Counter-party Credit Risk

Management

S Roy, CCIL
6th April 2013

Outline

Introduction
Bilateral Margining & CSA
Role of CCIL in Indian OTC Market
Trade Repository At CCIL
Alternate Risk Management Options
Conclusion

Introduction

Counterparty Risks from OTC Derivative Market Exposures

- significant, increasing steadily & can change fast
Approach to manage this risk

Bilateral Margining

CCP Clearing

Complexities due to new Regulatory Approach

Mandatory CCP Clearing of trades in Certain Products

Mandatory Bilateral Margining for other OTC Derivative trades

Bilateral Margining & CSA

In practice, Bilateral Margining is effected through CSA

Seeks to keep exposures in terms of MTM value under
control
Operationalisation requires:
(a) Portfolio Reconciliation
(b) Valuation to be in sync
(c) Transferred amount preferably in cash; else availability of
collateral re-hypothecation option

Structure does not allow Margin collection towards

Potential Future Exposures

Bilateral Margining & CSA(Cont.)

Does CSA create unmanageable operational difficulty?

How does one get so many CSAs executed & keep upto
date?
Often problems faced when one needs protection - at the
time of stress when counter-party looks vulnerable

Trade Portfolio Reconciliation fails

Valuations are disputed
Collaterals are not transferred in time by counterparty
Refund of collaterals placed earlier becomes doubtful
Revaluation on fortnight basis leaves huge risk uncovered
Across border flows become extremely uncertain

Bilateral Margining & CSA(Cont.)

Bigger problem is however under normal market

condition

In a market with 80 active players having outstanding

trades with each other can have upto (80*79/2) flows after
each revaluation period
Effecting & Tracking these flows increases costs & huge
operations risk
Sample Analysis in Inter-bank Forward Foreign Exchange
market in India shows 2506 connections for 79 participants
& Gross MTM placement requirement of Rs 8800 Crores
(net placement would be only Rs 3100 Crores)

Role of CCIL in Indian OTC Market

Pioneer in CCP clearing of OTC market products
Securities Settlement
Started in April 2002 - Market size increased from
average Rs 5000 Crs per day to Rs 46000 Crs per day
Rupee/USD Foreign Exchange
Started in Nov 2002 - Market Size increased from
average USD 2 bn per day to USD 21 bn per day
Collateralised Borrowing & Lending Obligation (CBLO)
Started in Jan 2003 - Market Size increased from
nil to average Rs 42000 Crs per day
Forward Foreign Exchange
Started in Dec 2009 - CCP Cleared Market Size increased from
USD 14 bn to USD 134 bn

Rupee Interest Rate Swaps likely to start soon

Trade Repository At CCIL

Institutional Trades

Interest Rate Swaps

Credit Default swaps
Forward Foreign exchange (including Cross Currency)
Currency Options (including Cross Currency)
Currency Swaps
Interest Rate Options

Client Trades
TR will have trade data for most of the OTC
derivative trades of the Banks & Institutions
Question : Can we leverage the data in TR for
Counterparty Exposure Management?

Alternate Risk Management Options

TR automatically ensures Trade Portfolio reconciliation

Valuation of Trades & PFE computation possible with TR data
Bilateral margin requirement can be computed
Member-wise net payable & receivable amounts can be arrived at
Each member can deposit or withdraw the amounts payable or
receivable by it by next day pre-specified time
The deposit can be in cash or in securities
If deposit is in securities, there will have to be additional processes
to share any loss from realisation in case of a member default
process for realisation also to be agreed upon.

Alternate Risk Management Options

(contd.)

Benefits from this approach

Non-replenishment by a member is known in a very short time &

will be known to all its counterparties will guard against risk of
contagion
Valuation related discrepancies will not hinder the process
Single flow of amount at netted level per day will allow the process
to achieve the objective
MTM values can be recomputed everyday & hence PFE can be
with 1 day Margin Period of Risk less collateral per entity shortage of collateral in the market can be avoided to a large extent
Counterparty Risk Coverage is at maximum efficiency
Documentation requirement minimum

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Alternate Risk Management Options

(contd.)

Downside - ???
How to make it work?
Valuation for trades to be standardised for this
purpose
Altogether new approach - Regulatory approval to be
obtained
Legal documentation to be created

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Do we find the approach attractive enough

to work for this?

12

Thank you

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Securities
Settlement
Average Daily volume Rs. 46,692 Crs.
Total number of members : 184
(All Institutional Members- Regulated entities)

S Roy, CCIL
6th April 2013

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Forex Settlement

Average Daily volume USD 20.82 billion

Total number of members - 80
All Authorised Dealers in Forex)

S Roy, CCIL
6th April 2013

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Collateralised Borrowing & Lending Obligation

(CBLO)
Average Daily volume Rs. 41,700 Crs.
Total number of members - 232
CBLO Settlement Volume (Daily Average)

S Roy, CCIL
6th April 2013

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