| 1. |
What are the pre-requisites and the process for seeking CCILs Forex Forward Segment (FFS) membership?
A. The pre-requisites for seeking Forex Forward Segment ( FFS) membership are :-
i. The applicant has to be a member of the CCILs Forex Settlement Segment.
ii. The applicant has to be a member of CCILs Securities Segment.
B. Process:
i. The applicant has to seek membership for Forex Forward Segment. on a specified membership form (To be Franked with Rs 300/- Stamp Duty ) and;
ii. Submit a Power of Attorney (to be executed on a Non-Judicial Stamp Paper of Rs.100/- issued in the name of Member not before six months from the date of execution.) The Power of Attorney has to be submitted along with acknowledged copy post approval of Membership by CCIL.
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| 2. |
What is the form of collateral required for this Segment?
The collateral should be in the form of Government securities and cash to meet the margin requirements of this segment. The Cash component has to be atleast 5% of the total margin requirement. The unutilized portion of collateral from the SGF of the Securities Segment would be blocked towards margins. Interest would be payable towards Cash contributions based on actual Cash utilization in excess of Rs.1 crore.
Dollar margins contributed towards USD/INR segment will NOT be used for Forex Forward Segment
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| 3. |
Which trades are eligible for Forex Forward guaranteed settlement?
All the Matched Forward trades are eligible for guarantee in the Forex Forward Segment subject to the trades passing through the following validations:
- " The matched forward trades should have a residual maturity up to 13 months. Trades with maturity of more than 13 months would be taken up for guaranteed settlement when the residual maturity comes down to 13 months.
- Both the members to the trade should be the members of the Forex Forward segment.
- The Member should not be a defaulter in the Forex (USD/INR & FFS) Segment.
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| 4. |
From what point the Forward trade will be guaranteed for Settlement?
A matched trade would be taken up for guaranteed settlement on the day of such matching if there are adequate margins in the account of both counterparties to the trade.
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| 5. |
What are the different types of margins applicable for this segment?
Please refer to the document endorsed:
Click Here
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| 6. |
How will the final settlement happen?
Final settlement of the trades would continue to happen through the existing USD/INR segment. On S-2 day, the net position of each member will be computed for all underlying trades accepted for guaranteed settlement for the relevant settlement date. Such net position arising out of guaranteed trades will be subjected to exposure check for margin adequacy in the USD-INR segment. The netted position would have CCIL as the Counterparty (Forex Forwards) and shall be accepted for settlement to the extent it passes the exposure check in USD-INR segment.
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| 7. |
What happens to the Forward Netted position which does not pass the Exposure check in the USD/INR Segment?
a) The net US Dollar sale position of a member that fails to pass the exposure check in the USD-INR segment on S-2 day will remain as "Pending Exposure".
b) Pending positions will be progressively reduced till the morning of Settlement (S) day based on subsequent buy trades of the concerned member accepted for settlement (including I/O Swap trade) and based on limit enhancement against pre-funding, by the concerned member, if any.
c) If, after the Early Morning batch on Settlement day, the Member that has breached its limit continues to have forward position pending acceptance, such position in excess will be cash settled.
d) For cash settlement, choice of allocatee members would be based on their net US Dollar buy position as on S-2 day arising out of forward trades accepted for the settlement day under consideration. Top 10 Members having the largest Buy position would be selected. On S-1 day, a notice of Cash settlement to Member (s) whose limit has been breached and to those members to whom such allocation may be made is issued. The amount allocated to each such member would be in relation to the amount to be allocated and the net buy position of such member.
e) The trades created for Cash settlement would have CCIL as the Counterparty. The rate to be used for such cash settlement would be the CCIL polled cash rates plus 1 paisa compensation. The members to whom such Allocation has been done can cover their positions and report cover trades to CCIL before the Cut-off Batch on S day, informing CCIL of the rate at which the cover deal has been done. CCIL would change the exchange rate of the Cash allocated trade to the exchange rate as indicated by the member adding a compensation of 1 paisa to the advised rate subject to matching of the reported cover deal in CCILs systems.
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| 8. |
How likely is it that cash settlement will have to take place?
It is very unlikely that there will be a need to effect cash settlement as there are mechanisms in place to ensure that a member will not end up with insufficient exposure limit in the Forex Settlement Segment to cover its net USD sell position in the Forex Forward Segment.
As long as a member has a net USD sell position in the Forex Forward Segment pending exposure check, no other USD sell deal (spot, tom, cash, or even forwards with non-Forex Forward Segment members) will be accepted in the Forex Settlement Segment - priority is given to the net USD sell position from the Forex Forward Segment. CCIL also has notified procedures in place for accepting requests for increase in exposure limits in the Forex Settlement Segment on a pre-funded basis. The additional 1 paise compensation imposed on cash settlement in the Forex Forward Segment also acts as a deterrent to incentiize a member to ensure that it has sufficient exposure limit in the Forex Settlement Segment to cover its net USD sell position in the Forex Forward Segment.
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| 9. |
Whether on acceptance of a trade by CCIL, should banks replace the original counterparty to the trade with CCIL?
CCIL accepts Forward trades for Guaranteed Settlement. Members can view it as a reduction in their bilateral exposure between them and treat the same as an exposure on CCIL. However, the members may be required to maintain individual trades in the names of the counterparty for reference and reconciliation purposes. Hence it is suggested that CCIL could be made as Counterparty with sub account stating the name of original counter Member.
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| 10. |
Are each Member’s trades with CCIL that are accepted for guaranteed settlement Netted, as of the relevant acceptance date, for purposes of exposure monitoring, margining and settlement in the Forex Settlement Segment?
Yes, each Member’s trades with CCIL that are accepted for guaranteed settlement are netted, as of the relevant acceptance date for the purpose of exposure monitoring, margining and settlement in the Forex Settlement Segment. Accordingly, each member will only have a net long or short forward position with CCIL for each settlement date.
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| 11. |
Is a forward trade which passes the exposure check and is accepted for guaranteed settlement in the Forex Forward Segment legally novated to CCIL?
A forward trade which passes the exposure check and is accepted for guaranteed settlement in the Forex Forward Segment is legally novated to CCIL, i.e., the original bilateral forward trade between the two parties (say Member A buys USD/sells INR with Member B) is terminated and replaced by two trades, one between Member A and CCIL where Member A buys USD/sells INR, and the other between Member B and CCIL where Member B sells USD/buys INR.. The legal novation occurs at the point in time when the trade is accepted for guaranteed settlement by CCIL.
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| 12. |
Under what circumstances does a margin call occur in the Forex Forward Segment?
The margin call occurs in the Forex Forward Segment under the following circumstances:
a) Increase in margin requirement on account of mark-to-market changes in a members netted position.
b) Increase in Initial Margin requirement.
c) Increase in margin requirement on account of increase in volatility or concentration risks.
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| 13. |
What happens when a member has insufficient margin and/or fails to top-up their margin in the Forex Forward Segment?
If a member has insufficient margin to support the acceptance of a trade for guaranteed settlement in the Forex Forward Segment then the trade will not be accepted and will be kept as “pending exposure”. Margin Call will be made to the member to replenish the margin within the cut-off time as notified by CCIL from time to time. If a member does not replenish on margin call to support its netted positions with CCIL then CCIL shall resort to close-out.
If a member defaults on its margin obligations in the Forex Forward Segment, an assessment is made by CCIL with regard to the member’s trade positions that can continue to remain accepted for settlement on a net basis with the existing margin contributed by that member. CCIL determines which of the net USD positions for each settlement date are to be closed-out. The net USD positions which CCIL decides to close-out are closed-out on a pro rata basis with the defaulting member’s original bilateral counterparties that have a bilateral net position with such member opposite to that of the net USD positions for the same settlement date to be closed-out. The close-out trades take place at the current market rate.
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| 14. |
What happens if a defaulting member has positions in both the Forex Forward Segment and the Forex Settlement Segment at the time of its default?
The defaulting member’s positions in each Segment will be dealt with in accordance with the default rules of the respective Segment in which the positions are in.
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| 15. |
What is Default Fund and why is it necessary to constitute a separate Default Fund?
Default Fund would be a separate Fund constituted in the forex forward segment with a view to meeting any residual risk arising out of a default by the members in discharging their margin obligations. The contribution by individual Members to Default Fund will be based on their turnover (50% weight) and Initial Margin requirements (50% weight) and the contributions shall be treated in bank’s book as “Other Assets” The minimum contribution of a member to the Default Fund shall be Rs.1 crore. The contribution would be in the form of Cash or eligible Government Securities.
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| 16. |
What happens when a member of the Forex Forward Segment is insolvent?
If a member of the Forex Forward Segment is insolvent, all trades of the insolvent member are closed-out individually with their original counterparties at the current market rate.
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| 17. |
What happens if a defaulting member’s margins are insufficient?
If a defaulting member’s margins are insufficient, recourse will be to the Default Fund and the Settlement Reserve Fund. The Default Fund will be funded by members. The Settlement Reserve Fund will be funded from CCIL’s profits. The sequence of application will be as follows:
(i) defaulting member’s contributions to Default Fund;
(ii) portion of CCILs Settlement Reserve Fund;
(iii) other members’ contributions to Default Fund.
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| 18. |
Is CCIL liable for claims on forward trades that are not matured?
Trades are marked to market daily. If a member defaults, CCIL will square off the positions of the concerned member against its bi-lateral counterparties at the current MTM. The defaulting member will be liable for loss, if any, arising on such squaring off. The non-defaulting member will be reimbursed to the extent of MTM gains vis-à-vis the defaulting member up to the date of default.
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| 19. |
When banks have Credit Support Agreement (CSA) with counterparties, how would the Forex Forward Guaranteed settlement accommodate?
CSA proceeds on the basis of bilateral netting whereas settlement through CCIL is on a multilateral net basis. Multilateral netting offered by a Central Counterparty (CCIL) reduces the Counterparty exposure across all counterparties resulting in reducing the Gross exposure of the members to single net Exposure on the CCIL. It would be hugely beneficial for members to opt for settlement through CCIL rather than have a CSA arrangement with bilateral counterparties. With regulatory concessions on capital adequacy in place, it would help members to post collateral towards CCIL rather than have a CSA arrangement.
Essentially through the arrangement with CCIL, the bank substitutes one high quality Counterparty (the CCP) for many, potentially lower quality, bilateral counterparties, and more importantly, reduce risk by netting exposures to that single (central) Counterparty, thus reducing the market-wide requirements for collateralization (when compared to a bilateral market). Further, under bilateral arrangements, there could be a time lag between market moves and posting of collateral, leading to over or under-collateralization. CCP clearing is a lower risk method of mitigating counterparty risk.
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| 20. |
Does RBI’s Notice No RBI/2008-09/485 dated 26 May 2009 on Capital Adequacy Norms for Banks’ Exposures to Central Counterparties (CCPs) apply to the Forex Forward Segment?
Yes, RBI’s circular No RBI/2008-09/485 dated 26 May 2009 on Capital Adequacy Norms for Banks’ Exposures to Central Counterparties (CCPs) on account of derivatives outstanding against the CCPs will be applicable to the Forex Forward Segment. Accordingly, a member whose forward trades have been accepted for guaranteed settlement by CCIL can assign a risk weight of zero to its exposure on CCIL in respect of such accepted forward trades.
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| 21. |
What are the advantages of Forex Forward Guaranteed Settlement?
a) Guarantee from the point of Acceptance.
b) Increase in effective capacity, volume and liquidity of the marketplace due to guaranteed settlement by CCIL.
c) Mitigate Counterparty risk and facilitate multilateral netting of exposures, freeing bilateral limits.
d) Significant reduction in capital requirement as the exposure on CCIL carries zero risk weight as per RBI notification. However the margins posted with CCIL carry 20% risk weight.
e) Transparent and reliable valuation of outstanding positions for the market participants – centralized mark-to-market and collateralization reduces back office and legal effort and costs.
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