Forex Forward: Risk Management Process
CCIL 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.
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.
In 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 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/ clearing
member to make available adequate resources (SGF) to fulfil the margin
obligation on its own / its constituent’s portfolio 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. 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.
The Clearing Corporation shall on declaration of default,
transfer the defaulting Member’s proprietary positions to one or more
non-defaulting Members by way of a sale (including an auction) or through an
allocation mechanism.