Counter-party Credit Risk Management. S Roy, CCIL 6 th April 2013. Outline. Introduction Bilateral Margining & CSA Role of CCIL in Indian OTC Market Trade Repository At CCIL Alternate Risk Management Options Conclusion. Introduction.
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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
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
Do we find the approach attractive enough to work for this?
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 Back
ForexSettlement Average Daily volume – USD 20.82 billion Total number of members - 80 All Authorised Dealers in Forex) S Roy, CCIL 6th April 2013 Back
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 Back