Forex Settlement Segment: Risk Management Process
management process relating to forex settlement operation stipulates fixing of
Net Debit Cap (NDC) for each member. NDC for a member is arrived at based on
two factors: the Short-term credit ratings of the member given by a reputed
credit rating agency and Tier-I capital of such member. Net Debit Cap (USD) and
Net Debit Cap (INR) are the maximum limits upto which CCIL can take exposure on
a member for a settlement date in terms of net US Dollar sale position and net
INR sale position respectively. Margin Factor is for 3 settlement dates and is
arrived at based on 3 day VaR at 99% confidence interval, subject to a floor.
Margin factor is stepped up for entities with low short term credit ratings.
Contribution of a member to Settlement Guarantee Fund (SGF) is in US Dollar.
limits in both currencies are arrived at on the basis of the Settlement
Guarantee Fund (SGF) in US Dollar deposited by a member. In both the
currencies, members can opt to avail lower exposure limits than the exposure
limits so arrived at by CCIL. Trades concluded by a member are accepted for
settlement only as long as the Exposure Limit is not breached, i.e., the net US
Dollar sale position of the member for the settlement date is within the
Exposure Limit (USD) and net INR sale position of the member for the settlement
date is within the Exposure Limit (INR) for the member subject to availability
of margins wherever required. Members with higher ratings will be allowed to
have higher Exposure limits (USD / INR) for TOM and SPOT settlement dates. CCIL
covers the risk arising out of such higher exposures by collecting Additional
Initial Margin (AIM) over and above the USD collateral deposited by the member
to support the base exposure limit.
the liquidity risk in USD Dollar, CCIL has Lines of Credit (LOC) in place from
its overseas settlement bank. CCIL draws against the LOC in case a member fails
to deliver its USD obligation to CCIL on the settlement date. Collaterals
required for availing of such credit facilities from the settlement bank are
furnished out of USD Treasury bill purchased by CCIL out of the contributions
made by the members to the SGF for this segment.
the liquidity risk in Indian Rupee, Rupee Lines of credit have been arranged
from the banks. Such Lines of credit are available at Reserve Bank of India at
the time of settlement.
is on-line, both for trades from Fx Clear and Fx Swaps trading systems and for
reported trades. On-line acceptance status of trades is made available to the
members through CCIL’s Integrated Risk Information System (IRIS). CCIL covers
its risk through prescription of Initial margin (including Additional Initial
Margin or AIM), Mark to Market (MTM) margin and, Volatility Margin (VM).
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 accepted trades of a member at
current market price and at the contracted price of the trade), if any, due to
movement of exchange rates. MTM margin is computed at the end of the day. There
is also a provision for collection of Intra-day MTM margin. If increase
in MTM margin on outstanding trade portfolio of a member, computed using
Intra-day MTM rates is beyond a threshold as notified from time to time, intra-day
MTM margin is collected. Margins blocked are released on successful settlement
If the MTM
value for a member results in a gain to the member, then the member’s margin
account is credited with the MTM gain amount (net after applying a haircut on
such MTM gain) and the same is allowed to be treated as margin made available
by the member. Such margin made available can be used against margin
requirements in any other segment which draws margins from Securities Segment
Margin (VM) is imposed In case of sudden
increase in volatility in USD/INR exchange rates. Imposition of VM results in a
corresponding increase in the Margin Factor and a reduction of Exposure Limit
of the members.
Initial Margin, Volatility Margin and MTM margin for Forex segment are blocked
from the additional USD collateral if any, made available by the member and the
unutilized portion of the SGF deposited by such member for Securities Segment.
member contributed Default
Fund is in place for the segment for
meeting any residual risks arising out of default by a member.