Foreign Exchange Contracts

Settlement of Foreign Exchange Contracts Every eligible foreign exchange contract, entered into between members, will get novated and be replaced by two new contracts - between CCIL and each of the two parties, respectively. Deal confirmation files will be transmitted over the INFINET to CCIL, and will form the starting point for processing by it. Following the multilateral netting procedure, the net amount payable to, or receivable from, CCIL in each currency will be arrived at, member-wise. The Rupee leg will be settled through the members' current accounts with RBI and the USD leg through CCIL's account with the Settlement Bank at New York. By choosing to settle their trades through CCIL, market participants will gain in the following ways: • •

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Assurance of settlement on the settlement date Reduction in counterparty exposure. (In case of government securities, the exposure will get extinguished upon acceptance of trades for settlement; in forex clearing & settlement, since a Loss Allocation Procedure is stipulated, the exposure will not get extinguished but will come down from the gross level to the net level.) Operational efficiency Easier reconciliation of accounts (in case of forex trades) Improved liquidity and better leveraging (e.g., shorter holding periods for government securities) Lower operational cost, overall Settlement Procedure

From November 8, 2002, CCIL has commenced live operations for value date November 12, 2002. Currently, CCIL's operations cover only the inter-bank spot and forward US Dollar-Indian Rupee (USD-INR) trades. Connectivity to the RBI's INFINET network will be a pre-requisite for members availing of CCIL's services for settlement of their trades. No settlement will take place on Saturdays, Sundays and such other days as are not business days in either Mumbai or New York. There will be at the least one settlement per Mumbai business day. Members will exchange deal confirmation files, over INFINET, among themselves, as well as with CCIL. At the CCIL end, the deal confirmation data received from the counter-parties will be matched, and then processed for netting. The Rupee leg will be settled through the members' current accounts with RBI and the USD leg through CCIL's account with the Settlement Bank at New York. Every eligible foreign exchange contract, entered into between members, will get novated and be replaced by two new contracts for the same value date - between CCIL and each of the two parties, respectively.

Following the procedure of multilateral netting, one net payable or receivable amount, in respect of both USD and INR, will be arrived at. Forex Settlement - Eligibility Criteria for grant of Membership The applicant shall : • be an Authorized Foreign Exchange Dealer; • must have a current account with the Reserve Bank of India for settlement of transactions in Indian Rupees; • have adequate risk management systems in place and qualified personnel in its employment; No entity shall be admitted as a Member of Clearing Corporation if it • has received a Notice of winding up or proceedings for winding up have commenced or if it has been ordered to be wound up or a provisional liquidator/receiver/official liquidator has been appointed for such an entity; • has compounded with its creditors for less than full discharge of debts save if such acts of compounding as are carried out in the normal course of its business as a part of a restructuring process; • has been barred by an order of a Court/Government/Regulatory body for any violation of law; • has been at any time declared a defaulter under any Law or by any regulatory body; • has been previously refused admission to Clearing Corporation unless the period of one year has elapsed since the date of last rejection; Notwithstanding anything contained herein, Board shall have the power to amend, alter, vary or exempt the eligibility criteria for admission to Membership. Collateral & Margin for Forex Settlement Members of CCIL's Forex Segment are required to deposit their margin contribution into CCIL's Settlement Guarantee Fund (SGF) maintained for this business segment. Individual member contributions to SGF are a function of the Net Debit Cap allotted to the concerned member and the margin factor assigned to it. SGF is received in U S Dollars funds only to CCIL's dedicated USD Nostro Account with its Settlement Bank at New York, USA. Composition Member contributions to SGF are payable in US Dollars funds only.

Work Process Deposits Members desirous of making SGF contributions are required to intimate CCIL about the same using a prescribed format within cut-off timings prescribed for the purpose. The relative contributions are to be remitted directly by the concerned member to the credit of CCIL's USD Nostro Account with its Settlement Bank in New York, USA. Member balances are updated by CCIL upon receipt of relative funds into its USD Nostro Account. Transaction Reports and Holding Reports are electronically delivered to the concerned members along with other daily business reports. Withdrawals Members seeking to withdraw from their SGF contributions are required to send a prior written notice to CCIL about the same using a prescribed format within cut-off timings prescribed for the purpose. Withdrawal payments are effected by CCIL by credit of USD funds on relative value date to concerned members' USD Nostro Accounts with their correspondent banks under advice to the members, after their SGF balances have been suitably reduced. Transaction Reports and Holding Reports are electronically delivered to the concerned members along with other daily business reports. Corporate Actions and Benefits The funds received from members are invested by CCIL in approved investment avenues such as US treasuries, Bank Deposits etc. Interest and other income earned on such investments are distributed amongst members at six monthly intervals net of costs, based on size and tenor of individual member holdings. This interest is remitted in the same manner as SGF withdrawals under advice to members. Forex Settlement - Risk Management Process The risk management process relating to forex settlement operation stipulates fixing of Net Debit Cap (NDC) for each member. NDC computation is based on two factors: the counter party risk assessment (CPRA) grading for the member given by a reputed rating agency and net-worth of such member. Trades concluded by a member is accepted for settlement only as long as the Net Debit Cap is not violated, that is, the net US Dollar sale obligation of the member for the settlement date does not exceed the NDC stipulated. Based on the CPRA grading of the member, margin factors are also arrived at. Contribution of a member to Settlement Guarantee Fund (SGF) is in US Dollar and is equal to margin factor percentage of NDC for such member. For covering its liquidity risk, CCIL will have in place the facility of a Line(s) of Credit (LoC) limit and/ or other credit facilities from its overseas Settlement Bank. CCIL will draw against the LoC in case a member fails to deliver its currency obligation to CCIL on the value date. Any collaterals required to be furnished to the Settlement Bank for availing of such credit facilities will be furnished from out of the contributions made by members to the SGF In case of Dollar default by any member, CCIL has the recourse to the defaulting bank's rupee account with RBI in terms of a mandate executed by the members in this regard. In case of a

Rupee default, CCIL does not release Dollar amount payable to the concerned member till the Rupee amount is received on the next day. Moreover, CCIL has right to sell the available US Dollars to meet such Rupee shortfall. In case of any residual shortfall, CCIL would appropriate margin collected from such member and then would allocate the residual loss through Loss Allocation Mechanism. As per Loss Allocation Mechanism of CCIL, any loss arising out of a default by a member is to be apportioned, net of margin amount recovered from the concerned member, to the members having done trade with the defaulting member for settlement on the day of default and having net buy position in the currency of default ( loss is apportioned in the ratio of their respective net buy position in the currency of default). It may be appreciated by the member that due to the existence of loss allocation mechanism, CCIL's guarantee to the members for their USD/Rupee trades do not result in CCIL's acceptance of counter-party exposure entirely. In the event of a default, if the amount recovered from the defaulter members is not adequate, a member may suffer some loss due to a default by its counterparty. The loss, however, is substantially reduced and potential maximum loss would be restricted only to the member's net exposure on such counterparty for the settlement date on which the default has occurred.