Risk Management Process
CCIL's risk exposure in the Triparty Repo settlement Segment emanates
mainly on two counts –
a. Risk of failure by a lender
to meet its obligations to make funds available or by a borrower to accept
funds by providing adequate security at the settlement of the original trade of
lending and borrowing under Triparty Repo transaction.
b. Risk of default by a
borrower in repayment.
As the repayment of borrowing
under Triparty Repo Settlement Segment is guaranteed by CCIL, it should have
enough security to meet any eventuality of a default by the borrower. To take
care of this risk, all borrowings are fully collateralized. This process is
managed through setting up of Borrowing Limits for the members against their
deposits of Government Securities as collaterals. These collaterals are
subjected to hair-cuts and are revalued daily at the end of the day. Any shortfall
in the value of collaterals (to cover outstanding borrowings) is collected
through margin calls. All orders before placement are validated for adequacy of
Initial Margin and for Borrow Limits for borrow orders.
CCIL may be exposed to risks
due to a member not honouring its obligation from a trade received for settlement.
A member may undertake to either lend or borrow but may fail to honour such an
obligation at the time of settlement. As CCIL extends guarantee for settlement
of all Tri party repo transactions, to ensure that this risk is adequately
taken care of, CCIL collects Initial Margin and MTM Margin from the members in
respect of their deals for borrowing or lending under Triparty Repo transaction.
As the risk on any such deal continues up to the settlement of the deal, Initial
Margin collected on deals are released only on settlement of 1st leg on such
deals. MTM margin applicable on trades and due to valuation of collateral is
treated as incremental MTM margin payable at EOD. The same is debited
immediately at end of the day. In case of a resultant shortfall in margin,
members are required to contribute to Triparty Repo Collateral account within
stipulated time on the next business day. Failure to do so attracts penalty.