The risk management process relating to forex settlement operation stipulates fixing of Net Debit Cap (NDC) for each member. NDC for a member is arrived at based on two factors: the Counter-party Risk Assessment (CPRA) grading for the member given by a reputed credit rating agency and net-worth of such member. Net Debit Cap is the maximum limit upto which CCIL can take exposure on a member for a settlement date in terms of net US Dollar sale position. Based on the CPRA grading of the member, margin factor applicable for the member is also arrived at. Contribution of a member to Settlement Guarantee Fund (SGF) is in US Dollar and is equal to margin factor percentage of NDC for such member.

Member are required to contribute to the Settlement Guarantee Fund (SGF) in US Dollar and based on their contribution, Exposure Limit (EL) is computed using the formula EL=SGF balance / Margin Factor, maximum value = NDC . Trades concluded by a member are accepted for settlement only as long as the Exposure Limit is not breached, i.e., the net US Dollar sale obligation of the member for the settlement date is not above the Exposure Limit for the member.

For covering its liquidity risk, CCIL has Lines of Credit (LOC) in place from its overseas settlement bank. CCIL draws against the LOC in case a member fails to deliver its currency obligation to CCIL on the settlement date. Collaterals required to be furnished to the Settlement Bank for availing of such credit facilities is furnished out of the contributions made by the members to the SGF.

CCIL retains the right to withhold INR pay-out, if any, to the member for the business day(s) subsequent to the day of any default in respect of trades already accepted for settlement. In case of a Rupee default, CCIL does not release Dollar amount payable to the concerned member till the Rupee amount is received on the next day. Moreover, CCIL has right to sell the available US Dollars to meet such Rupee shortfall. In case of any Dollar default by any member, CCIL has a recourse to the defaulting member’s rupee account with RBI in terms of a mandate executed by the members in this regard. In case of any residual shortfall, CCIL has a right appropriate margin collected from such member and then allocate the residual loss through Loss Allocation Mechanism.

As per Loss Allocation Mechanism of CCIL, any loss arising out of a default by a member is to be apportioned, net of margin amount recovered from the concerned member, to the members having done trade with the defaulting member for the settlement on the day of default and having net buy position in the currency of default. The loss is apportioned in the ratio of their respective net buy positions in the currency of default.

It may be appreciated by the members that due to the existence of loss allocation mechanism, CCIL’s guarantee to the members for their USD/Rupee trades do not result in CCIL’s acceptance of counter-party exposure entirely. In the event of a default, if the amount recovered from the defaulter members is not adequate, a member may suffer some loss due to a default by its bilateral counterparty. The loss, however, is usually substantially reduced and potential maximum loss would be restricted only to the member’s net exposure on such counterparty for the settlement date on which the default has occurred.