Forex Forward: Risk Management Process
extends guaranteed settlement of USD/INR Forward trades with residual maturity
up to 13 months reported in this segment by members or their constituents. 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/constituents 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.
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
terms of the provisions of Chapter VIII, of the Regulations of the Forex
Forwards Segment, proprietary trades of a clearing member and the trades of
each of its constituents shall be considered separately for margining. No
offset in margining is permitted between a clearing member and its constituents
or between different constituents of a clearing member. Where a constituent
avails services of multiple clearing members, its portfolio of trades cleared
through each such clearing member shall be considered separately for margining,
with no offsets being permitted between them.
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 CPRA grade 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 change 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
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 Member Common Collateral (MCC) pool.
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
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
margins viz. IM, VM, CM and MTM for Forex Forward segment are blocked from
available balance in MCC pool. It shall
be the responsibility of the member/ clearing member to maintain adequate
balance in MCC pool to fulfil the margin obligation on its own / its
constituent's portfolio within the stipulated timelines to avoid penal charges.
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 CPRA grade and
Tier I capital. Out of the total margin made available in MCC pool, 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 as free margin in MCC pool on session closure.
This prescribed margin is also used for meeting margin requirements for the
dedicated Default Fund is in place
for the segment for meeting any residual risks arising out of default by a
member. Quantum of Default fund is proportionately allocated amongst direct
members of the segment based on ratio of members (including their constituents,
if any) average initial margin contributed, average position outstanding and
higher of their stress loss, during the previous six month period.