Interest Rate Swaps (IRS) & Forward Rate Agreements (FRA) trades of residual maturity up to 10 years referenced to MIBOR & MIOIS benchmarks and Interest Rate Swaps (IRS) trades of residual maturity up to 5 years referenced to MIFOR & MMFOR benchmark 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, MTM margin and Volatility Margin are the margins collected in the Derivatives segment. Concentration Margin may also be collected from members who meet the threshold for Concentration Margin imposition
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 future 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 computed 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 Aug’ 2008 onwards subject to availability of reliable market data. There is a spread margin component to take care of the possible impact due to un-expected twist in the Swap 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 etc. In the 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 (MTM) constitutes the margin obligation required to be fulfilled by a member to cover the notional loss, if any, in the outstanding trades portfolio due to movement of swap rates.
The implied zero curve is arrived at from the swap curve using bootstrapping. All trades of a member on a benchmark are re-valued using implied swap zero curve for the benchmark and the net value is taken as MTM value of the portfolio of outstanding trades of the member. For such valuation, floating leg cash flows are arrived at using the forward rates estimated from the zero rates as above. If the aggregate of MTM values of all trades shows MTM loss, such amount will be collected as MTM margin from a member.
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 IRS/FRA 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 interest 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 shall be applicable separately for portfolio of IRS trades referenced to MIBOR/MIOIS benchmark and portfolio of IRS trades referenced to MIFOR/MMFOR benchmark. Concentration margin is levied on the member/s for whom either or both of the below 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 trade position during previous month , computed across all members in the segment referenced to particular benchmark ( separately for MIBOR/MIOIS & MIFOR/MMFOR benchmark). 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 during previous month, computed across all members in the segment referenced to particular benchmark (separately for MIBOR/MIOIS & MIFOR/MMFOR benchmark). 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 notional in breach, falls below the respective pre-determined thresholds (average IM and average gross trade position as stated above) as under: i. Level 2 threshold set at 13% for partial withdrawal ii. Level 1 threshold set at 6% for complete 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 trade position of participant for the purpose = Aggregate of “Notional Value of all trades of member referenced to a particular benchmark”
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 a 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). This amount is termed as “Margin Credit”.
Initial Margin and Mark to Market margin attributable to a trade are released on maturity of the trade. MTM margin or part thereof may also be released at the time of settlement of individual cash flows.
MTM gain (or part thereof) from a IRS/FRA trade which is available as margin credit to the member gets withdrawn on settlement of cash flows / maturity of such trade. If a member had utilized such credit against any other margin requirement, there could be a margin shortfall when such credit is withdrawn. 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.
Discounted value of any amount determined as payable or receivable by the Member due to early termination is termed as Crystallized Settlement Obligation. Crystallized Settlement Obligation payable by a member is treated akin to margin liability of the member. The Crystallized Settlement Obligation receivable by a member, on the other hand, is treated like a margin credit available to the member.
IRS trades concluded on ASTROID trading platform are accepted in Rupee Derivatives segment for guaranteed settlement. Margins are computed on these trades on post trade basis.
If, at any point in time, the margin requirement for a member exceeds the margin made available, the trading system enters into a Risk reduction mode where the member is allowed to put only those orders which if matched, would result in margin reduction. Once the margin requirement falls below the margin made available, the member comes out of Risk Reduction mode.
Margins for IRS trades done on ASTROID Trading Platform 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 periodically (half-yearly).
Two separate default funds are in place for Rupee Derivatives Segment for meeting any residual risks arising out of any default by the members of this segment. MIBOR & MIOIS-Default Fund and MIFOR-Default Fund, referenced to transactions in respective benchmarks, will be maintained with a view to meet losses arising out of default by Member(s) of this segment. In addition to meeting losses arising out of default by Member(s) on its MIFOR portfolio, the MIFOR Default Fund will also be used for meeting losses on the defaulter’s MMFOR portfolio. Each member is required to contribute to the default fund in the form of cash and / or eligible Government Securities.
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.
For each default fund, a member's contribution to the default fund is determined based on 1) Average of (a) outstanding gross trade positions and (b) Initial margin contributions and 2) Highest of its Stress Loss, during preceding six months period using trades referenced to the respective benchmarks, with 50:25:25 as weights for these components, respectively. The minimum contribution for a member is Rs.1 Crore in case of MIBOR and MIOIS Default Fund and Rs.10 lacs in case of MIFOR Default Fund. For MIFOR Default Fund, while computing the average outstanding gross trade positions, average Initial Margin and highest stress loss, members’s MIFOR and MMFOR portfolio will be considered. In case a particular member is acting as clearing member, then average computation above and highest stress loss for clearing member will be the aggregate of such values on his proprietary account and of all its constituents.
A) Settlement Shortage Any shortage in meeting daily settlement obligation in this segment shall, unless replenished by the Member by 11.00 A.M. on the next day (by 10.30 A.M. if the next day is a working Saturday), be treated as a Default by the Member. For meeting such shortage, Clearing Corporation shall have the authority to sell the securities placed by the Member as margin deposit. Such sale could be made either through NDS-OM or Over the Counter or sale through private arrangement as decided by Clearing Corporation. B) Other than Settlement Shortage i) Portfolio referenced to MIBOR & MIOIS benchmark: 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. ii) Portfolio referenced to MIFOR & MMFOR benchmark: A decision may be taken by the Clearing Corporation to close out all outstanding trades of such member with its bilateral counter-parties. 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 IRS/FRA 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.
One or both the parties to the trade have inadequate balance in Securities SGF account. Reported trades are kept pending for want of margin, please check the remark field of trade. In case of Forex settlement segment, trade are kept pending also due to inadequate exposure limit.
MTM gain allowed as credit to MCC account will get extinguished with settlement of corresponding trade positions. This will lead to a reduction in available balance in MCC and may result in margin shortfall if such gain was utilized against margin requirements. Hence it is required that such gain movement is checked in advance by the members and MCC account is suitably funded with funds/eligible securities beforehand. CCIL provides details of ‘MTM gain moving out on next day’ in its ‘Margin utilization report’ generated for each segment at the end of previous day.
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.