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 does not take any clean exposure on its members. Risk management processes at CCIL are 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. The Total Limit is capped to liquidity limit set by CCIL based on the member's CPRA grade. CCIL may place lower limits on banks on deteriorating financials of member's or regulatory actions imposed. Exposure monitoring is carried out on-line on real time basis. 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. The hair-cut rates are stepped up for weaker entities with low CPRA grades. CCIL may further step-up the hair-cut rates for banks with deteriorating financials of member's or regulatory actions imposed.