The National Stock Exchange is all set to start the cross-margin facility across the cash and derivatives segments across all categories of market participants from Monday.

The cross-margining facility will allow the market participants to see their overall position as a basket of cash and derivatives positions as against the existing practice of treating the cash & derivatives positions separately.

Cross margining allows a market participant to reduce the total margin payment required. This method is mainly used by financial intermediaries to reduce their systematic risk.

For instance, suppose an investor has taken a short position on 600 shares of Company A through the futures market and wants to buy 1,000 shares of the same company through the cash market, he is then required to pay a margin on only 400 shares as there is already a corresponding offsetting position on the remaining 600 shares that he wants to purchase.

Until now, both the cash and futures market transactions were treated separately and margin had to be paid on the entire shares bought (in the above case 1,000).

However, market players are of the view that cross margining would take away even the cash market transactions on the Bombay Stock Exchange to NSE.

"With this facility why would a broker want to trade on BSE and incur extra costs as there is hardly any derivatives volume on BSE," said a Mumbai-based stock broker.

Both the stock exchanges have different clearing and settlement operations, and therefore a cash position on BSE cannot be offset against a futures position on NSE. Brokers also say that it would also be difficult for other new bourses to break NSE's monopoly as volumes would be hard to shift unless there is some great incentives on offer.

The Bombay Stock Exchange has been surving mainly due to bulk and block deals in the cash segment. However, the exchange would face severe crisis if the cash market volumes too shift to NSE.

At present, the margin risk in the derivatives segment is calculated using the standardised portfolio analysis of risk software, developed by the Chicago Mercantile Exchange.

The software uses a set of algorithms that helps assess one-day risk for a trader. However, during the bullrun, the cross-margining facility could prove to be most effective volume generator, say traders.