Rupee Derivatives: Risk Management Process
CCIL offers CCP services for trades in Interest Rate Swaps (IRS) and Forward Rate Agreements (FRA) referenced to MIBOR, MIOIS, MIFOR and Modified MIFOR (MMFOR) benchmarks. IRS & FRA trades having residual maturity up to 10 years (for trades referenced to MIBOR and MIOIS benchmark) and IRS trades having residual maturity up to 5 years (for trades referenced to MIFOR and MMFOR benchmark) are eligible for guaranteed settlement. The risk associated with this segment is market risk and the same is sought to be covered by collection of margins. IRS & FRA 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, both for trades concluded on the ASTROID trading system as well as for reported trades. 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. Minimum Initial margin is collected in case the margin value as per PVaR model is lower due to lower volatility in swap rates. Initial margin is released after the settlement of the trade.
Mark to Market Margin (MTM) constitutes the margin obligation required to be fulfilled by a member to cover the notional loss, if any, in the outstanding trades portfolio due to movement of swap rates. Marking to market of outstanding trades is carried out at the end of the day. The implied zero rates are arrived at from the swap rates using bootstrapping. All trades of a member on a benchmark are re-valued using these implied zero rates for the benchmark and the net value is taken as MTM value of the portfolio of outstanding trades of the member. For such valuation, value of floating leg cash flows are estimated using the forward rates arrived at from the zero rates as above. If the aggregate of MTM values of all trades for a member shows MTM loss, such amount is collected as MTM margin from the member. The portion of the MTM Margin attributable to the cash flow settling on any business day is released on successful settlement of the same. There is also a provision for collection of Intra-day MTM margin. If MTM loss 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.
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 a sudden increase in volatility in the market, 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).
The margins viz. IM, VM, CM and MTM for Rupee Derivatives segment are blocked from the unutilized portion of the SGF deposited by such member for Securities Segment.
No-offset will be provided for any margins viz, IM, VM, CM and MTM across different benchmarks for the members. Moreover, no margin offsets are permitted between constituents or between a constituent and its Clearing Member
Risk Management in Trading System:
CCIL also offers CCP clearing to trades concluded on the ASTROID trading platform of the Clearcorp Dealing Systems (India) Ltd. (Clearcorp), a wholly owned subsidiary of CCIL. Exposure check of these trades is also carried out on online basis. A factor based margin is immediately blocked for a trade done in trading system. Once the portfolio margin has been re-computed after including the new trade in the portfolio, the factor based margin collected earlier is suitably adjusted.
Members are assigned tenor group-wise Single Order Limits (SOL) based on their short term credit rating and Tier I capital / AUM / net worth. Out of the total margin made available for this segment, a member has to allocate a certain minimum amount of margin to the trading system at the beginning of every day. This margin is also used for meeting margin requirements for the reported trades.
Incidentally, if, at any point in time, the margin requirement for a member exceeds the margin made available, the trading system enters into a Risk reduction mode where the member is allowed to put only those trades which will result in margin reduction.
Default Fund: Two separate Default Funds (MIBOR & MIOIS-Default Fund and MIFOR-Default Fund) are in place for the segment for meeting any residual risks arising out of default by a member. In addition to meeting losses arising out of default by Member(s) on its MIFOR portfolio, the MIFOR Default Fund will also be used for meeting losses on the defaulter’s MMFOR portfolio
The default handling procedure for the segment will be as under:
A) Settlement Shortage
Any shortage in meeting daily settlement obligation in this segment shall, unless replenished by the Member by 11.00 A.M. on the next day (by 10.30 A.M. if the next day is a working Saturday), be treated as a Default by the Member.
For meeting such shortage, Clearing Corporation shall have the authority to sell the securities placed by the Member as margin deposit. Such sale could be made either through NDS-OM or Over the Counter or sale through private arrangement as decided by Clearing Corporation.
B) Other than Settlement Shortage
a) Portfolio referenced to MIBOR & MIOIS benchmark:
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.
b) Portfolio referenced to MIFOR & MMFOR benchmark:
A decision may be taken by the Clearing Corporation to close out all outstanding trades of such member with its bilateral counter-parties.