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Credit Stress Testing Methodology
Stress Test for Credit Risk

Equity Cash Segment :

Frequency: Daily
Note: Day of Stress test –'S' day

Scenario 1: Default by 2 Brokers

  • ICCL computes the 'Cumulative Funds pay-in', 'Cumulative Funds pay-out', 'Cumulative Securities pay-in' and 'Cumulative Securities pay-out' of all members as on the end of pay-in deadline on the 'S' day. For this purpose cumulative payin/ payout of each member's trades (includes non-institutional trades as well as 2X*% by value of those institutional trades which have not yet been confirmed by the custodian) undertaken on 'S-2' day, 'S-1' day and on 'S' day till the pay-in deadline is considered.
    *X is the highest daily % by value of custodial rejects in the previous 12 months
  • Any early pay-in of funds/securities is ignored.
  • It is assumed that each clearing member would default in meeting its 'cumulative funds pay-in' and 'cumulative securities pay-in' obligations.
  • Loss:
    Price movement in respect of each underlying over the last 10 years is considered. The maximum percentage price movement is applied to the price on the day for which the stress test is being done
    • Securities pay-in failure of the member
      It is assumed that the failure to bring in securities would result in financial close-out and ICCL would suffer a loss of 20% (at the minimum) of the value of such securities pay-in obligation
    • Funds pay-in obligation failure of the member
      The assumed loss on liquidation of securities that would have been paid-out to the defaulting member is:
      a. Group 1 securities – 20%
      b. Group 2 & 3 securities – 20% scaled up by root of 3.
    • Gross loss due to member
      Gross loss
      due to member
      = Funds pay-in + 120% of securities
      pay-in
      - Funds pay-out - Liquidation value of
      securities pay-out
  • Coverage:
    ICCL calculates the gross loss (as per 4 above) for each clearing member and assesses that against the defaulting clearing members' mandatory margins (in case of early pay-in, those margins which would have been applicable had the early pay-in not been made, are considered). Excess collateral, if any, is ignored. Equity scrips as collateral, if any, are valued with minimum 20% haircut.
  • ICCL calculates the total credit exposure due to simultaneous default of at least two clearing members (based on residual loss calculated in 5 above) and their associates causing highest credit exposure.

Scenario 2: Default by 1 Custodian

  • ICCL computes the 'Cumulative Funds pay-in', 'Cumulative Funds pay-out', 'Cumulative Securities pay-in' and 'Cumulative Securities pay-out' of all custodians as on the end of pay-in deadline on the 'S' day. For this purpose cumulative pay-in/payout of each custodian's trades (including those trades which have been confirmed by the custodian) undertaken on 'S-2' day, 'S-1' day and on 'S' day till the pay-in deadline is considered.
  • Any early pay-in of funds/securities is ignored.
  • It is assumed that each custodian would default in meeting its 'cumulative funds pay-in' and 'cumulative securities pay-in' obligation.
  • Loss:
    • Securities pay-in failure of the member
      It is assumed that the failure to bring in securities would result in financial close-out and ICCL would suffer a loss of 20% (at the minimum) of the value of such securities pay-in obligation.
    • Funds pay-in obligation failure of the member
      The assumed loss on liquidation of securities that would have been paid-out to the defaulting member is:–
      a. Group 1 securities: 20%
      b. Group 2 & 3 securities: 20% scaled up by root of 3.
    • Gross loss due to member
      Gross loss
      due to member
      = Funds pay-in + 120% of securities
      pay-in
      - Funds pay-out - Liquidation value
      of securities pay-out
  • Coverage:
    • ICCL calculates the gross loss (as above) for each custodian and assesses that against the defaulting custodians' mandatory margins (in case of early pay-in, those margins which would have been applicable had the early pay-in not been made, are considered.) Excess collateral, if any, is ignored. Equity scrips as collateral, if any, are valued with minimum 20% haircut.
    • ICCL calculates the total credit exposure due to default of the custodian (based on residual loss calculated as above) causing highest credit exposure.