Treasury Risk Management in New Global Economy S Roy,CCIL27 th Jan ‘12

Financial Market Crisis of What really went wrong? Un-bridled greed punctured the bubble? Risk Management failed ? All problems due to OTC markets? Consequences Crisis of confidence. Huge contraction of markets.

Getting the system back on track  G 20 initiatives : Handling non-transparent OTC Derivatives Market exposures Better regulatory control on Systemically Important entities  Directions : Settle OTC Derivative trades through CCPs Create Trade Repositories for Derivative Products which can not be settled through CCPs Improved Risk Management standards for CCPs & other FMIs Strengthening Capital Requirements for banks Increased stress on liquidity risk management Manage Systemic risk pro-actively Segregate excessive risk taking from Banking & insistence on living will etc.

Where do we go from here?  Do we need to re-discover Risk Management?  Where do we start from?  Three corner stones of possible Way Forward - Change in Market Structure Change in Internal Processes Risk Governance

Change in Market Structure  Possibilities Standardisation of OTC trades Settlement of trades through CCPs Trade Warehouse & Post Trade Processing Services Portfolio Compression

Settlement through CCPs  Risk Mitigation Counterparty risk Liquidity risk Operations risk  Assistance in post trade processing  Reduction in Capital requirement  CAN WE REALLY MAKE IT WORK?

Derivatives Trading  Bilateral Negotiations have limitations  Anonymous Trading can increase participation  Standardisation of contracts required  CCP Clearing essential for efficient Anonymous Trading Systems  HOPE THAT SWAP EXECUTION FACILITIES IN US PROVIDE SOME DIRECTION

Trade Warehouse  Electronic Record of Trades  Lifecycle Processing  Settlement of Obligations  Valuation and Risk Management Services  Information to Stakeholders  Information Dissemination for market transparency

Portfolio Compression  Removal of Trades having no economic value  Optimisation Process ensures that market & counterparty exposures are kept substantially unchanged  Can lead to upto 95% reduction in outstanding contracts  CCIL carried out First Live Run for IRS trades in July ’11 – success rate 94.3% - Notionals down by Rs 7.31 lac Crores

State of Indian OTC Market in Financial Products  Product Coverage – inadequate but expected to develop fast  Regulation – almost the best in the world but conservative Clear segregation between Market Makers & Users Guidelines for exposure control  CCP Clearing available  Dealers are well versed – possibly some awareness deficiency at other levels

Market Size in OTC Derivatives markets  Size of IRS Market – Date No of Trades Amount( Rs Crs) Dec ’ ,61,000 Dec ’ ,00,086 Dec ’ ,16,433 Dec ’ ,29,552 Dec ’ ,81,821  Size of Forward Forex Markets - INR/USD Dec ’ USD bn Dec ’ USD bn Dec’ USD bn

Change in Internal Processes Adapting to new market structure is by itself a daunting task – huge change in processes, IT systems and approach towards risk control Regulatory control has tightened putting more demands re. adherence to new standards & information requirements New way to deal with liquidity risk and segregation requirements More transparency & appropriateness in dealing with customers Need to allocate resources of high order with possibly lower return on such resources – a big management challenge

Risk Governance  Why, if at all, Crisis is a risk management failure? It was mostly a failure of Risk Governance.  The position is changing fast Representation of Risk Function in Board/Top Management Segregation of Risk Function from other activities for proper focus Mandating Extensive Risk Disclosures Motivating talents with adequate rewards and role responsibilities Periodic External validations of models etc.  ARE WE IN SYNC WITH GLOBAL DEVELOPMENTS?

Thank You