Transcript CCIL
S Roy, CCIL 6 th April 2013
Counter-party Credit Risk Management
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Outline
Introduction
Bilateral Margining & CSA
Role of CCIL in Indian OTC Market
Trade Repository At CCIL
Alternate Risk Management Options
Conclusion
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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
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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
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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
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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)
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Role of CCIL in Indian OTC Market
Pioneer in CCP clearing of OTC market products
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Started in April 2002 - Market size increased from average Rs 5000 Crs per day to Rs 46000 Crs per day
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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
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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?
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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. 9
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 10
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 11
Do we find the approach attractive enough to work for this?
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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) 30,000 27,932 25,000 21,308 20,000 18,760 15,000 10,000 5,000 13,523 14,266 12,243 9,192 8,755 3,623 1,577 5,303 3,208 5,335 3,884 5,803 3,215 4,187 6,696 0 2002-03
S Roy, CCIL 6 th April 2013
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Outright Repo 13,943 14,656 12,934 11,623 2010-11 2011-12 2012-13 (upto 29.03.13)
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Forex Settlement
Average Daily volume – USD 20.82 billion Total number of members - 80 All Authorised Dealers in Forex) 25,000 20,000 17,463 20,185 20,823 16,414 15,000 13,167 12,996 10,000 7,466 5,020 5,000 1,496 0
S Roy, CCIL
2002-03
6 th April 2013
2,161 3,813 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 (upto 29.03.13)
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Collateralised Borrowing & Lending Obligation (CBLO)
Average Daily volume – Rs. 41,700 Crs. Total number of members - 232 60,000
CBLO Settlement Volume (Daily Average)
54,531 50,000 41,700 38,335 41,700 40,000 27,588 30,748 30,000 20,000 16,096 10,045 10,000 16 0
S Roy, CCIL
2002-03
6 th April 2013
262 3,345 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 (upto 29.03.13)
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