2010/11 Assessment of Clearing and Settlement Facilities in Australia 5. Assessment of CS Facilities against the Financial Stability Standards

The Reserve Bank monitors licensed clearing and settlement (CS) facilities' compliance with the Financial Stability Standards (FSS) on an ongoing basis and reports on its assessment annually, covering the year to end June. All four ASX licensees report financial information to the Reserve Bank quarterly, with the two central counterparties also reporting detailed risk-management information, including outcomes of stress tests. These reporting requirements are supplemented by a regular dialogue with the licensees on issues relevant to compliance, and by data on activity, exposures and operational performance.

The assessments that follow describe the key developments over the year to end June 2011 for each facility and consider the implications of these developments for each facility's compliance with the relevant Standard. All four facilities were found to comply with the relevant Standards.

Details of the information that the Reserve Bank has used to assess each facility against the relevant measures are presented in Appendix B, which builds on material included in prior Assessments.


All four CS facilities are part of the ASX Group (ASX). In the ASX corporate structure, the two central counterparties are subsidiaries of ASX Clearing Corporation Limited (ASXCC), while the two securities settlement facilities are subsidiaries of ASX Settlement Corporation Limited (Figure 1). ASX Compliance Pty Limited (ASX Compliance) provides compliance and enforcement services to the CS facilities.

The ASX Limited Board, which is accountable to ASX shareholders, is responsible for overseeing the processes for identifying significant risks to ASX and ensuring that appropriate and adequate control, monitoring and reporting mechanisms are in place. In addition, the ASX Limited's Board assigns certain responsibilities to subsidiaries within the group, including the boards of the four CS facilities (the CS Boards), which are responsible for managing the clearing and settlement risk of their respective central counterparties, and compliance with the FSS. Despite ASX devoting human resources to the proposed takeover by Singapore Exchange Limited, this activity had no effect on the CS facilities' compliance with the FSS.

Within ASX's management structure, the office of the Chief Risk Officer (CRO) is responsible for ensuring that ASX identifies, analyses and effectively manages the risks inherent in all its activities. All functional areas within ASX Group with responsibility for central counterparty financial risk management (among other things) report to the CRO, who in turn reports directly to the Chief Executive Officer. These functional areas are: the Clearing Risk Policy unit; the Clearing Risk Management unit; the Enterprise Risk unit; the Internal Audit unit; and the Portfolio Risk Manager. The CRO is not responsible for any other functions, and none of the units within the CRO's portfolio have a revenue or profit objective.

Participant Monitoring

Monitoring of clearing participants is conducted predominantly by the Clearing Risk Management unit, which covers both central counterparties. Within Clearing Risk Management, Capital Monitoring is responsible for monitoring, assessing and investigating matters relating to financial requirements. Capital Monitoring was relocated to Clearing Risk Management in December 2010; prior to that it sat within ASX Compliance.[1] In addition, Clearing Risk Management monitors day-to-day developments regarding, among other things, risk profiles, open positions and settlement of obligations to the central counterparties. It is also responsible for determining and reviewing internal credit ratings (ICRs) of participants, drawing on information provided by participants in their regular financial returns to Capital Monitoring.

It was noted in previous Assessments that during 2008/09 ASX reviewed a number of aspects of its capital- and liquidity-monitoring arrangements and had set in train a number of projects to deliver enhancements. This work continued in 2010/11, with some parts finalised during the year:

  • Spot checks continued to be conducted on the accuracy of participants' financial returns. As well as random spot checks, targeted checks are triggered by other factors such as two or more historical inaccuracies in a participant's returns.
  • A self-assessment program for participants has commenced, which is designed to ensure that participants are facing the correct regulatory capital requirements. This involves participants certifying that they are completing the returns appropriate for the range of business activities that they undertake.

During the assessment period ASX also conducted spot checks on participants' business continuity management. These are triggered if a participant has been experiencing operational problems, and include examination of governance and processes.

Effective participant monitoring is crucial to a central counterparty's ability to measure and assess the risks brought to it by its participants. As a result of this monitoring, ASX identified an instance of non-compliance with ASX Settlement Pty Limited's (ASX Settlement) risk-control requirements. As required by Measure 2c of the Financial Stability Standard for Securities Settlement Facilities, ASX was able to suspend the participant, which it chose to do. The Reserve Bank welcomes the enhancements that have been made to ASX's participant-monitoring framework.

Harmonisation and Linking of Central Counterparty Activity

Since the merger of the Australian Stock Exchange and SFE Corporation in 2006, ASX Clear Pty Limited (ASX Clear) and ASX Clear (Futures) Pty Limited (ASX Clear (Futures)) have continued to operate as separate central counterparties. ASX has made progress in implementing the initiatives it outlined in September 2009, aimed at harmonising and linking the activities of the two central counterparties. These initiatives have the potential to reduce ASX's fixed costs, simplify arrangements for clearing participants that use both central counterparties, and allow margin offsets across the two central counterparties.

These initiatives include the migration of the margining methodology at both central counterparties to the CME version of the Standard Portfolio Analysis of Risk (SPAN) margining system. The initial stage of this project involved bringing ASX Clear's margining system, the Theoretical Intermarket Margin System (TIMS), into ASX's in-house Derivatives Clearing System (DCS). This was completed in September 2010. The replacement of OMX RIVA SPAN with CME SPAN as ASX Clear (Futures)' margining system is expected to occur in early 2012, followed by the introduction of CME SPAN at ASX Clear in mid 2012.

Upon the implementation of CME SPAN, ASX will look to introduce margin offsets between the two central counterparties.

The Reserve Bank welcomes these practical measures and encourages ASX to further harmonise, where appropriate, the risk management practices of the two central counterparties and to continue to update the rulebooks of the central counterparties to reflect current risk management practices and expectations.

ASXCC and the Composition of Risk Resources

ASXCC manages the investment of all assets held by ASX Clear and ASX Clear (Futures) (including margins and other risk resources), as well as the central counterparties' funding and capital-management processes.

Within the ASX corporate structure, ASX Limited provides loans to ASXCC which in turn lends to the two central counterparties ($70 million to ASX Clear (Futures) and $75 million to ASX Clear). These funds, which are fully drawn down, would be called upon in the event of a clearing participant default, should all of a defaulting participant's margin and paid-up contributions, and the central counterparties' own capital, be depleted. In ASX Clear (Futures), the next tier of default resources to be called would be non-defaulting participant contributions ($120 million less any defaulting participant contributions already used). The next tier of default resources to be called is funded by a $250 million loan facility ASXCC has with a commercial bank, which funds further subordinated loans to the central counterparties ($150 million to ASX Clear (Futures) and $100 million to ASX Clear). The commercial bank loan facility is principal-reducing, which means that to the extent that the subordinated loans funded by the bank loan are applied towards a clearing participant default loss, the bank loan would not need to be repaid.

ASXCC has renewed the current commercial bank loan agreement for four years commencing August 2011. The terms of the agreement are essentially the same, with the loan able to be used to cover the default of a clearing participant, although ASX has removed its option to use the funds to cover the default of an investment counterparty (i.e. the loan will only be able to be used to cover the default of a clearing participant).

In December 2010, ASXCC became the controlling entity of treasury portfolios relating to ASX Clear and ASX Clear (Futures). As part of this ASXCC opened an Exchange Settlement (ES) account at the Reserve Bank in November 2010, to replace the ES accounts held by ASX Clear and ASX Clear (Futures), which were shut down in January 2011. During the year ASXCC also conducted a test of the systems it uses to access the Reserve Bank's overnight repo facility.

In line with the treasury investment policy endorsed by both CS Boards, ASXCC invests both cash margin collected and pooled risk resources in high-quality assets. The policy contains minimum liquidity requirements calibrated with reference to liquidity needs to meet the central counterparties' payment obligations to all clearing participants in the normal course of business (the ‘ordinary liquidity requirement’) and their obligations in the event of a participant default. To assess whether ASXCC holds sufficient liquid resources to cover a default it conducts liquidity stress tests, which are based on each central counterparty's capital stress tests (discussed in Sections 5.1 and 5.2). ASXCC's total liquidity requirement is calibrated to allow for the possibility that both central counterparties simultaneously experience default related stress.

In November 2010, ASX improved the liquidity requirements of its treasury investment policy by:

  • introducing a worst-case assumption in the ASX Clear (Futures) liquidity stress tests, wherein a default happens prior to receipt of the previous day's variation margin payments owed by the defaulter, or after variation margin payments owed to the defaulter have been paid;
  • explicitly requiring that the equivalent of the cash margin posted by the largest clearing participant in each central counterparty be invested in liquid assets;
  • requiring that the ordinary liquidity requirement be sufficient to cover the maximum margin obligations over the last year[2]; and
  • changing the definition of liquid assets to focus more on market liquidity considerations rather than the maturity of investments.[3]

Default Arrangements

These developments are discussed in the detailed assessment of ASX's default arrangements presented in Section 6 of this Assessment.

Business Continuity Arrangements

Over the year ASX has been finalising the development of a new operations centre, which is due to open in late 2011. ASX plans to have at least 10 per cent of operational staff permanently located at this site within 12 months of it becoming fully operational. This will facilitate rapid recovery in the event of a disruption (the new site will have the capacity to house 65 per cent of all operational staff). The new site will become ASX's primary site for IT infrastructure and ASX will retain its current backup site – ASX will be capable of running all systems on a continuous basis from either its primary site or its backup site. Once the new site becomes fully operational, ASX will implement dual redundancy for all four core clearing and settlement systems at both sites (currently only EXIGO, Austraclear Limited (Austraclear) operating system has this capacity).

Under its Business Continuity Management Policy, ASX requires that redundancy arrangements for all four core systems will be available within two hours of interruption. Should a switch to its backup site be necessary, ASX policy is to have an additional tier of redundancy arrangements in place within 24 hours to meet the contingency of a further interruption.

The Reserve Bank strongly endorses these enhancements, which are consistent with international best practice for systemically important systems.

Summary of Developments in 2010/11

The Assessment highlights a number of important developments across the CS facilities during the period under review. These include:

  • Improvements to participant-monitoring arrangements. ASX implemented a number of changes to its capital- and liquidity-monitoring arrangements applicable to ASX Clear and ASX Clear (Futures) participants, including a new system for the lodgement of participants' capital returns. ASX also conducted spot checks on participants' business continuity management.
  • Improvements to the liquidity requirements of ASX's treasury investment policy. ASX has modified its liquidity stress tests to be better aligned with worst-case default scenarios, increased the robustness of the threshold it uses to assess whether it holds sufficient liquid assets to meet ordinary requirements, and changed its definition of liquid assets. The Assessment also identifies a number of areas of ongoing developments that the Bank will continue to monitor. These include:

The Assessment also identifies a number of areas of ongoing developments that the Bank will continue to monitor. These include:

  • Risk calculation. ASX intends to introduce CME SPAN, widely regarded as the industry standard for risk margining, for ASX Clear (Futures) from early 2012 and for ASX Clear from mid 2012. This will place both central counterparties' risk management on a common platform.
  • Business continuity planning. ASX plans to have its new operations centre completed by the end of 2011 to facilitate availability of redundancy arrangements for all four of its core systems. The Reserve Bank welcomes this and will monitor progress over the period ahead.


In August 2011, the Australian Securities and Investments Commission (ASIC) took over responsibility for supervising capital monitoring of market-only participants (i.e. trading participants that are not clearing participants) on Australia's domestic licensed markets. As a result of this change in responsibilities, ASX Markets Supervision was renamed ASX Compliance. [1]

The ordinary liquidity requirement had been based on a 99 per cent confidence interval of margin obligations over the past year. [2]

In doing so, ASX removed the requirement that assets must mature within 14 days as it does not consider this a relevant restriction. [3]