Rupee Derivatives: Risk Management Process
guaranteed settlement of trades in Interest Rate Swaps (IRS) and Forward Rate
Agreements (FRA) referenced to MIBOR, MIOIS and MIFOR 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 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.
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
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.
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
significant exposure in this segment may be called upon to pay Concentration
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
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. 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.
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. 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 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 trades of such