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

2. Financial Market Crisis of 2008-09 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.

3. 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.

4. 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

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

6. 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?

7. 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

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

9. 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

10. 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

11. Market Size in OTC Derivatives markets  Size of IRS Market – Date No of Trades Amount( Rs Crs) Dec ’07 67645 35,61,000 Dec ’08 47038 26,00,086 Dec ’09 35283 18,16,433 Dec ’10 51105 29,29,552 Dec ’11 49512 29,81,821  Size of Forward Forex Markets - INR/USD Dec ’09 34598 USD 254.61 bn Dec ’10 42961 USD 375.50 bn Dec’11 56579 USD 487.77 bn

12. 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

13. Risk Governance  Why, if at all, 2008-09 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?

14. Thank You