Risk Management Process
CCIL settles the CLS trades of its
members by becoming a third party settlement agency to UBS Switzerland AG. To
take care of the risks arising out of this arrangement, 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 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
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.