FX option trades and delta hedge forward trades of residual maturity up to 1 year reported (bilateral) to CCIL’s Trade Repository (CCIL-TR) and trades concluded on CCIL’s FX Options Dealing system (OPTIX) are eligible to be accepted for guaranteed settlement in this segment. Acceptance of bilateral trades for CCP Clearing by CCIL happens if both the members have adequate margins to meet their margin requirements.
Forex options trades concluded on OPTIX trading platform will be accepted for CCP clearing and settlement from the point of trade itself. Margins are computed on these trades on post trade basis. If at any point the margin requirement for a member exceeds the margin available, the trading system will restrict the member from trading on the OPTIX platform. Trading can resume only when the required additional margin is provided, or when the portfolio-level margin requirement falls below the available margin, either through reported trades or due to favourable movements in market risk factors that reduce the portfolio’s margin requirement.
The margins collected comprise of Initial Margin, Net Premium Margin, Net Options Value (NOV) Margin, MTM Margin, and Volatility Margin.
Initial Margin constitutes the margin obligation required to be fulfilled by a member in relation to their outstanding trades accepted for CCP Clearing, so as to provide cover against future potential risk / loss in the value caused due to adverse price / rate movement during the default management period.
a) IM on option and forward trades (before option expiry / exercise) Initial Margin is computed at a portfolio level and has the following components:
Portfolio Risk
Calendar Spread Margin
Short Options Minimum Charge
IM = MAX [ (Portfolio Risk + Calendar Spread Margin), Short Option Minimum Charge]
b) IM on forward trades and resultant spot trades (after option expiry / exercise)
The net position arising from spot trades created on option exercise and delta hedge forward trades with residual maturity of S-2 days will be subject to a factor-based Initial Margin post option expiry till such positions are transferred to the USD INR segment for settlement on S-2 day.
Initial margins for relatively weaker members are stepped up based on the Counterparty Risk Assessment grade (CPRA) grade of the members. Initial Margin for members may also be stepped up in case of adverse market report or regulatory action etc.
Portfolio Risk represents the potential loss in value of an options portfolio, inclusive of delta hedge forward trades, when evaluated under various market conditions.
The computation of Portfolio Risk is carried out using two sets of scenarios:
Historical Scenarios: Volatility-weighted Historical Simulation or Filtered Historical Simulation based Value at Risk (FHS VAR) computed at 99 percentile confidence level over a 5-day Margin Period of Risk (MPOR) based on historical series of 1000 days returns.
Hypothetical Scenarios: Scenarios from a historical stress period calibrated by a defined Price Range and a Volatility Range.
Portfolio Risk is determined as below: Portfolio Risk = Max [99 percentile FHS VaR, Max Loss in Hypothetical Scenarios]
Price Range (PR) is the range over which the spot rate returns scenarios are built and Volatility Range (VR) is the corresponding range for Implied Volatility returns. PR is defined as the 10th largest (either positive or negative) 1-day Spot rate return from the stress period scaled by square-root of MPOR. VR is the largest 5-day absolute change in implied volatility or the largest 5-day relative change in implied volatility. Under normal market conditions, the volatility range is defined as the largest absolute change in implied volatility as observed during a predefined stress period. During a period of heightened volatility, VR is arrived by applying the largest relative change observed during the stress period on the prevailing 1M ATM implied volatility level. For example, if the prevailing 1M ATM volatility is 20% and the largest relative change in implied volatility is 50%, then VR parameter used for creating hypothetical IM scenarios is defined as: 20% x 50% = 10%
Filtered Historical Simulation Value-at-Risk (FHS VAR) is arrived at by scaling the historically observed volatility to reflect the prevailing volatility conditions. During normal market conditions, historical returns from previous episodes of high volatilities are scaled down. In times of heightened volatility, the historical returns are scaled up. Such scaling of risk factors helps in calibrating the Value-at-Risk (VAR) on portfolios to account for increasing/ decreasing volatility. Under this approach, 1,000 volatility-scaled risk factor return scenarios are generated from recent historical data over a one-day horizon. These returns are scaled over the MPOR (Margin Period of Risk). For each scenario, the portfolio’s profit and loss is evaluated by calculating the changes in the portfolio value. 99th percentile loss observed across these scenarios is then used in the calculation of Portfolio Risk.
Hypothetical Scenario is a set of scenarios, constructed from a historical stress period. Each scenario represents different combinations of spot rate shifts and implied volatility shifts within the upper and lower bounds defined by the Price Range and Volatility Range. The portfolio is revalued under each of these scenarios, and the worst loss observed across these scenarios is termed as Hypothetical Scenario Loss which is taken into account for the calculation of Portfolio Risk.
Calendar Spread Margin (CSM) is an additional component of Initial margin to cover the risk arising from deviations observed from historically observed co-movements of risk factors across different maturities. Under portfolio-based margining i.e. for Portfolio risk computation, complete offset of profits and losses is provided across offsetting positions across maturities. To mitigate the basis risk, Calendar Spread Margin is levied by disallowing the margin benefits inherent in portfolio-based margining. CSM is computed by segregating the positions into different maturity-based buckets and applying Calendar Spread Charge factor assigned to a specific tenor bucket with the Delta offset present in the portfolio for that bucket. The factors for intra-bucket and inter-bucket spread for various bucket pairs on a per delta spread position is as follows:
Delta-based spread between
CSM per delta spread (%)
Intra-bucket
0.21%
Buckets 1 and 2, Buckets 2 and 3 and Buckets 3 and 4
0.37%
Buckets 1 and 3 and Buckets 2 and 4
0.52%
Buckets 1 and 4
0.75%
Where; Bucket 1: Trades with residual maturity of 0-3 months Bucket 2: Trades with residual maturity of 3-6 months Bucket 3: Trades with residual maturity of 6-9 months Bucket 4: Trades with residual maturity of 9-12 months
Short Option Minimum Charge (SOMM) acts as a margin floor for portfolios containing short option positions. In portfolio-based margining, certain short options, especially deep out-of-the-money short options may appear to carry low risk. However, in the event of an extreme movement in the underlying asset, these positions can become risky and lead to sudden increase in margin requirements.
SOMM Rate is 1.25% of the prevailing USD/INR Spot rate.
If the Net Premium amount (across all buy and sell option transactions) is payable by a member then the same is collected from the member as Net Premium Margin from the member’s MCC account. The premium margin is collected at the time of trade being accepted for CCP Clearing and is released on the successful settlement of premium obligation. If the Net Premium amount (across all buy and sell options transaction) is receivable by a member then the same a notional credit is given to the members MCC account to the extent of the net receivable position as Net Premium Credit.
Crystallized settlement obligation is the discounted value of any amount determined as payable / receivable by a Member due to early termination (full or partial) of the contract or trade. The CSO payable is treated as margin liability for the member and margins are blocked from member’s MCC account. Such margins are released upon successful settlement of the payable obligation. The CSO receivable is treated as margin credit for the member and is used to offset margin requirement of member in FX Option segment. Such credit will be released at the onset of settlement.
Net Options Value (NOV) is computed as the sum of the values of all long option positions less the sum of the values of all short option positions in a portfolio at the time of acceptance (clearing) of each option trade and on an end-of-the-day (EOD) basis. Negative NOV shall be collected as NOV Margin while positive NOV reduced by a prescribed haircut (5%) is given as a notional credit to the Member’s MCC account and the same is allowed to be treated as Margin Made Available.
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 various market risk factors such as spot rate, forward premia and interest rate on delta hedge forward trades and spot trades resulting from exercise of FX options. If the aggregate of MTM values of all trades shows MTM loss, such amount will be collected as MTM margin from a member.
If the aggregate of MTM values of all trades (delta hedge forward trades and spot trades resulting from exercise of FX options) is positive, then such value, reduced by a prescribed haircut (5%) is given as a notional credit to the Member’s MCC account and the same is allowed to be treated as Margin Made Available and can be used for meeting their margin requirements in any segment which draws margins from Member Common Collateral (MCC). The notional gains post haircut made available to members is termed as Margin Credit.
MTM Margin and NOV Margin on accepted trade portfolio is computed on daily basis at a stipulated time using intra-day MTM rates. In case there is an increase in MTM margin and NOV margin beyond a threshold as notified from time to time, additional margin is collected as intra-day margin.
In case of sudden increase in volatility in the underlying risk factors, Volatility Margin is imposed by Clearing Corporation and is charged as a percentage of Initial Margin. 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.
Members are required to replenish margins when the utilization of available margin has reached a certain percentage as notified from time to time. This level is termed as replenishment level. Rejection level is the percentage of utilization of available margin beyond which CCIL will not accept any new trade for guaranteed settlement.
In case of Premia and CSO Obligation being receivable for a settlement date for a member, margin credit is made available to the member till the time the obligation is settled. Such margin credit will be released on settlement. If a member has utilized this margin credit, there could be a possibility of margin shortfall due to withdrawal of the margin credit. In such cases, CCIL will withhold the settlement proceeds to the extent of such shortfall, and the withheld amount is released once the member replenishes the MCC account. In case of Premia and CSO Obligation being payable for a settlement date for a member, the margins are released upon successful settlement of the obligation.
Portfolio based Initial Margin, Volatility Margin, NOV Margin will be released on the option exercise / expiry for option trades.
On the expiry date, option trades will either be expired worthless or be exercised by the member. In case the option trades are exercised, an underlying spot trade will be created. Such spot trades resulting from exercise of cleared option trades along with the cleared delta hedge forward trades (with Value date as Spot minus 2 business days) will be accepted for CCP clearing and will be settled as part of CCIL’s USD INR Forex Settlement Segment. Margins blocked on the FX option trades will be released as part of option exercise / expiry. Margins blocked on the resultant spot trades arising out of option exercise and cleared delta hedge forward trades (with Value date as Spot minus 2 business days) will be transferred to the Forex Settlement Segment and will be released post settlement of such trades.
Single Order Limit is the maximum order size that is allowed on the FX Options Trading Platform. SOL mitigates the risk of unusually large trades creating undue exposure or disrupting market’s orderly functioning.
Accumulated Order Limit is the maximum size of aggregate open positions a member is allowed to have before trading is disallowed on the FX Options Trading Platform.
Default Fund are prefunded resources maintained by CCIL to cover potential residual losses arising out of default of a member. Each member is required to contribute to the default fund in the form of cash and / or eligible Government Securities.
The Quantum of Default Fund size is arrived at on the basis of Stress tests conducted on the outstanding trade portfolio of the members. The Quantum is reviewed on a monthly basis (or on day when stress loss exceeds prevailing Default Fund for the segment) or at such frequency as decided by CCIL from time to time.
A member's contribution to the default fund is determined based on (a) Average outstanding gross trade positions (b) Average Initial margin requirements (c) Highest stress loss in the preceding six months period with 50:25:25 as weights for these components, respectively. The minimum default fund contribution for a member is Rs.1 Crore. For a clearing member, average and highest stress loss will be the aggregate of such values on his proprietary account and of all its constituents.
The Clearing Corporation shall on declaration of default transfer the defaulting Member’s proprietary positions to one or more non-defaulting Members by way of a sale (including an auction) or through an allocation/ tear up mechanism.