2009/10 Assessment of Clearing and Settlement Facilities in Australia 1. Introduction and Executive Summary

Under the Corporations Act 2001, the Reserve Bank is required to conduct an assessment at least once a year of whether licensed clearing and settlement (CS) facilities have complied with the Reserve Bank's Financial Stability Standards (FSS) and done all other things necessary to reduce systemic risk. This report presents the Reserve Bank's assessment of licensed CS facilities for 2009/10. There are two licensed central counterparties – ASX Clear Pty Limited (formerly Australian Clearing House) (ASX Clear) and ASX Clear (Futures) Pty Limited (formerly SFE Clearing Corporation) (ASX Clear (Futures)) – and two licensed securities settlement facilities – ASX Settlement Pty Limited (formerly ASX Settlement and Transfer Corporation) (ASX Settlement) and Austraclear Limited – that fall within the scope of the FSS.[1] These facilities are all owned by the Australian Securities Exchange (ASX) group. All four facilities were found to have complied with the relevant FSS.

The recovery in financial markets over 2009/10, following the turbulent conditions during the previous year, resulted in a strong increase in the equities and derivatives transactions processed by the licensed CS facilities during the year. Despite this increase in activity, none of the CS facilities experienced capacity or other issues relevant to the stability of market infrastructure.

For the central counterparties, notwithstanding increased activity, risk exposure declined due to the lower market volatility. Nevertheless, the facilities continued to improve their risk and operating frameworks. In particular, the central counterparties made changes in the following areas:

  • Composition of pooled risk resources: Following the ratings downgrade of the default insurer for ASX Clear and ASX Clear (Futures), both ASX Clear and ASX Clear (Futures) have now replaced this insurance with a subordinated loan from ASX Clearing Corporation Limited (ASXCC). This is in turn funded by a commercial bank principal-reducing loan facility. Like the previous insurance facility, this new facility covers any loss arising from a clearing participant default in excess of that covered by prior ranking default resources (since principal owed under the facility would be reduced by a corresponding amount). But it improves the composition of the central counterparties' risk resources because the loan facility is fully drawn (and thus more liquid than the previous default insurance) and under certain conditions has provision for use to cover loss arising from an investment counterparty default.
  • Improvements to participant-monitoring arrangements: A number of enhancements have been made to the capital- and liquidity-monitoring arrangements for ASX Clear and ASX Clear (Futures) participants.
  • Improvements to default-management arrangements: Following a number of default management ‘fire drills’, improvements have been made to information management in default situations at the central counterparties. ASX has also formalised arrangements with the broker it will use in each market to effect any necessary close-out of positions in a default situation.
  • Refinements to ASX Clear's risk framework: During 2009/10, ASX Clear replaced its uniform stress-test exposure limits (STELs) with rating-based limits – exposures beyond these limits require additional collateral to be posted – thus allowing ASX Clear to better manage its exposures to lesser-rated participants. ASX Clear also announced proposed system enhancements to allow intraday margin calls in respect of participants' derivatives positions (reflecting both price and position changes).
  • Triggers for an increase in fixed resources: ASX documented guidance on the important issue of the circumstances in which ASX Clear and ASX Clear (Futures) would consider an increase to their fixed risk resources, rather than relying on additional collateral, which may only be received with a delay. The Reserve Bank welcomes this action since, as noted in the 2008/09 Assessment, there are shortcomings to relying too heavily on variable calls for additional collateral, particularly given lags in the calculation and settlement of such calls.
  • Account segregation: In the last Assessment, the Reserve Bank noted that segregation of house and client cash equity market positions in ASX Clear would be consistent with international best practice and would assist in the management of a clearing participant default. The Reserve Bank accepts ASX Clear's judgement, informed by industry feedback, that the costs of segregating unsettled cash equity market obligations into house and client accounts would currently outweigh the benefits, but notes that should international standards be amended to recommend or require this, this issue will be revisited.

Progress has also been made in the following areas by the central counterparties, although work in these areas remains underway:

  • Routine margining of cash equities: In the 2008/09 Assessment, the Reserve Bank set out the strong case for ASX Clear to introduce margining for cash equities in line with international best practice. Margining is desirable because it provides participants with incentives to manage the risk they bring to the central counterparty, and reduces reliance on pooled risk resources, use of which in the event of a participant default may carry reputational costs. The Reserve Bank welcomes ASX Clear's plans to introduce routine margining of cash equities. The Reserve Bank will remain in dialogue with ASX regarding the refinement and implementation of the proposal during the next assessment period.
  • Harmonisation and linking of central counterparty activity: The Reserve Bank welcomes the announcement of further initiatives to harmonise and link the activities of the two central counterparties, including the migration of both central counterparties' margining systems to CME SPAN. The Reserve Bank will continue to monitor progress in these initiatives in the coming year.
  • Business Continuity Management Policy: ASX updated its Business Continuity Management Policy – which covers all four licensed facilities – during the assessment period, with a number of improvements to arrangements planned in line with international best practice. Notably, ASX is working towards ensuring redundancy of all key systems at the backup, as well as the main, site. The Reserve Bank welcomes these plans and will monitor their progress over the period ahead.

In other developments, ASX Settlement progressed its planned improvements to the batch-settlement model and implemented the securities lending disclosure regime – both these projects stemmed from recommendations made by the Reserve Bank in its Review of Settlement Practices for Australian Equities following the significant delays to the completion of settlement of Australian equities transactions on two days in early 2008.

  • Improvements to the batch-settlement model: ASX Settlement has now removed ASX Clear derivatives margins from the Clearing House Electronic Sub-register System (CHESS) settlement batch (thus ensuring that ASX Clear's risk management arrangements are not dependent on the completion of settlement in the cash equity market) and is in the process of establishing an earlier deadline for the back out of settlement obligations in the event that a participant fails to meet its payment obligations. Setting an earlier deadline will reduce the potential for settlement delay and thus reduce the uncertainty that may affect the market at large in the event a participant fails to meet its obligations. The Reserve Bank will continue to monitor ASX Settlement's progress in this area.
  • Securities lending disclosure regime: This regime – developed by the Reserve Bank in conjunction with ASX and industry participants – was implemented in stages over late 2009 and early 2010. ASX now collects and publishes data on both a transactional and positional basis. As reporting is only compulsory for ASX Settlement participants, however, the coverage of the data is incomplete. The Reserve Bank continues to work with ASX and industry to improve coverage.

The key focus for the assessment of Austraclear remained operational risk management. Although Austraclear experienced a number of operational incidents during the assessment period, the Reserve Bank is satisfied with both ASX's immediate responses to the situations, as well as the follow-up action to prevent reoccurrence.

Another important development during the past year has been the preparations for potential competition between markets for trading in equities in Australia. In August 2010, responsibility for market supervision was transferred from ASX to the Australian Securities and Investments Commission (ASIC). With ASIC as the whole-of-market supervisor, streamlined and complete supervision of trading on the market is ensured should any new trading platforms enter the Australian market; in March 2010, the Minister for Financial Services, Superannuation and Corporate Law (the Minister) gave in-principle approval to the application for a market licence from Chi-X, which plans to offer a platform to conduct secondary trading in ASX-listed shares.[2] In response to the prospect of approved market operators (AMOs) entering the Australian market, ASX has announced a new Trade Acceptance Service (TAS), which will allow trades executed on AMOs' platforms to be cleared and settled through ASX Clear and ASX Settlement respectively. The Reserve Bank cannot see any reason why the TAS, as currently proposed, would affect the compliance of ASX Clear and ASX Settlement with the relevant FSS.

As in the previous Assessment, this report contains a detailed assessment of the licensed CS facilities against one measure of the FSS. This year the governance measure of the Financial Stability Standard for Central Counterparties was chosen for this focus. It is the Reserve Bank's assessment that the governance arrangements of the ASX central counterparties – ASX Clear and ASX Clear (Futures) – comply with the governance measure of the Financial Stability Standard for Central Counterparties. The governance arrangements are effective, accountable and transparent. Arrangements are in place to ensure the boards of ASX Clear and ASX Clear (Futures) have appropriate expertise and independence; indeed, the independence of these boards was bolstered during the year by reducing the number of executive directors and increasing the number of independent directors sitting on them. The ASX Clear and ASX Clear (Futures) boards are responsible for oversight of the operation of the central counterparties, and the independence of the risk control functions of the central counterparties is assured by the positioning of the business units responsible for financial risk management under a Chief Risk Officer, who reports directly to the CEO.

The report is organised as follows. Section 2 introduces the Australian clearing and settlement landscape. Sections 3 and 4 satisfy a requirement under section 25M of the Reserve Bank Act 1959 for the Payments System Board to report annually to the Minister on material developments in clearing and settlement in Australia and any changes to the FSS. Sections 5 and 6 fulfil the Reserve Bank's statutory obligations under section 823CA of the Corporations Act to report to the Minister, and to ASIC, on its annual assessment of the licensed CS facilities.

The Reserve Bank welcomes ASX's continued efforts towards ensuring its CS facilities contribute to financial stability, and appreciates the open and constructive dialogue between the Reserve Bank and ASX in relation to financial stability issues.


The licensed entities (other than Austraclear) were renamed with effect from August 2010. [1]

Final approval of Chi-X's licence is dependent on Chi-X meeting all of the necessary legislative requirements and the finalisation of the regulatory framework for competition in trading services. [2]