Forex Settlement Segment: Risk Management Process

The risk management process relating to Forex settlement operation stipulates fixing of Net Debit Cap (NDC) for each member. NDC for a member is arrived at based on two factors: the CPRA grade of the member given by a reputed external agency including subsidiary of a rating agency engaged in counterparty risk assessment business and Tier-I capital of such member. Net Debit Cap (USD) and Net Debit Cap (INR) are the maximum limits upto which CCIL can take exposure on a member for a settlement date in terms of net US Dollar sale position and net INR sale position respectively. Margin Factor is for 3 settlement dates and is arrived at based on 3 day VaR at 99% confidence interval, subject to a floor. Margin factor is stepped up for entities with low CPRA grade. CCIL may further step-up the margin factor for banks with deteriorating financials of member's or regulatory actions imposed. Contribution of a member to FX Collateral is in US Dollar.

Exposure limits in both currencies are arrived at on the basis of the FX Collateral in US Dollar deposited by a member. In both the currencies, members can opt to avail lower exposure limits than the exposure limits so arrived at by CCIL. Trades concluded by a member are accepted for settlement only as long as the Exposure Limit is not breached, i.e., the net US Dollar sale position of the member for the settlement date is within the Exposure Limit (USD) and net INR sale position of the member for the settlement date is within the Exposure Limit (INR) for the member subject to availability of margins wherever required. Members with higher CPRA grade will be allowed to have higher Exposure limits (USD / INR) for TOM and SPOT settlement dates. CCIL covers the risk arising out of such higher exposures by collecting Additional Initial Margin (AIM) over and above the USD collateral deposited by the member to support the base exposure limit.

For covering the liquidity risk in USD Dollar, CCIL has Lines of Credit (LOC) in place from its overseas settlement bank. CCIL draws against the LOC in case a member fails to deliver its USD obligation to CCIL on the settlement date. Collaterals required for availing of such credit facilities from the settlement bank are furnished out of USD Treasury bill purchased by CCIL out of the contributions made by the members to the FX Collateral for this segment.

For covering the liquidity risk in Indian Rupee, Rupee Lines of credit have been arranged from the banks. Such Lines of credit are available at Reserve Bank of India at the time of settlement.

Exposure check is on-line, for trades concluded on 'Fx Clear Dealing Platform' and for reported trades. Acceptance status of trades is made available online to the members through CCIL's Integrated Risk Information System (IRIS). CCIL covers its risk through prescription of Initial margin (including Additional Initial Margin or AIM), Mark to Market (MTM) margin and, Volatility Margin (VM).

MTM margin constitutes the margin obligation required to be fulfilled by a member to cover the notional loss (i.e. the difference between the value of the accepted trades of a member at current market price and at the contracted price of the trade), if any, due to movement of exchange rates. MTM margin is computed at the end of the day. There is also a provision for collection of Intra-day MTM margin. If change in MTM value (i.e. increase in MTM loss / decrease in MTM gain / both) on outstanding trade portfolio of a member, computed using Intra-day MTM rates is beyond a threshold as notified from time to time, intra-day MTM margin is collected. Margins blocked are released on successful settlement of obligations.

If the MTM value for a member results in a gain to the member, then the member's margin account is credited with the MTM gain amount (net after applying a haircut on such MTM gain) and the same is allowed to be treated as margin made available by the member. Such margin made available can be used against margin requirements in any other segment which draws margins from Member Common Collateral (MCC) pool.

Volatility Margin (VM) is imposed In case of sudden increase in volatility in USD/INR exchange rates. Imposition of VM results in a corresponding increase in the Margin Factor and a reduction of Exposure Limit of the members.

Additional Initial Margin, Volatility Margin and MTM margin for Forex segment are blocked from the additional FX Collateral if any, made available by the member and from the available balance in MCC pool. .

A dedicated member contributed Default Fund is in place for the segment for meeting any residual risks arising out of default by a member.