INTRODUCTION OF PAYMENT VERSUS PAYMENT MODE OF SETTLEMENT

Infocus

INTRODUCTION OF PAYMENT VERSUS PAYMENT MODE OF SETTLEMENT

CCIL has introduced Payment-versus-Payment (PVP) mode of settlement in the Forex Settlement Segment (USD-INR) w.e.f. 6th April, 2015. A Settlement window of five hours (2:30 p.m. to 7:30 p.m. IST) has been defined, within which the settlement is effected, and payments of obligations in a currency are effected to a bank only if and after it meets its payment obligations in the other currency. Conditioning the final settlement of obligation in a currency upon the final settlement of the other has ensured that CCIL is compliant with Principle 12 of the Principles for Financial Market Infrastructure (PFMI) as set out by CPMI-IOSCO. The elimination of credit risk has enabled CCIL to do away with Loss Allocation. Member Banks need not maintain counter-party limits on acceptance of trade for guaranteed settlement by CCIL.

The move to PvP has also enabled CCIL to review its risk processes for forex settlement. Online exposure of trades, limits in both currencies for acceptance of trades, differentiated limits for days other than Settlement day in the Spot window, removal of margin factors for credit risk and introduction of a Default Fund for the segment are some enhancements brought in to add more efficiency to the settlement process.

CCIL has also launched new version of FXCLEAR and FX-SWAP applications on 6th April 2015 where CCIL shall be the

counterparty for all trades concluded on the platforms by providing guaranteed settlement.This will allow Members to trade on the platforms without any Bilateral Limits with various counter-parties.The platform is probably the only one of its kind globally where OTC forex trades are concluded on a completely anonymous basis with CCP guarantee.

Key benefits on account of a PvP model that would accrue to members are:

? Elimination of principal/credit risk and thus doing away with Loss allocation. Counterparty limits need not be maintained by members on acceptance of trade for guaranteed settlement by CCIL

? With the elimination of principal risk, margins required to support settlement would be reduced.

? Banks can trade with additional counterparties, which may also lead banks to consider counterparties that they have not traded with previously.

? The risk processes for the Forex Forward and USD-INR settlement segments could be better aligned.

Other FMIs offering PVP mode of settlement in Forex are CLS Bank and BM&FBOVESPA in Brazil. CLS Bank operates the largest multicurrency cash settlement system in 17

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currencies to mitigate settlement risk for the FX transactions of its Members and their customers. However, the settlement is not on a guaranteed basis. BM&FBOVESPA is a Brazilian Forex settlement system which processes the interbank transactions in Real and U S Dollar by multilateral netting and settles these obligations on Payment Versus Payment (PVP) mechanism.The HKMA

oversees payment-versus-payment (PvP) settlement arrangements for foreign exchange transactions between the Hong Kong dollar and the US dollar, Euro and RMB by connecting the RTGS systems of the respective currencies. The models adopted by CCIL, both for trading and settlement, are fairly unique with no parallels elsewhere in the globe.

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