Forex Forward: Risk Management Process

CCIL extends guaranteed settlement of USD/INR Forward trades with residual maturity up to 13 months reported in this segment by members or their constituents. The risk associated with this segment is the pre-settlement risk which is equivalent to market risk on forward positions. The risk management relating to forex forward segment provides for collection of margins based on the outstanding trade positions of the members/constituents in forward segment. Forward trades are subjected to exposure checks for adequacy of margins for both the counterparties to the trade, on a trade by trade basis before those are accepted by CCIL.

Exposure check is online, for both, Fx-forwards trades concluded on the Clearcorp Dealing platform and OTC trades reported to CCIL. On-line acceptance status of trades is made available to the members through CCIL's Integrated Risk Information System (IRIS). CCIL seeks to cover its risk through prescription of Initial margin (including spread margin), mark to market margin, volatility margin and concentration margin.

In terms of the provisions of Chapter VIII, of the Regulations of the Forex Forwards Segment, proprietary trades of a clearing member and the trades of each of its constituents shall be considered separately for margining. No offset in margining is permitted between a clearing member and its constituents or between different constituents of a clearing member. Where a constituent avails services of multiple clearing members, its portfolio of trades cleared through each such clearing member shall be considered separately for margining, with no offsets being permitted between them.

The Initial Margin (IM) on the outstanding trades of the Members is collected based on Portfolio Value at Risk model (PVaR). It is supplemented by collection of spread margin. Based on the CPRA grade of the members, CCIL has prescribed different levels of initial margins for different members. Provision is also available to step-up the Margin requirement for individual members on account of adverse development / regulatory action. Minimum Initial margin (including spread margin) is collected in case the margin value as per PVaR model is lower due to lower volatility in USD/INR exchange rate. Initial margin is released on acceptance of forward trades in Forex settlement segment (Spot window).

Mark to Market Margin (MTM) constitutes the margin obligation required to be fulfilled by a member to cover the notional loss (i.e. the difference between the current market price and the contract price of the trade), if any, in the outstanding trade portfolio due to movement of exchange rates. Marking to market of outstanding trades is carried out at the end of the day. MTM values of settlement date wise net positions are computed using USD/INR forward exchange rates. These MTM values are then discounted to the date of computation using CCIL sovereign zero coupon rupee interest rates (ZCYC). Forward Rates for pre-specified tenor points (calendar month ends and for other specified short tenors) are taken as the basis from which the forward rates for other tenors are arrived at through interpolation/ extrapolation. MTM margins blocked may be used to meet any shortfall in USD/INR settlement segment due to failure of the member to discharge its obligation toward forward trades. MTM margins blocked are released on successful settlement of forward position in the settlement window. 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/ intra-day MTM credit reduction is collected/affected.

Mark to Market Gain as MTM Credit: 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.

In case of sudden increase in volatility in USD/INR exchange rates, Volatility Margin (VM) is imposed by CCIL at a rate notified to the members. On imposition of VM, Initial Margin requirement effectively increases by the same percentage at which VM was imposed.

Members with significant exposure in this segment may be called upon to pay Concentration Margin (CM). Concentration Margin is collected as percentage (as notified) of Initial Margin.

The margins viz. IM, VM, CM and MTM for Forex Forward segment are blocked from available balance in MCC pool.  It shall be the responsibility of the member/ clearing member to maintain adequate balance in MCC pool to fulfil the margin obligation on its own / its constituent's portfolio within the stipulated timelines to avoid penal charges.

Risk Management in Trading System: CCIL also offers CCP clearing to trades concluded on the Forex trading platform of the Clear-Corp Dealing Systems (India) Ltd. Members are assigned Single Order Limits (SOL) based on their CPRA grade and Tier I capital. Out of the total margin made available in MCC pool, a member has to allocate a certain minimum amount of margin for trading system trades at the beginning of every day. This prescribed margin is maintained throughout the trading hours and is release back as free margin in MCC pool on session closure. This prescribed margin is also used for meeting margin requirements for the reported trades.

A dedicated Default Fund is in place for the segment for meeting any residual risks arising out of default by a member. Quantum of Default fund is proportionately allocated amongst direct members of the segment based on ratio of members (including their constituents, if any) average initial margin contributed, average position outstanding and higher of their stress loss, during the previous six month period.