Counter-party Credit Risk
Management
S Roy, CCIL
6th April 2013
1
Outline
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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
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Counterparty Risks from OTC Derivative Market Exposures
- significant, increasing steadily & can change fast
Approach to manage this risk
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Bilateral Margining
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CCP Clearing
Complexities due to new Regulatory Approach
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Mandatory CCP Clearing of trades in Certain Products
Mandatory Bilateral Margining for other OTC Derivative trades
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Bilateral Margining & CSA
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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
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Structure does not allow Margin collection towards
Potential Future Exposures
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Bilateral Margining & CSA(Cont.)
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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
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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.)
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Bigger problem is however under normal market
condition
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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
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Rupee Interest Rate Swaps – likely to start soon
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Trade Repository At CCIL
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Institutional Trades
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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
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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.)
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Benefits from this approach
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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.)
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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
13
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
Volume (Rs. cr.)
21,308
18,760
20,000
13,523
15,000
5,000
3,623
1,577
5,803
5,335
5,303
4,187
3,884
3,215
3,208
12,243
13,943 14,656
12,934
11,623
9,192
8,755
10,000
14,266
6,696
0
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
S Roy, CCIL
6th April 2013
Outright
2008-09
2009-10
2010-11
2011-12
2012-13
(upto
29.03.13)
Repo
Back
14
Forex Settlement
Average Daily volume – USD 20.82 billion
Total number of members - 80
All Authorised Dealers in Forex)
25,000
20,185
Volume (USD mm)
20,000
17,463
16,414
15,000
13,167
10,000
20,823
12,996
7,466
3,813
5,000
1,496
5,020
2,161
0
2002-03
S Roy, CCIL
6th April 2013
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
(upto
29.03.13)
Back
15
Collateralised Borrowing & Lending Obligation
(CBLO)
Average Daily volume – Rs. 41,700 Crs.
Total number of members - 232
CBLO Settlement Volume (Daily Average)
60,000
54,531
Volume (Rs. Cr.)
50,000
41,700
41,700
38,335
40,000
30,748
27,588
30,000
20,000
16,096
10,045
10,000
3,345
16
262
0
2002-03
S Roy, CCIL
6th April 2013
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
(upto
29.03.13)
Back
16