ASSESSING THE ECONOMIC IMPACT OF CROSS MARGINING ON COMMODITIES FUTURES TRADE IN MCX INDIA

Abstract

The Securities and Exchange Board of India (SEBI) on June 29, 2021 decided to introduce cross margin benefit between commodity index futures and futures of its underlying constituents or its variants. The intent was to improve the efficiency of the use of the margin capital by market participants, which would ultimately reduce trading costs and increase the liquidity in both the Commodity Index futures and its underlying constituent futures or its variants.1 This was done after a long standing demand of a large section of market participants including the Multi Commodity Exchange (MCX), who believed that such a step would increase liquidity. Notably, SEBI was believed to be against allowing cross-margining prior to the June 29, 2021 notification owing to concerns that it would have increased risk in the commodity market. This arose due to the possibility of an imperfect hedge if a trader took opposing positions in an index and its underlying constituents.2 In this study, we attempt to empirically assess the economic impact of cross-margining on the commodity market activity and commodity market quality. This is essential to understand the efficacy of the current cross-margining system implemented, and to check whether the intended results were achieved or not. Cross-margining is considered to increase market liquidity, particularly increase in trading volumes in noted. Cross-margining is also particularly aimed to be used as a risk management tool during periods of high volatility. However, there is very little research about changes in price efficiency after allowing cross-margining.