Institute of Chartered Financial Analysts of India (ICFAI) University 2006 Certification Finance International and Trade – II - Question Paper

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part E: Caselets

Caselet 1



6. Unlikely to the continuous linked settlement system, in the CCIL settlement system the settlements are guaranteed by CCIL. Principal risk is substantially decreased in CCIL system. Also market risk is taken care of by CCIL which is not done in the continuous linked settlement system. All settlement participants are equal. They take exposures on CCIL as Central Counterparty. Under continuous linked settlement system Settlement Members are needed to take credit exposure on a different Settlement Member. 3rd party members settling through a Settlement Member really have no control on the exposures they take on the Settlement Member through whom they decide to settle their transactions. As CCIL settlement system is deferred net settlement, liquidity requirement is significantly lower compared to the continuous linked settlement system. The model is simple, easy to implement and extremely efficient. It brings in almost all market participants into the system irrespective of their credit standings while simultaneously reducing the systemic risk substantially.

Interbank settlements require huge settlement related activities: Matching of counterparty confirmations, effecting payments through the nostro accounts, tracking payments and receipts, reconciliation of nostro accounts, effecting back-valuation or payment of interest for delayed payments, ensuring collection of interest for delayed receipts etc. Settlement through CCIL outcomes in contraction of all these activities into effecting a single payment in either of the currencies (Indian rupee or US dollar) and tracking a single payment and a single receipt per day. Cost savings in the form of reduction in back office activities has therefore been substantial.

Payment or receipt of interest on delayed settlements had always been a contentious problem ranging from the counterparties and needed considerable cost and effort on the part of both the involved entities to resolve. In the past, these disputes or cases of delays used to finally reach FEDAI and used to take significant portion of their time and attention. Since settlement of trades started through the settlement system of CCIL, cases of such claims have come down to negligible numbers evidencing the extent of cost savings and efficiency achieved by the financial market as a whole. Standardization of the processes in regard to deal reporting, getting info about the status of the deals etc. has also given opportunities for the creation of a cost effective online system for tracking of positions based on exceptional events. This offers significant opportunities for reduction of operational risk.

Earning:   Approval pending.