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CCIL’s risk exposure in the CBLO Segment emanates mainly on
two counts-:
a) Risk of failure by a lender to meet its obligations to make funds available
or by a borrower to accept funds by providing adequate CBLO/security at the
settlement of the original trade of buying or selling CBLOs.
b) Risk of default by a borrower in repayment of a CBLO on its maturity
As the repayment of borrowing under CBLO Segment is guaranteed by CCIL, it
should have enough security to meet any eventuality of a default by the
borrower. To take care of this risk, all borrowings are fully collateralised.
This process is managed through setting up of Borrowing Limits for the members
against their deposits of Government Securities as collaterals. These
collaterals are subjected to hair-cuts and are revalued on a daily basis. Any
shortfall in the value of collaterals (to cover outstanding borrowings) is
collected through the end of the day margin calls.
CCIL may be exposed to risks due to a member not honouring its obligation from
a trade done during the day. A member may undertake to either lend or borrow
but may fail to honour such an obligation at the time of settlement. If the
rates have moved adversely in the mean-time, the non-defaulter member needs to
be compensated for the loss suffered. As CCIL extends guarantee for settlement
of all CBLO transactions, to ensure that this risk is adequately taken care of,
CCIL collects Initial Margin from the members in respect of their deals for
buying and selling CBLOs. As the risk on any such deal continues up to the
settlement of the deal, Initial Margin collected on deals is released only on
settlement of such deals.
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