How will the final settlement happen?
What happens to the Forward Netted position which does not pass the Exposure check in the USD/INR Segment?
Is CCIL liable for claims on forward trades that are not matured?
A. The pre-requisites for seeking Forex Forward Segment ( FFS) membership are :-
i. The applicant has to be a member of the CCIL’s Forex Settlement Segment.
ii. The applicant has to be a member of CCIL’s Securities Settlement Segment.
i. The applicant has to seek membership to the Forex Forward Segment on a specified membership form (To be Franked with applicable Stamp Duty) and;
ii. Submit Power of Attorney - one for blocking of SGF and another towards Default Fund to be executed on a Non-Judicial Stamp Paper (for value as applicable).
Collateral to meet the margin requirements in Forex Forward segment should be in the form of eligible Government of India Securities (as notified by CCIL) and INR cash. Collateral to cover 5% of the margin requirements shall be in the form of cash. The unutilized portion of collateral from the SGF of the Securities Segment is blocked towards margin requirement in this segment. Interest on Cash contribution is payable based on actual Cash utilised (in excess of Rs.1 crore) to meet margin requirements.
U S Dollar SGF contributed towards USD/INR segment will NOT be used for Forex Forward Segment.
Which trades are eligible for Forex Forward guaranteed settlement?
All Matched Forward trades are eligible for guarantee in the Forex Forward Segment subject to the trades passing through the following validations:
i. 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.
ii. Both the members to the trade should be the members of the Forex Forward segment.
iii. The Member should not be a defaulter in the Forex (USD/INR) Segment.
Matched Forward trades are subjected to exposure checks online for adequacy of margins for both the counterparties to the trades. Online exposure checks are run generally between 9 a.m. and 6.00 pm IST on all business days. Trades are accepted for guaranteed settlement if there are adequate margins in the account of both counterparties to the trade.
What are the different types of margins applicable for this segment?
Please refer to FAQs on Forex Forward under Risk Management
Final settlement of the trades happens through the USD/INR segment. On S-2 day, the net position of each member is computed for all underlying trades accepted for guaranteed settlement for the relevant settlement date. Such net position arising out of guaranteed trades is subjected to exposure check in the USD-INR segment. The netted position has CCIL as the Counterparty (Forex Forwards) and is accepted for settlement to the extent it passes the exposure check in USD-INR segment.
The net sale position (in USD or INR) of a member that fails to pass the exposure check in the USD-INR segment till 11:00 a.m. on the Settlement (S) day is liable for Cash Settlement (as per process notified).
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 to the original counterparty to the trade and treat the same as an exposure on CCIL. However, the members may maintain individual trades in the names of the counterparty for reference and reconciliation purposes.
Can a forward trade already accepted by CCIL be amended/cancelled?
Trades accepted for guaranteed settlement can be cancelled provided the cancellation is reported by both counterparties to the trade and subject to availability of sufficient margins. Amendment to matched trades is possible. Except counterparty and value date, all other details can be amended.
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.
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.
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:
i. Increase in margin requirement on account of mark-to-market changes in a member’s netted position.
ii. Increase in Initial Margin requirement.
iii. Increase in margin requirement on account of increase in volatility or concentration risks.
iv. Margin requirements going up on account of reduction of MTM gain available to the members.
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”. In case there is a shortage of margin for accepted trades, a 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 the member does not replenish 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.
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.
What is Default Fund and why is it necessary to constitute a separate Default Fund?
Default Fund is a separate Fund constituted in the forex forward segment with a view to meet 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). The minimum contribution of a member to the Default Fund shall be Rs.1 crore. The contribution may be in the form of Cash or eligible Government Securities.
What is the frequency for valuation of Quantum of Default fund? How can member track the same? Is the default fund contribution to both USDINR & FFS segment fungible?
The quantum of Default fund is valued on a monthly basis. The members can view the details of their default fund contribution in Default fund monthly/quarterly valuation report. This report is available under Risk management section of Forex Forward segment on the first working day of the month. The Default funds contributed by the members in USDINR & FFS segment are not fungible. Members may withdraw the funds from the account where there is excess and shall be required to contribute additional amount to the DF as determined, if there is a shortfall. Such contributions to the Default fund will be at the market value of the security and not the face value at the time of deposit.
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
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 is funded by members and Settlement Reserve Fund is funded from CCIL’s profits. The sequence of application will be as follows:
(i) defaulting member’s contributions to Default Fund;
(ii) pre-determined portion of CCIL's Settlement Reserve Fund;
(iii) other members ‘contributions to Default Fund.
Is CCIL liable for claims on forward trades that are not matured?
Trades are marked to market daily. If a member defaults on its margin contribution arising on account of incremental MTM, 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.
Is it mandatory for banks to settle Forward trades through CCIL’s Forex Forward Segment?
Yes, it is mandatory for all Authorised Dealer’s in India to clear all inter-bank forward trades through a CCP. This is in terms of FEDAI circular no. SPL-5/CCIL-FFGS/2014 dated 9th May, 2014.
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) Reduction in Counterparty risk through settlement guarantee and multilateral netting of exposures, freeing bilateral limits.
d) Significant reduction in capital requirement
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.