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Counter-party Credit Risk Management

S Roy, CCIL 6th April 2013

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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 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

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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?

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.

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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?

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Thank you

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S Roy, CCIL 6th April 2013

Securities Settlement

0

5,000

10,000

15,000

20,000

25,000

30,000

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13(upto

29.03.13)

3,6235,303

3,884 3,2154,187

6,696

9,192

12,243 11,623

14,656

27,932

1,5773,208

5,335 5,803

8,755

13,523 14,266

21,308

13,94312,934

18,760

Vo

lum

e (R

s. c

r.)

Outright Repo

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

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S Roy, CCIL 6th April 2013

Forex Settlement Average Daily volume – USD 20.82 billion Total number of members - 80 All Authorised Dealers in Forex)

0

5,000

10,000

15,000

20,000

25,000

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13(upto

29.03.13)

1,496 2,1613,813

5,020

7,466

13,167

16,414

12,996

17,463

20,185 20,823

Vo

lum

e (U

SD

mm

)

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S Roy, CCIL 6th April 2013

Collateralised Borrowing & Lending Obligation (CBLO)

Average Daily volume – Rs. 41,700 Crs. Total number of members - 232

0

10,000

20,000

30,000

40,000

50,000

60,000

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13(upto

29.03.13)

16 2623,345

10,045

16,096

27,58830,748

54,531

41,70038,335

41,700

Vo

lum

e (R

s. C

r.)

CBLO Settlement Volume (Daily Average)

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