2010/11 Assessment of Clearing and Settlement Facilities in Australia 5.1 ASX Clear


ASX Clear provides central counterparty services for a range of financial products traded on the ASX market, including cash equities, pooled investment products, warrants, certain debt products and equity- and commodity-related derivatives. Through a process known as novation, ASX Clear becomes counterparty to every eligible trade, managing the associated risk by applying a range of risk-management tools.

The rights and obligations of ASX Clear and its participants are set out in the ASX Clear Operating Rules and Procedures. Under section 822B of the Corporations Act 2001, these rules constitute a contract under seal between ASX Clear and each of its participants, as well as between participants. The netting arrangements contained in the ASX Clear Operating Rules and Procedures are further protected under Part 5 of the Payment Systems and Netting Act 1998. This provides certainty for the netting process in the event of the insolvency of an ASX Clear participant.

ASX Clear applies three layers of risk-management protections:

  • Participation requirements and ongoing monitoring. ASX Clear Direct Participants clearing cash equities or derivatives are required to hold at least $5 million in ‘core capital’. ASX intends to increase the requirement to $10 million over time. While capital is only a proxy for the overall financial standing of a participant, minimum capital requirements offer comfort that a participant has adequate resources to withstand an unexpected shock, perhaps arising from operational or risk-control failings.
  • Margining and other collateralisation of exposures by participants. Margins are routinely collected from participants in respect of derivatives exposures, but not currently for cash equities. Where exceptionally large or concentrated exposures in either derivatives or cash equities are identified through stress testing, calls are made under the Contributions and Additional Cover (CAC) regime. The margins and other collateral posted by a defaulting participant would be drawn on first by ASX Clear in the event of a default.
  • The maintenance of pooled risk resources. Finally, ASX Clear has access to pooled risk resources of $550 million to meet losses arising from a participant default in extreme but plausible market conditions. Of these additional resources, $250 million are fully paid up and comprise $3.5 million of own equity, $71.5 million paid into a restricted capital reserve from the National Guarantee Fund (NGF) in 2005, and subordinated loans totalling $175 million provided by ASXCC. These paid-up funds can be supplemented by ‘emergency assessments’ of up to $300 million, which surviving clearing participants must pay within a reasonable timeframe in the event of a participant default.

At the end of the assessment period, ASX Clear had 48 participants, including 18 Australian-owned brokers, 20 subsidiaries of foreign banks and brokers, seven subsidiaries of Australian-owned banks, and three specialist clearers. Seven participants resigned their membership during the period, while no new participant joined.

Adequacy of ASX Clear's Risk Resources

The risk resources available to ASX Clear to meet losses arising in the event of participant default comprise any margin or other collateral collected from the defaulting participant, and ASX Clear's pooled risk resources. Having risen significantly between 2005 and 2007, the aggregate value of ASX Clear's pooled risk resources has remained at $550 million over the past five years (Graph 6). ASX Clear's risk resources comprise $250 million of paid-up resources and $300 million of committed promissory resources.

In order to assess the adequacy of its risk resources, ASX Clear compares its available resources against the largest loss given the default of a participant under a range of extreme but plausible (stress-test) scenarios. In May 2010, a change was made to the ‘market-up’ stress test by raising the across-the-board price increase of this scenario to 10 per cent, compared with 7 per cent previously. This more stringent stress test was adopted shortly after prices declined consistently over a period of 10 days. In response to this episode, Clearing Risk Management thought it prudent to allow for the possibility of a more substantial rise in prices given the potential for the market to rapidly bounce back from such a decline. During the 2010/11 assessment period several other minor changes were made to the stress-test scenarios, as part of ASX Clear's annual review of stress-test parameters.

ASX Clear calls for CAC whenever a participant's potential stress-test losses on its cash equities and derivatives positions exceed a stress-test exposure limit (STEL). STELs are linked to participants' ICRs (as determined by ASX). Highly rated (A− and B-rated) participants are eligible for discounts on the additional collateral called. However, these discounts have not been applied by Clearing Risk Management since a breach of the Exponentially Weighted Moving Average (EWMA) Monitor (a daily risk measure that compares an EWMA against historical volatility of the SPI 200) occurred in April 2010. As B− or lower-rated participants have STELs that are less than ASX Clear's paid-up risk resources, CAC can be called even when stress-test exposures do not exceed these resources.

Comparison of potential stress-test losses with the level of available risk resources offers some guidance as to the resilience of the central counterparty to a participant default in extreme market conditions (Graph 7). During the assessment period, there were 14 days on which two participants' stress-test exposures exceeded their internal credit rating-based STELs, resulting in CAC being called. One participant had CAC called due in part to a build up in positions following the Japanese earthquake and tsunami. The second participant had CAC called on six consecutive days due to an accumulation of short equity option positions.

Cash Equities Margining

In the 2009/10 assessment period, ASX engaged with stakeholders regarding enhancements to ASX Clear's risk controls, including the introduction of routine margining by ASX Clear in the cash equities market. After further consultation with market participants, industry bodies and clearing participants over the current assessment period, ASX has begun development of a ‘futures-style’ margining system, which will: continue to margin option exercises under the current derivatives margining approach (to reduce spikes in cash equity market margin calls); will not have a house/client split (because no client funds will be held in the account); and will not have mandatory pass-through of margin to clients (though it is possible that participants will choose to do so). Additionally, the system will allow for a more tailored treatment for stocks considered ‘illiquid’ or with limited price history (e.g. initial public offerings), and will allow for integration of margining and settlement of low exercise price options (LEPOs).

ASX has held workshops with participants on these issues, with discussions focusing on how best to implement the project. ASX expects the project to be implemented after CME SPAN is in use at ASX Clear, with the introduction of end-of-day margining by the end of 2012 and intraday margining in early 2013.

The Reserve Bank welcomes ASX Clear's progress towards introducing margining in the cash equities market. In the 2008/09 Assessment, the Reserve Bank set out the strong case for margining of cash equities – it provides participants with incentives to manage the risk they bring to the central counterparty, and provides an additional layer of protection for the central counterparty, reducing its reliance on pooled risk resources, use of which (in the event of a participant default) may carry reputational costs. Furthermore, margining of cash equities (or an equivalent collateralisation of potential losses in normal market conditions) is the usual practice in other markets; introducing it at ASX Clear will bring the central counterparty more into line with international best practice.

Derivatives Margining

ASX Clear's Derivatives Intraday Risk Quantification (DIRQ) project went live on 20 September 2010. The DIRQ project involved two system enhancements: allowing ASX Clear to make intraday margin calls that reflect sizeable intraday changes in participants' positions, where previously intraday calls only reflected changes in prices; and the migration of margin-setting calculations from an outsourced system, TIMS, to ASX Clear's in-house DCS. As discussed under ‘Harmonisation and Linking of Central Counterparty Activity’ above, this is the first step towards replacing both central counterparties' derivatives margining systems with CME SPAN.

In addition, since 6 September 2010 ASX Clear now settles house and client exchange traded options margin payments separately on a gross basis in Austraclear. As a result, margin flows and risk protections are a little higher as there is no offset between house and client margins.

Participation Requirements

Starting 1 July 2010, ASX Clear's minimum ‘core capital’ requirement for Direct Participants increased from $2 million to $5 million (and to $10 million for General Participants, which may act as third-party clearers). Most clearing participants affected by these changes have chosen to inject capital; others have chosen to use third-party clearers. One participant has chosen to clear trades through its parent, which meets the minimum capital requirements.

ASX Clear originally intended to further increase the minimum capital requirement for Direct Participants to $10 million from 1 January 2012; however, due to the limited development of third-party clearing services, ASX has deferred the proposed implementation to 1 January 2013. ASX will review the intended timetable in late 2011, to include an assessment of progress on third-party clearing and the implementation of cash equity margining. However, ASX intends to proceed with the increase in General Participants' minimum capital requirement to $20 million from 1 January 2012. ASX has held informal discussions with the affected participants, as well as ASIC and the Reserve Bank, both of which will contribute to advice to the Minister on this proposed rule change. As noted in recent Assessments, ASIC and the Reserve Bank view depth in the third-party clearing market as being an important consideration in ASX Clear's planning for further increases to capital requirements for Direct Participants. During the assessment period there was one new entrant to the third-party clearing market, CBA Equities Limited (an existing Direct Participant), and one participant, Berndale Securities Limited, exited from this role.

Currently there are no Authorised Deposit-taking Institution (ADI) clearing participants clearing cash equities or exchange-traded options on ASX Clear. Prior to October 2007, the Securities Exchanges Guarantee Corporation (SEGC) could effectively impose unlimited levies on ASX Clear participants to restore shortfalls arising in the NGF. The potentially unlimited liability that this might generate for participants was in conflict with the Australian Prudential Regulation Authority's (APRA) prudential standards, which generally prevent ADIs from entering into arrangements with unlimited liability. However, in October 2007 the Corporations (National Guarantee Fund Levies) Amendment Bill 2007 was passed, imposing a per annum cap on levies payable to SEGC, removing the conflict between APRA's requirements and clearing participation obligations. The necessary rule changes to allow ADIs to become ASX Clear participants are now being considered by ASX.

Operational Performance

ASX Clear's core systems are DCS and Clearing House Electronic Sub-register System (CHESS). Developments in respect of CHESS are considered in the assessment of ASX Settlement in Section 5.4. DCS experienced no outages during the assessment period, resulting in complete availability. The target for DCS to be available is 99.8 per cent of the time. Although there were some unsuccessful logins early on the morning of 11 February 2011 due to a hardware problem with the core switch (discussed in Section 5.3), the impact on DCS was minimal as there were no impending settlement deadlines, and ASX decided against transferring DCS to the backup site. Average capacity utilisation of DCS in 2010/11 was 14 per cent, while peak utilisation was 30 per cent, in accordance with its policy that peak utilisation does not exceed 50 per cent of capacity.

As well as monthly connectivity and procedural checks, ASX conducts business continuity tests of its key systems over two-year cycles. The business continuity testing program for 2010 and 2011 was finalised in early 2010, with DCS tested from 7 to 11 March 2011, this did not reveal any problems.

Trade Acceptance Service

In the previous assessment period, ASX announced the creation of a trade acceptance service (TAS) in response to the prospect of new trade execution facilities for ASX-listed financial products entering the Australian market. The TAS allows trades executed on approved market operators' (AMO) platforms to be cleared and settled through ASX Clear and ASX Settlement, respectively. In May 2011, ASX published pricing options for the TAS, also clarifying that an AMO will be free to use the services of other clearing houses at the same time as using the TAS; in June 2011 ASX published finalised legal terms together with operational and technical standards, and relevant operating rule changes were also finalised. The TAS will enable trades originating from AMOs to be submitted to ASX Clear and ASX Settlement using CHESS, ASX's integrated clearing and settlement system for cash equities. Upon validation, trades will be novated and netted on the same basis as trades originating from the ASX market.

ASX is making the TAS available under a published set of contractual terms of service. Each AMO will be required to periodically certify that it has complied with the standards in the previous quarter. Any failure to comply must be notified immediately to ASX Clear and ASX Settlement, and may trigger suspension. This arrangement is similar to that required of ASX Clear clearing participants. In assessing the implications of ASX offering a trade acceptance service, the key consideration for the Reserve Bank was that the CS facilities' risk controls be unaffected. Given this, the Reserve Bank cannot see any reason why the current TAS arrangement would affect the compliance of ASX Clear and ASX Settlement with the relevant FSS.

In May 2011, the Minister granted Chi-X Australia Pty Ltd (Chi-X) a licence to operate as an AMO. Chi-X expects to begin operating on 31 October 2011 using the TAS.


It is the Reserve Bank's assessment that ASX Clear complied with the Financial Stability Standard for Central Counterparties during the assessment period.

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

  • Implementation of the DIRQ project. The project, which went live in September 2010, involved: system enhancements to enable ASX Clear to make intraday calls reflecting sizable changes in participants' positions; and the migration of TIMS to a replica within DCS.
  • Publication of standards and pricing options for the TAS. In May 2011, ASX published standards and pricing options for the TAS, ahead of Chi-X entering the market.

The Assessment also identifies a number of areas for further attention during the forthcoming period, including:

  • Routine margining of cash equities. The Reserve Bank welcomes ASX Clear's progress on introducing routine margining of cash equities. It will continue discussions with ASX regarding the refinement and implementation of the proposal during the next assessment period, with the expectation that this will have commenced by the end of 2012.
  • Participation requirements. ASX Clear proposes to increase the minimum ‘core capital’ requirement for General Participants (specialist third-party clearers) to $20 million from 1 January 2012. ASX Clear also proposes to increase the minimum ‘core capital’ requirement for Direct Participants to $10 million from 1 January 2013 and in that context it is expected that ASX, in conjunction with ASIC and the Reserve Bank, will consider developments in the third-party clearing market in determining whether it is appropriate to pursue this timetable.