Risk Management Process
CCIL’s settlement of CLS trades for its members by becoming a third party settlement agency to UBS Switzerland AG as a settlement bank (so that the members become fourth parties) exposes CCIL to the same kind of risks that the Settlement Banks are exposed to. To take care of such risks, Settlement Banks usually set limits for all entities settling through them. As a settlement agency, CCIL do not take any clean exposure on its members. Risk management processes at CCIL is therefore designed in such a way that the CCIL’s exposure on a member on account of the outstanding CLS trades of the member is covered through collateral or bank guarantees. The risk is monitored by setting Exposure Limits for members, which are arrived at on the basis of the collaterals deposited.
CCIL sets two types of limits for a member (both denominated in US Dollars).i) Base CLS Limit – Minimum limit for each settlement date ii) Additional CLS Limit - Only for specified settlement date
Total Limit for a member for a settlement date is equal to the sum of the Base CLS Limit and the Additional CLS Limit. Exposure Limit utilization monitoring is on-line and system driven. A member’s exposure in any currency is marked to market daily and is further adjusted for the currency fluctuation factor by way of a distinct hair-cut rate for each currency.