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Home > FAQ > Risk Management > Securities Settlement

What is the initial margin?

What is the mark to market margin?

What are the Margin Factors?

How is the exposure verification done?

How is margining done for repo trades?

What is CCIL’s Value at Risk methodology?

Can I get an idea about my initial margin requirement?

Can I get an idea about Mark to Market margin requirement?

What is Incremental MTM Margin?

Whether the deals beyond the exposure limit are accepted?

What is Settlement Guarantee Fund?

What are eligible securities (for contribution into SGF)?

Can a security deposited by a member into its SGF be withdrawn?

What is CCIL’s Valuation Methodology for valuing Government Securities?

What is the initial margin?

Initial Margin constitutes the margin obligation required to be fulfilled by a member as his contribution to SGF in relation to his outstanding trades so as to provide cover to the Clearing Corporation in regard to the likely risk from the future adverse movement of prices of the securities.

What is the mark to market margin?

Mark to Market Margin constitutes the margin obligation required to be fulfilled by a member to cover the notional loss (i.e. the difference between the current market price and the contract price of the security) in respect of those outstanding trades which attract MTM margin.

What are the Margin Factors?

Margin Factors are the numbers expressed security-wise in percentage terms. These factors are used to determine Initial Margin requirement for the trades to be accepted for guaranteed settlement by CCIL. [Initial margin for a trade is computed by multiplying the total consideration for the trade by the Margin Factor applicable for the concerned security]. Margin Factors are arrived at security-wise based on Value at Risk for three day holding period (at 99% confidence level) for such securities.

How is the exposure verification done?

The exposure verification for a member is done on the following basis :
1.Outstanding trades at the time of exposure check are segregated and the trade considerations are totalled security wise and settlement date wise by allowing netting between buys and sales. During the process of netting, trading loss incurred by a member, if any, is arrived at using FIFO principle and the loss, if any, is captured as Initial Margin. Profits on such netting are ignored.
2.Each security wise settlement date wise total is multiplied by the margin factor applicable for the respective security to arrive at the margin requirement for the trades in the security due for settlement on such settlement day.
3.The security wise settlement date-wise margins are then summed up to find out the total initial margin requirement of a member.
4.Initial Margin is computed based on deal consideration till the trade is subjected to MTM margin. Thereafter, the computation is based on the value of the trade at MTM price.
5.Mark to Market margin (MTM margin) is applicable for the outstanding trades as at the end of the day and is applied at the end of the day (i.e. at the time of End of the Day Risk Valuation). While normally there is no change in MTM margin liability of a member during the day, in case any trade received from a member is at a price which is considered as outlier, CCIL may impose Additional Initial Margin for the trade at the time of acceptance of such trade.
6.The total of Initial Margin, MTM Margin and Volatility Margin requirement in respect of the outstanding trades of a member is compared with the SGF contribution available for the member. If the total of the required margins is less than the member’s SGF contribution, then the member is within his exposure limit. On the other hand, if the total is more than the SGF contribution, then the member has exceeded his exposure limit.

How is margining done for repo trades?

As in case of other trades, Initial Margin on a repo trade based on a security is computed by multiplying the Total Consideration by the Margin Factor applicable for the concerned security. The First Leg of the repo trade is considered for margining till it is settled. After settlement of the first leg, the second leg is considered for margining.

An offset in margin is provided between two repo trades in opposite direction i.e. buy against sell or vice-versa, when the trades are based on the same security and have same settlement dates for both legs of the trades. No offset is allowed between the first leg of a repo trade and an outright trade whereas such offset is allowed between the second leg of the trade and an outright trade based on the same security and for the same settlement date.

No MTM margin is charged on 1st leg of Repo trades unless the trade has been identified as having done at an off market price. MTM Margin on second leg of repo trade, if any, is treated as payable at the end of the day of settlement of the first leg itself (i.e. not considered as part of Incremental MTM margin).

What is CCIL’s Value at Risk methodology?

Value at Risk (VaR) is computed security-wise using historical simulation method. For computing VaR, Nelson Siegel Zero Coupon Yield Curve data for the past 1000 days are used. CCIL may set the VaR for illiquid securities by adding appropriate illiquidity weights to such numbers.

Can I get an idea about my initial margin requirement?

The requirements for initial margin vary significantly depending on the nature of securities traded. It depends on the residual maturities of the traded security and is usually higher for securities having higher residual maturity. To assist the members to find out their margin requirement for their trades in Government Securities and also to do ‘what if’ analysis regarding margin requirement and SGF contribution, CCIL has developed a software, CCIL Margin Calculator, which can help members to compute their Initial Margin and Mark to Market margin requirements. This software can be downloaded by the members from CCIL Report server.

Can I get an idea about Mark to Market margin requirement?

Outright trades falling due for settlement beyond T+0 day and Repo trades would attract Mark to Market margin (MTM Margin). This type of margin is computed only for the members holding adverse positions (i.e. notional loss positions) and is computed for security-wise settlement date-wise group of trades. No credit is allowed for such group-wise positions having notional gains for the same member. Amount of MTM Margin therefore depends on the actual change in market price of the concerned security(ies).

What is Incremental MTM Margin?

Incremental MTM Margin is the sum of MTM Margin applicable on the new trades received during the day and the increase in MTM Margin during the day in respect of the trades carried over from the previous day. However, MTM Margin representing loss arrived at during the time of netting of trades, Additional Initial Margin collected on trades done at off-market prices and MTM Margin on 2nd leg of Repo trades do not qualify for being treated as Incremental MTM Margin. Incremental MTM Margin is payable by the member by a cut-off time on the next day. The cut-off time presently is 12.30 P.M. for week days and 11.30 A.M. for Saturdays.

Whether the deals beyond the exposure limit are accepted?

At present, trades that fall beyond concerned members’ risk exposure limits are accepted without guarantee (vis-à-vis such members) for settlement by the Clearing Corporation. Trades once accepted without guarantee would qualify for guaranteed settlement only upon receipt of additional contributions to the concerned member’s SGF to cover the shortfall at the time of breach in exposure limit. The members can make intra-day deposit of cash and securities into their Settlement Guarantee Fund towards expected intra-day margin shortfall which are accounted for provisionally on the basis of Notice of Deposits received by CCIL from the members. The securities are valued based on CCIL’s Mark to Market (MTM) price of the previous day, after accounting for haircut.

What is Settlement Guarantee Fund?

Settlement Guarantee Fund is a fund to which contributions are made by the members to meet the margin requirements. The members’ contribution to the Funds are in the form of cash and securities with cash being not less than 10% of the total margin requirement.

What are eligible securities (for contribution into SGF)?

Eligible Securities are Central Government Securities and Treasury Bills listed as such by CCIL through notification. CCIL accepts deposits into SGF from the members. These listed securities are usually liquid securities and the list is reviewed periodically. Inclusion or exclusion of any security from the list is notified to the members. On exclusion of a security from the list, a member having deposits in such security is expected to withdraw from SGF such security before the announced dated of exclusion; else, the value of the holding in the security is treated as nil.

Can a security deposited by a member into its SGF be withdrawn?

Any security deposited by a member can be withdrawn after giving notice as required as per CCIL Regulations for the Securities Segment, as long as the value of the remaining balance in its SGF is adequate to take care of its margin requirement.

What is CCIL’s Valuation Methodology for valuing Government Securities?

CCIL’s valuation methodology gives primacy to the traded prices. As such, if there are trades in a particular security, weighted average price (of last five trades) for such security is taken as MTM price for the security. In case there is no trade in such security on subsequent dates, such price is normally repeated for next six working days. If there is no trade in the security even after six days, CCIL Model price for the security is taken as MTM price. CCIL model prices for all securities are worked out at the end of every working day based on Zero Coupon Yield Curve generated from the data on trades in Government Securities done by market participants during the day. Adjustment may be made for liquidity / illiquidity premium / discount.

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