Segments

USD/INR Process

The risk management process relating to forex settlement operations stipulates the fixing of a Net Debit Cap (NDC) for each member. The NDC for a member is arrived at based on two factors: 

• The Counterparty Risk Assessment (CPRA) grade as assigned to a member by the agency engaged by CCIL for the purpose, and 

• The Tier-I capital of such a member. 

Net Debit Cap (USD) and Net Debit Cap (INR) are the maximum limits up to 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. 

The margin factor is for three (3) settlement dates and is arrived at based on a 3-day VaR at a 99% confidence interval, subject to a floor. The margin factor is stepped up for entities with lower CPRA grades. The contribution of a member to the FX Collateral is in US dollars.

Exposure limits in both currencies are arrived at on the basis of the FX Collateral in US dollars deposited by a member. In both currencies, members can opt to avail of 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 by both counterparties to the trade, i.e., the net US dollar sale position of the member for the settlement date is within the exposure limit (USD) and the net INR sale position of the opposite member for the settlement date is within the exposure limit (INR), subject to availability of margins wherever required. 

Members with higher CPRA grades are allowed to have higher exposure limits (USD or 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 (acting as base initial margin) deposited by the member to support the base exposure limit.

For covering the liquidity risk in USD dollars, 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. 

The collateral required for availing of such credit facilities from the settlement bank is furnished out of the USD Treasury bill purchased by CCIL out of the contributions made by the members to the FX Collateralfor this segment.

To cover the liquidity risk in the Indian rupee, rupee lines of credit have been arranged with the banks. Such lines of credit are available at the Reserve Bank of India at the time of settlement.

The exposure check is online, both for trades from the FX CLEAR and FX SWAP trading systems and for reported trades. The online acceptance status of trades is made available to members through CCIL’s Integrated Risk Information System (IRIS). 

CCIL covers its risk through the 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 the collection of intraday MTM margin. If the increase in MTM margin on the outstanding trade portfolio of a member, computed using intraday MTM rates, is beyond a threshold as notified from time to time, the intraday MTM margin is collected. Margins blocked are released upon successful settlement of obligations.

If the MTM value of an accepted trade portfolio for the member results in a gain for the member, then the member’s FX Collateralaccount is credited with the MTM gain amount (net after applying a haircut on such MTM gain), such MTM credit is allowed to be treated as margin made available by the member and can be used against margin requirements in any other segment which draws margins from Securities Segment FX Collateral.

Volatility Margin (VM) is imposed in the event of a sudden increase in volatility in USD/INR exchange rates. The imposition of VM results in a corresponding increase in the Margin Factor and a reduction in the exposure limit of the members.

Additional Initial Margin, Volatility Margin, and MTM margin for the Forex segment are blocked from the additional USD collateral if any, made available by the member and the unutilized portion of the FX Collateraldeposited by such member for the Securities segment.

A dedicated member-contributed default fund is in place for the segment to meet any residual risks arising out of a member's default.