Payment vs payment settlements in FX to result in risk reduction: R Sridharan

Interview with Managing Director, CCIL

The Clearing Corporation of India (CCIL), which provides institutional infrastructure for the clearing and settlement of transactions in government securities (g-sec), money market instruments, foreign exchange transactions, and derivatives in the over-the-counter (OTC) market, plans to introduce new measures in 2015. R Sridharan, managing director of CCIL, talks to Neelasri Barman and Sachin Mampatta about the plans. Edited excerpts:

What are the new infrastructure in the offing to be put up by CCIL in 2015?

We plan to introduce the payment-versus-payment mode of settlements in the forex segment involving dollar/rupee transactions. This is similar to the DVP (delivery-versus-payment) mode of settlements that we have adopted in government securities, CBLO (collateralised borrowing and lending obligation) and the repo segments. This will result in substantial risk reduction.

We have also developed an anonymous electronic trading platform for trading in interest rate swaps and forward rate agreements, which will be introduced in 2015. An anonymous electronic trading platform, combined with guaranteed settlement of swaps, will improve transparency, reduce risks, and promote uniform price availability for all members, big or small. Our experience with the anonymous electronic trading platforms in other asset classes has shown that such a combination can result in increased trading volumes.

RBI have authorised CCIL to issue legal entity identifiers in India. This will be fully operationalised in 2015.

What will be the advantages of auction of trades and positions of defaulters laid down in your discussion paper?

The discussion paper has been circulated by us to elicit the views of our members on the proposed default-handling process. By becoming central counter party (CCP) to the trades done by its members, the CCIL helps its members to manage their counterparty/settlement risks in a better manner. The CCIL, in turn, manages the risks through its risk-management processes in a way that the ultimate risks to its members from defaults are either eliminated or reduced to the minimum. We will finalise the default handling process after we get responses from our members to the discussion paper circulated by us.

To determine overnight Mumbai Interbank Bid Rate (MIBID)- Mumbai Interbank Offered Rate (MIBOR), volume weighted average of trades are to used. However, for the 14-day, one-month and three-month MIBID-MIBOR, the polling method will be in place. How will it help improve the governance and when is the weighted average method likely to be implemented?

The benchmark committee appointed by the Reserve Bank of India (RBI) has recommended that wherever traded rates are available, such as in the overnight segment of the call money market, they should be used as benchmarks in line with global thinking in this area even though there were no malpractices here. While the recommendations have been accepted by RBI, they are yet to be implemented.

How are the CCIL certification courses different from those offered by National Institute of Securities Markets?

Our courses are related to CCIL settlement processes. Our courses relate to settlements we do and products we handle. It is essentially useful for people who use CCIL for settlements.

We have a g-sec curve for long-term instruments, but there is nothing as such for short-term instruments. Why?

Currently, transactions take place only in the overnight segment of the interbank money market. As such, there is no interbank term money market in India. However, there are proxies available in the form of secondary market trades in bank certificates of deposit (CDs), data in respect of which is available on the CCIL website. In due course, as volumes of trading in various maturities of such CDs increase in the secondary market, the information will be found useful by the market. 

How does a Qualified Central Counterparty (QCCP) tag help?

In the aftermath of the recent financial crisis, the G20 countries got together and decided to introduce certain reform measures in the OTC market for derivatives. First, all standardised derivatives should be settled through a CCP. Second, as far as possible, standardised derivatives should be traded on an electronic trading platform to improve transparency. Third, all derivative transactions should be reported to a trade repository so that adequate information about such transactions is available to the regulator and the market participants. In line with these decisions, regulators in many countries have been mandating that standardised derivatives should be settled through a CCP. In turn, the regulators started looking at the governance models, risk management practices, etc., practiced by the CCPs and felt the need for enhancing and standardising these requirements. Thus, were born the Principles for Financial Market Infrastructures (PFMIs), a standardised set of rules to be adopted by all CCPs globally.

In July 2013, CCIL was designated as a critical Financial Market Infrastructure (FMI) for oversight considering its systemic importance in financial markets regulated by the Reserve Bank of India (RBI). In January 2014, RBI granted CCIL the status of a Qualified Central Counterparty (QCCP) in view of the fact that it is authorised and supervised by RBI under the Payment and Settlement Systems Act, 2007 and because it is also subjected, on an on-going basis, to rules and regulations that are consistent with PFMIs. The advantage of a QCCP certification is that members’ capital requirements on their exposures to a QCCP will be much less than on a non-QCCP.