Clearing Corporation of India Limited (CCIL)

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The Reserve Bank of India (RBI) and the Bank of England (BoE) recently signed a Memorandum of Understanding (MoU) for cooperation and exchange of information in relation to the Clearing Corporation of India Limited (CCIL).

About Clearing Corporation of India Limited (CCIL)

  • It was set up in April, 2001 to provide guaranteed clearing and settlement functions for transactions in Money, G-Secs, Foreign Exchange, and Derivative markets.
  • CCIL also provides non-guaranteed settlement for Rupee interest rate derivatives and cross-currency transactions through the CLS Bank.
  • Promoters: State Bank of India, IDBI Bank Ltd, ICICI Bank Ltd, Life Insurance Corporation of India (LIC), Bank of Baroda and HDFC Bank Ltd.
  • The Company was incorporated with an authorized equity share capital of Rs. 50 Crores.
  • CCIL’s adherence to the stringent principles governing its operations as a Financial Market Infrastructure (FMI) has resulted in its recognition as a Qualified Central Counterparty (QCCP) by the Reserve Bank of India in 2014.
  • It has also set up a Trade Repository to enable financial institutions to report their transactions in Over-the-Counter (OTC) derivatives.
  • Through its fully owned subsidiary, Clearcorp Dealing Systems Limited (CDSL), CCIL has introduced various platforms for electronic execution of deals in various market segments.
  • Further, CDSL has developed, implemented, and manages the NDS-OM, the RBI-owned anonymous electronic trading system for dealing in G-Secs and also for reporting OTC deals, as well as the NDS-CALL platform, which facilitates electronic dealing in the Call, Notice & Term Money market.
  • CCIL is also the trade repository for all OTC transactions in the Forex, Interest Rate and Credit derivative transactions.

What is CLS?

  • Continuous Linked Settlement (CLS) is an initiative by a consortium of the world’s largest foreign exchange clearing banks to eliminate the settlement risk in foreign exchange transactions. 
  • The CLS system is run by CLS Bank International, which is solely dedicated to settling foreign exchange trades.
  • The CLS Bank was established in 2002 and is owned by the world’s largest banks. It is based in New York, with its main operations in London.
  • Working:
    • Standard foreign exchange transactions involve a settlement risk. As the exchange of the two currencies involved is not simultaneous, the party that sells a currency before receiving the currency purchased from the counterparty is exposed to a certain risk.
    • CLS removes settlement risk by using a payment-versus-payment mechanism (“PVP”). This means that you get paid only if you pay.
    • On settlement day, each counterparty to the trade pays to CLS the currency it is selling.
    • CLS pays out the bought currency only if the sold currency is received.
    • In effect, CLS acts as a trusted third party in the settlement process.
    • It’s important to note that CLS is not a central counterparty; the trade remains between the two counterparties.

What Is an Over-the-Counter (OTC) Derivative?

  • A derivative is a security with a price that is dependent on or derived from one or more underlying assets. 
  • Its value is determined by fluctuations in the underlying asset.
  • The most common underlying assets include stocks, bonds, commodities, currencies, interest rates, and market indexes.
  • Depending on where derivatives trade, they can be classified as over-the-counter or exchange-traded (listed).
  • An OTC derivative is a financial contract that is arranged between two counterparties but with minimal intermediation or regulation.
  • OTC derivatives do not have standardized terms, and they are not listed on an asset exchange.

Q1) What are Government Securities (G-Secs)?

Government Securities, popularly known as G-Sec Bonds, are debt instruments issued by the Central government to meet its fiscal needs.Such securities are short term (usually called treasury bills, with original maturities of less than one year) or long term (usually called Government bonds or dated securities with original maturity of one year or more). In India, the Central Government issues both, treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs). G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.

Source: RBI, BoE end deadlock over clearing corporation