Risk Management Process

During the settlement processes, CCIL assumes certain risks which may arise due to a default by a member to honour its obligations. Settlement being on Delivery Versus Payment basis, the risk from a default is the market risk (change in price of the concerned security). CCIL processes are designed to cover the market risk through its margining process.

CCIL collects Initial Margin and Mark to Market Margin (both Intraday and EOD) from members in respect of their outstanding trades. Initial Margin is collected to cover the likely risk from future adverse movement of prices of the concerned securities. Mark to Market Margin is collected to cover the notional loss (i.e. the difference between the current market price and the contract price of the security covered by the trade) already incurred by a member. Both the margins are computed trade-wise and then aggregated member-wise. No margin offsets are permitted between constituents or between a constituent and its Clearing Member.

In case of sudden volatility, Intraday Mark to Market Margin is collected if the difference between the Mark to Market Margin at previous EOD and intra-day Mark to Market Margin is greater than a specified threshold level of the initial margin as at previous EOD.  In addition, CCIL may also collect Volatility Margin in case of unusual volatility in the market.

Members are required to maintain sufficient margin balances in its Member Common Collateral (MCC) pool, in a manner that the same is enough to cover the all types of margin requirements on the trades done by such members in various segments. In case of any shortfall, CCIL makes margin call and the concerned member is required to meet the shortfall before the stipulated time. Members' contribution towards the MCC pool is in the form of eligible Govt. of India Securities/T-Bills and Cash.

Another important risk emanating from the process is Liquidity Risk. To ensure uninterrupted settlement, CCIL is required to arrange for liquidity both in terms of funds and securities. CCIL has arranged for Lines of Credit from Banks to enable it to meet any reasonable shortfall of funds arising out of a default by a member either in its Securities Segment or Forex Segment. In regard to the member’s contributions to MCC, it is mainly in the form of securities as per the list of specified securities acceptable as contribution towards MCC as notified from time to time. CCIL ensures that the most liquid securities in which a significant portion of the trades are settled are likely to be eligible to be posted towards margin in the MCC pool.