Forex Forward: Risk Management Process
CCIL extends guaranteed
settlement of USD/INR Forward trades with residual maturity up to 13 months.
The risk associated with this segment is the pre-settlement risk which is
equivalent to market risk on forward positions. The risk management relating to
forex forward segment provides for collection of margins based on the
outstanding trade positions of the members in forward segment. Forward trades
are subjected to exposure checks for adequacy of margins for both the
counterparties to the trade, on a trade by trade basis before those are
accepted by CCIL.
Exposure check is online,
for both, Fx-forwards trades concluded on the Clearcorp Dealing platform and
OTC trades reported to CCIL. On-line acceptance status of trades is made
available to the members through CCIL’s Integrated Risk Information System
(IRIS). CCIL seeks to cover its risk through prescription of Initial margin
(including spread margin), mark to market margin, volatility margin and
concentration margin.
The Initial Margin (IM) on
the outstanding trades of the Members is collected based on Portfolio Value at
Risk model (PVaR). It is supplemented by collection of spread margin. Based on the Short-term
credit ratings of the members, CCIL has prescribed different levels of initial
margins for different members. Provision is also available to step-up the Margin requirement for individual
members on account of adverse development / regulatory action. Minimum Initial margin (including
spread margin) is collected in case the margin value as per PVaR model is lower
due to lower volatility in USD/INR exchange rate. Initial margin is released on
acceptance of forward trades in Forex settlement segment (Spot window).
Mark to Market Margin (MTM) 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), if any, in the outstanding trade portfolio due to
movement of exchange rates. Marking to market of outstanding trades is carried
out at the end of the day. MTM values of settlement date wise net positions are
computed using USD/INR forward exchange rates. These MTM values are then
discounted to the date of computation using CCIL sovereign zero coupon rupee
interest rates (ZCYC). 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. MTM margins blocked may be used to meet any shortfall in USD/INR
settlement segment due to failure of the member to discharge its obligation
toward forward trades. MTM margins blocked are released on successful
settlement of forward position in the settlement window. There is also a provision
for collection of Intra-day MTM
margin. If loss in MTM value (i.e. increase in MTM loss / decrease in MTM
gain / both) 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/ intra-day MTM credit reduction is collected/affected.
Mark to Market Gain as MTM Credit: 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 SGF
In case of sudden increase
in volatility in USD/INR exchange rates, Volatility Margin (VM) is imposed by CCIL at a rate notified
to the members. On imposition of VM, Initial Margin requirement effectively
increases by the same percentage at which VM was imposed.
Members with significant exposure in this segment
may be called upon to pay Concentration
Margin (CM). Concentration Margin is collected as percentage (as notified)
of Initial Margin.
The margins viz. IM, VM, CM
and MTM for Forex Forward segment are blocked from the unutilized portion of
the SGF deposited by such member for Securities Segment. It shall be the
responsibility of the member to make available adequate resources (SGF) to fulfil
aforesaid margin obligation within the stipulated timelines to avoid penal
charges.
Risk Management in Trading
System: CCIL also offers CCP clearing to trades concluded on the Forex trading
platform of the Clear-Corp Dealing Systems (India) Ltd. Members are assigned
Single Order Limits (SOL) based on their short term credit rating and Tier I
capital. Out Of the total margin made available for this segment, a member has
to allocate a certain minimum amount of margin for trading system trades at the
beginning of every day. This prescribed margin is maintained throughout the
trading hours and is release back to common SGF pool on session closure. This
margin is also used for meeting margin requirements for the reported trades.
A dedicated Default Fund is in place for the
segment for meeting any residual risks arising out of default by a member.
The Default handling procedure
for the segment provides for two approaches:
a) 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.
b) 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.