21:31 Jan 23, 2019
CCILCCIL > Risk Management > Forex Forwards > FAQ
1. Which trades are accepted for guaranteed settlement in Forex Forward segment?


1. Which trades are accepted for guaranteed settlement in Forex Forward segment?


USD/INR forward trades of residual maturity up to 13 months are eligible to be accepted for guaranteed settlement in this segment. Actual acceptance by CCIL happens if both the members have adequate margins to meet their margin requirements.



What are the types of Margins collected in Forex Forward Segment? 


Initial Margin, Volatility Margin, Concentration Margin and Mark to Market margin.



What is Initial Margin?

Initial Margin constitutes the margin obligation required to be fulfilled by a member in relation to their outstanding trades accepted for guaranteed settlement, so as to provide cover against any potential risk / loss in value caused due to adverse price/rate movement.



How is the Initial margin computed?

CCIL uses volatility weighted Historical simulation based Value at Risk (VaR) for initial margin computation. VaR is at 99% confidence level over a 2 day Margin period of Risk (MPOR) based on Historical series of 1000 days returns comprising of a) 750 consecutive recent returns & b) 250 consecutive returns from period representing highest stress in market across a 10 year period. There is a spread margin component to take care of the possible impact due to un-expected twist in the forward rate curve. Initial margins for relatively weaker members are stepped up by 50% to 100% based on the Short-term credit ratings of the members. Initial Margin for particular member may also be stepped up in case of adverse market report or regulatory action.


5. What is Minimum Initial Margin?


The Initial margin based on VaR computed using Volatility weighted Historical simulation may be low in the period of low volatility in exchange rates. To guard against the impact of sudden increase in volatility, Initial margin is not allowed to fall below a minimum level.

6. How is MTM Margin computed?

Mark to Market Margin constitutes the margin obligation required to be fulfilled by a member to cover the notional loss (i.e. the difference between the current market price and the contract price of the trade) in its trade portfolio.


 MTM margin is computed on settlement date wise net position using USD/INR forward exchange rates. Forward Rates for pre-specified tenor points (calendar month ends and for other specified short tenors) are taken as the basis from which the forward rates for other tenors are arrived at through interpolation/ extrapolation. Settlement date wise MTM margin values are then discounted to the date of computation using sovereign zero coupon rupee interest rate curve (ZCYC). Off-set is allowed between MTM loss and MTM gain across all settlement dates. If the net of MTM values for all such settlement date-wise positions shows loss, then same is collected as MTM margin.

7. What is Incremental MTM margin?


Increase in MTM Margin on a day over the MTM margin on the previous day is termed as Incremental MTM margin. MTM margin is imposed at the time of end of the day risk valuation and becomes payable on next day before the stipulated time.



8. How is Intra-day MTM Margin applied? 

MTM Margin on forward trades is computed on daily basis at a stipulated time using intra-day MTM rates. In case there is an increase in MTM margin beyond a threshold as notified from time to time, additional margin is collected as intra-day MTM margin.



9. What is Volatility margin and when it is applicable?


In case of sudden increase in volatility in USD/INR exchange rates, Volatility Margin is imposed by Clearing Corporation. In case of any margin shortfall on account of such volatility margin imposition, members get an hour’s time to replenish the shortage i.e. if the shortage is replenished within one hour’s time; no penalty is imposed for such margin shortfall.





What is Concentration Margin and when it is applicable?

Concentration Margin is levied on participants having significant exposure in the segment. It is charged as a percentage of Initial Margin.

It is levied on participants when their Initial Margin obligation is equal to or exceeds a pre-determined threshold value set for imposition. Concentration Margin is withdrawn once the Initial Margin obligation is lower than the pre-determined threshold value set for withdrawal. Shortfall on account of imposition of concentration margin is to be replenished in an hour’s time to avoid penal charges.






What are Replenishment and Rejection levels?


Members are required to replenish margins when the utilisation of available margin has reached such percentage as notified from time to time. This level is termed as replenishment level.

Rejection level is such percentage of utilization of available margin, beyond which CCIL would not accept any new trade for guaranteed settlement.




What is Margin Credit?

If the net MTM value of all accepted trades of a member is positive (i.e. gain), then such value, subject to haircut, is allowed as notional credit to the member for meeting its margin requirements in any segment which draws margins from Securities Segment SGF. This amount is termed as “Margin Credit”.





When are the margins released?


Initial Margin on forward trade positions entering into spot window is released as soon as such position is accepted in the USD/INR Settlement segment. In case a forward position is not fully accepted in Settlement segment, proportionate amount of initial margin is held back till such position is either fully accepted or cash settled.

MTM margin blocked for a position is released on successful settlement of such position.





What happens when position with MTM gain are settled?


MTM gain from a forward position which is available as margin credit to the member gets withdrawn on settlement of such position. If a member had utilized such credit against any other margin requirement, there could be a margin shortfall when such position goes for settlement. In such cases, CCIL holds back the settlement proceeds to the extent of shortfall. Amount held back is released on replenishment of margin by the member.




How margining and acceptance of online trades from Fx-Swap trading platform take place?


Forward trades concluded on Fx-Swap trading platform are accepted in Forex Forward segment for guaranteed settlement. Margins are computed on these trades on post trade basis.




What is Single Order Limit?


Margins for forward trades done on Fx-Swap Trading Platform are checked on a post trade basis. In order to minimize the risk from such trades being accepted without adequate margin, Single Order Limits (SOLs) are set for the members. SOLs are reviewed on half-yearly basis.




What is Default Fund?


A dedicated default fund is in place for Forex Forwards Segment for meeting any residual risks arising out of any default by the members of this segment. Each member is required to contribute to the default fund in the form of cash and / or eligible Government Securities. CCIL may from time to time, also prescribed certain proportion of contribution to be mandatorily in CASH.





How is Default fund Size/Quantum arrived?


The Quantum of Default fund is arrived at on the basis of Stress tests conducted on the outstanding trade portfolios of the members. The amount is reviewed on monthly basis (or whenever the stress loss exceeds prefunded default handling resources by predetermined percentage)or at such frequency as decided by CCIL from time to time.





How is a member’s contribution to default fund determined?


A member’s contribution to the default fund is determined based on its average of outstanding settlement date-wise trade positions and average of Initial margin contributions. The minimum contribution is Rs.1 Crore.




How the Defaults are handled?


In the event of Margin Shortfall: In the event of a member’s margin requirement exceeding 100% of the margin made available by the member, Clearing Corporation may bring the margin liability of the member within the required level by closing out such trades or positions of the member as it considers necessary.


In the  event of Insolvency : In case of insolvency of a member, a decision may be taken by the Clearing Corporation to close out all outstanding forward trades of such member.






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