18:16 Nov 15, 2018
CCILCCIL > FAQ > Risk Management > Forex Settlement

      

1

What is Net Debit Cap (NDC)?

2

What is Margin Factor?

3

What is Settlement Guarantee Fund (SGF)?

4

What is Exposure Limit (EL)?

 

5

What are the types of Margins collected in Forex Segment?

6

What is Additional Initial Margin and how is it computed?

 

7

What is MTM margin and how is MTM Margin computed?

 

8

What is Incremental MTM margin?

 

9

How is Intra-day MTM Margin applied?

 

10

What is Volatility margin and when it is applicable?

 

11

What are Replenishment and Rejection levels?

 

12

What is Margin Credit?

 

13

How is Exposure check Done?

14

What is Temporary Enhancement to NDC?

 

15

Is there any impact of shortage in member’s account on Exposure Limits for such member?

16

What happens when position with MTM gain are settled?

 

17

How margining and acceptance of online trades from Fx- clear and Fx-Swap trading platform take place?

 

18

What is Single Order Limit?

 

19

What is Default Fund?

 

20

How is Default fund Size/Quantum arrived?

 

21

How is a member’s contribution to default fund determined?

 

22

When are the margins released?

 

 


 

1.

What is Net Debit Cap (NDC)?

 

Net Debit Cap (NDC) is a limit up to which CCIL can take exposure on a member in terms of net US Dollar sale position of such member. NDC - INR is a limit up to which CCIL can take exposure on a member in terms of net INR sale position of such member. NDC is fixed settlement date-wise and is fixed on the basis of certain parameters such as Short-term credit ratings for the Member, as determined by an independent credit rating agency, Tier-I capital etc. 

2. What is Margin Factor? 

Margin Factor is derived from the Market risk factor which is same for all members and set at 3 times of the Value-at-Risk for Rupee-US Dollar exchange rate (to take care of the market risk component for positions for 3 settlement days for which trade acceptance happens simultaneously). The margin factor will be stepped up by a step-up factor, which is arrived at on the basis of the member’s Short-term credit ratings as determined by an independent credit rating agency.
 

3.

What is Settlement Guarantee Fund (SGF)?

Members are required to contribute collateral to the Settlement Guarantee Fund in accordance with the processes laid down by CCIL from time to time. The SGF contribution for this segment is payable in US Dollar funds. Amount deposited by a member in SGF determines the Exposure Limit allowed to it by CCIL. CCIL invests these funds in short term US Government securities or keeps these as deposits with Settlement Bank or other overseas banks in terms of its investment policy.

 

4.

What is Exposure Limit (EL)?

Exposure Limit for a currency is the maximum limit up to which CCIL can take exposure on the member in terms of net sale position in the currency by such member for a settlement date. Exposure limit is computed from SGF contributed by the member and the Margin Factor allotted (including step-up is any) using the formula EL = SGF/Margin Factor % subject to the EL not exceeding the NDC in the respective currency. However, if a member has opted for a lower Exposure Limit, such lower amount would be the ceiling.  A member is not allowed to run a net Sold Position in any currency in excess of this Exposure Limit for the currency on any given settlement date, unless it has been allowed temporary enhancement to its NDC as per the process described hereunder or unless member has availed higher Exposure Limit for TOM and SPOT dates.

 

Amount deposited in USD by a member in its SGF account to support the Exposure Limit availed by it is now being treated as ‘Initial Margin’.   

 

Availing higher Exposure Limit (EL)

 

A member with higher credit rating may choose to avail higher limits up to specified ceilings for days other than the cash date in the Spot Window. The permissible higher limits will be derived as under:

 

Category of Members 

On S -2 Day

On S -1 Day

On S Day 

For Members with CCIL 1 & 2 ratings  

 3 times EL

2 times EL 

EL

For Members with CCIL 3 & 4 ratings 

2 times EL 

2 times EL

EL

For Members with CCIL 5 & 6 ratings 

2 times EL

EL 

EL

For Members with CCIL 7 & 8 ratings 

EL

EL

EL

 

 

A member desirous of availing such higher limit will be required to request Clearing Corporation to permit utilisation of such higher limit. Clearing Corporation may approve such request subject to the member agreeing to adhere to the requirements stipulated in this regard.

5.

What are the types of Margins collected in Forex Segment?

Initial Margin in the form of USD collateral is deposited by a member to support the exposure limits availed at by it in this segment. Apart from this, CCIL may impose Additional Initial Margin, MTM Margin and Volatility Margin on a member’s outstanding trades’ portfolio.

 

6.

What is Additional Initial Margin and how is it computed?

i.       Members who seek higher Exposure Limits as above shall be able to avail such higher limits on providing additional initial margin over and above the initial margin made available by them to avail Exposure Limits. 

ii.        Members having positions in excess of the Exposure Limits in any currency on account of trades done in FX-Clear and/or FX-SWAP Dealing Systems shall also be required to deposit Additional Initial Margin.

iii.       Initial margin obligation for members who have limit utilisations in excess of the EL shall be computed by multiplying the applicable net exposure of the member in the spot window by 1/3rd of the margin factor (including any step-up) applicable for the member for the spot date. The applicable net exposure for this purpose shall be higher of:

       a.     the net USD exposure for all the days in the Spot Window and

       b.      the net USD exposure in the Spot Window after excluding such exposure on Cash Date.

 

      The margin obligation as above in excess of the Initial Margin for the exposure limits availed by the member above will be treated as Additional Initial Margin.

7.

How is MTM Margin computed?

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 value of the outstanding trades at the current market price and the value of the same portfolio at the contract price) in its trade portfolio.

 

MTM margin is computed on settlement date wise net position using USD/INR exchange rates. If the net of MTM values for a settlement date shows loss, then same is collected as MTM margin and if it shows gain then the same is allowed as MTM credit for the member provided the member has opted for such gain. For members who have not opted for such gains, no such MTM credit will be allowed.

 

If the trade is an outlier, or the trade date is not same as the date of trade acceptance or if the trade results in trading loss for the member, MTM margin for such trades is collected at the point of trade acceptance. All other trades are subject to MTM margin requirement at the end of the day and also during intra-day on certain pre-specified times as notified.   

 

8.

What is Incremental MTM margin?

 

Increase in MTM Margin on a day over the MTM margin on the previous day is termed as Incremental MTM margin. MTM margin is re-computed at the time of end of the day risk valuation and becomes payable on the next day before the specified time. 

 

9.

How is Intra-day MTM Margin applied?

 

MTM Margin on forex trades is computed on daily basis at a specified time using intra-day MTM rates. In case there is an increase in MTM margin beyond a threshold as notified from time to time, additional margin is collected as intra-day MTM margin.

 

10.

What is Volatility margin and when it is applicable? 

 

In case of sudden increase in volatility in USD/INR exchange rates, Volatility Margin is imposed by Clearing Corporation through issue of specific notification. Imposition of volatility margin would effectively amount to a corresponding increase in the Margin Factor and would result in reduction of Exposure Limit of the members.

 

Volatility margin is imposed if any of the following conditions is satisfied:

1.    One day exchange rate fluctuation >= Market Risk component of Margin Factor. (or)

2.  Three day exchange rate fluctuation on cumulative positions of Cash/Tom/Spot date is >= sum of Market Risk components of Margin factor for all the three days in spot window.

 

 

11.

What are Replenishment and Rejection levels? 

 

Members are required to replenish margins when the utilisation of available margin has reached such percentage as notified from time to time. This level is termed as replenishment level.

 

Rejection level is such percentage of utilization of available margin, beyond which CCIL would not accept any new trade for guaranteed settlement.

 

12.

What is Margin Credit? 

 

If the net of MTM values for all settlement dates is positive (i.e. there is MTM gain in the portfolio), then such value is allowed as notional credit to the member for meeting its margin requirements in any segment which draws margins from Securities Segment SGF. This amount is termed as “Margin Credit”.

 

13.

How is Exposure check done?

 

Exposure check is carried out on an online basis. Each trade is checked against the exposure limit of the member and its counterparty. For members who have decided to avail higher limits, availability of Additional Initial Margin (AIM) is also validated. Moreover, availability of MTM margin is validated for certain trades at the point of trade acceptance. Trades which fail to pass Exposure Check at the cut off batch are rejected by CCIL.

 

14.

What is Temporary Enhancement to Exposure Limit?

 

When trades of a member for a settlement date fail Exposure Check, such member may seek temporary enhancement to Exposure Limit for such settlement date by pre-funding an amount equal to the extent of shortfall, as per the process detailed in CCIL’s Regulations for Forex segment. This will effectively results in CCIL’s temporarily increasing Exposure Limit for the member by such amount of temporary enhancement and accepting trades of the members for guaranteed settlement to the extent of enhanced Exposure Limit for the said settlement date. It is possible for a member to seek enhancement of both USD as well as INR Exposure limits by depositing values in respective currencies.

 

15.

Is there any impact of settlement shortage in member’s account on Exposure Limit for such member?  

 

In case of shortage of INR or US Dollar in a member’s account, Exposure Limits for the settlement dates (within spot window) and Exposure Limits for new dates entering into the spot window are set to nil and no further trade of the member which increases its net position is allowed to pass through exposure check till the  shortage is replenished. Trades which reduce the net position of a member are however continued to be accepted provided member and counterparty has sufficient collateral to cover margin requirements and such trades are within the counterparty’s exposure limits. Exposure limits are normally reset to original levels after equivalent counter-value fund is withheld /received by CCIL and/or the shortage is replenished. If the shortage is not replenished by the day next to the date of shortage (after allowing restoration of limit, subsequent to the shortfall, by withholding equivalent counter value by CCIL), Exposure Limits in the spot window and Exposure Limits for new dates are again set to nil.

 

16.

What happens when position with MTM gain are settled? 

 

MTM gain from a forex position which is available as margin credit to the member gets withdrawn on settlement of such position. If a member had utilized such credit against any other margin requirement, there could be a margin shortfall when such position goes for settlement. In such cases, CCIL holds back the settlement proceeds to the extent of shortfall. Amount held back is released on replenishment of margin by the member.

 

 

17.

How margining and acceptance of online trades from Fx- clear and Fx-Swap trading platform take place? 

 

Cash, TOM and SPOT trades concluded on Fx-Swap trading platform and spot trades concluded on Fx-Clear trading platform are accepted in Forex segment for guaranteed settlement. Margins are computed on these trades on-line on post trade basis.

 

 

18.

What is Single Order Limit?

 

Margins and exposure limits for forex trades done on Fx-Swap and Fx-Clear Trading Platform are checked on a post trade basis. In order to minimize the risk from such trades being accepted without adequate exposure limits and / or margins, Single Order Limits (SOLs) are set for the members. SOLs are reviewed on half-yearly basis.

 

19.

What is Default Fund? 

 

A dedicated default fund is in place for Forex Segment for meeting any residual risks arising out of any default by the members of this segment. Each member is required to contribute to the default fund in the form of cash and / or eligible Government Securities.

 

 

20.

How is Default fund Size/Quantum arrived? 

 

The Quantum of Default fund is arrived at on the basis of Stress tests conducted on the outstanding trade portfolios of the members. The amount is reviewed on monthly basis (or at such frequency as decided by CCIL from time to time). 

 

21.

How is a member’s contribution to default fund determined?

 

A member’s contribution to the default fund is determined based on its average of outstanding settlement date-wise trade positions. The minimum contribution is Rs.1 Crore.

 

 

22.

When are the margins released? 

 

MTM margin blocked for a position is released on successful settlement of such position.

 

  

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