14:45 Nov 17, 2018
CCILCCIL > Risk Management > Rupee Derivatives > FAQ
 

1. Which trades are accepted for guaranteed settlement in Rupee Derivatives segment?

2. What are the types of Margins collected in Rupee Derivatives Segment?

3. What is Initial Margin (IM)?

4. How is Initial margin computed?

5. What is Minimum Initial Margin?

6. How is MTM margin computed?

7. What is Incremental MTM margin?

8. How is Intraday-MTM margin applied?

9. What is Volatility margin and when it is applicable (VM)?

10. What are Replenishment and Rejection levels?

11. What is Margin Credit?

12. When are the margins released?

13. What happens when trades with MTM gain are settled?

14. What is Crystallized Settlement obligation (CSO)?

15. How margining and acceptance of online trades from ASTROID trading platform takes place?

16. What is Single Order Limit (SOL)?

17. What is Default Fund?

18. How is Default fund Size/Quantum arrived?

19. How is a member’s contribution to default fund determined?

20. How the Defaults are handled?

 


 

 


1.

Which trades are accepted for guaranteed settlement in Rupee Derivatives segment?

 

 

 

 

Interest Rate Swaps (IRS) & Forward Rate Agreements (FRA) trades of residual maturity up to 10 years referenced to MIBOR & MIOIS benchmarks are eligible to be accepted for guaranteed settlement in this segment. Actual acceptance by CCIL happens if both the members have adequate margins to meet their margin requirements.

 

 

2.

What are the types of Margins collected in Rupee Derivatives Segment? 

 

Initial Margin, MTM margin and Volatility Margin are the margins collected in the Derivatives segment. Concentration Margin may also be collected, if required.

 

3.

What is Initial Margin?

 

 

 

 

Initial Margin constitutes the margin obligation required to be fulfilled by a member in relation to their outstanding trades accepted for guaranteed settlement, so as to provide cover against any future potential risk / loss in value caused due to adverse price/rate movement.

 

 

4.

How is the Initial margin computed?

 

 

 

 

CCIL uses volatility weighted Historical simulation based Value at Risk (VaR) for initial margin computation. VaR at 99% confidence level is used for margining. In addition, there is a spread margin component to take care of the possible impact due to un-expected twist in the swap rates curve. Initial margins for relatively weaker members are stepped up by 25% to 100% based on the Short-term credit ratings of the members.

 

 

5.

What is Minimum Initial Margin?

 

 

 

 

The Initial margin based on VaR computed using Volatility weighted Historical simulation may be low in the period of low volatility in exchange rates. To guard against the impact of sudden increase in volatility, Initial margin is not allowed to fall below a minimum level.

 

 

6. How is MTM Margin computed?


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.

 

The implied zero curve is arrived at from the swap curve using bootstrapping. All trades of a member on a benchmark are re-valued using implied swap zero curve for the benchmark and the net value is taken as MTM value of the portfolio of outstanding trades of the member. For such valuation, floating leg cash flows are arrived at using the forward rates estimated from the zero rates as above. If the aggregate of MTM values of all trades shows MTM loss, such amount will be collected as MTM margin from a member.

 

 

 

 

7.

What is Incremental MTM margin?

Increase in MTM Margin on a day over the MTM margin on the previous day is termed as Incremental MTM margin. MTM margin is imposed at the time of end of the day risk valuation and becomes payable on next day before the stipulated time.

 

 

8. How is Intra-day MTM margin applied?

 

MTM Margin on IRS/FRA trades is computed on daily basis at a stipulated time using intra-day MTM rates. In case there is an increase in MTM margin beyond a threshold as notified from time to time, additional margin is collected as intra-day MTM margin.

 

 

9. What is Volatility margin and when it is applicable? 

 

In case of sudden increase in volatility in interest rates, Volatility Margin is imposed by Clearing Corporation. In case of any margin shortfall on account of such volatility margin imposition, members get an hour’s time to replenish the shortage i.e. if the shortage is replenished within one hour’s time; no penalty is imposed for such margin shortfall.

 

 

10. What are Replenishment and Rejection levels?

 

Members are required to replenish margins when the utilisation of available margin has reached such percentage as notified from time to time. This level is termed as replenishment level.

Rejection level is such percentage of utilization of available margin, beyond which CCIL would not accept any new trade for guaranteed settlement.

 

 

 

11. What is Margin Credit?

 

If the net MTM value of all accepted trades of a member is positive (i.e. gain), then such value is allowed as notional credit to the member for meeting its margin requirements in any segment which draws margins from Securities Segment SGF. This amount is termed as “Margin Credit”.

 

 

12.

When are the margins released?

 

 

 

 

Initial Margin and Mark to Market margin attributable to a trade are released on maturity of the trade. MTM margin or part thereof may also be released at the time of settlement of individual cash flows.

 

 

13. What happens when trades with MTM gain are settled?

 

MTM gain (or part thereof) from a IRS/FRA trade which is available as margin credit to the member gets withdrawn on settlement of cash flows / maturity of such trade. If a member had utilized such credit against any other margin requirement, there could be a margin shortfall when such credit is withdrawn. In such cases, CCIL holds back the settlement proceeds to the extent of shortfall. Amount held back is released on replenishment of margin by the member.

 

 

14. What is Crystallized Settlement obligation (CSO)?

 

Discounted value of any amount determined as payable or receivable by the Member due to early termination is termed as Crystallized Settlement Obligation. Crystallized Settlement Obligation payable by a member is treated akin to margin liability of the member. The Crystallized Settlement Obligation receivable by a member, on the other hand, is treated like a margin credit available to the member.

 

 

15. How margining and acceptance of online trades from ASTROID trading platform take place?

 

IRS trades concluded on ASTROID trading platform are accepted in Rupee Derivatives segment for guaranteed settlement. Margins are computed on these trades on post trade basis

 

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 orders which if matched, would result in margin reduction. Once the margin requirement falls below the margin made available, the member comes out of Risk Reduction mode.

 

16. What is Single Order Limit?

 

Margins for IRS trades done on ASTROID Trading Platform are checked on a post trade basis. In order to minimize the risk from such trades being accepted without adequate margin, Single Order Limits (SOLs) are set for the members. SOLs are reviewed periodically (half-yearly).

 

17. What is Default Fund?

 

A dedicated default fund is in place for Rupee Derivatives Segment for meeting any residual risks arising out of any default by the members of this segment. Each member is required to contribute to the default fund in the form of cash and / or eligible Government Securities.

 

 

 18. How is Default fund Size/Quantum arrived?

The Quantum of Default fund is arrived at on the basis of Stress tests conducted on the outstanding trade portfolios of the members. The amount is reviewed on monthly basis (or whenever the stress loss exceeds prefunded default handling resources by predetermined percentage).

 

 

19. How is a member’s contribution to default fund determined?

 

A member’s contribution to the default fund is determined based on its average of outstanding gross trade volume and average of Initial margin contributions in the preceding month, with equal weights assigned to each. The minimum contribution is Rs.1 Crore.

 

 

20. How the Defaults are handled?

 

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.

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 IRS/FRA trades of such member.

 

 

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