Risk Management Process
During the settlement processes, CCIL
assumes certain risks which may arise due to a default by a member to honour
its obligations. Settlement being on Delivery Versus Payment basis, the risk
from a default is the market risk (change in price of the concerned
security). CCIL processes are designed to cover the market risk through
its margining process.
CCIL collects Initial Margin and Mark
to Market Margin (both Intraday and EOD) from members in respect of their
outstanding trades. Initial Margin is collected to cover the likely risk
from future adverse movement of prices of the concerned securities. Mark
to Market Margin is collected to cover the notional loss (i.e. the difference
between the current market price and the contract price of the security
covered by the trade) already incurred by a member. Both the margins are
computed trade-wise and then aggregated member-wise. No margin offsets are
permitted between constituents or between a constituent and its Clearing
Member.
In case of sudden volatility,
Intraday Mark to Market Margin is collected if the difference between
the Mark to Market Margin at previous EOD and intra-day Mark to
Market Margin is greater than a specified threshold level of the initial
margin as at previous EOD. In addition, CCIL may also collect
Volatility Margin in case of unusual volatility in the market.
Members are required to keep balances
in Settlement Guarantee Fund (SGF) in such a manner that the same is enough to
cover the requirements for both Initial Margin and Mark-to-Market Margin for
the trades done by such members. In case of any shortfall, CCIL makes margin
call and the concerned member is required to meet the shortfall before the
stipulated time.. Members' contribution to the SGF is in the form of eligible
Govt. of India Securities/T-Bills and cash, with cash being not less than 10 %
of the total margin requirement at any point of time.
Another important risk emanating from the process is Liquidity Risk. To
ensure uninterrupted settlement, CCIL is required to arrange for liquidity both
in terms of funds and securities. CCIL has arranged for Lines of Credit from
Banks to enable it to meet any reasonable shortfall of funds arising out of a
default by a member either in its Securities Segment or Forex Segment. In
regard to the Securities Segment, member’s contributions to SGF is mainly in
the form of securities and through the list of specified securities acceptable
for contribution to SGF, CCIL ensures that the most liquid securities in which
a significant portion of the trades are settled are likely to be available in
the SGF. For requirements of other securities, CCIL has put in place a limited
purpose security borrowing arrangement with two major market
participants.