FEX CLEAR AND FOREX SETTLEMENT BY CCIL CCIL has developed FX-CLEAR, a Forex Dealing System, which has

been launched on August 7, 2003. FX-CLEAR offers both Order Matching and Negotiation Modes for dealing. The FX-CLEAR covers the inter-bank US Dollar-Indian Rupee (USD- INR) Spot and Swap transactions and transactions in major cross currencies (EUR/USD, USD/JPY, GBP/USD etc.) The USD-INR constitutes about 85% of the transactions of the total Forex transactions in India in terms of value CCIL settlement works in the following manner. Only members of CCIL can do interbank forex settlement through CCIL after executing suitable novation agreement. The settlement is done on a netted basis after order matching. The AD has to submit deal details in a prescribed format to CCIL on line. Cash,Tom,spot and forward interbank deals in USD/INR are taken up for settlement on respective settlement dates. Cross currency and INR /FC (other than USD) are not settled by CCIL, and have to be settled on one to one basis by concerned banks. In the case of USD/INR interbank deals, the counterparty contracts get substituted through novation agreement and CCIL becomes the counterparty guaranteeing settlement. Based on optimum exposure at any point of time the Banks need to make individual contribution to the settlement fund in USD as well as INR. On receiving deal details CCIL does order matching and settles the INR leg through current account of concerned Bank and USD leg through its settlement account with Federal Reserve Bank of New York. For clearer understanding let us take the example of ICICI Bank Net owing USD 1 Mio to SBI and SBI owing net INR 5.4 crores to ICICI value today. CCIL will debit INR account of SBI with RBI and credit INR account of ICICI with RBI. The USD 1 Mio will be credited to Nostro account of SBI by CCIL through its settlement account. ICICI Bank is expected to have issued a swift PO to its Nostro correspondent to debit its account value today and credit CCIL settlement account with FED. The point to be noted is that CCIL having taken up guaranteed settlement does not wait for ICICI to to fund its USD settlement account. It also executes the Rupee leg even if SBI has no funds. In the unlikely scenario of the counterparties to settlement not providing sufficient funds, CCIL will take recourse to the settlement fund. However, the Bank will have to pay a penalty or may be suspended. Hence no Bank management takes defaults lightly, as the chairman of the Bank will be pulled by DG of RBI. The advantage in CCIL settlement is that Outstanding Forex contracts get netted instead of being settled individually, and thus on balance date the CRAR requirement gets reduced drastically. Secondly, the counter party settlement risk is completely eliminated through novation agreement. Thirdly, the concept of counterparty dealing limit gets freed, resulting in higher dealing volumes between counterparties.