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
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.