsetting the positions of each other.

In the event of a suspension on creation/redemption of the ETF units, the cross-margining benefit would be withdrawn, the circular noted.

SEBI has asked all stock exchanges to take necessary steps for implementing the revised framework. The regulator has also advised Stock Exchanges take necessary steps and put in place necessary systems for implementation of the above methods. It has also advised stock exchanges to make necessary amendments to the relevant bye-laws, rules and regulations for the implementation of the above decision.

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