2015/16 Assessment of ASX Clearing and Settlement Facilities A1.2 ASX Clear (Futures) Standard 17: Access and participation requirements

A central counterparty should have objective, risk-based and publicly disclosed criteria for participation, which permit fair and open access.

ASX Clear (Futures) has objective and transparent participation requirements set out in its Operating Rules and Procedures (CCP Standard 17.1). These include minimum capital and other financial requirements, as well as operational and risk management arrangements tailored to the specific activities of ASX Clear (Futures). Additional requirements apply for OTC derivatives clearing participants (CCP Standard 17.2). ASX Clear (Futures) monitors participants' compliance with requirements on an ongoing basis and has the authority to suspend or terminate participation or take other disciplinary or remedial action in the event of a breach of these requirements (CCP Standard 17.3).

17.1 A central counterparty should allow for fair and open access to its services, including by direct and, where relevant, indirect participants and other FMIs, based on reasonable risk-related participation requirements.

ASX Clear (Futures) has objective and transparent participation requirements, which are publicly available and form part of its Operating Rules and Procedures. ASX has also issued formal guidance to assist applicants' and participants' understanding of the participation requirements. This includes guidance on: the admission process and criteria; notification obligations; offshoring and outsourcing arrangements; and business continuity requirements.

ASX has an internal policy and supporting standards that summarise the financial and operational requirements placed on participants under the ASX Clear (Futures) Operating Rules and Procedures (see CCP Standard 17.2), and document the responsibilities of the CS Boards, CRPC, CRO and relevant departments for ensuring these requirements are met and periodically reviewed. The Operating Rules and Procedures provide for an appeals process should an application for participation be rejected or a participant's access be terminated.

At the end of June 2016, ASX Clear (Futures) had 19 participants, predominantly large domestic and foreign banks and their subsidiaries. Eight participants were OTC derivatives clearing participants, of which four cleared OTC derivatives only. One futures participant was clearing remotely from the United Kingdom under a pilot scheme (see CCP Standard 17.2).

17.2 A central counterparty's participation requirements should be justified in terms of the safety of the central counterparty and the markets it serves, be tailored to and commensurate with the central counterparty's specific risks, and be publicly disclosed. Subject to maintaining acceptable risk control standards, a central counterparty should endeavour to set requirements that have the least restrictive impact on access that circumstances permit.

ASX Clear (Futures)' participation requirements are designed to promote the safety and integrity of the CCP. They cover minimum capital and financial obligations; requirements related to legal structure, governance and regulatory status; business and managerial requirements; operational resources and capabilities; business continuity arrangements; and risk and liquidity management arrangements.

Participants that clear futures only are subject to a minimum NTA requirement of $5 million. ASX management has discretion to impose a higher requirement.

Participation requirements for participants that clear OTC derivatives are set out in the publicly available OTC Rules and OTC Handbook. The capital requirement of $50 million for these participants is significantly higher than that for futures-only participants to reflect the increased complexity of OTC derivatives markets, and the potential for a default event to require the liquidation of less liquid products than those in the futures market. In particular, it is likely that OTC derivatives participants would be called upon to contribute to the close-out process, including by bidding in an auction of a defaulted participant's positions.

Under the Operating Rules and Procedures, the ASX Clear (Futures) Board must be satisfied that a potential participant has (or will have) the resources and processes to comply with its obligations as a participant. For these purposes, ‘resources’ include financial, technological and human resources, and ‘processes’ include management supervision, training, compliance, risk management, business continuity and disaster recovery processes. A participant must also demonstrate that it has the capacity to make an immediate transfer of funds, on demand, should this be required to meet its obligations.

Since April 2015, ASX Clear (Futures) has been conducting a pilot scheme for the admission of participants that are incorporated and base their operations offshore. Such participants must demonstrate the capacity to meet all of the financial and operational requirements described above and that no conflicts of law would arise as a result of their participation. ASX will assess the outcomes from the pilot scheme (initially involving a single UK-based participant) prior to allowing such arrangements more broadly.

17.3 A central counterparty should monitor compliance with its participation requirements on an ongoing basis and have clearly defined and publicly disclosed procedures for facilitating the suspension and orderly exit of a participant that breaches, or no longer meets, the participation requirements.

The CRPM department, which covers both CCPs and reports to the CRO, is responsible for the risk management of exposures to clearing participants. CRPM monitors day-to-day developments regarding, among other things, financial requirements, risk profiles, open positions and settlement obligations to the CCPs.

The CRA team is responsible for monitoring, assessing and investigating matters relating to financial requirements, including monitoring participants' monthly financial statements for any matters of concern. The CRA team reports to the General Manager, Participants Compliance with a secondary reporting line to the Senior Manager, CRPM.

CRA also carries out a range of participant monitoring spot checks and other initiatives designed to validate the accuracy of the financial and operational information that participants submit to ASX Clear (Futures). Participants are required to inform ASX if at any stage their capital falls below the minimum requirement. CRA, working with CRPM, is also responsible for determining and reviewing participants' ICRs, drawing in part on information provided by participants in their regular financial returns to ASX, and coordinating a ‘watch list’ of participants deemed to warrant more intensive monitoring (see CCP Standard 4.1).

In addition, Operations and ASX Compliance perform regular and ad hoc compliance monitoring activities, including monthly reviews of participants' financial returns. During the Assessment period, ASX also initiated additional risk-based validation reviews.

ASX Clear (Futures)' arrangements for monitoring and enforcing compliance with its Operating Rules are published on the ASX public website. Under these, ASX Clear (Futures) has wide-ranging powers to sanction its participants in order to preserve the integrity of the CCP. ASX Clear (Futures) may restrict, suspend or terminate a participant's authority to clear all market transactions in the event of a default, or in the event of a breach of the Operating Rules and Procedures that may have an adverse effect on the CCP. The action taken will depend on a number of factors, including the materiality of the incident, the participant's financial and operational capacity as well as the participant's history. Where a breach has been identified and the participant has taken appropriate steps to rectify it, ASX Clear (Futures) will typically continue to monitor the participant closely for a period of time. Significant breaches are also referred to ASIC and, depending on the nature of the breach, may be investigated by ASX Compliance for formal disciplinary action.