2015/16 Assessment of ASX Clearing and Settlement Facilities Appendix A1.1 ASX Clear

A1. Financial Stability Standards for Central Counterparties

The CCP Standards are made up of 21 headline standards, each of which is accompanied by a number of more detailed sub-standards. In assessing whether a facility has met each of the CCP Standards, the Reserve Bank takes into account associated guidance.[1] The following provides details of how ASX Clear and ASX Clear (Futures) observe each of the CCP Standards (including sub-standards). It also sets out the Bank's assessment of how well ASX Clear and ASX Clear (Futures) has complied with each of the CCP Standards during the Assessment period, and provides recommendations for each of the CCPs to address relevant areas of concern and take steps to further strengthen their observance of the CCP Standards.[2]

A1.1 ASX Clear

ASX Clear is a wholly owned subsidiary of ASXCC, itself a wholly owned subsidiary of ASX Limited (see ‘ASX Group Structure’ in Appendix A). ASX Clear acts as the CCP for cash equities, pooled investment products, warrants, certain fixed-income products and equity-related derivatives listed on the ASX market. Under the TAS, it can also act as a CCP for trades in both ASX- and non-ASX-quoted financial products executed on AMO platforms. ASX Clear currently provides clearing arrangements for Chi-X under the TAS.

Summary of Ratings and Recommendations

The following table summarises the Bank's 2015/16 Assessment of ASX Clear against the FSS using the rating system set out in the Principles for Financial Market Infrastructures: Disclosure framework and assessment methodology. The table includes the recommendations made by the Bank for ASX Clear to observe or continue observing the requirements under the FSS, as well as recommendations to further strengthen ASX Clear's observance of the FSS.

Table 11: ASX Clear Ratings and Recommendations
Standard Rating Recommendation
1. Legal basis Observed  
2. Governance Observed ASX Clear is encouraged to continue enhancing the documentation of the key elements of its financial risk management framework, including clear articulation to participants and regulators (and where appropriate the public) of the analytical basis and rationale for the choice and calibration of key margin and stress test model parameters and assumptions.

ASX Clear is encouraged to review its governance arrangements in light of the CPMI-IOSCO guidance on cyber resilience and forthcoming guidance on resilience and recovery of CCPs.
3. Framework for the comprehensive management of risks Observed ASX Clear is encouraged to continue to refine the documentation of its recovery plans, including considering further elaborating: stress scenarios; communications procedures; the methodology for determining critical services; how structural weaknesses are identified and addressed; and links to other FMIs.
4. Credit risk Observed ASX Clear is encouraged to complete its review of spread, concentration and liquidity add-ons for its credit stress test models and incorporate these add-ons as appropriate.

ASX Clear is encouraged to continue to progress planned enhancements to its risk management systems, including the capability to calculate credit stress test exposures on a near real-time bas is.

ASX Clear is encouraged to review its framework for credit stress testing, including its interpretation of ‘extreme but plausible’ market conditions and its framework for determining the adequacy of its prefunded financial resources, in light of forthcoming CPMI-IOSCO guidance on resilience and recovery of CCPs.
5. Collateral Observed  
6. Margin Observed ASX Clear is encouraged to complete its review of spread, concentration and liquidity add-ons for its margin models, and incorporate these add-ons as appropriate.

ASX Clear is encouraged to continue to progress planned enhancements to its risk management systems, including the ability to calculate exposures and margin requirements using a range of models and parameters on a near real-time basis.

ASX Clear is encouraged to review its margin models in light of forthcoming CPMI-IOSCO guidance on resilience and recovery of CCPs.
7. Liquidity risk Observed In order to continue to observe CCP Standard 7, ASX Clear should implement plans to expand and refine its liquidity-specific stress scenarios and integrate these into its liquidity stress test framework.

ASX Clear should also continue to refine and enhance the sensitivity analysis of its liquidity stress test model. This includes examining further the sensitivity of outcomes to certain underlying assumptions, such as the level of priming of securities.

ASX Clear should also ensure that its liquidity stress test framework is aligned with a clearly defined strategy for managing liquidity obligations in a default scenario. ASX Clear should implement plans to maintain sufficient liquid resources to cover a pre-specified value of stressed liquidity exposures arising from cash market transactions, while continuing to maintain sufficient liquid resources to cover stressed liquidity exposures arising from derivatives transactions. Processes should be in place to respond promptly to any breaches of target liquidity coverage; these processes should be clearly documented.

ASX Clear should also conduct appropriate due diligence on its participants' ability to understand, quantify and manage any contingent liquidity obligations under its Rules. ASX Clear should ensure that its disclosures remain consistent with its liquidity risk management framework and assist participants in understanding their contingent exposure to the use of tools to address a liquidity shortfall.

ASX Clear should enhance and formalise its processes for conducting due diligence on the ability of its committed liquidity providers to perform as required under those commitments.

ASX Clear is encouraged to regularly test its procedures for accessing its liquid resources, including the on-market liquidation or repo of non-cash collateral and collateral investments, drawdown of ASX's committed liquidity facilities and potential repo of eligible securities at the Bank.

ASX Clear is encouraged to continue to progress planned enhancements to its risk management systems, including the ability to calculate liquidity stress test exposures on a near real-time basis.

ASX Clear is encouraged to review its frameworks for liquidity stress testing and determining the adequacy of its liquid resources in light of the forthcoming CPMI-IOSCO guidance on resilience and recovery of CCPs.
8. Settlement finality Observed  
9. Money settlements Observed  
10. Physical deliveries Not applicable  
11. Exchange-of-value settlements Observed  
12. Participant default rules and procedures Observed ASX Clear should continue enhancing its approach to the testing and review of its default management arrangements. Such enhancements should include increasing the complexity and scope of its default management fire drills. ASX Clear should also ensure that these fire drills involve all relevant internal and external stakeholders and committees, and test the interaction between all relevant stakeholders.

ASX Clear should more prominently involve its default brokers in the testing of default management arrangements for exchange-traded products. On an annual basis, ASX Clear should engage with its default brokers on their proposed method for closing out the hypothetical portfolio used in the fire drill, including expected close-out prices and timeframes.

ASX Clear should also involve the Risk Consultative Committees and other clearing participants in future default management fire drills that test ASX Clear's recovery arrangements.

As part of its annual review of the DMF, ASX Clear should assess the potential implications of any changes to the resolution regimes that govern its participants. This includes the resolution regimes of any offshore-based participants.

ASX Clear should also review its DMF in light of the proposed establishment of a special resolution regime for FMIs in Australia, once the regime has been finalised.

ASX Clear is encouraged to complete its review of the DMF and finalise planned enhancements to the relevant documents.

ASX Clear is encouraged to implement its plans for enhancing the effectiveness of its default management arrangements, including improvements to portability and the close-out process for ETOs, and finalise its policy on dealing with ‘specific cover’ exposures.

ASX Clear is encouraged to continue examining ways in which its new risk management system could be used to facilitate, and mitigate risks arising in, the default management process. ASX Clear is encouraged to continue developing the system functionality over time, integrating learnings from fire drills and other enhancements identified by the DMSG. In the meantime, ASX Clear is encouraged to continue to explore options to improve the effectiveness of the default management process within its existing systems.

ASX Clear is encouraged to carry out plans to sign on an additional default broker for the ASX and Chi-X markets.

ASX Clear is encouraged to carry out its plans to enhance participant and client education and communication regarding its default management arrangements. As part of this, ASX Clear is encouraged to complete its planned updates of existing participant disclosures on the key aspects of its default management arrangements, including the development of an ASX Clear Client Fact Sheet. Any disclosures should be easily accessible, preferably in a centralised location.
13. Segregation and portability Observed  
14. General business risk Observed ASX Clear is encouraged to review its assumptions in respect of the reliability and timeliness of payments under its insurance policies in calculating its general business risk capital.
15. Custody and investment risks Broadly observed

In order to fully observe CCP Standard 15, ASX Clear should implement plans to:

  • limit unsecured exposures to individual non-government investment counterparties/issuers to the level of capital set aside for non-participant-default or general business risk losses
  • ensure that other investments are with government-related obligors or secured by assets issued by government-related or other highly creditworthy obligors, subject to prudent concentration limits
  • ensure that ASX Clear's minimum liquid resource requirement (under CCP Standard 7.3) is invested in or secured by government/semi-government securities or cash. Other investments should be able to address effectively any additional liquidity shortfalls (e.g. be investments in, or secured by, securities eligible for repo with the Bankli.
16. Operational risk Observed

In order to continue to observe CCP Standard 16, ASX Clear should review its cyber risk management arrangements in light of CPMI-IOSCO guidance on cyber resilience for FMIs. As part of this review, ASX Clear should:

  • consider developing participant requirements in the area of cyber resilience, liaising as appropriate with the Bank and other relevant authorities
  • develop concrete plans to improve its capability to meet the two-hour recovery time objective following an extreme cyber attack.
ASX Clear will also need to review its operational arrangements in light of the proposed special resolution regime for FMIs in Australia, once the regime has been finalised. In particular, ASX Clear will need to ensure that its operations are organised in such a way as to facilitate effective crisis management actions under that regime.
17. Access and participation requirements Observed ASX Clear is encouraged to complete enhancements to participant minimum core capital requirements.
18. Tiered participation arrangements Observed ASX Clear is encouraged to review its approach to monitoring concentration risks in tiered participation, including triggers for further investigation and actions, and processes for ongoing review of concentration risk.
19. FMI links Observed  
20. Disclosure of rules, key policies and procedures, and market data Observed  
21. Regulatory reporting Observed  

Footnotes

The standards and guidance are available at <http://www.rba.gov.au/payments-and-infrastructure/financial-market-infrastructure/clearing-and-settlement-facilities/standards/central-counterparties/2012/>. [1]

For an explanation of the Bank's Assessment approach and the ratings scale used, see the introduction to Appendix A. [2]