ARtICLE
The Changing Dynamics of the Indian Interest Rate Derivatives Market
Vardhana Pawaskar and Payal Ghose ¥
Over the nearly two decades since it permitted
Interest Rate Derivatives (IRD) in India from July
1999, the Reserve Bank of India (RBI) has adopted a
calibrated approach for developing the market with
particular emphasis on institutions and security.
IRDs are traded either on organized exchanges or in
over the counter (OTC) markets. As per semi
annual OTC derivatives statistics from the Bank for
International Settlements (BIS), starting June 1998,
IRDs have been by far the most actively traded
global OTC derivative instrument and within this
segment, Interest Rate Swaps (IRS) hold the largest
market share. The decade since 2008 has witnessed a
major overhaul in the global derivatives markets
with greater emphasis on transparency and
collateralization for mitigating systemic risks. In
this note we discuss about the Indian IRS market,
the inherent risks associated with the product and
various measures taken by RBI for market
development and the role of the Clearing
Corporation of India Limited (CCIL).
1. Overview
A derivative is a financial instrument:
a) whose value changes in response to the change
in a specified interest rate, security price,
commodity price, foreign exchange rate, index
of prices or rates, a credit rating or credit index,
or similar variable (sometimes called the
'underlying');
b) that requires no initial net investment or little
initial net investment relative to other types of
Dr. VardhanaPawaskar is Vice President and Ms. PayalGhose is Senior Manager, Economic Research and
Surveillance, CCIL. The authors acknowledge the guidance from Mr. Arun Kumar Pandey and
Ms. Jigna Thakkar.
contracts that have a similar response to
changes in market conditions; and
c) that is settled at a future date.
This future settlement is the primary source of the
returns from as well as the risks in the product. Over
the lifetime of the contract, the value of a derivative
fluctuates with the price of its “underlying”.
Derivatives are used on one hand for hedging
against unfavorable price movements in the future,
while, on the other hand they are used for
speculating on gains to be made from favorable
expectations of future price movements. For an
IRD, the underlying is an interest rate, or set of
different interest rates. An IRS is a financial
contract between two parties exchanging or
swapping a stream of interest payments for a
'notional principal' amount on multiple occasions
during a specified period. Such contracts generally
involve exchange of a 'fixed to floating' or 'floating
to fixed' rates of interest. The notional principal is
used to calculate interest payments but is not
exchanged. Only interest payments are exchanged
at pre-determined time intervals.
The most commonly used IRS in India are the Monthly Newsletter January 2019
overnight index swaps (OIS) where the floating leg
of the swap is linked to an overnight index,
compounded every day over of the payment period.
The parties agree to exchange the difference in the
accrued interest arrived according to the fixed and
floating interest rates at the maturity on the
notional principal amount. While currently, there
CCIL
7
ARtICLE

are four benchmarks used in Rupee IRS, viz.
MIBOR, MIFOR, INBMK and MIOIS, trading is
confined to MIBOR and MIFOR benchmarks,
with MIBOR OIS being the most liquid.
As can be gauged from their basic structuring,
IRS/OIS products are traded on basis of the
opposite expectations of the trading parties about
the future path of interest rate movements. Any
move in interest rates thereafter leads to gains or
ensuring assets earn a fixed rate through swaps;
• Provides an alternative to re‐position portfolio
and avoid asset sale/realize capital gains;
• Banks can hedge their floating rate liabilities
and Insurance Companies their fixed interest
liabilities by entering into IRS;
The primary risks associated with the derivatives
market are :
2

losses depending on their position in the swap. For

• Counterparty risk that a counterparty to a
the period from August 2007 to August 2018, the
derivatives contract defaults and cannot
correlation between the G-Sec and OIS rates, for 2Y
(completely) fulfill its contractual obligation.
and 5Y tenors, was around 96% and 90%
The safety of the market is harmed if a default
respectively. Thus, IRS can be used as a primary
by one market participant triggers a chain of
hedging tool for portfolio investors in G-Secs . The
defaults;
primary benefits/uses of IRS/OIS include:
• Operational risk encompassing failures in the
• Reduction of credit risk;
operational processing, e.g. trading, clearing,
• Reduction in capital requirements; settlement and controlling failures. Market
• Allows the financial institutions the flexibility safety is at risk if there are operational
to move to the interest rate basis of choice; breakdowns within the organization of
relevant market participants or infrastructure
• Can be used to convert the fixed rate liability providers;
into floating rate liability and vice versa;
• Legal risk including the risk arising from
• Customization provides closer duration unenforceable contracts or non-compliance
matching of investment portfolios by with laws, rules and regulations. Market safety
reducing the impact of interest rate volatilities; could be affected in the case of legal
uncertainty with regard to widely used
Monthly Newsletter January 2019

• Mitigating reinvestment cost and reducing

reinvestment risk by better matching of cash derivative products;
flows; • Liquidity risk that a derivative cannot be sold
for its fair value since there is no demand for
• Duration extension where long‐dated bonds
that derivative at that fair value. Market safety
can be synthetically constructed from a
1 is at risk if relevant market participants default
shorter‐dated bond plus forward starting IRS ;
as they are unable to dispose of their
• Balance sheet volatility can be reduced by derivatives positions.
CCIL

1
Application of Interest Rate Swaps - 21st IFS Seminar Institute of Actuaries of India
2
The Global Derivatives Market A Blueprint for Market Safety and Integrity; Deutsche Börse and Eurex White Paper
released on September 7, 2009

8

OTC derivative contracts are bilateral in nature and
can be customized as per the counterparties' needs.
Following extreme turmoil in the global financial
markets which commenced with the collapse of
Lehman Brothers in September 2008 (Global
Financial Crisis (GFC)), the G20 group of countries
decided on sweeping reforms to the OTC
derivatives market, to bring about transparency
and mitigate operational as well as systemic risks.
In their Pittsburgh Mandate released on September
24-25, 2009, G20 leaders mandated that OTC
derivative contracts should be reported to trade
repositories (TRs); all standardized OTC
derivatives contracts should be traded on
exchanges or electronic trading platforms, as
appropriate; and all standardized OTC derivatives
contracts should be cleared through the central
counter parties (CCPs).
The SEBI Committee headed by L C Gupta
examined the need for financial derivatives in India
in a broader perspective and recommended the
introduction of interest rate and currency
derivatives in November 1996. Subsequently, RBI
permitted scheduled commercial banks, primary
dealers (PDs) and all-India financial institutions to
undertake Forward Rate Agreements/Interest Rate
Swaps (FRAs/IRS) as plain vanilla products for
their balance sheet management and market
making on July 7, 1999. While introducing OTC
derivative products in a phased manner keeping in
view the hedging needs of the real sector, RBI has
focused on improving transparency and reducing
counterparty risk in the OTC derivatives markets
by creating neutral and independent infrastructure
providers. It has chosen CCIL for executing some
reforms as an independent institution to ensure
safety and integrity.
CCIL now offers the entire system of integrated
solutions for the INR IRS market with a trading
system, a data reporting system and a CCP for
ARtICLE
settlement. CCIL's processes and products have
been developed through close interactions with the
regulators and the market participants in line with
the global best practices. These are covered in detail
in the subsequent sections in the chronological
sequence of their introduction. While other roles in
segments like currency derivatives have been
discussed briefly, the overall emphasis of the note is
on discussing CCIL's role in the Indian IRS
segment.
2. Reporting Platform to Trade Repository
Long before the release of the G20 resolution of
September 24-25, 2009 mandating reporting of
OTC derivative contracts to TRs, the Working
Group constituted by RBI under the Chairmanship
of Shri Jaspal Bindra, to review the progress and
map further developments in regard to IRD in
India, had in its January 31, 2003 report
recommended:
• Introduction of a centralized clearing system
for OTC derivatives through CCIL;
• Product standardization to facilitate central
clearing;
• Implementation of a daily mark-to-market
margining system by CCIL and using the
existing Settlement Guarantee Fund for swap
contracts as well; Monthly Newsletter January 2019
• Amendment of the Banking Regulation Act,
1949 to clarify the status of derivatives
contracts in India undertaken by
banks/FIs/PDs;
• Inclusion of netting of derivative contracts in
the draft legislation on netting forwarded to
the Government by RBI.
CCIL
In its Annual Policy Statement for 2007-08, RBI
directed CCIL to develop a trade reporting
platform for Rupee IRS by August 31, 2007 for
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 ARtICLE

transparent capture and dissemination of trade
information as well as an efficient post-trade
processing infrastructure to address some of the
attendant risks. CCIL's reporting platform for the
transactions in OTC IRD (IRS/FRA) was
operationalized on August 30, 2007. Banks and
PDs were directed by RBI to report all their
IRS/FRA trades on the reporting platform within
30 minutes from the deal time and also to ensure
that details of all the outstanding IRS/FRA
contracts (excluding the client trades) were
migrated to the reporting platform, by September
15, 2007. The reported deals were processed by
CCIL which also offered matching and some post
trade processing services like resetting interest rates,
providing settlement values etc. to the reporting
members. Information on traded rates and volumes
was released through CCIL's website and various
publications. The IRS deals matched at CCIL for
the MIBOR and MIFOR benchmarks are depicted
in Chart 1. While IRS referenced to the INBMK are
also matched at CCIL, the numbers are negligible
and have been excluded from the chart.
In September 2008, the reporting system provided
the regulator with full details of the extent of
exposures that the Lehman Brothers subsidiary had
in India within a very short time which facilitated
the early close out of the outstanding trades. This
reemphasized the utility of having a centralized
trade reporting system for OTC trades. Further,
CCIL also introduced a facility wherein trades
matched between two interbank counterparties at
CCIL acted as final confirmation eliminating the
paper confirmation, which eliminates operational
risk, based on a one-time bilateral agreement
amongst the counterparties to the trade.
A TR is an entity that maintains a centralized
electronic database of OTC derivative transactions.
The centralized database provides both a granular
view of positions and exposures product-wise and
counterparty-wise, as well as a ringside view of
market concentration, and thereby helps support
risk reduction, increased operational efficiency and
cost savings for the market as a whole. The 2008
GFC highlighted that opacity and data
fragmentation for both trading activity as well as

Chart 1: IRS Deals Matched at CCIL

100,000
90,000 18139
80,000
70,000
Monthly Newsletter January 2019

60,000 79495
1786
50,000
4799 2107
40,000
1291 2101
30,000 40912
1437 51833
1050 1252 1932 1372 2120 41494
20,000
33057 33642
20352 22713 25514 21153 20746 21036
10,000
0
2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19
(Upto
CCIL

MIBOR MIFOR December

2018)

Source: Rakshitra, CCIL

10
 ARtICLE

open interest seriously impeded the ability to for an efficient, single point reporting mechanism
protect the stability and integrity of the financial for all OTC interest rate and forex derivative
system as a whole. In its aftermath, there was a transactions. The report of the Working Group on
global commitment for reporting all future as well Reporting of OTC Interest Rate and Forex
as outstanding OTC derivative contracts to TRs to Derivatives released on May 25, 2011 endorsed
ensure that national regulators had access to all CCIL as the designated repository for interest rate
relevant trade related information in a timely and forex derivatives transactions in India. Further,
manner so as to take both preventive and corrective RBI notified that client trades in OTC forex and
action in the initial stages of a crisis. interest rate derivatives also had to be reported to
CCIL's TR subject to a mutually agreed upon
TRs provide the regulators the means to identify
confidentiality protocol. In August 2011, RBI
the obligations of individual trading parties and
permitted CCIL to develop a TR for Credit Default
support them in assessing systemic risk and
Swaps (CDS). CDS were launched in the Indian
financial stability, conducting market surveillance
market on December 1, 2011. The trades concluded
and enforcement, supervising market participants
are mandated to be reported to CCIL through its
and conducting resolution activities in the event of
Online Reporting Engine (CORE). However, the
a default. Data from a TR can be used to facilitate
product is yet to take off in India.
electronic trade matching and confirmation,
settlement of payment obligations, trade novation On March 9, 2012, RBI notified that “all inter-bank
and affirmation, portfolio compression and OTC foreign exchange derivative transactions as
reconciliation, and collateral management thereby well as all/selective trades in OTC foreign exchange
resulting in risk reduction and improved and interest rate derivatives between the Category I
operational efficiencies for individual participants Authorised Dealer Banks/market makers
as well as greater market efficiency. TRs add (banks/PDs) and their clients had to be reported on
significant transparency and help ease the market's a TR to be developed by CCIL subject to a mutually
risk perceptions by making public the aggregate agreed upon confidentiality protocol”. The TR was
data on risk buildup through open risk positions, launched on July 9, 2012 with Dr. Subir Gokarn,
prices and transaction volumes. Deputy Governor of RBI initiating the first TR
reports. The implementation was done in four
Following an announcement in RBI's Annual Monthly Newsletter January 2019
phases.
Table 1: Sequence of TR Implementation
Phase Launch Date Scope
Capture of all inter-bank forex forwards and swaps in the USD-INR currency pair, and
Phase I July 9, 2012
currency options in FCY-INR.
Phase II November 5, 2012 Capture of all FCY-INR and FCY-FCY Forwards and Swaps and FCY-FCY Options
Reporting of FCY-FCY and FCY-INR Forwards and FCY-FCY and FCY-INR Options between
Phase III April 2, 2013
ADs and their Clients.
Phase IV December 30, 2013 Reporting of Interbank and Client transactions in Currency Swaps and FCY IRS & FRA.
CCIL

Policy for 2010-11, a Working Group was In alignment with the launch of the phases of TR,
constituted in June 2010 to work out the modalities CCIL executed confidentiality protocols with all

11
 ARtICLE
the reporting members to ensure absolute
confidentiality of client information reported.
CCIL TR is now the repository for all inter-bank
and client level OTC derivative transactions in the
Indian interest rate, credit and foreign currency
OTC derivatives. Client transaction reporting is
limited to regulatory thresholds. The successful
implementation of the TR has ensured RBI's
compliance with the G20 resolution with regard to
reporting of OTC derivative trades to TRs3. Data
related to all transactions reported to CCIL is
shared with RBI in the required formats while
relevant data in aggregated form is also published
on CCIL's website and publications for the benefit
of the market participants as well as the general
public. RBI is also provided an online access to the
trade status through the CORE Platform for access
to all the OTC derivative data in a near real time
basis.
3. From Non-Guaranteed Settlement Service
to Guaranteed Settlement
Centralized clearing through CCPs is one of the
best ways of managing many of the counterparty
and operational risks in the derivative products
which have relatively longer lifecycles. Mitigation
of counterparty risk is achieved by contract
novation, i.e. the process through which a CCP acts
as a buyer to all sellers, and vice versa. The CCP
Monthly Newsletter January 2019
thereby assumes the counterparty risk of all trading
parties and ensures collateralization through
margins collected. During risk management and
following novation, the CCP nets all offsetting
open derivatives contracts of each trading party
across all other trading parties. Such multilateral
netting reduces the gross risk exposure
CCIL
3
Report of Implementation Group on OTC Derivatives Market Reforms, RBI released on March 6, 2014
4
The Global Derivatives Market A Blueprint for Market Safety and Integrity; Deutsche Börse and Eurex White Paper
released on September 7, 2009
12
substantially such that the default of a market
participant has lesser probability of destabilizing
other participants. The CCP's own risk is reduced
to manageable levels by means of margin and
capital deposits designed to prevent damages which
arise as a result of one member's default burdening
the CCP. Usually the CCP also generates the
settlement instructions for the payments resulting
from derivatives contracts and, if necessary, for the
physical transfer of the underlying asset.
CCPs4 reiterated their worth in risk management
and mitigation in September 2008 in the wake of
the default of Lehman Brothers which was one of
the largest derivatives players globally. In the case
of the Lehman's centrally cleared derivatives, the
CCPs achieved a near complete resolution for all
open positions within less than 15 trading days.
Additionally, they were able to effectively shield the
accounts of market participants trading through
Lehman from the effects of its bankruptcy. In this
way, CCPs mitigated market disruptions and
prevented spillover effects, thus minimizing risks
to all parties involved. The collateral that CCPs had
asked from Lehman was fully sufficient to cover its
obligations.
RBI's Annual Policy 2008-09 indicated its
intention to put in place a clearing and settlement
arrangement for OTC rupee derivatives through
CCIL. CCIL commenced multilateral non-
guaranteed settlement of OTC trades in rupee
derivatives (IRS/FRA)from November 27, 2008 as a
unique experiment in the derivatives market
worldwide that linked up the idea of netting with
an OTC market. Apart from substantially reducing
individual member funding requirements, such
 ARtICLE

netting reduced liquidity risk as also counterparty of `5,440 crore were settled during 2017-18, with a
credit risk from a gross to net basis. By reducing the netting factor of 65% i.e. net cash flows were
number and overall value of payments between its reduced to `1,905 crore.

Table 2: IRS Non-Guaranteed Settlement (Amount in ` crore)

Settlement Period Gross Amount Net Amount Netting %
2009-10 13827 3688 73.33
2010-11 22794 5250 76.97
2011-12 28328 7735 72.69
2012-13 23797 6732 71.71
2013-14 19667 6947 64.67
2014-15 16361 6073 62.88
2015-16 7374 2442 66.89
2016-17 5682 2110 62.87
2017-18 5440 1905 64.99
2018-19 (UptoDecember 2018) 3354 1206 64.05

Source: Rakshitra
Note: Netting Factor denotes the extent of actual reduction achieved through multilateral offsetting of individual
member fund obligations (arising out of every trade) to a single net fund obligation. This process has significantly
reduced individual funding requirements for every member and also achieved reduction in market liquidity risk.

members, this enhanced the efficiency of the RBI, in its circular dated May 26, 2009, announced
system and reduced settlement costs associated that derivative exposure on CCIL would be
with growing volumes of market activity. assigned zero risk weight for counterparty risk
although the collaterals/margins posted with CCIL
Till the introduction of guaranteed settlement
were assigned 20% risk weight. With the
services, almost 95-96% of the total cash flows in
clarifications on risk weightage in place, CCIL
OTC IRS used to be settled through CCIL's non-
proposed to commence settlement of OTC trades
guaranteed settlement. This high share was despite
in rupee derivatives on a guaranteed basis where the Monthly Newsletter January 2019
the fact that it was not mandated by the regulator
accepted trades were multilaterally netted and
for market participants to opt for this service. The
settled. To be eligible for the guarantee, banks had
average netting benefit stood at 77% which peaked
to maintain adequate margins to cover the
to 92% on January 29, 2010. Initially starting with 4
potential future exposure and the mark to market
members, the number of members in this segment
exposure on the trades. The guaranteed settlement
increased from 13 as at the end of March 2009 to 47
was expected to provide members of CCIL a
members at the end of December 2018. The share of
significant reduction in counterparty credit risk,
the non-guaranteed settlement segment has been
reduction in credit exposures and further reduction
gradually declining with the increased preference
in capital required to be maintained to support
CCIL

for the guaranteed settlement segment. Cash flows

such exposures.

13
 ARtICLE

In June 2009, the Committee on Payment and operational guidance on novation of OTC
Settlement Systems (CPSS) formed a working derivative contracts on December 9, 2013.
group to investigate the developments in the
CCIL was given the status of a Qualifying Central
clearing industry's market structure, their drivers
Counterparty (QCCP) by RBI on January 1, 2014,
and the implications for financial stability. The
the first to get so in India. This status entails that
working group also reviewed the state of market
CCIL adheres to the PFMIs in its role as a CCP
infrastructure in support of the Financial Stability
services provider in the securities, forex and
Board (FSB) initiative to strengthen core financial
derivative markets. The QCCP lowers capital
infrastructures and markets. In March 2011, it
requirements against exposures to CCIL and makes
came out with a consultative report entitled
it easier for market participants, and especially
“Principles for Financial Market Infrastructures
international banks to become members of CCIL's
(FMIs)” setting standards intended to be applied to
settlement operations. On the same date, RBI's
the relevant FMIs in all CPSS-IOSCO 5
guidelines on capital requirements for banks'
jurisdictions. The recommendations covered
exposures to CCPs became effective. A significant
payment systems, central security depositories and
aspect in the guidelines was the proposal to treat the
securities settlement systems, CCPs and TRs. CCIL
exposures to CCIL on net basis. In cases, where
participated in the BIS and CPSS-IOSCO
CCIL provides guaranteed settlement, banks can
consultations involving CCPs apart from playing
reckon their total replacement cost (MTM) on net
an active role in multilateral consultations through
basis, i.e., on net replacement cost as part of trade
CCP12 - the global association of CCPs, of which it
exposure determination. This provides significant
is a member.
capital relief to banks. On March 6, 2014, RBI's
Standardization of contracts both in terms of Implementation Group on OTC Derivatives
contractual details and operational processes, Market Reforms directed operationalization of
contributes to market transparency and liquidity CCP based clearing for interbank IRS trades by end
and is necessary for OTC derivatives transactions March 2014.
to be centrally cleared and traded on exchanges or
On March 28, 2014, CCIL commenced CCP
electronic trading platforms. RBI decided on
clearing for IRS/FRA trades referenced to the
January 28, 2013 to standardize IRS contracts in
MIBOR and MIOIS benchmarks. All trades
Monthly Newsletter January 2019

terms of minimum notional principal amount,

referenced to the MIBOR and MIOIS with original
tenors, trading hours, settlement calculations etc.
maturities ranging from 1 month to 10 years are
to be prescribed by FIMMDA in consultation with
eligible for guaranteed settlement. Trades reported
the market participants to improve tradability and
in a prescribed format through the Deal Reporting
facilitate centralized clearing and settlement of IRS
Utility are validated and matched. Matched trades
contracts in future. All new INR MIBOR-OIS
(having both the counterparties as members of INR
contracts executed from April 1, 2013 onwards were
IRS GS segment) are subjected to margin adequacy
to be in the standardized format. The
checks on an online basis. Trades supported by
standardization requirement was mandatory for all
adequate margin are guaranteed for settlement.
CCIL

IRS contracts other than client trades. RBI notified

5
International Organization of Securities Commissions (IOSCO)

14
 ARtICLE

Trades not supported by margins (by either or both Benefits of Guaranteed Settlement at CCIL:
counterparties) are kept “Pending” with daily
• Reduction in counter-party exposure i.e. risk
margin check till 2 days prior to next cash flow
of loss from counterparty default would be
settlement date. Novation occurs at the point in
minimal due to proper margining for market
time when the trade is accepted for guaranteed
risk.
settlement by CCIL. CCIL arrives at the net
settlement obligation arising out of cash flows due • Reduced settlement risk, more efficient
on the trades of members accepted for guaranteed clearing and settlement system.
settled through multilateral netting. The net
• Transparent and reliable valuation of
settlement obligation is settled through the
outstanding positions for the market
members' current account with RBI.
participants.
CCIL obtained recognition as a “third-country
• CCIL has been accorded the status of a QCCP -
CCP” under the European Market Infrastructure
hence reduced capital requirement to the
Regulation (“EMIR”) on March 29, 2017
participants.
consequent upon recognition of India as an
equivalent regime by European Commission's • Translation of bilateral gross exposure to
decision dated December 15, 2016. This enabled multi-lateral net exposure on CCIL.
the branches of European banks to have similar • Improved operational and liquidity efficiency.
capital benefits.
Table 3: Guaranteed Settlement Summary Statistics- Interest Rate Swap Transactions
Average Average Share of IRS
Period Trades Value ` Crore
Trades Value ` Crore Market (%)
2015-16 2529 228950 16 1440 16
2016-17 10431 939008 43 3880 49
2017-18 30346 2420315 125 9960 72
2018-19 (Upto December 2018) 42075 3335445 230 18226 79
Source: Rakshitra

4. Portfolio Compression
Monthly Newsletter January 2019
On November 19, 2018 CCIL commenced
guaranteed settlement services in respect of trades
CCIL was conceptualized as an RBI initiative for
referenced to the MIFOR benchmark. Trades with a
upgrading the country's financial infrastructure in
residual maturity of 5 years and less are accepted for
respect of clearing and settlement of debt
guaranteed settlement. This is expected to increase
instruments and forex transactions. CCIL has
the liquidity in the segment which has been
enhanced the functions that it was slated to
lackluster in recent years.
perform by bringing about constant upgradations
in its core functions while voluntarily undertaking
several market development initiatives at the same
CCIL

time like the portfolio compression service it

launched in the derivative markets.

15
 ARtICLE

Usually participants in the IRS market enter into portfolio compression exercise in the Indian OTC
additional or new derivative contracts to offset IRS market on July 28, 2011 with 14 participants,
their existing exposures resulting in a multiplying and achieved a compression ratio of over 94%.
effect on the notional outstanding in their books as Since then, trade compression at CCIL is being run
well as in the market as a whole. Portfolio/trade twice a year in March and September. Initially, only
compression is the process of tearing up trades to non-cleared INR-IRS trades were considered for
remove economically redundant derivatives compression. From March 2017, IRS trades cleared
positions. It has gained traction globally as well as by CCIL (including trades concluded
in India, due to the dual benefits of reducing anonymously on the ASTROID dealing system)
notional outstanding positions as well as freeing up were included in the compression exercise. As of
capital. September 30, 2018, CCIL has carried out 15
compression exercises where on an average, 84.26%
The report of the Working Group on Reporting of
compression has been achieved in case of the total
OTC Interest Rate and Forex Derivatives released
trades considered for compression over the years,
on May 25, 2011 also suggested that as a designated
eliminating on average about a fourth of total
TR, CCIL may offer post-trade processing services,
outstanding IRS trades and about a fifth of
such as trade compression, with regulatory
outstanding notional value of IRS trades per cycle6.
approval. CCIL successfully carried out its first
Table 4: Portfolio Compression - Trades Compressed
Total Trades Total Fully Partially % Of Trades
%
Month Considered For Terminated Terminated Terminated IRS
Compression@
Compression Trades Trades Trades Outstanding *
Jul-11 14,447 13,859 13,693 166 95.93 29.11
Mar-12 19,698 17,790 17,493 297 90.31 40.14
Sep-12 11,507 9,744 9,408 336 84.68 31.24
Mar-13 4,231 3,608 3,360 248 85.28 15.23
Sep-13 9,246 7,855 7,476 379 84.96 27.44
Mar-14 6,472 5,514 5,191 323 85.20 24.22
Sep-14 6,102 5,125 4,850 275 83.99 26.07
Monthly Newsletter January 2019

Mar-15 6,196 5,278 4,999 279 85.18 25.37

Sep-15 5,480 4,439 4,180 259 81.00 19.14
Mar-16 6,414 5,437 5,198 239 84.77 24.88
Sep-16 4,744 3,996 3,772 224 84.23 18.98
Mar-17 5,450 3,956 3,737 219 72.59 17.70
Sep-17 6,793 5,238 5,015 223 77.11 20.02
Mar-18 15,063 12,715 12,468 247 84.41 29.16
Sep-18 16,146 13,611 13,308 303 84.30 24.95

@ In terms of number of trades fully/partially terminated *As at End of Preceding Month Source: CCIL
CCIL

6
Interest Rate Swaps Portfolio Compression at CCIL;Golaka C Nath, Vardhana Pawaskar and Payal Ghose, Rakshitra
October 2018

16

Every member of CCIL's derivatives segment
opting for settlement of cash flows from its
outstanding IRS trades through CCIL, on a non-
guaranteed basis and/or opting for guaranteed
settlement can avail the compression services
subject to compliance with all necessary
formalities. The benefits accruing to the
participants out of the exercise in terms of savings
(arising from the reduction in the regulatory
charges associated with notional outstanding of
redundant IRS trades as well as the maintenance
charges paid to CCIL over the residual life of such
trades) far outweigh the charges for this service. The
high compression ratios achieved in the cycles
conducted by CCIL are recognition of the savings
that can be made. These exercises are additionally
significant in an illiquid market like the Indian IRS
market which offers restricted options for
offsetting positions. Termination of redundant
positions is especially critical for non-cleared
trades.
After the success witnessed in the portfolio
compression for IRS, CCIL extended the
compression service to the USD-INR forex forward
segment and the first cycle was completed on
March 26, 2015, with respect to cleared forex
forward trades. In the forex market, only forward
trades of residual maturity up to 13 months are
eligible to be accepted for guaranteed settlement.
5. Anonymous System for Trading in Rupee
OTC Interest Rate Derivatives (ASTROID)
An efficient financial market offers price efficiency
with the prices consistently reflecting all available
information and expectations as well as cost
efficiency with the lowest transaction costs.
Exchanges and electronic trading platforms
improve transparency and help to reduce market
abuse by standardizing trading rules and processes
while providing equal access to available
ARtICLE
information. All exchange-traded derivatives are
standardized with pre-specified contract
parameters. Exchanges create a level playing field to
contribute and execute trading interests and being
neutral infrastructure providers there is no bias in
price discovery.
Electronic platforms address one of the biggest
shortcomings in the derivatives market i.e. the lack
of transparency. These platforms afford the
regulators as well as the market participants equal
and real-time access to information regarding
prices and volumes as well as built-up in risk
positions while the bid-ask spreads help in efficient
price discovery. Participants get the ability to trade
anonymously without causing a significant
movement in the price. This also helps in
minimizing market manipulations and the
platforms also aid regulators to effectively monitor
market activity to prevent manipulation and fraud,
thus helping to boost trading activity and to
safeguard market integrity. The benefits of
unrestricted market access and market
information, anonymity to traders, and swift order
execution ultimately result in improving liquidity
in the market which further leads to reduced
transaction costs. Linking the trading platforms
with CCP clearing further minimizes operational
risks and costs.
Monthly Newsletter January 2019
The RBI Working Group on Enhancing Liquidity
in the Government Securities and Interest Rate
D e r i v a t i v e s M a r k e t s re c o m m e n d e d t h e
standardization of IRS contracts as mentioned
earlier in order to facilitate centralized clearing and
settlement of these contracts. It also recommended
the introduction of an electronic trading platform
for IRS wherein the trades executed through the
trading platform would be settled through CCP
CCIL
based clearing. CCIL commenced CCP clearing for
IRS trades referenced to the MIBOR and MIOIS
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benchmark from March 28, 2014.
CCIL under Rupee Derivatives Dealing Segment of
its subsidiary, Clearcorp Dealing Systems India
Limited (CDSL), launched a dealing platform
(hereinafter called ASTROID- Anonymous System
for Trading in Rupee OTC Interest Rate
Derivatives) for rupee derivative trades referenced
to the MIBOR (O/N) benchmark on August 3,
2015. The trades dealt on the ASTROID are eligible
for CCIL's clearing and settlement services, from
the point of trade. The anonymous trading
platform with CCP facility has many benefits like
availability of transparent quotes, less
documentation requirement, reduced credit risk,
saving of capital, higher credit exposure etc. The
data in ASTROID in respect of pre (size, price,
quantity and bid-ask quotes) and post trade
(anonymized composite trade prices and volumes)
is also disseminated on the CCIL website on a real
time basis which enhances the market
transparency.
participants, irrespective of their credit risk
profile;
iii. The trades on ASTROID offer settlement
guarantee from the point of trade itself;
iv. It has increased the faith in the market due to
guaranteed settlement and has expanded the
list of participants trading in the INR IRS
market;
v. It is very cost effective;
vi. It offers several operational risk mitigating
features to mitigate operational risks in
trading.
The primary benefit of ASTROID is the seamless
integration with CCIL's guaranteed settlement
system for IRS. The system automatically conducts
online exposure checks and ensures that trades do
not breach the margin limits set for any of the
counterparties. Margin offsets are allowed between
the same swap instruments. This reduces back-

Table 5: ASTROID Product Features

Order Parameters
Minimum Lot size: `5 crore and in
multiples of `5 crore
Tick size: 0.0025 (%)
Minimum Disclose Quantity (DQ): 25 (%).
Monthly Newsletter January 2019
Instrument Parameters
Cash flow Frequency: Upto 1 Year Bullet and
Beyond 1 Year Semi-Annual
Rate Band: 100 bps
(Subject to change by CCIL)
Session Parameters
The System is made available for
trading from 9.00 AM to 5.00 PM on all
Mumbai working days from
Monday to Friday.

Benefits of ASTROID: office efforts for the participants as well as leads to

more efficient handling of the margins posted with
i. Due to the complete anonymity offered on
CCIL prior to trading. The trading system also
ASTROID, no counterparty limit is required as
permits risk reduction features to participants. The
required in bilateral trades or on other trading
additional margins posted by ASTROID members
platforms which are not completely
can be used against their reported trades also. The
anonymous;
anonymous system eliminates the pricing bias
CCIL

ii. It leads to fair and transparent pricing to all the normally present in the bilateral OTC market.

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Table 6: ASTROID Instruments

Instrument Name Instrument Category Tenor Coupon Frequency No of Settlement dates
OIS1M Rolling Maturity 1M Bullet 1
OIS2M Rolling Maturity 2M Bullet 1
OIS3M Rolling Maturity 3M Bullet 1
OIS6M Rolling Maturity 6M Bullet 1
OIS9M Rolling Maturity 9M Bullet 1
OIS1Y Rolling Maturity 1Y Bullet 1
OIS2Y Rolling Maturity 2Y Semi-Annual 4
OIS3Y Rolling Maturity 3Y Semi-Annual 6
OIS4Y Rolling Maturity 4Y Semi-Annual 8
OIS5Y Rolling Maturity 5Y Semi-Annual 10
OIS7Y Rolling Maturity 7Y Semi-Annual 14
OIS10Y Rolling Maturity 10Y Semi-Annual 20

RBI permitted all regulated institutional entities
(regulated by RBI, the Securities and Exchange
Board of India, the Insurance Regulatory and
Development Authority of India, the Pension
Fund Regulatory and Development Authority and
the National Housing Bank), subject to the
approval of their respective sectoral regulators, to
apply for membership of electronic trading
platforms in IRS which have CCIL as the central
counterparty for settlement on June 1, 2016.
ASTROID shall be extended to institutional
entities like Mutual Funds, Insurance Companies,
Pension Funds and Housing Finance Companies
(subject to regulatory approvals) offering them
with an additional tool for hedging the interest rate
risk on their portfolios which will require
substantially lower margins than bilateral offset
trades in the OTC market. Trading on the CCP
guaranteed ASTROID platform takes care of the
associated credit risks while the anonymity of the
platform ensures fair pricing. The enhanced and
diverse participant base is expected to make the IRS
market more liquid, transparent and robust.
6. Going Ahead
The growth in the Indian IRS market has been
expedited with the various market development
initiatives by the regulator. The move for
centralized reporting and clearing of OTC deals
was envisaged long before associated systemic risks
triggered global action in this direction and the
benefits have been realized in the form of secured
market expansion. Improvements in infrastructure
Monthly Newsletter January 2019
like the ASTROID trading platform with its
benefits of price discovery, risk mitigation, fair and
transparent access for smaller participants are
expected to boost liquidity in the market segment
which provides an effective option for hedging
interest rate risks in the underlying bond market.
CCIL

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Annex: History of Interest Rate Derivatives (IRD) in India

L C Gupta Committee set up by SEBI examined the need for financial derivatives in a broader perspective
November, 1996
and recommended introduction of interest rate and currency derivatives.
RBI permitted SCBs (excluding RRBs), PDs and all-India financial institutions to undertake Forward Rate
July 7, 1999 Agreements/Interest Rate Swaps (FRAs/IRS) as plain vanilla products for their balance sheet management
and market making.
For pricing of rupee interest rate derivatives, banks were allowed to use interest rate implied in foreign
April 27, 2000
exchange forward market, etc.

November 7, 2002 Working Group under the Chairmanship of Shri Jaspal Bindra constituted by RBI to review the progress
and map further developments in regard to IRD in India.
Working Group on Rupee Derivatives submitted its Report. Major recommendations included:
• Mandatory anonymous disclosure of deals done in a standardized manner on the NDS platform which
would download trades to CCIL, just as in the case of government securities.
• Introduction of a centralized clearing system for OTC derivatives through CCIL. RBI advised to
consider mandatory clearing of swap contracts through CCIL in view of the several advantages of such a
facility.
January 31, 2003 • Product standardization to facilitate central clearing.
• Implementation of a daily mark-to-market margining system by CCIL and use the existing Settlement
Guarantee Fund for swap contracts as well.
• Amendment of the Banking Regulation Act, 1949 to clarify the status of derivatives contracts in India
undertaken by banks/FIs/PDs.
• Inclusion of netting of derivative contracts in the draft legislation on netting forwarded to the
Government by RBI.
Banks were encouraged to follow the Current Exposure Method (CEM) for measuring the credit risk
April 1, 2003 exposure inherent in derivatives for determining individual/group borrower exposures.
Interest Rate Futures (IRF) were introduced in India on the National Stock Exchange (NSE). Banks/FIs
June 1, 2003 were allowed to deal in exchange traded interest rate derivatives in a phased manner, with a view to enabling
them to manage their exposure to interest rate risks.
June 3, 2003 RBI Guidelines on participation of PDs in Exchange Traded IRD.

August 7, 2003 Group constituted by RBI to study issues related to IRD on an on-going basis.
Report on Rupee IRD released. Recommendations included:
• Reduction in risk weight for exposures on clearing agencies like CCIL, NSCCL, BOI Clearing house to
December 31, 2003 20% from existing 100%.
• CCIL should be encouraged to evaluate the feasibility of multilateral netting in OTC derivative
contracts like IRS.

March 20, 2004 RBI decided to introduce trading and settlement of OTC derivatives through CCIL.
RBI's Annual Monetary and Credit Policy for the year 2004-2005 indicated operationalization of
May 18, 2004 settlement of OTC Derivatives through CCIL by March 2005.
Monthly Newsletter January 2019

For ensuring smooth transition to Basel II norms, banks directed to maintain capital charge for market risk
March 31, 2005 in respect of their trading book exposures (including derivatives).

May 20, 2005 Market participants advised to use only domestic rupee benchmarks for IRD.
Reserve Bank of India Act, 1934 amended providing RBI with the statutory backing for regulating the
June, 2006 money market and also for regulating trading of over-the-counter derivatives. It also provided legality of
OTC derivative instruments, including credit derivatives.
Internal Group constituted by RBI to review the existing guidelines on derivatives and formulate
October 31, 2006 comprehensive guidelines on derivatives by banks.

December 11, 2006 RBI released draft comprehensive guidelines on derivatives.

April 20, 2007 RBI notified comprehensive guidelines on derivatives.

CCIL

CCIL directed to start a trade reporting platform for Rupee Interest Rate Swaps (IRS). This reporting
April 24, 2007 module was expected to be functional by August 31, 2007 and thereafter be available to all market
participants.

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August 9, 2007 Working Group on IRF under the Chairmanship of Shri V K Sharma, Executive Director, RBI.
CCIL's reporting platform for the transactions in OTC IRD (IRS/FRA) became operational. All banks and
PDs were directed to report all their IRS/FRA trades on the reporting platform within 30 minutes from the
deal time and also ensure that details of all the outstanding IRS/FRA contracts (excluding the client trades)
August 30, 2007 were migrated to the reporting platform, by September 15, 2007. The reported deals were processed by CCIL
which also offered certain post trade processing services like resetting interest rates, providing settlement
values etc. to the reporting members. Information in regard to traded rates and volumes was released
through CCIL's website.
Payment and Settlement Systems Act, 2007 notified to permit netting of exposures for capital calculations;
December 20, 2007
examining setting up of additional CCPs; etc.
RBI Annual Policy Statement for year 2008-09 stated that with the enactment of the Payment and
April 29, 2008 Settlement Systems Act, 2007 the modalities for operationalizing the clearing and settlement system for the
OTC rupee interest rate derivatives would be worked out in consultation with the CCIL.
RBI Mid-term Review of Annual Policy for 2008-09 stated that CCIL would operationalize a clearing and
October 24, 2008 settlement arrangement for OTC rupee interest rate derivatives on a non-guaranteed basis within a month
and on a guaranteed basis within three months.
November 27, 2008 CCIL commenced Non-Guaranteed Settlement of OTC Trades in Rupee Derivatives.
RBI Annual Policy Statement for year 2009-10 laid down the norms for capital adequacy treatment of
exposures to CCPs as per which:
• the exposures on account of derivatives/securities financing transactions trades outstanding against all
April 21, 2009
the CCPs, was assigned zero exposure value;
• the margin amounts/collaterals maintained with the CCPs will attract risk weights appropriate to the
nature of the CCP. For CCIL, the risk weight was 20%.
G-20 leaders mandated that OTC derivative contracts should be reported to trade repositories; all
September 24-25, 2009 standardized OTC derivatives contracts should be traded on exchanges or electronic trading platforms,
where appropriate; and all standardized OTC derivatives contracts should be cleared through the CCPs.
October 16, 2009 Banks and PDs were directed to report the IRS transactions entered into with their clients on a weekly basis
to the RBI.
Report of the Working Group on Reporting of OTC Interest Rate and Forex Derivatives released
May 25, 2011
recommending CCIL to be the designated repository for interest rate and forex derivatives transactions.
CCIL successfully carried out a Portfolio Compression exercise in the OTC IRS market. The first live run of
July 28, 2011
the service comprising 14 participants achieved a compression ratio of over 94%.
RBI set up a Working Group (Chairman: Shri R. Gandhi) to examine and suggest ways for enhancing
December 16, 2011
secondary market liquidity in G-Sec and IRD markets.
RBI released Draft Guidelines on Basel III Capital Regulations. For OTC derivatives, in addition to the
capital charge for counterparty default risk under CEM, banks required to compute an additional credit
December 30, 2011
value adjustments (CVA) risk capital charge to protect themselves against the potential mark to market
losses associated with deterioration in the creditworthiness of the counterparty.
CPSS-IOSCO technical committee released the 'Report on OTC Derivatives Data Reporting and
January 1, 2012
Aggregation Requirements (Data Report)'.
RBI issued final guidelines on Basel III to be effective from April 1, 2013 with the exception of CVA risk Monthly Newsletter January 2019
capital charge for OTC derivatives effective from January 1, 2014. This was done keeping in view the
May 2, 2012
impending introduction of mandatory forex forward guaranteed settlement through a CCP and the norms
were expected to be fully implemented by March 31, 2018.
Recommendations of the Working Group on Enhancing Liquidity in the G-Sec and IRD Market:
• Consider an electronic swap execution facility (electronic trading platform) for the IRS market, and
consider introducing a CCP to provide guaranteed settlement of trades executed through the electronic
platform. [Para 5.10]
• Standardize IRS contracts to facilitate centralized clearing and settlement of these contracts. [Para 5.11]
May 31, 2012 • Insurance companies, PFs and other financially sound entities may be permitted to participate in IRS
market. [Para 5.12]
• Consider developing INBMK swap market, and, evolve a standard benchmark (FIMMDA determined)
on which INBMK swaps can be based. [Para 5.12]
• RBI guideline on risk limits for derivatives exposures, for banks/PDs should be reviewed periodically.
[Para 5.13]
CCIL

July 9, 2012 Launch of the TR service for OTC Foreign Exchange Derivatives.

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Working Group on G-secs and Interest Rate Derivatives Markets (Chairman: Shri R. Gandhi) finalized its
August 10, 2012
report.
October 30, 2012 RBI proposed to standardize IRS contracts to facilitate centralized clearing and settlement of these contracts.
To improve tradability and facilitate centralized clearing and settlement of IRS contracts in future, RBI
decided to standardize IRS contracts in terms of minimum notional principal amount, tenors, trading hours,
January 28, 2013 settlement calculations etc. to be prescribed by FIMMDA in consultation with the market participants. All
new INR MIBOR-OIS contracts executed from April 1, 2013 onwards standardized. The standardization
requirement mandatory for all IRS contracts other than client trades.
April 1, 2013 IRS on Overnight Index Swap for interbank trades was standardized.

July 2, 2013
The finalized guidelines on capital requirements for banks' exposures to central counterparties notified -
effective from January 1, 2014.
December 9, 2013 RBI notified operational guidance on novation of OTC derivative contracts.

January 1, 2014 RBI granted the status of a Qualified Central Counterparty (QCCP) to CCIL.
Guidelines on capital requirements for banks' exposures to CCPs became effective. One of the significant
aspects in the guidelines was the proposal to treat the exposures to CCIL on net basis. In cases, where the CCIL
January 1, 2014 provides guaranteed settlement, banks may reckon their total replacement cost (MTM) on net basis, i.e., on
net replacement cost as part of trade exposure determination. This would provide significant capital relief to
banks.
RBI selected CCIL to act as a Local Operating Unit (LOU) for issuing globally compatible Legal Entity
January 6, 2014
Identifiers (LEIs) in India.
Implementation Group on OTC Derivatives Market Reforms - Recommendations:
• Make operational CCP based clearing for interbank IRS trades by March 2014.
• CCP based clearing would be made mandatory for all interbank Forex Swaps trades by March 2014.
March 6, 2014
• Electronic trading platform for IRS trades may to be put in place by September 2014 subject to approval
from RBI.
• Non-centrally cleared IRS trades (including client trades) should be subject to margin requirements.
March 27, 2014 PD's clearing exposure to a QCCP to be kept outside of the exposure ceiling of 25% of its net owned funds
applicable to a single borrower/counterparty.
March 28, 2014 CCIL commenced CCP clearing for IRS trades referenced to the MIBOR and MIOIS benchmarks.

November 18, 2014 CCIL launched its services as a LOU for issuing globally compatible LEIs in India.

May 28, 2015 Basel III framework on liquidity standards Net Stable Funding Ratio (NSFR) draft guidelines released.

July 22, 2015 Launch of FBIL Overnight MIBOR, with CCIL as the Calculation Agent.
Launch of ASTROID, CCIL's Anonymous IRS Dealing System for trading in OTC rupee derivative trades.
August 3, 2015
The anonymous trading platform with CCP facility has many benefits like availability of
transparent quotes, less documentation requirement, reduced credit risk, saving of capital, higher credit
exposure etc.
All regulated institutional entities, subject to the approval of their respective sectoral regulators, allowed to
Monthly Newsletter January 2019

June 1, 2016 apply for membership of electronic trading platforms in IRS which have CCIL as the central counterparty for
settlement.
Legal Entity Identifier India Limited (LEIL), a wholly owned subsidiary of CCIL, was accredited by the Global
January 4, 2017 Legal Entity Identifier Foundation (GLEIF) as a LOU for issuance of LEIs, among the first LOUs to be
accredited by GLEIF.
CCIL obtained recognition as a “third-country CCP” under the European Market Infrastructure Regulation
March 29, 2017 (“EMIR”), consequent upon recognition of India as an equivalent regime by European Commission's
decision dated December 15, 2016.
June 1, 2017
RBI mandated the implementation of the LEI system for all participants in the OTC markets for Rupee IRD,
foreign currency derivatives and credit derivatives in India.
November 2, 2017 Schedule for introduction of Legal Entity Identifier for large corporate borrowers notified.

April 3, 2018 Launch of the FBIL MIBOR-OIS benchmark.

CCIL

April 10, 2018 RBI proposed to permit nonresidents access to the Rupee IRS market in India.
Guaranteed settlement services in respect of trades referenced to the MIFOR benchmark commenced by
November 19, 2018
CCIL.
November 29, 2018 Final schedule for implementation of LEI in the money market, g-sec market and forex market notified.

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