21:13 Mar 29, 2020
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. Is there any impact of shortage in member’s account on Exposure Limit for such member?
8.

Is Mark to Market (MTM) margin payable on trades accepted for settlement in Spot window? 

9. When is Volatility Margin collected in Forex Settlement Segment?



1. What is Net Debit Cap (NDC)?


Net Debit Cap (NDC) is a limit upto which CCIL can take exposure on a member in terms of net US Dollar 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?


CCIL sets the Margin Factor for each Member. Margin Factor comprises of two factors – credit risk factor, which is arrived at on the basis of the member’s Short-term credit ratings as determined by an independent credit rating agency and market risk factor, which is based on the Value-at-Risk for Rupee-US Dollar Exchange rate for a 3 days holding period. Market risk component of the margin factor 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). 


3. What is Settlement Guarantee Fund (SGF)?


Members are required to contribute collateral to the Settlement Guarantee Fund in accordance with the policy 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.


4. What is Exposure Limit (EL)?


Exposure Limit is a limit set in terms of US Dollars for each member in the Forex Segment up to which CCIL can take exposure on the member in terms of net US Dollar sale position by such member on a settlement day. Exposure limit is computed from SGF contributed by the member and the Margin Factor allotted using the formula EL=SGF/Margin Factor %, maximum EL equal to NDC. A member is not allowed to run a Net US Dollar Sold Position in excess of this Exposure Limit on any given settlement day, unless it has been allowed temporary enhancement to its NDC as per the process described hereunder.


5. How is Exposure check Done?


Exposure checks are done at the end of each batch separately for each settlement date within spot window except for the cut off batch where the process is restricted to check for only the corresponding settlement date for which the cut off batch is being run. Settlement date-wise net US Dollar sell positions are compared against member’s Exposure Limit (EL) and trades which may cause net US Dollar sale position of a member to exceed the Exposure Limit for the member is marked as having failed Exposure check. Trades which pass exposure check are accepted for guaranteed settlement. Trades which fail to pass Exposure Check at the cut off batch are rejected by CCIL.


6. What is Temporary Enhancement to NDC?


When trades of a member for a settlement date fail Exposure Check, such member may seek temporary enhancement to NDC 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 to NDC and accepting trades of the members for guaranteed settlement to the extent of enhanced Exposure Limit for the said settlement date.


7. Is there any impact of 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 subsequent settlement dates (within spot window) are frozen to the level of utilised limits and no further trade of the member is allowed to pass through exposure check till the shortage is replenished. 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 are again frozen to utilised level and Exposure Limits for new dates are set to nil.

8. Is Mark to Market (MTM) margin payable on trades accepted in Spot window? 

MTM margin is collected in Forex Settlement segment on trades accepted for settlement. MTM margin is applicable on:

• CASH/TOM/SPOT trades concluded at a rate which is significantly at variance from the market prices prevailing on the trade date for respective settlement dates. Such trades are termed as outliers.
• Forward trades entering or reported directly in the Spot Window and which were not guaranteed under Forex forward segment.
• Banks that are members of CCIL’s Forex Forward Segment (FFS) are not liable to pay additional margins on trades accepted in the Forex Forward Segment, when such trades are accepted in settlement segment, as margins are collected separately in the FFS segment. MTM margin collected on S-3 day on these trades is held back till the completion of settlement.

MTM margin in Forex Settlement segment is blocked from the unutilized portion of the SGF deposited by such member for Securities Segment.



9.

When is Volatility Margin collected in Forex Settlement Segment?

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. 

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

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