Cross Margin

Cross Margin is a trading choice that allows traders to utilize margin balances across their different positions. Under this arrangement, the equity or profit that becomes excess in margin requirement is used to cover another margin deficiency. In other words, it is used to offset loss from another position.

One of the main benefits of the arrangement is that, in certain situations, it helps in preventing forced liquidation and preventing margin calls of a losing position. The feature helps reduce and optimize existing margin requirements for traders with multiple open positions. It is a tool to make smart investment choices and increase an investor's trading capacity.

Let us look into some examples to understand the concept better.

Example #1 - A Hypothetical Example 

Imagine a trader. Let's call him Dan.

Suppose a trader has a long position in commodity A and a short position in commodity B, and the exchange allows cross-margining. 

If such an option is available, then Dan could use his available balance to keep collateral common for both commodities. This way, if he incurs a loss in one, he could leverage it for another. This way, he can prevent loss and make use of the available capital efficiently.

Example #2 - Real Life Example

The CME (Chicago Mercantile Exchange) group, the world's leading platform for derivatives, has announced cross margining arrangement with the DTCC (the Depository Trust and Clearing Corporation). The new arrangement is expected to bring in more trading and cost efficiency. It is available to the eligible clearing members of GSD (government securities division of DTCC's FICC (fixed income Clearing Corporation) for both cash and futures.

Given below are some of the benefits offered by cross margin trading.

• It raises liquidity and lowers net settlements. 
• It helps in risk management by using the full account amount for collateral purposes and can help restrict individual holdings from premature liquidation.
• It brings in chances of gaining a higher return owning to greater leverage.
• Cross-margin trading is used as a hedging method to prevent risks. 

Given below are some of the points of differences between both concepts 

Concept

• It is a process of using excess margin from a trader's account to be moved to another to maintain margin requirements.
• Isolated margins are those margins that are assigned to a particular position that is restricted by certain amounts.  

Liquidation

• The main idea here is to use the available balances in a trader's account to be used as collateral as a means of preventing liquidation. Hence, the chances of it being liquidated are less.

Suitability 

• Cross margining is better suited for experienced or institutional traders for hedging.
• Isolated margin method is useful for beginners in trading to limit their losses. 
• Under isolated margin trading, the position is automatically liquidated when the allocated margin drops below the profit or loss margin requirement and is left unrealized. 

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