Clearing Corporation may guarantee forward deals

The Clearing Corporation of India (CCIL) may soon guarantee deals struck in the currency forward contract market, providing a much-needed support to such deals.

The average daily volume in the forward market is around $18 billion. In the current year, the annual forward contract market is set to achieve a turnover of $3.5 trillion.

Currency forwards are a hedging tool, where entities having currency exposures can buy or sell them in the forward market. But the deals in the market are generally between two parties, especially the banks, with the trade done over the counter. At present, such deals are reported to CCIL, but they are opaque in nature.

Forward contracts are settled by CCIL, but there is no guarantee that the parties may comply with CCIL’s terms. “We have proposed to RBI to allow us to provide a guarantee for forward deals,” said CCIL Chairman R H Patil. With the CCIL guarantee, banks providing products to currency hedgers, will benefit as they will have to make a lesser provision towards capital adequacy.

In most cases, when banks sell currency forward contracts, they simultaneously cover the deal in the spot market. Such deals, known as mirror-image deals, are settled and guaranteed, but forward contracts are not guaranteed by a third party and hence banks end up providing the complete risk-weighted capital for forward deals.

CCIL also expects all dated securities issued by the Union government to be auctioned by it. Currently, in case of treasury bills, auctions are conducted by RBI, but CCIL invites bids and conducts the other processes.