The transactions relating to government securities are settled through member's SGL / Current accounts at RBI, with settlement of funds being done on a net basis and that of securities on a gross, or trade-by-trade, basis. CCIL guarantees settlement of trades on the settlement date by becoming a central counter-party to every trade through the process of novation.

Members conclude trades, on-line, on RBI's Negotiated Dealing System (NDS) platform, via the INFINET network, a secure closed-user group (CUG) hybrid network consisting of VSATs and leased lines. After trades have been concluded on the NDS, details are forwarded to the CCIL system, via INFINET, for settlement, initially in batches. Both the funds as well as the securities leg get settled through members' accounts maintained at RBI. The DVP-II method of settlement (settlement of funds on a net basis and that of securities on a gross, or trade-by- trade, basis), is followed, with CCIL guaranteeing settlement of trades on the settlement date (Guaranteed Settlement commenced from April 10, 2002). In order to ensure this, CCIL becomes a central counter-party to every trade through the process of novation. Funds settlement is done on a multilateral netting basis, leading to efficiency in operations.

The process work-flow with respect to securities settlement at CCIL is as follows :

1. CCIL receives trades of its members from the RBI NDS network after the matching process is completed by that system. All trades that have been flagged for settlement through CCIL flows to CCIL electronically.

2. Trades from NDS system are received by CCIL in two batches. The first batch contains trades for T+0 settlement and beyond. The second batch contains trades for settlement T+1 and beyond. The cut - off times for the first and second batches are 14.30 and 17.30 respectively. RBI-NDS however decides on the cut-off times based on the market requirements.

3. Upon receipt of trades, CCIL performs business and technical validations, and all trades passing these validations are taken up for processing.

4. CCIL checks exposure limits in respect of validated trades and generate member-wise "Trade Acceptance Report" for trades within respective exposure limits. Trades contained in this report are accepted by CCIL for guaranteed settlement.

5. CCIL does not reject the trades that exceed individual member's exposure limits, merely for want of adequate exposure limits. Such trades are accepted by CCIL for settlement on behalf of the concerned member without any guarantee of settlement. Trades so accepted on behalf of a member form part of CCIL does not reject the trades that exceed individual member's exposure limits, merely for want of adequate exposure limits. Such trades are accepted by CCIL for settlement on behalf of the concerned member without any guarantee of settlement. Trades so accepted on behalf of a member form part of "Trades Exceeding Exposure Limits Report" sent to the concerned member.

6. The trades in the first batch are then novated, whereby CCIL becomes the central counter party for all the trades. Trades for T+0 settlement are clubbed with trades processed earlier and due for settlement on that day, and member-wise obligations are computed. Funds are settled on a multi-lateral netting basis, wherein a member has only a net payable or receivable position. Securities are settled on a trade by trade gross basis. After netting of Funds, CCIL generates and transmits "Final Securities Obligation Report" and "Final Funds Obligation Report" to each individual member whose trades form part of that day's settlement process.

7. CCIL electronically delivers two settlement files to RBI, after processing the first batch trades - (a) securities file containing details of member-wise security-wise pay-ins and pay-outs; and (b) funds file containing details of member-wise net funds receivable or payable.

8. CCIL electronically delivers two settlement files to RBI, after processing the first batch trades - (a) securities file containing details of member-wise security-wise pay-ins and pay-outs; and (b) funds file containing details of member-wise net funds receivable or payable

9. Upon receipt of settlement files at RBI PDO, CCIL's Securities Pay-in file is processed first by debit to member's SGL Account and credit to CCIL's Settlement SGL Account. In the event of any shortages, RBI-PDO marks the trades where securities shortages have been encountered and sends the files back to CCIL for necessary modifications. CCIL then meets the shortage from SGF/Proprietary account and withholds funds payable to the defaulting member. If the Funds withheld are not sufficient, Securities payable are withheld from the defaulting member. The Funds/Securities payable are withheld in such a manner that the value of Funds/Securities withheld is equal to or more than the value of shortage reported. In case CCIL is not able to meet the shortage, then the concerned trade is withdrawn. The modified files are then sent back to RBI-PDO for further processing. After the Securities pay-ins are processed, Funds pay-ins are taken up for processing at RBI-DAD. Here, if funds shortages are encountered, RBI-DAD, based on the standing instructions from CCIL, access SGF cash contribution and the Line of Credit provided by the banks, to meet the funds shortfall. The records where shortages were encountered are marked and the files sent back to CCIL for necessary modifications. CCIL withholds Securities deliverable to the defaulting member in such a manner that the value of Securities withheld is equal to or more than the value of shortfall. CCIL then sends back the modified files to RBI for effecting the Funds and Securities Pay-outs thereby completing the settlement process

10. In the event of shortages of either funds and/or securities, CCIL handles the shortages and transmit "Funds and Securities Shortage Report" to the concerned defaulting member(s). In the event of a trade being withdrawn from the settlement process as part of the shortage handling effort, a "Deal Withdrawn from Settlement Report" is transmitted to the non-defaulting member.

11. On receipt of confirmation from RBI regarding completion of settlement, CCIL notifies all its members regarding completion of that day's settlement through a "Settlement Status Report".

12. In respect of trades received in the second batch, CCIL validates and checks the trades against individual member risk exposure limits and generate and transmit "Trade Acceptance Report" and "Trades Exceeding Exposure Limits Report".The trades are then be novated and member-wise obligations for Securities and Funds generated and the position is advised to the members through "Interim Funds Obligation Report" and "Interim Securities Obligations Report". 12. CCIL expects to receive its statement of accounts in respect of its own RBI Current Account and CSGL Account by the time the settlement process is complete. Based on the entries in these statements, CCIL confirms the relative deposits by members towards their individual fund/securities contributions to SGF during the day, based on notice of deposit already sent by members to CCIL. The SGF balances are updated as part of the daily End of Day procedure and members are sent "Transaction Statement" and "Holding Statement". Formats of relative notices of deposits, withdrawals and substitutions to be given by members to CCIL in respect of their SGF form part of CCIL's Bye-Laws, Rules and Regulations. These notices are to be delivered by members to CCIL by telefax or in physical form.

13. As part of its end-of-day process, CCIL generates member-wise "Guarantee Fund Utilization Report" where applicable and transmits to members concerned. Members are expected to meet their margin calls on the next business day within the cut-off timings prescribed by CCIL for the purpose.

14. CCIL also transmits "Margin Factor Report" and "SGF Valuation Report" to members at fortnightly intervals.

15. CCIL transmits its statement of standard fees and charges to individual members at monthly intervals through a "Fees and Charges Report"

16. All CCIL reports are transmitted using the Web Browser capabilities in the RBI INFINET system. Members are required to log into the system using their member-ids and passwords to get the reports.

The applicant shall :

• be a Bank/Financial Institution/Primary Dealer/Mutual Fund or a Statutory Corporation or a body corporate including a Company as defined in the Companies Act, 1956 or any entity as may be permitted from time to time by Reserve Bank of India to open SGL and Current Accounts with it;

• have opened SGL Account and Current Account with the Reserve Bank of India; Provided however that Clearing Corporation may relax the requirement of the maintenance of Current and SGL Accounts in respect of the Members;

• not have any record of repeated failure in complying with the regulatory requirements;

• not have been subject to an order of statutory disqualification or an order of similar effect issued by a regulatory authority;

• have adequate risk management systems in place and shall have qualified personnel in its employment;

• fulfilled Capital Adequacy norms/Minimum Net Worth requirements as laid down by their respective regulators; if no such norm is prescribed or if the applicant is exempted from fulfilling the same, then the applicant shall have adequate Net Worth to support the scale of operations undertaken or proposed to be undertaken;

• be a profitable organization (must have reported operating profits inat least two out of three financial years immediately preceding the date of application); Provided that Clearing Corporation may exempt public sector undertakings/ banks that is to say entity in which a majority of the shares are held by the Government of India/State Governments/Reserve Bank of India), Financial Institutions/body corporate formed under any special statute or Act of the Parliament, from the requirement of Sub-rules (f) and (g) above

Members of CCIL's Securities Segment are required to deposit their margin contributions into CCIL's Settlement Guarantee Fund (SGF) maintained for this business segment. Individual member contributions are a function of their outstanding trade obligations based on the types of trades, securities involved and value dates of settlement. Members are expected to always maintain adequate balances in their SGF to cover their unsettled trade exposures. Margins are required to be maintained by every member for their own trades as well as trades reported by them on behalf of their constituents. SGF is received in the form of both cash and securities. SGF cash contributions are received in CCIL's Current Account maintained with Reserve Bank of India Mumbai. SGF security contributions are received and maintained in CCIL's Constituent SGL (CSGL) Account maintained with Reserve Bank of India, Mumbai

Composition

SGF is received in the form of cash and securities. Members are required to maintain a minimum of 10% of their total margin obligations in the form of cash contributions to SGF. Members have the option to maintain their entire SGF contribution in the form of Cash. The balance SGF contribution can be held in the form of specified GOI dated securities and/or Treasury Bills from amongst a list of eligible securities notified by CCIL from time to time.

Members of CCIL's Securities Segment are currently required to maintain a ratio of 1:9 in respect of their cash: securities SGF contributions in relation to their margin requirements.

Members desirous of making cash contributions to their SGF are required to intimate CCIL about the same using a prescribed format. Cash contributions from members are received by means of their cheques drawn on their Current Account with Reserve Bank of India, Mumbai. These are expected to be held in multiples of INR 100,000.00. Relative cheques are deposited at CCIL counters within cut-off timings prescribed for the purpose. Member SGF balances are updated by CCIL upon receipt of relative funds into its Current Account with RBI. Transaction Reports and Holding Reports are electronically delivered to the concerned members along with other daily business reports.

All transfers of securities to and/or from CCIL by its members are carried out on a "Value Free of Payment" basis. Members desirous of making securities contributions to their SGF are required to intimate CCIL about the same using a prescribed format. Security contributions from members are tendered using SGL Transfer Form III duly signed by the concerned member as a "Seller". These forms are deliverable at CCIL counters by members within cut-off timings prescribed for the purpose. CCIL shall lodge these Forms with Reserve Bank of India, Mumbai after counter-signing them as a "Buyer". Member SGF balances are updated by CCIL upon receipt of relative securities into its CSGL Account with Reserve Bank of India. Transaction Reports and Holding Reports are electronically delivered to the concerned members along with other daily business reports.

Members seeking to withdraw from their SGF security 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. Withdrawals requests shall be processed and permitted after taking into account concerned members' outstanding trade obligation. Security withdrawals are effected to members by credit to their SGL Account with Reserve Bank of India, Mumbai on relative value date 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.

Members are entitled to substitute their SGF holdings after giving prior notice as prescribed by CCIL. Depending on the type of substitution viz., security for cash, cash for security or security for security, members are required to comply with relative deposit and withdrawal procedures specified for the same. Transaction Reports and Holding Reports are electronically delivered to the concerned members along with other daily business reports upon completion of the process.

All corporate actions on member SGF holdings are serviced through the electronic funds transfer mechanism of Reserve Bank of India. Relative funds are remitted to the Current Accounts of concerned members with separate individual electronic advices to members

Members are not entitled to any interest on their cash contributions to SGF, which is expected to be 10% of their total margin requirements.

In respect of members holding their entire SGF contribution in the form of cash, CCIL pays interest to such members at quarterly rests (at the end of every calendar quarter) on 90% of their average cash balances during the relative period @ 100 basis points below the weighted average 91 Day Treasury Bills' cut off yields at the last three primary auctions held before the relevant interest payment date. The benchmark instrument to which such interest is pegged as well as spread between the yield on the benchmark instrument and the interest rate paid by CCIL may be changed at the sole discretion of CCIL from time to time.

Periodic coupon payments received in respect of Members' SGF security contributions (held in the form of dated securities) are passed on to concerned Members by CCIL immediately upon receipt of relative interest from Reserve Bank of India.

Redemption proceeds of matured securities are treated as concerned members' additional cash contribution to SGF

CCIL prescribes a list of securities that are eligible for margin contributions by members to their SGF. This list is periodically reviewed based on trading volumes, tenor, market volatility etc. CCIL values member security holdings in SGF at prescribed intervals and/or at every instance of SGF deposit/withdrawal by a member.

During the settlement processes, CCIL assumes certain risks which may arise due to a default by a member to honour its obligations. Settlement being on Delivery Versus Payment basis, the risk from a default is the market risk(change in price of the concerned security). CCIL processes are designed to cover these risks through its margining process.

CCIL collects Initial Margin and Mark to Market Margin from members in respect of their outstanding trades. Initial Margin is collected to cover the likely risk from future adverse movement of prices of the concerned securities. Mark to Market Margin is collected to cover the notional loss (i.e. the difference between the current market price and the contract price of the security covered by the trade) already incurred by any member. Both the margins are computed trade-wise and then aggregated member-wise. In addition CCIL may also collect Volatility Margin in case of unusual volatility in the market.

Members are required to keep balances in Settlement Guarantee Fund(SGF) in such a manner that the same is enough to cover the requirements for both Initial Margin and Mark-to-Market Margin for the trades done by such members. In case of any shortfall, CCIL makes margin call and the concerned member is required to meet the shortfall before the specified period of the next working day. Members' contribution to the SGF is in the form of eligible Govt. of India Securities/T-Bills and cash with cash being not less than 10 % of the total margin requirement at any point of time.

Another important risk emanating from the process is Liquidity Risk. To ensure uninterrupted settlement, CCIL is required to arrange for liquidity both in respect of funds and securities. CCIL has arranged for Lines of Credit of Rs. 800 crores from Banks to enable it to meet any reasonable shortfall arising out of a default. In regard to Securities, member's contributions to SGF is mainly in the form of securities and through the list of specified securities acceptable for contribution to SGF, CCIL ensures that the most liquid securities in which a significant portion of the trades are settled are available in the SGF. For requirements of other securities, CCIL is finalising limited purpose security borrowing arrangement from major market participants.