The Reserve Bank's Approach to Supervising and Assessing Clearing and Settlement Facility Licensees

Under section 823CA of the Corporations Act 2001 (the Act), the Bank may conduct assessments of how well each clearing and settlement (CS) facility licensee is complying with paragraph 821A(1)(aa) of the Act (compliance assessment). That paragraph requires a CS facility licensee, to the extent that it is reasonably practicable to do so, to comply with the Financial Stability Standards (FSS) and do all other things necessary to reduce systemic risk. If a CS facility licensee is prescribed by regulation for the purpose of section 823CA, then the Bank must do a compliance assessment of it at least once a year. If a CS facility licensee is not so prescribed, it is a matter for the Bank to determine whether and how frequently it will conduct compliance assessments of it. As at 25 February 2021, no CS facility licensees had been prescribed by regulation for the purpose of section 823CA.

The Act gives the Bank and the Australian Securities and Investments Commission (ASIC) separate, but complementary, responsibilities for the supervision of CS facilities. In carrying out supervision and assessments of any CS facility licensee, the Bank works closely with ASIC as appropriate.

It is the intention of the Bank that the frequency, scope and level of detail of a compliance assessment (if any) of a CS facility licensee should be commensurate with the CS facility licensee's systemic importance to the Australian financial system.

The purpose of this statement is to set out the factors that the Bank will consider to classify CS facility licensees into categories based on their systemic importance in Australia. This statement also sets out the Bank's general approach to supervision and conducting compliance assessments of CS facility licensees based on this categorisation, drawing a distinction between the approach that it will take in respect of operators of domestic facilities licensed under section 824B(1) (domestic licensees), and the approach in respect of operators of overseas facilities licensed under section 824B(2) (overseas licensees) that are primarily supervised under a sufficiently equivalent overseas regulatory regime.

Criteria for Categorisation of CS Facility Licensees

The Bank's approach to assessing CS facility licensees is based on the categorisation of the licensee, with reference to the degree of systemic importance in Australia of the CS facility operated by the licensee under its CS facility licence. This approach builds on the Council of Financial Regulators’ July 2012 framework for ensuring appropriate regulatory influence over cross border CS facilities.^[1][2] The requirements applying to each category of licensee are:

1. Base-level requirements for CS facility licensees that are not categorised as ‘Important’ or ‘Systemically Important’ e.g. for start-ups and overseas licensees with relatively limited Australian participation
2. Requirements for Important CS facility licensees e.g. for operators of CS facilities that provide services to a large proportion of the Australian market for a product that is integral to the Australian financial system
3. Requirements for Systemically Important CS facility licensees e.g. for operators of CS facilities that are the major provider, or one of the major providers, of services to the Australian market for a product that is integral to the Australian financial system. Within this category, there would be different arrangements for:
   1. overseas licensees; and
   2. domestic licensees.

The relevant factors in assessing the importance in Australia of the CS facility operated by the licensee under its CS facility licence would ordinarily include, but not be limited to:

• the size of the facility in Australia
• the availability of substitutes for the facility's services in Australia
• the nature and complexity of the products cleared or settled by the facility
• the degree of interconnectedness with other parts of the Australian financial system.

As part of the licensing process, the CS facility proposed to be operated by the applicant will be assessed against these factors, and any other criteria that may be deemed by the Bank to be appropriate on a case-by-case basis in order to determine the categorisation of the proposed CS facility licensee. The Bank will review the categorisation of individual CS facility licensees as part of its assessment process and promptly communicate any changes to CS facility licensees. The categorisation of CS facility licensees will be communicated to the public as part of the Payments System Board's Annual Report.

The Bank's Supervisory and Assessment Approach

Initial Assessment

As part of any licence application, the Bank will conduct an initial compliance assessment of the CS facility applicant against any applicable FSS. The Bank may also consider and assess other matters relating to systemic risk in the provision of the applicant's facility and services. Such an exercise would draw on publicly available information, including rules and procedures, and self-assessments, supplemented with information provided by the applicant (and its overseas regulator, if applicable). It is the Bank's intention that, if a licence was granted, this initial compliance assessment, and any resulting regulatory priorities, would be published.

For overseas licensees, the Minister must be satisfied, among other things, that ‘the operation of the facility in that country is subject to requirements and supervision that is sufficiently equivalent, in relation to [certain matters, including the degree of protection from systemic risk], to the requirements and supervision to which clearing and settlement facilities are subject to under this Act in relation to those matters’. The Minister must also consider under section 827A(3)(d), among other things, ‘whether adequate arrangements exist for cooperation between ASIC, the Reserve Bank of Australia and the authority, or authorities, that are responsible for that supervision’. For the purposes of advising the Minister on a licence application, the Bank has published guidance on its approach to assessing sufficient equivalence of an overseas jurisdiction in relation to the degree of protection from systemic risk.^[3]

Data and Reporting Requirements

If a CS facility licence is issued, the CS facility licensee will be required on an ongoing basis to provide the Bank with sufficient and timely information on any material developments relevant to the services provided under its CS facility licence and its compliance with the FSS. As far as practicable, the licensee would be expected to notify the Bank of these developments sufficiently in advance of their implementation – or as soon as practicable after the relevant change has occurred – to allow the Bank to seek further information and/or discuss the impact of the changes with the licensee, as appropriate.

Material developments would include, but would not be limited to, the introduction of or changes to:

• products or services
• key personnel
• governance arrangements
• ownership or control of the licensee or any holding company (direct or ultimate) of the licensee
• the size and composition of risk resources
• risk management policies
• stress-testing methodology
• margining methodology
• operational processes and arrangements (including payment arrangements and co-sourcing and outsourcing arrangements)
• participation criteria
• participation by Australian-based entities
• the domestic and foreign regulatory regimes (including legislative frameworks and rules) under which the CS facility licensee operates.

To better understand material developments, the Bank will also review reports on financial results, risk management reports and findings from independent audit reports or any external independent reviews of technology and of operational, risk management and control functions. The Bank will seek the full reports of independent audits or external independent reviews in the case of Systemically Important Domestic CS facility licensees.

In addition, the FSS require regular provision of regulatory information and data and the Act requires a CS facility licensee to provide to the Bank such information and other assistance as the Bank reasonably requests in relation to the Bank's compliance assessments. The required form and frequency of data provision by a CS facility licensee are determined by the nature of the CS facility’s operations and the categorisation of the CS facility licensee. Precise data and reporting requirements will be specified by the Bank.

In the case of overseas licensees, the Bank will, subject to certain conditions, place reliance on reports and information from the regulator in an overseas licensee's principal place of business (the overseas regulator). The arrangements for information sharing will be discussed with the overseas licensee and the overseas regulator, and are expected to be set out in the Memorandum of Understanding (MOU) concluded with the overseas regulator at the time the licence is granted. Information received through participation in any cooperative oversight arrangement may also be taken into account. The documentary evidence received from an overseas regulator will not be expected to be tailored to the FSS. However, it should include, at a minimum, the following:

• details of any assessment carried out by the overseas regulator in respect of the overseas licensee's compliance with the requirements to which it is held, whether or not published
• where applicable, details of any relevant action taken or to be taken by the overseas regulator or the overseas licensee.

Liaison

The Bank will expect to gather information through an open and ongoing dialogue with the CS facility licensee, including through scheduled periodic meetings and ad hoc targeted meetings on specific topics. The frequency and scope of scheduled meetings will be determined by the categorisation of the CS facility licensee. For overseas licensees, the liaison also involves the home regulator, which forms part of the adequate arrangements for cooperation that are an ongoing requirement for this type of CS facility licence.

For each category, these are expected to include:

Base-level Requirements

• At least annual meetings to discuss business developments and the facility's progress against the Bank's regulatory priorities (if any)
• At least annual liaison with the home regulator (for overseas CS facility licensees)

Requirements for Important CS Facility Licensees and Systemically Important Overseas CS Facility Licensees

• Quarterly meetings to discuss business developments and the licensee's progress against the Bank's regulatory priorities (if any)
• At least semi-annual liaison with the home regulator (for overseas CS facility licensees)

For a Systemically Important overseas licensee, the Bank would expect to be represented on any supervisory college and crisis management groups. While these arrangements are expected for Systemically Important overseas licensees, they may also be used for other overseas licensees where they are made available to the Bank.

Requirements for Systemically Important Domestic CS Facility Licensees

• At least annual engagement with the board and, separately, the Chair of the board to discuss strategic issues and compliance with the FSS.
• At least semi-annual high-level review meetings to discuss strategy and relevant market developments, involving the Chief Executive Officer and other relevant executives.
• Quarterly meetings to discuss with the relevant members of the C-suite (or equivalent) and their respective teams:
  • developments relevant to compliance with the FSS
  • implementation of operational strategy, management of operational and cyber risk, and business continuity planning
  • audit reports, findings and observations
  • in the case of CCPs, clearing risk policy and the implementation of risk management arrangements.

Precise arrangements will be specified by the Bank.

Ongoing Assessments

On an ongoing basis, each CS facility licensee would be expected every two years to conduct, and publish on its website, self-assessments against the Principles for Financial Market Infrastructures (PFMI) and the Australian-specific requirements in the applicable FSS (which are set out in Attachment 1). It is expected that a member of the CS facility's C-suite (or equivalent) signs off these self-assessments. The CS facility licensee would be expected to notify the Bank once these self-assessments have been published.

As set out below, the Bank's approach to compliance assessments of CS facility licensees and the scope of such assessments is expected to be determined by the categorisation of the CS facility licensee. These assessments will be guided by the Committee on Payments and Market Infrastructures (CPMI) and the Technical Committee of the International Organization of Securities Commissions (IOSCO) Assessment Methodology for the Principles for FMIs and the Responsibilities of Authorities (Assessment Methodology), which provides a framework for assessing and monitoring observance of the PFMI and the responsibilities of authorities.^[4] Information gathering to support assessments of progress in addressing previous regulatory priorities, as well as material developments and (where relevant) special topics, will occur on an ongoing basis throughout the assessment period. The Bank may submit a supplementary information request towards the end of the assessment period.

In its supervision of overseas licensees, the Bank will, subject to certain conditions, place reliance on reports and information from the overseas regulator. As a result there is an ongoing requirement for CS facilities licensed under section 824B(2) that the level of supervision to which the facility is subject in the home jurisdiction continues to be sufficiently equivalent. Notwithstanding that an overseas regime is sufficiently equivalent to that in Australia, there may be some differences in the detailed application of the principles or standards. Given this, the Bank will use its discretion in determining how much reliance it can place on reports of reviews conducted by overseas regulators.

Base-level Requirements

Generally, the Bank will not itself conduct compliance assessments for a CS facility licensee that is not categorised as Important or Systemically Important. However, where there are material developments or the Bank has set regulatory priorities for such a CS facility licensee, the Bank will expect to review the progress of the licensee against these every two years. It is the Bank's intention that these biennial reports on material developments and regulatory priorities would be published.

Requirements for Important CS Facility Licensees

Generally, the Bank will not itself conduct compliance assessments of Important CS facility licensees against all the FSS. However, the Bank, at its discretion, may conduct a targeted compliance assessment of Important CS facility licensees against selected FSS (or equivalent overseas standards). In determining the scope of these targeted compliance assessments the Bank will consider:

• regulatory priorities identified in previous assessments
• material developments over the preceding period
• a risk-based assessment of potential implications for financial stability.

In the case of overseas licensees, the Bank would expect to rely on reports from reviews conducted by the overseas regulator to the extent possible. The Bank's compliance assessments would not be published. However, where there are material developments or the Bank has set regulatory priorities for an Important CS facility licensee, the Bank expects to report publically on these every two years.

Requirements for Systemically Important Overseas CS Facility Licensees

The Bank will typically conduct compliance assessments of Systemically Important overseas licensees against the full set of FSS (or equivalent overseas standards) over a rolling four-year period, with certain standards assessed more frequently depending on market and business developments. The Bank would expect to rely on reports from reviews conducted by the overseas regulator to the extent possible. These compliance assessments would not be published. However, where there are material developments or the Bank has set regulatory priorities, the Bank will expect to report publically on these on an annual basis for CCPs and every two years for SSFs.

Requirements for Systemically Important Domestic CS Facility Licensees

The Bank will typically conduct detailed compliance assessments against the full set of FSS for Systemically Important Domestic CS facility licensees. Together with ASIC, the Bank will also generally conduct assessments against the full set of PFMI Principles.^[5]

Compliance assessment

It is the Bank’s intention to publish an annual compliance assessment for Systemically Important Domestic CS facility licensees. This would include a summary of regulatory priorities and relevant developments that covers:

• a summary of material developments over the assessment period, including their implications for compliance with the FSS
• progress in addressing any of the Bank’s recommendations or areas of supervisory focus identified in previous assessments
• ratings (but not necessarily detailed assessments) of how well the licensee has observed each high-level standard
• detailed reviews against a subset of the FSS (‘special topics’)
• recommendations and the areas of supervisory focus for the next assessment period.

The Bank expects to conduct special topics covering each of the FSS over a four-year period and will consider the selection and sequencing of special topics according to matters such as:

• recommendations and regulatory priorities identified in previous assessments
• material developments over the preceding period^[6]
• risk-based assessment of potential implications for financial stability
• the desirability of covering each of the FSS during a four-year period.

The Bank will use these reviews and other information received from the licensee over the assessment period in updating its ratings of how well the licensee has observed each standard.

Joint PFMI assessment

The Bank, together with ASIC, expects to conduct an assessment every five years against each Principle in the PFMI. The joint PFMI assessment would be published. Recommendations or areas of supervisory focus identified that are relevant to the FSS would be included in the Bank’s annual compliance assessment.

The Bank expects to carry out the joint PFMI assessment with ASIC in the year following completion of each four-year cycle of FSS special topics. The next cycle of special topics would typically commence in the year following the joint PFMI assessment.

Attachment 1: Australian Specific Requirements in the FSS

The FSS include a number of requirements that are complementary to the PFMI, and represent matters the Bank deems important, particularly in the Australian context. The complementary requirements include:^[7]

Legal Basis

• CCP and SSF Standard 1.1: A central counterparty/securities settlement facility should be a legal entity which is separate from other entities that may expose it to risks unrelated to those arising from its function as a central counterparty/securities settlement facility.
• CCP and SSF Standard 1.6: A central counterparty/securities settlement facility conducting business in multiple jurisdictions should identify and mitigate the risks arising from any potential conflicts of law across jurisdictions. A central counterparty/securities settlement facility should provide the Reserve Bank with a legal opinion that demonstrates the enforceability of its rules and addresses relevant conflicts of law across the jurisdictions in which it operates. This should be reviewed on a periodic basis or when material changes occur that may have an impact on the opinion, and updated where appropriate.

Governance

• CCP and SSF Standard 2.5: The roles and responsibilities of management should be clearly specified. A central counterparty's/securities settlement facility's management should have the appropriate experience, mix of skills and integrity necessary to effectively discharge its responsibilities for the operation and risk management of the central counterparty/securities settlement facility. Compensation arrangements should be structured in such a way as to promote the soundness and effectiveness of risk management.
• CCP and SSF Standard 2.7: A central counterparty's/securities settlement facility's operations, risk management processes, internal control mechanisms and accounts should be subject to internal audit and, where appropriate, periodic external independent expert review. Internal audits should be performed, at a minimum, on an annual basis. The outcome of internal audits and external reviews should be notified to the Reserve Bank and other relevant authorities.
• CCP and SSF Standard 2.8: Governance arrangements should ensure that the central counterparty's/ securities settlement facility's design, rules, overall strategy and major decisions reflect appropriately the legitimate interests of its direct and indirect participants and other relevant stakeholders. Governance arrangements should provide for consultation and stakeholder engagement through appropriate forums on operational arrangements, risk controls and default management rules and procedures. Major decisions should be clearly disclosed to relevant stakeholders and, where there is a broad market impact, the public.
• CCP and SSF Standard 2.9: A central counterparty/securities settlement facility that is part of a group of companies should ensure that measures are in place such that decisions taken in accordance with its obligations as a central counterparty/securities settlement facility cannot be compromised by the group structure or by board members also being members of the board of other entities in the same group. In particular, such a central counterparty/securities settlement facility should consider specific procedures for preventing and managing conflicts of interest, including with respect to intragroup outsourcing arrangements.

Framework for the Comprehensive Management of Risks

• CCP and SSF Standard 3.2: A central counterparty/securities settlement facility should ensure that financial and other obligations imposed on participants under its risk management framework are proportional to the scale and nature of individual participants' activities.

Credit Risk

• CCP and SSF Standard 4.2: A central counterparty/securities settlement facility should identify sources of credit risk, routinely measure and monitor credit exposures, and use appropriate risk management tools to control these risks. To assist in this process, a central counterparty/securities settlement facility should ensure it has the capacity to calculate exposures to participants on a timely basis as required, and to receive and review timely and accurate information on participants' credit standing.
• CCP and SSF Standard 4.3: A central counterparty/securities settlement facility should have the authority to impose activity restrictions or additional credit risk controls on a participant in situations where the central counterparty/securities settlement facility determines that the participant's credit standing may be in doubt.
• CCP Standard 4.7: A central counterparty should have clearly documented and effective rules and procedures to report stress-test information to appropriate decision-makers and ensure that additional financial resources are obtained on a timely basis in the event that projected stress-test losses exceed available financial resources. Where projected stress-test losses of a single or only a few participants exceed available financial resources, it may be appropriate to increase non-pooled financial resources; otherwise, where projected stress-test losses are frequent and consistently widely dispersed across participants, clear processes should be in place to augment pooled financial resources.

Collateral

• CCP and SSF Standard 5.2: In determining its collateral policies, a central counterparty/securities settlement facility should take into consideration the broad effect of these policies on the market. As part of this, a central counterparty/securities settlement facility should consider allowing the use of collateral commonly accepted in the relevant jurisdictions in which it operates.

Margin

• CCP Standard 6.8: In designing its margin system, a central counterparty should consider the operating hours of payment and settlement systems in the markets in which it operates.

Liquidity Risk

• CCP Standard 7.7: A central counterparty with access to central bank accounts, payment services or securities services should use these services, where practical, to enhance its management of liquidity risk. A central counterparty that the Reserve Bank determines to be systemically important in Australia and has obligations in Australian dollars should operate its own Exchange Settlement Account, in its own name or that of a related body corporate acceptable to the Reserve Bank, to enhance its management of Australian dollar liquidity risk.

Money Settlements

• CCP Standard 9.1: A central counterparty should conduct its money settlements in central bank money, where practical and available, to avoid credit and liquidity risks. A central counterparty that the Reserve Bank determines to be systemically important in Australia and has Australian dollar obligations should settle its Australian dollar obligations across an Exchange Settlement Account held at the Reserve Bank, in its own name or that of a related body corporate acceptable to the Reserve Bank.

Central Securities Depositories

• SSF Standard 9.1: A securities settlement facility operating a central securities depository should have appropriate rules, procedures and controls, including robust accounting practices, to safeguard the rights of securities issuers and holders, prevent the unauthorised creation or deletion of securities, and conduct periodic and at least daily reconciliation of securities issues it maintains. These rules and procedures should:
  1. identify the type of title or interest held by participants for particular securities, to the extent such title or interest is recognised by the facility's rules and procedures;
  2. clearly identify the way in which the transfer of (or any other forms of dealing with) securities and related payments can be effected through the facility; and
  3. ensure that, to the extent permissible by law, the creditors of the operator of the securities settlement facility have no claim over securities or other assets held, deposited or registered by participants in the facility.

Exchange-of-value Settlements

• CCP Standard 11.2: A central counterparty should eliminate principal risk associated with the settlement of linked obligations by ensuring that it employs an appropriate delivery versus payment (DvP), delivery versus delivery (DvD) or payment versus payment (PvP) settlement mechanism.
• SSF Standard 10.2: A securities settlement facility that is an exchange-of-value settlement system should eliminate principal risk by linking the final settlement of one obligation to the final settlement of the other through an appropriate DvP, DvD or PvP settlement mechanism.

Participant Default Rules and Procedures

• CCP Standard 12.1 and SSF Standard 11.1: A central counterparty/securities settlement facility should have default rules and procedures that enable the central counterparty/securities settlement facility to continue to meet its obligations in the event of a participant default and that address the replenishment of resources following a default. A central counterparty/securities settlement facility should ensure that financial and other obligations created for non-defaulting participants in the event of a participant default are proportional to the scale and nature of individual participants' activities.
• CCP Standard 12.2: A central counterparty should be well prepared to implement its default rules and procedures, including any appropriate discretionary procedures provided for in its rules. This requires that the central counterparty should:
  1. require its participants to inform it immediately if they:
     1. become subject to, or aware of the likelihood of external administration, or have reasonable grounds for suspecting that they will become subject to external administration; or
     2. have breached, or are likely to breach, a risk control requirement of the central counterparty; and
  2. have the ability to close out, hedge or transfer, a participant's open contracts in order to appropriately control risk of a participant that:
     1. becomes subject to external administration; or
     2. breaches a risk control requirement of the central counterparty.

• SSF Standard 11.2: A securities settlement facility should be well prepared to implement its default rules and procedures, including any appropriate discretionary procedures provided for in its rules. This requires that the securities settlement facility should:
  1. require its participants to inform it immediately if they:
     1. become subject to, or become aware of the likelihood of external administration, or have reasonable grounds for suspecting that they will become subject to external administration; or
     2. have breached, or are likely to breach, a risk control requirement of the securities settlement facility;
  2. allow for the cancellation or suspension of a participant or commercial settlement bank from the securities settlement facility:
     1. if the participant or commercial settlement bank is in external administration; or
     2. if there is a reasonable suspicion that the participant or commercial settlement bank may become subject to external administration; and
  3. allow participant users of a commercial settlement bank which becomes subject to external administration, or which is reasonably likely to become subject to external administration, to quickly nominate a new commercial settlement bank.
• CCP Standard 12.5 and SSF Standard 11.5: A central counterparty/securities settlement facility should demonstrate that its default management procedures take appropriate account of interests in relevant jurisdictions and, in particular, any implications for pricing, liquidity and stability in relevant financial markets.

Operational Risk

• CCP Standard 16.4 and SSF Standard 14.4: A central counterparty/securities settlement facility should ensure that it can reliably access and utilise well-trained and competent personnel, as well as technical and other resources. These arrangements should be designed to ensure that all key systems are operated securely and reliably in all circumstances, including where a related body becomes subject to external administration.
• CCP Standard 16.5 and SSF Standard 14.5: A central counterparty/securities settlement facility should identify, monitor and manage the risks that key participants, other FMIs and service and utility providers might pose to its operations. A central counterparty/securities settlement facility should inform the Reserve Bank of any critical dependencies on utilities or service providers. In addition, a central counterparty/securities settlement facility should identify, monitor and manage the risks its operations might pose to its participants and other FMIs. Where a central counterparty/securities settlement facility operates in multiple jurisdictions, managing these risks may require it to provide adequate operational support to participants during the market hours of each relevant jurisdiction.
• CCP Standard 16.6 and SSF Standard 14.6: A participant of a central counterparty/securities settlement facility should have complementary operational and business continuity arrangements that are appropriate to the nature and size of the business undertaken by that participant. The central counterparty's/securities settlement facility's rules and procedures should clearly specify operational requirements for participants.
• CCP Standard 16.8 and SSF Standard 14.8: A central counterparty/securities settlement facility should consider making contingency testing compulsory for the largest participants to ensure they are operationally reliable and have in place tested contingency arrangements to deal with a range of operational stress scenarios that may include impaired access to the central counterparty/securities settlement facility.
• CCP Standard 16.9 and SSF Standard 14.9: A central counterparty/securities settlement facility that relies upon, outsources some of its operations to, or has other dependencies with a related body, another FMI or a third-party service provider (for example, data processing and information systems management) should ensure that those operations meet the resilience, security and operational performance requirements of the FSS and equivalent requirements of any other jurisdictions in which it operates.
• CCP Standard 16.10 and SSF Standard 14.10: All of a central counterparty's/securities settlement facility's outsourcing or critical service provision arrangements should provide rights of access to the Reserve Bank to obtain sufficient information regarding the service provider's operation of any critical functions provided. A central counterparty/securities settlement facility should consult with the Reserve Bank prior to entering into an outsourcing or service provision arrangement for critical functions.
• CCP Standard 16.11 and SSF Standard 14.11: A central counterparty/securities settlement facility should organise its operations, including any outsourcing or critical service provision arrangements, in such a way as to ensure continuity of service in a crisis and to facilitate effective crisis management actions by the Reserve Bank or other relevant authorities. These arrangements should be commensurate with the nature and scale of the central counterparty's/securities settlement facility's operations.

FMI Links

• CCP Standard 19.3 and SSF Standard 17.3: Where relevant to its operations in Australia, a central counterparty/securities settlement facility should consult with the Reserve Bank prior to entering into a link arrangement with another FMI.

Disclosure of Rules, Key Policies and Procedures, and Market Data

• CCP Standard 20.2: A central counterparty's rules, policies and procedures should clearly identify the nature and scope of the risk exposure assumed by the central counterparty, such as by novation, open offer or other similar legal devices. A central counterparty's rules, policies and procedures should clearly identify the point in the clearing process at which the central counterparty assumes the risk exposure.

Regulatory Reporting

• CCP Standard 21 and SSF Standard 19: A central counterparty/securities settlement facility should inform the Reserve Bank in a timely manner of any events or changes to its operations or circumstances that may materially impact its management of risks or ability to continue operations. A central counterparty/securities settlement facility should also regularly provide information to the Reserve Bank regarding its financial position and risk controls on a timely basis.
• CCP Standard 21.1 and SSF Standard 19.1: A central counterparty/securities settlement facility should inform the Reserve Bank as soon as reasonably practicable if:
  1. it breaches, or has reason to believe that it will breach:
     1. a CCP Standard/SSF Standard; or
     2. its broader legislative obligation to do, to the extent that it is reasonably practicable to do so, all things necessary to reduce systemic risk;
  2. it becomes subject to external administration, or has reasonable grounds for suspecting that it will become subject to external administration;
  3. a related body to the central counterparty/securities settlement facility becomes subject to external administration, or if the central counterparty/securities settlement facility has reasonable grounds for suspecting that a related body will become subject to external administration;
  4. a participant becomes subject to external administration, or if the central counterparty/securities settlement facility has reasonable grounds for suspecting that a participant will become subject to external administration;
  5. a participant fails to meet its obligations under the central counterparty's/securities settlement facility's risk control requirements or has its participation suspended or cancelled because of a failure to meet the central counterparty's/securities settlement facility's risk control requirements;
  6. it fails to enforce any of its own risk control requirements;
  7. it plans to make significant changes to its risk control requirements or its rules, policies and procedures;
  8. it or a service it relies on from a third party or outsourced provider experiences a significant operational disruption, including providing the conclusions of its post-incident review;
  9. any internal audits or independent external expert reviews are undertaken of its operations, risk management processes or internal control mechanisms, including providing the conclusions of such audits or reviews;
  10. its operations or risk controls are affected, or are likely to be affected, by distress in financial markets;
  11. it has critical dependencies on utilities or service providers, including providing a description of the dependency and an update if the nature of this relationship changes;
  12. it proposes to grant a security interest over its assets (other than a lien, right of retention or statutory charge that arises in the ordinary course of business);
  13. it proposes to incur or permit to subsist any loans from participants or members unless such loans are subordinated to the claims of all other creditors of the central counterparty/securities settlement facility; or
  14. any other matter arises which has or is likely to have a significant impact on its risk control arrangements (see also CCP Standards 1.6, 16.10 and 19.3/SSF Standards 1.6, 14.10 and 17.3).
• CCP Standard 21.2 and SSF Standard 19.2: A central counterparty/securities settlement facility should also provide to the Reserve Bank, on a timely basis:
  1. audited annual accounts;
  2. management accounts on a regular basis, and at least quarterly;
  3. risk management reports [for CCPs, including detailed information on margining and stress testing] on a regular basis, and at least quarterly;
  4. periodic activity, risk and operational data, as agreed with the Reserve Bank; and
  5. any other information as specified by the Reserve Bank from time to time.

Endnotes

These criteria are set out in Council of Financial Regulators (2012),'Ensuring Appropriate Influence for Australian Regulators over Cross-border Clearing and Settlement Facilities ‘, July. [1]

SSFs that settle $200 million or less in financial obligations in a financial year are exempt from the FSS and therefore excluded from this categorisation. [2]

See <https://www.rba.gov.au/payments-and-infrastructure/financial-market-infrastructure/clearing-and-settlement-facilities/standards/overseas-equivalence.html>. [3]

The Disclosure Framework and Assessment Methodology was released in December 2012: see CPMI-IOSCO (2012), Assessment Methodology for the Principles for FMIs and the Responsibilities of Authorities, December, available at <http://www.bis.org/publ/cpss106.pdf>. See also CPMI–IOSCO (2012), Principles for Financial Market Infrastructures, Bank for International Settlements, April, available at <http://www.bis.org/publ/cpss101a.pdf>. [4]

ASIC and the Bank are jointly responsible for overseeing the implementation of the PFMI in Australia for CS facilities. For more information see: <https://www.rba.gov.au/payments-and-infrastructure/financial-market-infrastructure/principles/implementation-of-principles.html>. [5]

In some cases the Bank may select a special topic motivated by recent events or thematic issues, which may involve reviewing elements of several standards. [6]

For a detailed comparison of the differences between the FSS and PFMI see <https://www.rba.gov.au/payments-and-infrastructure/financial-market-infrastructure/clearing-and-settlement-facilities/standards/201212-new-fss-ris/#comparison-to-principles-for-financial-market-infrastructures> [7]