USD/INR forward trades of residual maturity up to 13 months are eligible to be accepted for guaranteed settlement in this segment. Actual acceptance by CCIL happens if both the members have adequate margins to meet their margin requirements.
Initial Margin, Volatility Margin, Concentration Margin and Mark to Market margin.
Initial Margin constitutes the margin obligation required to be fulfilled by a member in relation to their outstanding trades accepted for guaranteed settlement, so as to provide cover against any potential risk / loss in value caused due to adverse price/rate movement.
CCIL uses volatility weighted Historical simulation based Value at Risk (VaR) for initial margin computation. VaR is at 99% confidence level over a 5 day Margin period of Risk (MPOR) based on Historical series of 1000 days returns comprising of a) 750 consecutive recent returns & b) 250 consecutive returns from period representing highest stress in market identified from Oct’2002 onwards. There is a spread margin component to take care of the possible impact due to un-expected twist in the forward rate curve. Initial margins for relatively weaker members are stepped up by 50% to 100% based on the CPRA grade of the members. Initial Margin for particular member may also be stepped up in case of adverse market report or regulatory action. In case Of margining of client trades step up factor applicable (if any) to its clearing member would be applicable to the client also.
The Initial margin based on VaR computed using Volatility weighted Historical simulation may be low in the period of low volatility in exchange rates. To guard against the impact of sudden increase in volatility, Initial margin is not allowed to fall below a minimum level.
Mark to Market Margin 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) in its trade portfolio.
MTM margin is computed on settlement date wise net position using USD/INR forward exchange rates. 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. Settlement date wise MTM margin values are then discounted to the date of computation using sovereign zero coupon rupee interest rate curve (ZCYC). Off-set is allowed between MTM loss and MTM gain across all settlement dates. If the net of MTM values for all such settlement date-wise positions shows loss, then same is collected as MTM margin.
Increase in MTM Margin on a day over the MTM margin on the previous day is termed as Incremental MTM margin. MTM margin is imposed at the time of end of the day risk valuation and becomes payable on next day before the stipulated time.
MTM Margin on forward trades is computed on daily basis at a stipulated time using intra-day MTM rates. In case there is an increase in MTM margin beyond a threshold as notified from time to time, additional margin is collected as intra-day MTM margin.
In case of sudden increase in volatility in USD/INR exchange rates, Volatility Margin is imposed by Clearing Corporation. 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.
Concentration Margin is levied on participants having significant exposure in the segment. It is charged as a percentage of Initial Margin.
Concentration margin is levied on the member/s for whom either or both of the below mentioned conditions are met:
a) Initial Margin (IM) requirement breaches the "IM Threshold for CM imposition” or / & b) Gross Trade Position* breaches the "Position Threshold for CM imposition".
Concentration Margin is levied in two stages on breach of thresholds set as under:
i. First Level of threshold set at 8% of respective average values of Initial Margin and gross USD positions during previous month, computed across all members in the segment. Concentration margin is imposed at 15% of applicable Initial Margin on breach of First Level Threshold/s.
ii. Second Level of threshold set at 15% of respective average values of Initial Margin and gross USD positions during previous month, computed across all members in the segment. Concentration margin is imposed at 20% of applicable Initial Margin on breach of Second Level Threshold/s.
Withdrawal: Concentration Margin, in place for member/s, is withdrawn (partially/fully) once the Initial Margin obligation and/or gross position in breach, falls below the respective pre-determined thresholds (average IM and average gross USD position as stated above) as under: i. Level 2 threshold set at 13% for partial withdrawal ii. Level 1 threshold set at 6% for compete withdrawal
Margin Shortfall (if any) on account of imposition of concentration margin, is to be replenished in an hour’s time to avoid penal charges.
* Gross USD Position of participant for the purpose = Aggregate of 'Settlement date wise Net USD Position (in absolute terms)'.
Members are required to replenish margins when the utilisation of available margin has reached such percentage as notified from time to time. This level is termed as replenishment level. Rejection level is such percentage of utilization of available margin, beyond which CCIL would not accept any new trade for guaranteed settlement.
If the net MTM value of all accepted trades of a member is positive (i.e. gain), then such value, subject to haircut, is allowed as notional credit to the member for meeting its margin requirements in any segment which draws margins from Member Common Collateral (MCC) pool. This amount is termed as “Margin Credit”.
Initial Margin on forward trade positions entering into spot window is released as soon as such position is accepted in the USD/INR Settlement segment. In case a forward position is not fully accepted in Settlement segment, proportionate amount of initial margin is held back till such position is either fully accepted or cash settled. MTM margin blocked for a position is released on successful settlement of such position.
MTM gain from a forward position which is available as margin credit to the member gets withdrawn on settlement of such position. If a member had utilized such credit against any other margin requirement, there could be a margin shortfall when such position goes for settlement. In such cases, CCIL holds back the settlement proceeds to the extent of shortfall. Amount held back is released on replenishment of margin by the member.
Forward trades concluded on Fx-Clear Dealing System are accepted in Forex Forward segment for guaranteed settlement. Margins are computed on these trades on post trade basis.
Margins for forward trades done on Fx-Clear Dealing System are checked on a post trade basis. In order to minimize the risk from such trades being accepted without adequate margin, Single Order Limits (SOLs) are set for the members. SOLs are reviewed atleast on half-yearly basis.
A dedicated default fund is in place for Forex Forwards Segment for meeting any residual risks arising out of any default by the members of this segment. Each member is required to contribute to the default fund in the form of cash and / or eligible Government Securities. CCIL may from time to time, also prescribed certain proportion of contribution to be mandatorily in CASH.
The Quantum of Default fund is arrived at on the basis of Stress tests conducted on the outstanding trade portfolios of the members. The amount is reviewed on 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 1) Average of (a) outstanding settlement date-wise trade positions and (b) Initial margin contributions and 2) Highest of its Stress Loss, during preceding six months period, with 50:25:25 as weights for these components, respectively. The minimum contribution for a member is Rs.1 Crore. In case of a clearing member, the average computations above and highest stress loss for clearing member will be the aggregate of such values on its own account and on account 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 mechanism.
In the event of Insolvency : In case of insolvency of a member, a decision may be taken by the Clearing Corporation to close out all outstanding forward trades of such member.
Operational FAQs
One of the counterparty to trade has not reported the deal to CCIL or both have reported the deals with economic details not matching.
MTM margin requirement increases if price/ rate movement is adverse. For example, INR depreciation will affect member with net USD sell portfolio in Forex Segment. Such Incremental MTM requirement would be blocked from SGF account.