CCIL: Taking govt bond and foreign exchange markets to the masses

What NSE and BSE are to the equity market, CCIL is far more than that for the govt bond, foreign exchange and OTC derivative markets

Last Friday, Reserve Bank of India (RBI) Governor Sanjay Malhotra invited the Clearing Corporation of India Ltd (CCIL) to explore the possibility of putting in place necessary infrastructure to facilitate the trading and settlement of currency pairs beyond the US dollar and the Indian rupee. This is in line with the broader objective of the internationalisation of the rupee.

 

We’ll see how CCIL treads this path. For now, let’s look back at CCIL’s 25-year journey in taking the markets to the masses. No, I am not talking about the equity markets. What the National Stock Exchange of India Ltd (NSE) and BSE Ltd are to the equity market, the CCIL is far more than that for the government bond, foreign exchange (forex), and over-the-counter (OTC) derivative markets. 

CCIL has replaced the old system of dealing over the phone, preparing a paper slip for deals, confirming such transactions over phone or fax, and then settling it through a snail-paced mechanism with the click of a mouse. It has been continuously innovating to keep the Indian financial markets up with global trends – sometimes even ahead. 

In some sense, CCIL was a response to the East Asian financial crisis of 1997. India needed an institution to address the needs of the settlement system in the aftermath of the crisis. But CCIL’s genesis can be traced further back, to the Sodhani Committee, set up by the RBI in 1994 to develop and deepen India’s forex market. 

 

Its key recommendations, submitted in June 1995, included increasing flexibility for banks in forex operations, allowing corporations the freedom for foreign currency accounts, and introducing new risk management tools like derivative products.

 

Subsequently, at least two more committees looked into the payments and settlement systems till YV Reddy, an RBI deputy governor then, started exploring the modalities of establishing a clearing corporation with industry associations in the early part of this century. 

 

CCIL was incorporated in April 2001 with the State Bank of India, Life Insurance Corporation of India, Bank of Baroda, Industrial Development Bank of India, HDFC Bank Ltd, and ICICI Bank Ltd chipping in as core promoters. 

 

NSE founder RH Patil was CCIL’s first chairman. Having led the movement to create the OTC platform, among many other things, he steered CCIL through the market maze in its formative years.

 

In his Budget speech in February 2002, then finance minister Yashwant Sinha took note of the new player on the settlement turf, saying: “Primary issuance of government securities is now being facilitated by an electronic negotiated dealing system (NDS) and efficiency of trading in government securities is being enhanced by the new Clearing Corporation of India.”

 

Initially, CCIL took care of the clearing and settlement of market trades in government securities and repos reported on the RBI’s Public Debt Office (PDO)-NDS platform, and also the rupee-US dollar forex spot and forward deals. 

 

The PDO-NDS platform, an integrated project, combines the computerisation of the public debt offices with an electronic dealing system for trading government securities and money market instruments. It’s an online platform for electronic bidding in auctions and real-time trading.

 

Even by global standards, CCIL is a unique experiment. It’s a central counterparty (CCP) that offers guaranteed settlement in the OTC cash and derivatives markets in money, government bonds, and forex transactions. 

 

CCP in the payments system is a financial institution that acts as an intermediary – the buyer to every seller and the seller to every buyer in a transaction. This function of “novation” – the legal process of replacing an existing contract with a new one – replaces bilateral risk between parties with a single, centralised risk to the CCP. 

 

CCPs manage counterparty credit risk, reduce settlement risks, and enhance financial stability by requiring collateral or margin from members and providing guarantees to ensure trades are completed even if one party defaults.

 

Well before the global financial crisis of 2008, CCIL had facilitated the reporting of OTC derivatives transactions under the RBI mandate in 2007. This helped mitigate the impact of the crisis on the Indian financial markets to a large extent. 

 

It has also been offering the CLS, or continuous-linked settlement, services since 2005 – a distinctive design involving a four-party structure to clear cross-currency transactions. This is a unique arrangement whereby cross-border settlement is being achieved through a third-party arrangement. 

 

Called “delivery-versus-payment”, this system protects against one side failing to deliver its currency after the other has paid, preventing potential payment and liquidity issues. Currently, CCIL offers this service for 14 eligible currencies.

 

It manages the NDS-Order Matching (OM) platform, the most widely used one for dealing in government bonds. The market participants can either execute trades directly or report bilateral, off-platform transactions. About 75 per cent of all government bond transactions are conducted directly on this platform and the rest must be reported to it. Simply put, all government bond transactions data is consolidated on a single platform and settled through CCIL. 

 

The design and features of the NDS-OM platform have supported both the expansion in the range of instruments as well as the diversity of trading options and participants in the bond market.

 

Currently, all types of government securities, including dated securities, treasury bills, and state development loans, are traded on this platform. Features such as odd lot and standard lot, when-issued trading, and short sale have provided participants with greater flexibility to execute trades aligned with their market views.

 

The NDS-OM platform also connects global bond platforms to facilitate international investors’ access to the Indian bond market.

 

How has CCIL been growing over the years? In the financial year 2002-03 (FY03), it had seen $0.4 trillion worth of forex transactions. By FY25, the volume of forex transactions zoomed to $12 trillion. During this period, repo transactions jumped from Rs 9 trillion to Rs 779 trillion and plain vanilla outright government bond transactions, from Rs 11 trillion to Rs 161 trillion.

 

CCIL also facilitates compression of swap books, which releases limits for banks to trade more OTC derivatives in swaps. It has enabled a compression of the portfolio of members from Rs 313 trillion to Rs 86 trillion since 2011 through an interest rates swaps portfolio compression exercise.  

 

Along with its three subsidiaries, CCIL has built a robust ecosystem for the Indian financial markets, offering integrated solutions that manage every phase of the trade lifecycle — from initiation to the final settlement. 

 

Set up in 2003, the Clearcorp Dealing Systems (India) Ltd manages electronic trading platforms that facilitate trading across government bonds, money, forex, and OTC derivatives markets. It is instrumental in bringing in retail customers – including individuals and micro, small, and medium enterprises (MSMEs) – by launching the FX-Retail platform for buying/selling of foreign exchange by them. This platform provides transparency and better pricing for retail customers.

 

Its another wholly-owned subsidiary, Legal Entity Identifier India Ltd, set up in 2015, is the local operating unit for issuing globally compatible legal entity identifiers in India. 

 

The youngest of the three, CCIL IFSC Ltd, set up in May 2024, acts as a system provider, strengthening the financial market infrastructure in GIFT-IFSC, India’s emerging offshore hub.

 

Globally – and, India is no exception – government bond markets continue to be institutional in nature. Unlike equity markets, where individuals rush to buy and sell, retail participation in the government bond market is mostly indirect – through mutual funds, insurance companies, etc. The RBI is keen to welcome direct retail participation in the government bond market.  

 

CCIL has been supporting the RBI’s objective of expanding the investor base in government securities by managing the central bank’s Retail Direct platform. This platform offers retail investors direct access to the primary and secondary segments of the government bond market – something not many countries can boast. 

 

The reduction in the minimum investment amount from Rs 10 lakh to Rs 10,000 has been a major factor in opening up the market to a broader base of retail investors. But more needs to be done. Of course, that’s not the mandate of CCIL. 

The writer is an author and senior advisor to Jana Small Finance Bank Ltd.

His latest book: Roller Coaster: An Affair with Banking.

To read his previous columns, log on to www.bankerstrust.in.

X: @TamalBandyo