2011/12 Assessment of Clearing and Settlement Facilities in Australia 5. Assessment of Clearing and Settlement Facilities against the Financial Stability Standards

The Reserve Bank (the Bank) monitors licensed clearing and settlement (CS) facilities' compliance with the Financial Stability Standards (FSSs) on an ongoing basis and reports on its assessment annually. All four ASX licensees report financial information to the Bank quarterly, with the two central counterparties (CCPs) also reporting detailed risk management information, including outcomes of stress tests. These reporting requirements are supplemented by both formal and ad hoc dialogue with the licensees, and by the provision of data on activity, exposures and operational performance.

All four facilities were found to comply with the relevant Standards over the 2011/12 Assessment period, as well as their obligation to do all other things necessary to reduce systemic risk. This chapter focuses on key developments over the year to end June 2012, and considers the implications of these developments for each licensed facility's compliance with its obligations. This chapter first considers developments common to more than one facility, before going on to discuss matters specific to each facility in turn. Details of the information that the Bank has used to assess each facility against the measures underpinning the relevant Standards are presented in Appendix A, 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 CCPs are subsidiaries of ASX Clearing Corporation Limited (ASXCC), while the two securities settlement facilities (SSFs) are subsidiaries of ASX Settlement Corporation Limited (Figure 1). ASX Compliance Pty Limited (ASX Compliance) provides compliance and enforcement services to the CS facilities.

ASX Limited is a listed company. The ASX Limited Board is responsible for overseeing the processes for identifying significant risks to ASX and ensuring that appropriate policies as well as adequate control, monitoring and reporting mechanisms are in place. In addition, ASX Limited's Board assigns certain responsibilities to subsidiaries within the group, including the boards of the four CS facilities (the CS Boards). The CS Boards are responsible for managing the particular clearing and settlement risks faced by each respective CS facility, including through compliance with the FSSs.

Harmonisation and Linking of CCP Activity

Since the merger of the Australian Stock Exchange and Sydney Futures Exchange in 2006, ASX Clear Pty Limited (ASX Clear) and ASX Clear (Futures) Pty Limited (ASX Clear (Futures)) have continued to operate as separate CCPs. However, ASX has looked to harmonise and link the activities of the two CCPs where appropriate.

A common approach to risk management of similar products has the potential to simplify operations for both ASX and its clearing participants and permits better calibration of exposures to ASX's risk tolerance. ASX is introducing a common derivatives margining system across both CCPs by upgrading both CCPs' systems to CME SPAN. This is a widely used margining system developed by the Chicago Mercantile Exchange (CME), which is expected to improve the CCPs' margin calculations and processes. CME SPAN was successfully introduced at ASX Clear (Futures) in the first quarter of 2012 – replacing the OMX RIVA version of the Standard Portfolio Analysis of Risk (SPAN) methodology. ASX plans to introduce CME SPAN at ASX Clear in the fourth quarter of 2012 – replacing a system based on the Theoretical Intermarket Margin System (TIMS) methodology. Also, during the 2012/13 Assessment period, ASX plans to introduce a different system, the Cash Market Margining (CMM) system, for cash equity margining at ASX Clear. This is discussed further in Section 5.1.

The introduction of CME SPAN at ASX Clear (Futures) has enhanced the CCP's approach to margining in a number of respects. In particular, the new system provides for more granularity when setting margin rates for contracts with different expiries. At ASX Clear, a key improvement will be the ability to set specific pairwise offset rates for the large number of contract classes, replacing the single generic 30 per cent offset rate currently used. Box A provides more information about the CME SPAN system and the implications of the upgrade.

Following the implementation of CME SPAN at both CCPs, ASX will aim to link derivatives margin processing across the facilities. Using the same system at both facilities will permit the production of consistent margin reports and margin data. At a later date, ASX plans to consider introducing margin offsets between the two CCPs.

In the current Assessment period, ASX also improved its internal processes around margining by replacing a number of manual procedures with the ‘Farsight’ system. This is a database management system that performs a range of functions related to risk oversight, including managing the data used in risk analysis, calculating margin parameters for input to the margining systems, and generating a variety of risk reports used within ASX. In the next Assessment period, ASX plans to further enhance Farsight with an expanded range of risk reports, and improved operational processes for updating initial margin risk parameters. The introduction of Farsight has reduced the operational risk associated with processing margin parameters and conducting risk analysis and reporting.

The Bank welcomes these measures and is supportive of ASX's plans to further improve and, where appropriate, harmonise the risk management practices and systems of the two CCPs.

Box A

Initial margin is often a CCP's first layer of financial protection against a participant default, and is therefore fundamental to its risk management framework. SPAN, originally developed by CME, is a widely used methodology for calculating initial margin. This box outlines the CME SPAN methodology, ASX's approach to setting the CME SPAN parameters, and the impact of this upgrade.

CME SPAN was introduced at ASX Clear (Futures) in early 2012 and is scheduled for rollout at ASX Clear in late 2012. It will be used for the margining of derivatives contracts and to facilitate continued margining of exercised equity options through to the settlement date of the underlying cash equity transactions (referred to as ‘prolonged margining’). As discussed in Section 5.1, below, most cash equity margining will be performed separately using CMM. ASX's objectives with the upgrade to CME SPAN are to move to a system that is widely used and supported in the industry, enhance the accuracy of risk calculations, and harmonise margining processes across the two CCPs. A particular benefit of CME SPAN is that it allows participants to carry out their own margin calculations and risk analysis on real and hypothetical portfolios, using software such as CME SPAN's PC-SPAN.

The objective of any initial margin calculation system is to accurately estimate the potential portfolio losses that could occur in the period between the most recent settlement of variation margin and the close out of a defaulted participant's positions. The resulting initial margin should cover potential losses in normal market conditions with a high degree of confidence; the ‘tail risk’, representing extreme but plausible market conditions, is generally covered using pooled risk resources. At ASX, initial margin requirements are calculated at the end of each day based on participants' positions at market close, and collected the next morning. Initial margin may also be collected as part of an ad hoc intraday margin call resulting from ASX's monitoring of price movements and market activity.

The CME SPAN methodology calculates initial margin requirements that reflect the total risk of each portfolio – at ASX, each house or client account is considered a separate portfolio. In calculating the margin requirement for each portfolio, CME SPAN breaks down the portfolio by underlying ‘commodity’, with the group of contracts under a single underlying commodity referred to as a ‘combined commodity’. For example, at ASX Clear (Futures), all futures and options based on 90-day bank bills, at all expiries, are grouped into a single combined commodity.

Scanning risk

The first step to calculating the margin for a combined commodity is to calibrate the so-called ‘scanning risk’. CME SPAN does this by establishing the maximum loss from 16 hypothetical risk scenarios. These scenarios cover a range of changes in price and volatility, specified in relation to a predetermined ‘price scanning range’ (PSR) and a ‘volatility scanning range’ (VSR). These scanning ranges are calibrated to the maximum price and volatility movements for the contracts within that combined commodity under normal market conditions. For example, in one risk scenario, price increases by one-third of the PSR and volatility falls by the full VSR, while in another scenario price falls by the full PSR and volatility rises by the full VSR.

CCPs using CME SPAN independently set the PSR and VSR parameters, based on their own analysis and processes. At ASX, the scanning ranges are set at three standard deviations of 60 days of historical data, using the higher of one- or two-day price movements. The inclusion of two-day price movements reflects the possibility that defaulted positions may take up to two days to close out.

ASX typically expresses PSR as an absolute dollar value and VSR as a percentage; for example, at the end of June 2012, the PSR for a SPI 200 futures contract (which has a notional value of around $100,000) was $6,000, while the VSR was 2.5 per cent (Table A1). CME SPAN also allows the PSR to be defined as a percentage of the current price, in which case different PSRs can be applied to different ‘tiers’ of contracts within the combined commodity. Individual expiries or groups of expiries are assigned to tiers based on their time to expiry. Each tier can also have a unique VSR assigned to it. Tiered and percentage-based PSRs are particularly useful where different expiries within a combined commodity vary considerably in price movements, or where open interest is spread fairly equally across multiple expiries. At ASX Clear (Futures), for example, this functionality is used for electricity futures, which exhibit strong seasonal effects that vary across different expiries.

Margin adjustments

Once the scanning risk for each combined commodity has been calculated, a series of adjustments are applied to account for correlations and specific risks. First, there is an upward adjustment to the margin requirement for a given combined commodity, to account for less-than-perfect correlation between contracts with different expiries (known as the ‘intra-commodity spread charge’). This adjustment is based on a participant's actual net position at each expiry month multiplied by an ‘intra-commodity charge rate’, which is itself based on observed price correlations between the different expiries. The default setting is for a single charge rate for the combined commodity, although for some contracts ASX utilises CME SPAN's charge-rate tiering functionality, which allows the charge rates to vary depending on the temporal difference in the pair's expiries (see example in Table A2).

The second set of adjustments applied to margin requirements consists of the ‘inter-commodity spread concessions’. These are deductions designed to account for reliable and economically robust correlations across different combined commodities. The scanning risk for each combined commodity is set based on the worst-case risk scenario for that combined commodity. In some cases, however, it may be highly unlikely that the set of worst-case scenarios will occur simultaneously, particularly if a participant holds net long and net short positions in different combined commodities that have a robust positive correlation. To adjust for this, an inter-commodity spread concession is deducted, which is calculated by applying (in a defined order) a spread ratio and concession rate to a participant's actual net positions in pairs of combined commodities. The spread ratio determines the number of net positions in one combined commodity required to offset a position in another combined commodity. The concession rate is specified as a percentage of the scanning risk (after adjustments based on options characteristics) for both combined commodities in the pair. For example, at ASX Clear (Futures), for 10-year relative to 3-year Treasury bond futures, a spread ratio of 1:3 and a concession rate of 90 per cent would mean that one net position in the 3-year contract is offset against three net positions in the 10-year contract, and that the concession for that pairing will be 90 per cent of the scanning risk of the combined commodities used in the offset (Table A3). ASX calculates these parameters in the same manner as the price movement for the intra-commodity spread.

Finally, CME SPAN allows a CCP to require additional margin to cover specific risks. Specifically, ‘spot month isolation rates’ are added to cover additional risks at the time a contract expires, including the possibility that, for deliverable commodities, alternative delivery arrangements need to be made in the event of a default. In the case of ASX, this is also used to cover the CCP's exposure on the day of expiry, because expiring positions are otherwise not included in that day's initial margin calculations. Additional margin (known as a ‘short option minimum charge’) is also required for short positions in deep out-of-the-money options.

Margin Rate Setting policy

Using a margining system such as CME SPAN, a CCP has significant influence over margin rates through its role in setting the margin parameters (e.g. PSRs, VSRs). At ASX, this process is governed by a Margin Rate Setting policy, which is reviewed annually, with material changes approved by the CS Boards. The policy states that margin rates must be reviewed at least every three months along with an annual review of the authorisation and documentation process for margin parameter changes, the statistical calculations used to determine margin rates, and guidelines for the application of management discretion.

Under the Margin Rate Setting policy, the Manager or General Manager of ASX's Clearing Risk Management (CRM) unit can approve the use of management discretion if the standard statistical analysis would result in an economically inappropriate margin rate. This may be due to the fact that the statistical analysis is, by definition, backward looking and therefore may not take appropriate account of expected future price movements. Other reasons for using management discretion include insufficient historical data (e.g. where a product is new), seasonality in some products, and one-off spikes in price movements that result in excessively high statistical recommendations. The Margin Rate Setting policy also allows the General Manager of Clearing Risk Policy to approve exceptions to the normal margin rate setting process based on a wider risk assessment.

The introduction of CME SPAN at ASX Clear (Futures) has not produced large changes in margin rates. The main change has been the introduction of more granular margin setting parameters, reflecting for instance PSR tiering and percentage-based PSRs on energy contracts. In considering the effectiveness of the new margining model and the adequacy of margin protections, Section 5.2 presents an initial analysis of observed margin coverage at ASX Clear (Futures).

Over time, ASX Clear (Futures) plans to further increase the granularity of margin rate parameters. This will allow parameter settings to more accurately reflect observed price correlations, potentially delivering lower margin rates without requiring a change to the CCP's risk appetite. This is likely to have a larger effect when CME SPAN is introduced at ASX Clear, since ASX plans to introduce around 1 300 specific inter-commodity offsets to replace the single generic 30 per cent offset applied in the current TIMS margining system.

Default Management

ASX carries out continuous review and improvement of its default management framework (DMF). The DMF is reviewed at least annually; in 2011/12, it was reviewed as part of the regular in-house default management ‘fire drills’ and following the default of MF Global Holdings Limited (MF Global) (discussed in Box B). The fire drills are used to test the effectiveness of the DMF using a number of hypothetical default scenarios, which are tracked through the entire default management process.

A subset of the fire drills centre on the role of ASX's Default Management Committee (DMC), which is comprised of senior management from relevant policy and operational areas. The DMC is the primary decision-making entity for the management of a default; its responsibilities range from recommending declarations of default and suspensions, to devising a risk neutralisation plan and overseeing its implementation. A broader default management team participates in the remaining fire drills, which focus on the practical management of information gathering, close out, CCP solvency, funding and financial offset in a default.

As well as ensuring that relevant ASX personnel are familiar with the default management process, these tests help to identify areas in which the DMF should be refined. Among recent enhancements, ASX has completed work to clarify the role of the Directors' Solvency Statement in establishing whether a default event has occurred. In addition, a new section to the DMF gives guidance on the use of the Solvency Statement, including the criteria under which it would be requested, and how actions would be coordinated with relevant regulators.

Box B
The MF Global Default

The ASX CCPs successfully applied their DMF to manage the defaults of the MF Global subsidiaries, the first clearing participant defaults these CCPs have faced. In the last week of October 2011, there were widespread concerns about the financial viability of MF Global, a commodities and futures broker headquartered in the United States. This followed disclosure of an unexpected loss and a net long position in short-duration European sovereign debt, including that of Belgium, Ireland, Italy, Portugal and Spain. MF Global's subsidiaries were direct participants in a number of CCPs, including ASX Clear and ASX Clear (Futures). Given the stressed circumstances, over this period ASX monitored the situation closely, liaising with MF Global, and keeping both the Australian Securities and Investments Commission (ASIC) and the Bank informed of developments. To minimise the potential impact on the ASX CCPs, ASX imposed conditions on the three MF Global subsidiaries with membership of these facilities; namely, restrictions on new business; requiring domestic cash holdings (to prevent funds from being repatriated offshore); and requiring daily Directors' Solvency Statements. A number of MF Global clients also reacted to the developments, moving their positions to other clearing participants.

After an attempt to sell MF Global failed (reportedly due to the potential buyer's uncertainty over the status of some client funds), the company filed for bankruptcy in the US on 31 October 2011. In the wake of this bankruptcy filing, the UK Financial Services Authority put the UK subsidiary, MF Global UK – an ASX Clear (Futures) and Austraclear participant – into special administration. The following morning, the two Australian subsidiaries, MF Global Australia and MF Global Securities Australia (which participated in ASX Clear, ASX Settlement Pty Limited (ASX Settlement) and Austraclear Limited (Austraclear)), appointed Deloitte Touche Tohmatsu as their administrator. In response, ASX recorded an event of default against all three subsidiaries of MF Global, and suspended them from participating in all ASX trading, clearing and settlement facilities.

MF Global UK was the only subsidiary with open positions at either CCP at the time of the default. These positions were well covered by initial margin posted by MF Global UK, and there was no need to call on pooled risk resources. When MF Global UK defaulted, it had no open house positions but ASX Clear (Futures) held $36 million of client-related funds. After closing out its net client position with MF Global UK, the balance was $34 million.

MF Global UK was, however, the dominant broker in ASX grains and wool futures, and cleared around 80 per cent of the open interest in these products. Given this, to prevent a disorderly market, ASX suspended trade in grain and wool futures on 1 November 2011; these markets were reopened the following day. While ASX already routinely monitors concentrations in the CCPs' overall exposures, in reviewing the DMF in light of the default of MF Global, one of the enhancements implemented in July 2012 was to introduce more granular monitoring of the concentrations in the clearing of particular products and contracts.

As noted, MF Global UK's positions were held on behalf of clients, including MF Global Australia. ASX had already identified the legal and practical impediments to the transfer (or ‘porting’) of client accounts from a defaulting participant to another participant. The default of MF Global further highlighted these issues, which include: arrangements to comply with ‘know your client’ regulations; CCP account structures (which was discussed in Box A of the 2010/11 Assessment); and legal restrictions on dealing with the assets and liabilities of an entity that has been placed into administration. ASX has completed an initial study of the circumstances under which it would attempt to transfer client positions in a default situation and the impediments to the wider use of transfers. The Principles for Financial Market Infrastructures (the Principles) introduce explicit requirements around segregation and portability and, as part of its consideration of measures required under the new Principles, ASX will be seeking participant feedback on this topic.

Participant Monitoring

Monitoring of clearing participants is conducted predominantly by the CRM unit, which covers both CCPs. CRM monitors day-to-day developments regarding, among other things, financial requirements, risk profiles, open positions and settlement obligations to the CCPs. It is also responsible for determining and reviewing internal credit ratings (ICRs) of participants, drawing in part on information provided by participants in their regular financial returns to ASX.

CRM also coordinates a ‘watch list’ of participants deemed to warrant more intensive monitoring. During the current Assessment period, the watch list regime was consolidated within CRM, whereas previously different teams within ASX (including CRM) had maintained separate watch lists with different triggers. The result is a more comprehensive and accessible picture of the factors affecting the risks that participants bring to the CCPs. This facilitates appropriate and coordinated responses to those risks.

Inclusion on the watch list is based on a range of factors, such as: concerns emerging from a specific event or media report; significant changes in a participant's own share price, bond yield or credit default swap price; ICR downgrades; calls for additional initial margin; operational issues; compliance issues; or issues arising from ASX's routine review of financial returns. Participants on the watch list may be subject to a more stringent intraday margin call regime, and CRM will typically also carry out a detailed credit review. The results of a credit review are examined by senior representatives of the Office of the Chief Risk Officer (CRO), ASX Compliance and Operations. In response to a review, restrictions may be placed on the participant's trading, clearing and settlement activities.

In early 2012, the CRO and the General Manager of CRM commenced a program of visits to clearing participants to improve communication at Senior Executive level on risk matters. Specifically, the program aims to: ensure that participants have up-to-date and relevant contact points at the clearing facility; give participants an opportunity to update ASX on any likely changes to their business models and risk management approaches; and allow participants to provide feedback on new clearing initiatives. The program is ongoing and ASX aims to visit each clearing participant annually.

Other ongoing participant-monitoring projects, mentioned in previous Assessments, are:

  • Spot checks on the accuracy of participants' financial returns. ASX has an ongoing project to conduct ad hoc spot checks as appropriate, for example in the event of significant market volatility. During 2011/12, ASX initiated spot checks on two ASX Clear participants. There was also one industry-wide spot check, completed in March 2012, which focused on the consistency of returns submitted by participants who were members of both ASX Clear and ASX Clear (Futures). Following the heightened market volatility in both August 2011 and May 2012, ASX Clear participants were also required to submit ad hoc returns and information on capital ratios.
  • A self-assessment program covering participants' capital calculations. This program is designed to check that participants are correctly calculating their capital requirements. During the Assessment period, work proceeded on phase one of the program, with ‘major’ participants (generally those with net tangible assets (NTAs) above $200 million) required to complete self assessments. By the end of June 2012, these participants had completed their forms and these are now being reviewed by ASX. Depending on the results from phase one, ASX may proceed with a second phase involving all other participants.
  • Business continuity spot checks. ASX has collated participant data from a series of business continuity spot checks. These checks have examined both the governance of business continuity planning and operational arrangements. ASX is reviewing the information received and aims to release an industry report for participants that have contributed to the initiative during the third quarter of 2012.

Business Continuity Arrangements

In early 2012, ASX completed the migration of all core systems to its new operations centre, which is now its primary site for information technology infrastructure. ASX's Bridge Street office in Sydney remains its primary site for staff and ASX has retained its original backup site. Each core system is replicated at both the new operations centre and the original backup site on multiple servers with spare capacity, delivering a high level of system redundancy. Additionally, should one level of redundancy be lost, ASX policy is to activate an additional tier of redundancy arrangements within 24 hours to meet the contingency of any further service interruption. ASX is able to fail over to its clearing and settlement backup systems within one hour in most circumstances. Furthermore, even in the event of delay during failover, any disruption to participants would be minimised since ASX's systems could, in most circumstances, continue to accept messages submitted; these would be processed once failover was completed.

To further support rapid recovery in the event of an operational disruption, ASX is also gradually increasing the number of operational staff based at the new operations centre, and plans to have around 30 per cent of operational staff located there by early 2013. In case of a disruption to staffing arrangements at the Bridge Street office, the operations centre has capacity to house 65 per cent of all operational staff.

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

Compliance with the Principles

Further to the release of the Principles in April 2012, ASX has begun to consider the implications of the various additional measures required. This work is important to ensure ASX's readiness to comply with regulatory requirements aligned with the Principles, both in Australia (i.e. the proposed new FSSs) and in relevant overseas jurisdictions (i.e. the home jurisdictions of participants in the ASX CS facilities).

Some actions in accordance with the new Principles are already underway. Ongoing work to introduce margining in the cash equity market (as discussed in Section 5.1, below) is consistent with new requirements under the Principles. In discussion with the Bank, ASX has identified a range of additional measures and policy clarifications arising from the Principles. ASX is planning to consult with participants and other stakeholders on issues such as:

  • Segregation and portability. Examining alternative options for meeting new expectations around segregation and portability of client positions and collateral.
  • ‘Cover one plus affiliates’ stress testing of credit and liquidity exposures. Both ASX CCPs would need to ensure that their financial resources, currently calibrated to cover the default of the participant that would cause the largest aggregate credit exposure, were sufficient to cover the joint default of the participant and its affiliates that would cause the largest aggregate credit or liquidity exposure. ASX is working towards implementing regular ‘cover one plus affiliates’ stress testing of both credit and liquidity exposures at both CCPs during the 2012/13 Assessment period.
  • Access to liquidity to minimise the risk of rescheduling settlements. Currently, ASX Settlement can reschedule transactions for settlement at a later date, one effect of which may be to defer ASX Clear's payment obligations in the event of a participant default. ASX Clear will need to consider additional steps to ensure that, in accordance with the Principles, it is able to meet its payment obligations at the time they fall due. One possibility may be to conclude explicit contingent ex ante agreements with participants for liquidity provision.
  • Collateral eligibility. Under the Principles, the ASX CCPs will no longer be able to routinely accept bank guarantees as collateral. Other changes to ASX's collateral acceptance policies may also be required, including restrictions on the acceptance of collateral subject to ‘wrong-way’ risk.[19] It is not expected that these changes would impose significant additional costs on the currently licensed CCPs, although there may be some additional costs to participants that need to supply alternative collateral.

The Bank welcomes ASX's early consideration of these measures and will remain in dialogue with ASX through the consultation process and subsequent policy development.

Treasury Investment Policy

In addition, ASX is encouraged to undertake a review of its Treasury Investment policy, in consultation with the Bank. In accordance with the Treasury Investment policy endorsed annually by both Clearing Boards, ASXCC invests both cash margin collected and pooled risk resources in short-dated highly rated assets. The policy establishes counterparty eligibility criteria and sets investment limits to control investment counterparty risk. Notwithstanding that the policy sets limits on both the absolute level and share of exposure to each of the four large domestic banks, it still allows relatively large and concentrated credit exposures to these banks.

This issue was discussed in the Bank's Assessments in 2007/08 and 2008/09, with ASX encouraged to review possible measures to reduce the size and concentration of its exposures to the large domestic banks.[20] Alternative measures considered included disincentivising the use of cash collateral, and investment on a secured basis by entering into repurchase (repo) arrangements backed by Commonwealth Government Securities (CGS). It was, however, acknowledged that a lack of depth in the CGS market might limit ASX's options, and that disincentivising the use of cash collateral could have adverse liquidity risk implications for the CCPs. While cash margins held by ASX have fallen markedly in recent years, to around 30 per cent of the peak levels reached in 2008/09, issuance of CGS has increased considerably and there is also some prospect of greater depth in the repo market in the near future (as noted in the ‘Strategic Initiatives’ section below). Given these developments, it is timely for ASX to revisit this issue. Such a review will also support an assessment of ASX's Treasury Investment policy against explicit recommendations in the Principles.

Strategic Initiatives

In 2012, ASX commenced a strategic review to develop its priorities over the next three years. The ASX Board is expected to finalise the review in the second half of 2012. The review covers a number of enhancements to its products, services and systems, some of which have been discussed in previous Assessments. Three initiatives will be of particular relevance to the Bank's future Assessments of the ASX CS facilities:

  • ASX Collateral. ASX plans to offer a centralised collateral management service (‘ASX Collateral’) that will assist users to more efficiently manage and reallocate the collateral they post against counterparty exposures. Such efficiencies may be expected to encourage greater depth in the repo market. This service will utilise CmaX, a collateral optimisation engine developed by Clearstream Banking S.A. (Clearstream) (an international central securities depository based in Luxembourg). See Box C for more details.
  • Central clearing of over-the-counter (OTC) derivatives. ASX is conducting a design study to gauge the feasibility of offering central clearing of Australian-denominated OTC interest rate derivatives. ASX is considering the development of this service in the context of Australia's G-20 commitment to increase the use of central clearing within the Australian OTC derivatives market. As part of this process, ASX has established a working group involving a number of large domestic and international banks that represent the majority of the activity in the Australian OTC interest rate derivatives market. Drawing on data provided by working group members, ASX is considering key elements of the design of such a service, including estimates of initial and variation margins, the potential for margin offset against exchange-traded interest rate derivatives, and the likely size of pooled risk resources. ASX is aiming to complete the design study later this year, with a delivery target for the new service of June 2013.
  • Retail trading in CGS. In 2010, the Australian Government launched an initiative to facilitate trading in CGS by retail investors. ASX is currently developing a trading, clearing and settlement service to meet this objective. Trading on the new facility will be in depository interests, each representing equitable interest in CGS held by a depository nominee and created by a market maker. It is proposed that trades in depository interests will be novated to ASX Clear and that settlement will occur on a t+3 basis in ASX Settlement, as for cash equities. This is a departure from existing arrangements for wholesale trading in CGS, which occurs on an OTC basis, with no central clearing, and with settlement in Austraclear. However, the proposal remains subject to regulatory approval. One consideration is the possibility that some wholesale activity in CGS migrates to the new trading facility – and therefore settlement migrates from Austraclear to ASX Settlement. Both the current FSSs and the proposed new standards require that settlement of high-value transactions, such as wholesale CGS, occur on a gross transaction-by-transaction basis (i.e. delivery-versus-payment (DvP) model 1). This is the model operated currently by Austraclear. Settlement in ASX Settlement, by contrast, occurs in a single multilateral net batch (i.e. DvP model 3). This would only be acceptable if the trading facility remained retail oriented.

The Bank welcomes ASX continuing the dialogue with its regulators as these plans develop to ensure that these initiatives are pursued in a manner consistent with ASX's ongoing compliance with the FSSs.

Box C
ASX Collateral

During the 2011/12 Assessment period, ASX announced its intention to develop ASX Collateral in partnership with Clearstream. Impending regulatory changes and other market developments are increasing demands on a limited pool of high-quality collateral, providing an incentive for market participants to optimise the use of their collateral. However, manually reallocating collateral entails significant operational costs. ASX's proposed service would automate the optimisation and allocation of collateral, with title remaining and settlement continuing to take place in the existing SSFs. ASX plans to commence offering this service for collateral held in Austraclear towards the end of the 2012/13 Assessment period, with plans to extend coverage in due course to collateral settled by ASX Settlement. This Box introduces the ASX Collateral and discusses some potential implications.

ASX's proposal involves creating a subsidiary (ASX Collateral Management Services Pty Limited) to act as a ‘triparty’ collateral management agent. This subsidiary would have full operational control of collateral-related transfers between ASX Collateral participants' dedicated securities accounts. Based on bilateral exposures and collateral eligibility criteria specified by ASX Collateral participants, it is proposed that Clearstream's CmaX system will calculate the optimal allocation of a participant's available collateral. The dynamic allocation would take into account factors such as up-to-date market prices, predefined limits on concentration risk, other potential uses of the collateral, and availability of new collateral (including the reuse of collateral received). ASX Collateral would then effect a transfer of collateral, in Austraclear or potentially ASX Settlement, between participants to achieve this optimal allocation. As a result, the service has the potential to lower the opportunity cost of providing collateral, and improve operational efficiency through outsourcing back-office functions.

ASX Collateral, which will be closely linked to the ASX SSFs, has the potential to become a key piece of infrastructure in Australian financial markets. Furthermore, the links to the SSFs have the potential to affect the SSFs' compliance with the relevant FSSs. Accordingly, the Bank expects ASX Collateral functionality to comply with standards equivalent to those required of the licensed facilities with which it interacts. In particular:

  • Principal risk. The Bank requires SSFs to settle on a DvP basis to eliminate principal risk. The Bank would expect that the arrangements for transfer of collateral via ASX Collateral provide an equivalent degree of protection. In particular, any substitution of collateral should occur on a DvP (or, strictly, delivery-versus-delivery) basis to ensure that the reallocation process does not result in any party being significantly over- or under-collateralised, and to prevent the creation of principal exposures through the substitution process.[1]
  • Operational risk. Given the interaction between ASX Collateral and the SSFs in which the collateral is held, the Bank expects ASX Collateral, including the systems provided by Clearstream, to provide a level of security and operational resilience equivalent to that required of the SSFs. This would include ensuring appropriate business continuity arrangements and providing appropriate operational support to both the SSFs and participants in the Australian time zone.
  • Default management arrangements. The Bank would also need to be assured that there are effective default management procedures in place, and that the proposed arrangements do not introduce legal or other risks that could delay the timely and appropriate resolution of a default event. Consistent with FSS guidelines, there must be clear rules and procedures for these default arrangements.

The Bank is also working with ASX to clarify other aspects of ASX Collateral is proposed activities that could have potential stability ramifications, including changes to CS facility rules and details of the proposed account structures.


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

  • CME SPAN. ASX is in the process of introducing CME SPAN, a widely used margining system, at both CCPs. This is expected to facilitate better calibration of exposures to ASX's risk tolerance, and will consolidate the two CCPs' risk management for derivatives on a common platform.
  • Default management. ASX's CCPs successfully handled the default of the MF Global subsidiaries in November 2011, in accordance with their DMF. ASX nevertheless continues to review and enhance its default management arrangements on an ongoing basis and has implemented some changes in response to lessons learned from this event.
  • Participant monitoring. ASX improved its participant-monitoring processes by refining its participant watch list; in particular, arrangements were put in place to coordinate actions and information sharing between different areas within ASX. ASX also increased its face-to-face engagement with participants, and progressed a number of projects related to monitoring participants' compliance with ASX's rules.
  • Business continuity arrangements. ASX completed the move to its new operations centre, which has improved redundancy arrangements for all four of its core systems, will facilitate rapid recovery, and provides an alternative workspace for a significant proportion of ASX staff.

The Bank welcomes these measures, which reflect a process of continual improvement of the CS facilities' risk management and operating frameworks over the Assessment period.

Further to the release of the Principles in April 2012, the Assessment also identifies a number of areas in which ASX, in consultation with the Bank, is considering the need for changes to ensure readiness to meet future regulatory requirements aligned with the Principles. Some actions are already underway, including ongoing work on cash equity margining at ASX Clear. Several other changes are under consideration, on which ASX plans to consult further with participants and other stakeholders over the coming period.

The Bank welcomes ASX's consideration of these measures and will remain in dialogue with ASX through the consultation process and subsequent policy development. ASX is also encouraged to carry out a review of its Treasury Investment policy, in consultation with the Bank.

The Assessment also identifies a number of strategic initiatives in train that are likely to be relevant to the Bank's future Assessments of the CS facilities. These include:

  • ASX Collateral. ASX intends to introduce a new service that will assist users to more efficiently manage and reallocate the collateral they post to counterparties.
  • Central clearing of OTC derivatives. ASX is studying the feasibility of offering central clearing of OTC derivatives.
  • Retail trading in CGS. ASX has developed a proposal for trading, clearing and settling CGS depository interests using its existing cash market infrastructure.

The Bank welcomes ASX continuing the dialogue with its regulators as these plans develop to ensure that these initiatives are pursued in a manner consistent with ASX's ongoing compliance with the FSSs.

5.1 ASX Clear


ASX Clear provides CCP services for a range of financial products traded on the ASX and Chi-X Australia Pty Ltd (Chi-X) markets, 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, with a higher requirement of $20 million for General Participants (which clear on behalf of third parties). 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 or exceed capital-based position limits (CBPL), 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 in 2005, and subordinated loans totalling $175 million provided by ASXCC. These pre-funded resources can be supplemented by ‘emergency assessments’ of up to $300 million, which surviving clearing participants must pay within a reasonable time frame in the event of a participant default.

At the end of the Assessment period, ASX Clear had 44 participants, including 16 Australian-owned brokers, 19 subsidiaries of foreign banks and brokers, six subsidiaries of Australian-owned banks, and three specialist clearers. One participant joined, and subsequently resigned, during the period. Four other participants also resigned their membership in the Assessment period.

In the previous Assessment period, Chi-X was granted a licence by the Minister to operate as an approved market operator (AMO). In response, ASX launched a Trade Acceptance Service (TAS) that allows trades executed on an AMO's platform to be cleared and settled through ASX Clear and ASX Settlement, respectively. On 31 October 2011, Chi-X began operating and accessing the TAS; Chi-X now offers trading in all S&P/ASX 200 stocks and ASX exchange-traded funds, with a market share by volume of around 3 per cent. Since its commencement, the TAS has generally been functioning effectively, with the exception of two operational outages on 11 November and 6 December 2011. These are discussed in more detail in Section 5.3.

Adequacy of ASX Clear's Total 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. The aggregate value of ASX Clear's pooled risk resources has remained at $550 million over the past six years (Graph 5). These risk resources comprise $250 million of pre-funded resources and $300 million of committed promissory resources.

In order to assess the adequacy of its risk resources, ASX Clear compares its available pre-funded resources against the largest potential loss given the default of a participant under a range of extreme but plausible (stress-test) scenarios (Graph 6, top panel). One of these scenarios (the ‘market-up’ scenario) involves an across-the-board price increase. In August 2011, CRM raised the price risk under the market-up scenario to 12 per cent, compared with 10 per cent previously. This followed a similar rise from 7 to 10 per cent in May 2010; both changes resulted from observed persistent price declines over a number of days, which were considered to increase the probability of a subsequent rebound. On 5 December 2011 the scenario was returned to 10 per cent, following ASX Clear's regular annual review of stress-test parameters. The review also resulted in several other minor changes to the stress-test scenarios.

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). During the Assessment period, there were two days on which two participants' stress-test exposures exceeded their STELs, resulting in CAC being called (Graph 6, bottom panel). STELs are linked to participants' ICRs (as determined by ASX).

According to the stated policy, highly rated (A-rated and B-rated) participants are eligible for discounts on the additional collateral called. Application of these discounts is dependant on current volatility of the SPI 200, as measured by its exponentially weighted moving average (EWMA), compared with its historical volatility. In April 2010, the EWMA exceeded historical volatility by a threshold amount and these discounts were suspended. They have not since been reapplied. Since B- or lower-rated participants have STELs below ASX Clear's total pre-funded risk resources, CAC can be called even when stress-test exposures do not exceed these resources.

Cash Equity Margining

In the 2011/12 Assessment period, ASX Clear continued work on the introduction of routine margining of cash equities. ASX Clear conducted a number of workshops and information sessions for market participants, industry bodies and clearing participants to finalise arrangements for implementation of the new CMM system. In July 2012, ASX Clear started calculating and reporting margin requirements to participants, with margin collections now scheduled to commence by the end of June 2013. The delayed implementation owes largely to participants' and their system vendors' requests for more time to develop the internal procedures and infrastructure needed to process margin calls and post collateral.

ASX Clear's approach to cash equity margining is to use ‘futures-style’ margining, involving the collection of initial margin and variation margin. Both types of margin will be routinely calculated at the end of the day and collected the following morning. Margin will be calculated and collected from clearing participants, though participants will not be required by ASX to pass through margin calls to clients. The selected methodology for initial margin calculation is largely based on historic simulation of value-at-risk (HSVaR), supplemented by flat rates for less liquid stocks (e.g. stocks outside the All Ordinaries, and warrants) and new stocks where there is insufficient historical price data. The HSVaR methodology calculates hypothetical changes in the value of a portfolio of securities, using historical price moves, and determines a margin requirement from these to achieve the desired degree of confidence. At ASX, the HSVaR calculations are based on 2 years of 1-day price moves, with a 99 per cent confidence interval. To allow for possible underestimation of future risk exposure in the HSVaR calculation, which might occur following extended periods of low volatility, ASX adds to the margin requirement using a multiple of the HSVaR calculation (1.30 for ASX 200 equities, and 1.75 for other equities in the All Ordinaries).

Cash equity transactions arising from the exercise of exchange-traded options (ETOs) will be handled differently to margin payable on traded cash market positions. Post-exercise, margin on ETOs and low exercise price options (LEPOs) will continue to be calculated using CME SPAN (so-called prolonged margining), rather than by switching to the CMM system. This will reduce the likelihood of placing liquidity strains on participants around option expiries by smoothing participants' total margin requirements.

Changes to international standards, when implemented through revised FSSs, will require that margining of cash equities is in place at ASX Clear. While, as a general matter, transitional arrangements will be considered in implementing the new FSSs, the Bank is not considering transitional relief for the application of routine margining of cash equities beyond 30 June 2013. The Bank therefore expects collection of margin to be implemented in line with ASX's revised timetable and will continue to monitor developments over the coming months.

Participation Requirements

Starting 1 January 2012, ASX Clear's minimum ‘core capital’ requirement for General Participants (which are permitted to act as third-party clearers) increased from $10 million to $20 million. The clearing participants affected by these changes increased their capital in December 2011. Ahead of the general policy change, in September 2011 ASX Clear increased the capital requirements for Penson Financial Services Pty Ltd's (Penson) – then the market's primary ‘specialist’ third-party clearing participant for retail brokers that are trading participants – to $15 million, owing to concerns surrounding the financial position of its parent company. In November 2011, Penson was acquired by Pershing Securities Australia Pty Ltd (Pershing), a subsidiary of BNY Mellon.

ASX intends to increase minimum core capital for Direct Participants to $10 million on 1 January 2014, depending on development of the third-party clearing space, which ASX will review in late 2012. ASX Clear had originally intended to further increase the minimum capital requirement for Direct Participants to $10 million from 1 January 2012; however, due to limited development of third-party clearing services, this was deferred. While there are currently 11 General Participants that offer some form of third-party clearing, only one, Pershing, offers clearing services to retail brokers that are trading participants; Berndale Securities Limited is continuing the process of exiting from this role. The only other specialist third-party clearer is ABN Amro Clearing Sydney Pty Ltd (ABN Amro), formerly known as Fortis Clearing Sydney. While ABN Amro clears for a number of market participants, it does not offer its clearing services to retail brokers. The remaining General Participants mostly provide services to related parties.

Notwithstanding the limited number of specialist third-party clearers, ASX Clear's exposures to Pershing are typically a relatively small share of total participant exposures. As with all participants, ASX Clear monitors and manages the exposure to individual third-party clearers in accordance with its risk management framework, and as part of its risk-based capital requirements it also ensures that third-party clearers appropriately manage the risks posed by their clients.

ASX continues to actively encourage participation by authorised deposit-taking institutions (ADIs), and at the same time to consider rule changes that would streamline participation requirements for ADIs by placing some reliance on regulatory requirements imposed by the Australian Prudential Regulation Authority (APRA). Currently, no ADIs clear cash equities or ETOs on ASX Clear. Prior to October 2007, rules of the Securities Exchanges Guarantee Corporation (SEGC) meant that ASX Clear participants could potentially be called for unlimited levies, which was in conflict with APRA's prudential standards for ADIs. 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 and thereby removing the conflict between APRA's requirements and clearing participant obligations.

Central Clearing of OTC Equity Options

In May 2012, ASX Clear launched a central clearing service for OTC equity options. While the OTC equity options cleared through this service are similar to ASX ETOs, this service gives participants the flexibility to bilaterally agree the strike price, expiry date and exercise type (i.e. American or European). Given the similarity between these products, OTC equity options are subject to equivalent risk management practices to those that apply for ETOs; ASX interpolates the value of OTC options using the price of similar ETOs. Phase one of this service is limited to the 20 most liquid stocks, with a maximum time to expiry of one year. A second phase of this product launch, due to be rolled out in early 2013, will cover all ETO classes with a maximum duration of four years. As the markets for these longer-duration options currently exhibit low levels of liquidity, ASX is working with market makers to ensure sufficient market depth before they become cleared.

Operational Performance

ASX Clear's core systems are the Derivatives Clearing System (DCS) and Clearing House Electronic Sub-register System (CHESS). Developments in respect of CHESS are considered in Section 5.3. DCS recorded 100 per cent system availability in 2011/12, with average capacity utilisation of 19 per cent and peak utilisation of 41 per cent. As a result, ASX met its minimum availability target of 99.8 per cent and its minimum capacity headroom target of 50 per cent of total capacity.


It is the 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:

  • Participation requirements. From 1 January 2012 the minimum core capital requirement for General Participants was increased from $10 million to $20 million. Subject to further review in late 2012, an increase in the minimum core capital requirement for Direct Participants, from $5 million to $10 million, is planned for January 2014.
  • Central clearing of OTC equity options. ASX Clear has launched a new service for central clearing of OTC equity options, with an expansion of this offering planned for next year.

The Bank also notes that ASX Clear has delayed introducing routine margining of cash equities until June 2013. While the Bank appreciates the complexities involved in implementing cash equity margining, and fully acknowledges the competing demands on participants' technology resources, this remains an important improvement to risk management at ASX Clear. Furthermore the implementation of new FSSs, aligned with the Principles, in 2013, will require that margining arrangements are in place. While as a general matter, transitional arrangements will be considered in implementing the new FSSs, the Bank is not considering transitional relief for the application of routine margining for cash equities beyond 30 June 2013. The Bank therefore expects collection of margin to be implemented in line with ASX Clear's revised timetable and will continue to monitor developments over the coming months.

5.2 ASX Clear (Futures)


ASX Clear (Futures) provides CCP services for derivatives traded on the ASX 24 market.

ASX Clear (Futures) operates within a sound legal framework, based on its Operating Rules and Procedures. Under section 822B of the Corporations Act, these rules constitute a contract under seal between ASX Clear (Futures) and each of its participants, as well as between participants. Among other things, the rules set out the rights and obligations of ASX Clear (Futures) and each of its participants in respect of ASX Clear (Futures)' provision of CCP services. The netting arrangements contained in the ASX Clear (Futures) Operating Rules and Procedures are further protected under Part 5 of the Payment Systems and Netting Act. This provides certainty for the netting process in the event of the insolvency of an ASX Clear (Futures) participant.

Given the concentration of counterparty risk in a CCP, effective risk management processes are crucial. ASX Clear (Futures) manages the risk associated with the potential for a participant default through a range of measures:

  • Participation requirements and ongoing monitoring. ASX Clear (Futures) participants are required to hold at least $5 million in NTAs. Over time, ASX Clear (Futures) plans to implement a further increase in this NTA requirement to $10 million, with a higher requirement for those clearing for third parties.
  • Margining and other collateralisation of exposures by participants. ASX Clear (Futures) levies margin on all derivatives products to cover any losses potentially arising should a participant default in normal market conditions. ASX Clear (Futures) also calls for Additional Initial Margin (AIM) from participants when individually large or concentrated exposures are identified, including through stress testing.
  • The maintenance of pooled risk resources. Should margin and other collateral collected from a defaulting participant prove insufficient to meet its obligations, ASX Clear (Futures) maintains a fixed quantity of pooled risk resources. The aggregate value of the pre-funded components is currently $370 million, calibrated to ensure coverage in extreme but plausible market conditions. This includes $30 million in ASX Clear (Futures)' own capital; a $70 million subordinated loan from ASXCC, in turn funded by a subordinated loan from ASX Limited; participant commitments of $120 million; and a further subordinated loan from ASXCC of $150 million, funded in turn by a commercial bank loan. In addition, ASX Clear (Futures) may call on participants for up to $30 million in promissory commitments, although the ASX Clear (Futures) rules suggest that it is unlikely that these resources would be available on a timely basis following a default.

At the end of June 2012, ASX Clear (Futures) had 17 participants, predominantly large foreign banks and their subsidiaries.

Adequacy of Initial Margin

The Bank monitors the appropriateness of ASX Clear (Futures)' initial margin rates on an ongoing basis. As discussed in Box A, combined commodity rates are calibrated to cover three standard deviations of price movements over the last 60 days, which provides a high level of confidence that coverage is adequate.

One method of analysing margin coverage at a portfolio level is to compare the daily initial and variation margin requirements for each portfolio. Variation margin, when owed to the CCP, represents the loss that the portfolio has incurred over the last day. If the participant holding that portfolio were to default, initial margin would be used to cover this loss and any further losses incurred in the time taken to fully close out the portfolio. ASX Clear (Futures) can also make intraday margin calls, which it will generally do if markets are particularly volatile. In the current Assessment period ASX improved its intraday margining system, so that the initial margin on new positions is accounted for when calculating intraday margin calls.

During the 2011/12 Assessment period, ASX Clear (Futures)' initial margin requirements covered losses arising from price movements on at least 99.8 per cent of occasions. The largest of all initial margin shortfalls was $14.9 million, which was one of three totalling $34.1 million on 5 August 2011 (Table 4). On 5 August 2011, the S&P/ASX 200 fell 4 per cent following the downgrade of the US federal government; ASX Clear (Futures) made an intraday margin call totalling $381.3 million, with the single largest call being $177.8 million. The largest shortfall on any other day was $0.8 million. These figures are well below ASX Clear (Futures)' pre-funded pooled risk resources of $370 million, which would have been available to cover such excesses (and any additional losses incurred in the time taken to close out the positions) should one or more of those participants have defaulted.

Since initial margin is collected once per day, variation margin often reflects losses from new positions on which initial margin has not yet been collected. Therefore, excesses of variation margin over initial margin sometimes occur that are not indicative of margin rate adequacy, but rather the time lag between establishment of a new position and the calculation and collection of associated initial margin. To provide a coverage percentage, the analysis distinguishes, where possible, between timing-related shortfalls and shortfalls arising from price movements.

Adequacy of ASX Clear (Futures)' Total Risk Resources

In common with other CCPs, ASX Clear (Futures) maintains a fixed amount of pooled risk resources to protect itself should initial margin be insufficient to cover default losses. The pooled risk resources are intended to protect against tail risk arising from extreme but plausible events. The advantage of using pooled resources for such protection is that setting initial margin sufficiently high to cover more extreme price movements could impose such a high opportunity cost on participants that it disrupts trading activity and hence market liquidity.

The value of ASX Clear (Futures)' pooled risk resources was unchanged throughout the Assessment period, comprising $370 million in pre-funded resources and $30 million in promissory participant commitments (Graph 7). In July 2011, ASX Clear (Futures) changed its rules to clarify that the promissory commitments would be called upon after the commercial bank-funded subordinated ASXCC loan in the event of a default. It also removed the promissory commitments from its STEL calculation, in recognition of the potential delay in receipt of these resources. As a result, even for A-rated clearing participants, any stress-test exposures above the level of pre-funded resources result in the collection of additional collateral.

Comparison of potential stress-test losses with the level of available risk resources offers some guidance as to the resilience of ASX Clear (Futures) to a participant default under a range of extreme but plausible (stress-test) scenarios. During 2011/12, the stress-test exposure of the participant with the highest potential loss was typically well below the value of the pre-funded component of ASX Clear (Futures)' risk resources (Graph 8, top panel). This suggests that the level of initial margin rates have been well calibrated and that the size of ASX Clear (Futures)' risk resources remained sufficient over the period to prevent undue reliance on additional collateral.

Since B-rated or lower-rated participants have STELs below ASX Clear (Futures)' total pre-funded risk resources, STEL AIMs can be called even when stress-test exposures do not exceed these resources. There were no exposures in excess of STELs in 2011/12 (Graph 8, bottom panel), although two small CBPL AIM calls were made.

One of the stress-test scenarios (the ‘futures up’ scenario) involves an across-the-board price rise for all futures. An increase in the futures ‘up’ stress-test scenario was implemented in May 2010 and remained in place during the 2011/12 Assessment period. It had initially been increased following an episode of declining prices over a sustained period, to allow for the possibility of a rapid rebound from such a decline. The annual review of stress-test parameters in November 2011 resulted in a number of minor parameter changes, including a decrease in the magnitude of the volatility shock for SPI 200 options under all scenarios and changes (both increases and decreases) to the futures price shocks in around half of the scenarios.

Operational Performance

ASX Clear (Futures)' core system is the SECUR system. SECUR recorded 100 per cent system availability in 2011/12, with average capacity utilisation of 18 per cent and peak utilisation of 27 per cent. As a result, ASX met its minimum availability target of 99.8 per cent and its minimum capacity headroom target of 50 per cent of total capacity.

ASX conducts business continuity tests of its core systems over two-year cycles. The most recent testing for the SECUR system was carried out in February 2012, and revealed no problems.


It is the Bank's assessment that ASX Clear (Futures) complied with the FSS for CCPs during the Assessment period. Analysis of initial margin coverage in light of the introduction of CME SPAN early in 2012 indicates that the CCP continued to achieve an adequate level of coverage over the Assessment period. There were no significant changes to the pooled risk resources available to ASX Clear (Futures) in the event of a participant default, and operational performance was consistent with targets for minimum availability and capacity headroom.

5.3 ASX Settlement


ASX Settlement operates the SSF for cash equities and warrants traded on the ASX market.

ASX Settlement operates within a sound legal framework, based on its Operating Rules and Procedures. Under section 822B of the Corporations Act, these rules constitute a contract under seal between ASX Settlement and each of its participants, as well as between participants. Among other things, the rules set out the rights and obligations of ASX Settlement and each of its participants, including in the event of default or suspension. ASX Settlement's netting arrangements are approved under Part 3 of the Payment Systems and Netting Act. This provides certainty for the netting process in the event of the insolvency of an ASX Settlement participant or a Payment Provider.

ASX Settlement's securities settlement system is CHESS. Settlement risk in CHESS is mitigated by the use of a DvP model 3 mechanism, whereby settlement of securities transfers and associated cash payments occurs in a multilateral net batch at around noon each day (the CHESS batch), with interbank cash payments made across Exchange Settlement Accounts in the Bank's real-time gross settlement (RTGS) system, the Reserve Bank Information and Transfer System (RITS). Securities title is updated upon confirmation of cash settlement from RITS.

Improvements to the Batch Settlement Model

The Bank's Review of Settlement Practices for Australian Equities (the Review), released in 2008, recommended a number of potential enhancements to the functioning of the batch settlement model. This review followed significant delays to the completion of settlement on two days in January 2008. In September 2009, after consultation with industry participants, ASX announced that it would implement a number of changes, including an earlier deadline for the back out of transactions scheduled for settlement in the event of the failure of a participant, or its Payment Provider, to meet its funds settlement obligation.

In August 2012, after consultation with Payment Providers, ASX agreed an earlier deadline of 2.30 pm for Payment Providers to authorise or reject payment obligations on behalf of settlement participants. This change was effective from 10 September 2012. The earlier deadline maintains a maximum payment authorisation window of 90 minutes, with ASX Settlement having brought forward its cut-off for issuing payment notifications to Payment Providers to 1.00 pm (from 1.44 pm). In addition, in the event that a Payment Provider requires longer than 60 minutes to authorise a payment, the Payment Provider must inform ASX Settlement and provide details of the participant credit concerns that are delaying their decision. Had such arrangements been in place in January 2008, decisions that ultimately resulted in the back out of a troubled participant's settlement obligations and the recalculation of the batch could have been accelerated. This would have reduced the overall length of the settlement delay, mitigating the uncertainty that ultimately affected the market at large.

Another enhancement, originally identified by ASX in its work on implementing recommendations arising from the Review, which is now close to being finalised, is so-called prolonged margining for LEPOs. Once cash equity margining is fully implemented at ASX Clear, exercised LEPOs will continue to be margined through to the settlement date of the underlying cash equity trades using the CME SPAN methodology. This will provide a permanent solution to manage the risk around LEPO expiries that results from securities delivered being nominally valued at the $0.01 option strike price rather than the prevailing stock price. This will replace the current temporary solution in which ASX Clear withholds all outgoing margin payments until it has been confirmed that the CHESS batch has settled.

The Bank welcomes these refinements to the settlement model, which are consistent with the Bank's earlier recommendations.

New Settlement Services

Also during the Assessment period, two new services were developed for the CHESS batch: a DvP settlement service for non-ASX listed securities; and the ASX Managed Funds Service (AMFS).

  • From December 2011, AMOs trading securities other than those listed on the ASX have been able to opt to settle on a DvP basis in the CHESS batch. Previously, transfer of ownership of these securities happened free of payment in CHESS, with payment occurring separately, outside of ASX Settlement's processes. Providing DvP settlement of these trades allows participants in these markets to avoid incurring principal risk.
  • AMFS is a payment and unit allocation service for managed fund units, using the CHESS batch; this has the potential to improve the efficiency of payment arrangements in this market, which would otherwise be settled using manual or paper-based arrangements. Subject to approval from other regulators, ASX Settlement plans to launch AMFS in late 2012.

To the extent that non-novated transactions are related to novated transactions, the Bank recognises the efficiency of the current CHESS batch process. However, as identified in the Review, where non-novated transactions are unrelated to novated market transactions, alternative settlement arrangements might, in some circumstances, be appropriate so as to mitigate the risk that any problems associated with the settlement of such transactions become a source of disruption to the entire CHESS settlement batch.

Since AMFS payments are not related to novated settlements, ASX Settlement has accordingly developed alternative settlement arrangements to mitigate the risk that an issue with AMFS payments could disrupt the settlement of novated market trades. In particular, ASX Settlement will require that Payment Providers separately authorise payments related to AMFS settlements payments, thereby enabling settlement participants (in conjunction with their Payment Providers) to prioritise payments for novated trades.

The Bank is satisfied that the implementation of these alternative arrangements is consistent with ASX Settlement's ongoing compliance with the FSS. Nevertheless, the Bank continues to monitor the overall value of non-novated transactions (other than those related to novated market transactions) within the CHESS batch as an indication of the potential for these transactions to disrupt the settlement of novated market transactions. Should the value of these non-novated transactions grow to become a significant component of the CHESS batch, the Bank may encourage ASX to consider whether alternative settlement arrangements would be appropriate. Alternative arrangements could include, for instance, implementing arrangements for separate payment authorisations for other non-novated transaction classes, such as are planned for AMFS.

Operational Performance

ASX Settlement's core system is CHESS. CHESS recorded 99.98 per cent system availability in 2011/12, with average capacity utilisation of 13 per cent and peak utilisation of 21 per cent. As a result, ASX met its minimum availability target of 99.8 per cent and its minimum capacity headroom target of 50 per cent of total capacity.

There were, however, two operational incidents involving CHESS during the Assessment period. On 11 November 2011, at around 4.00 pm, participants lost connection to CHESS for around 30 minutes and were unable to process transactions; Chi-X transactions were also affected. When CHESS resumed functioning, Chi-X could not automatically reconnect; the connection was eventually restored after almost 2 hours by rebooting the Chi-X CHESS gateway software. On 6 December 2011, there was a problem with the TAS, arising from a CHESS outage earlier on the same day. This involved discrepancies within the CHESS database, which led to Chi-X transactions being rejected. CHESS was unable to send confirmation messages in respect of Chi-X trades. To avoid any delays to settlement of the CHESS batch, ASX Settlement waited until after the batch had settled to rectify the discrepancy by restarting the database.

Both incidents were rectified in a timely fashion. The Bank is satisfied with both ASX Settlement's immediate responses to these incidents, as well as the follow-up action to prevent a recurrence. Since these incidents affected settlement arrangements for trades executed on both the ASX market and ChiX, ASX has, in consultation with both the Bank and ASIC, developed a multi-market communication protocol.

Separately, the ASX CS facilities have also introduced procedures for better communication with participants around clearing- and settlement-infrastructure technology upgrade releases, which will facilitate their smooth implementation. This includes classifying all releases by their potential impact on participants, providing some clarification around when releases will and will not be implemented, and establishing regular updates of planned releases for the following two years.

ASX conducts business continuity tests of its core systems over two-year cycles. Testing was conducted for CHESS in March 2011, as part of the formal testing program for 2010 and 2011. This testing did not reveal any problems.


It is the Bank's assessment that ASX Settlement complied with the Financial Stability Standard for Securities Settlement Facilities during the Assessment period.

The Assessment highlights a number of enhancements and extensions to ASX Settlement's settlement arrangements over the period, including:

  • An earlier deadline for the back out of settlement obligations. In the event that the batch has to be recalculated, the earlier deadline accelerates this process, reducing the overall length of the settlement delay, and mitigating the uncertainty that could affect the market at large.
  • DvP settlement of non-ASX listed securities. Providing DvP settlement of these trades allows participants in these markets to avoid incurring principal risk.
  • AMFS payment and unit allocation service. Settling these obligations in the CHESS batch has the potential to improve the efficiency of the payment arrangements for managed fund units.

The Bank welcomes the earlier deadline for the back out of settlement obligations, which is consistent with the Bank's earlier recommendations. The Bank also welcomes the forthcoming introduction of prolonged margining of LEPOs using CME SPAN as a permanent solution to manage the risk around LEPO expiries.

While the managed funds service is subject to approval from other regulators, the Bank is satisfied that the implementation of new settlement services for AMOs and managed funds is consistent with ASX Settlement's ongoing compliance with the FSS. Nevertheless, the Bank will continue to monitor the composition of the daily settlement batch as an indication of the potential for the settlement of novated market transactions to be disrupted by problems arising in the settlement of unrelated transactions.

ASX Settlement's core system operated soundly, meeting its availability and capacity target. While there were two incidents, which also affected Chi-X, the Bank is satisfied both with ASX Settlement's immediate response to these incidents, as well as the follow-up action to prevent recurrence.

5.4 Austraclear


Austraclear operates the SSF for debt securities trades, including government bonds and repos.

Austraclear operates within a sound legal framework, based on its Regulations and Procedures. Under section 822B of the Corporations Act, these have effect as a contract under seal between Austraclear and each of its participants, as well as between participants. Among other things, the Regulations set out the rights and obligations of Austraclear and each of its participants, including in the event of default or suspension. The finality of settlements undertaken by Austraclear is reinforced by its approval as an RTGS system under Part 2 of the Payment Systems and Netting Act. This approval protects the finality of payments made through Austraclear should a participant enter external administration.

Austraclear addresses settlement risk by the use of a DvP model 1 mechanism, involving settlement of individual transactions on a gross basis. The interbank cash leg is paid through the Reserve Bank's RTGS system, RITS, with simultaneous transfer of securities title in Austraclear.

System Development

EXIGO is the core system used by Austraclear. During 2011/12, Austraclear commenced an in-sourcing project to take over EXIGO's third-level operational and software support, which is currently outsourced to NASDAQ OMX. The in-sourcing project will also include a software upgrade, primarily aimed at simplifying the system design. The project is being divided into three phases, comprising an architecture design phase, a handover phase during which the source code will be transferred to ASX, and an implementation and testing phase. Senior software developers from NASDAQ OMX will be assisting with the project.

This project will allow Austraclear to manage its own software development and reduce Austraclear's operational reliance on external suppliers. It therefore has the potential to significantly reduce operational risk by giving ASX control over future development of the system in terms of both the nature and timing of future enhancements. It should also improve the timeliness of ASX's responses to operational incidents, given the current reliance on highly technical 24-hour support across different time zones. In particular, this project has the potential to reduce the likelihood and duration of operational incidents such as those that occurred in the current Assessment period (discussed below under ‘Operational Risk Management’).

Notwithstanding these potential benefits, there are potential risks associated with internally resourcing the development of a major system. In particular, ASX will need to ensure that it can adequately resource third-level support for Austraclear, and do this without impacting the quality of support for other systems. The Bank will continue to review these and other risks through its regular liaison with ASX. Overall, however, the Bank recognises the significant potential benefits of the in-sourcing project and is supportive of this initiative.

During the Assessment period ASX also completed Release III of Austraclear as part of its Austraclear System Enhancement project. Release III was aimed at delivering functional improvements to Austraclear users based on feedback received by ASX via the Austraclear Help Desk, industry working groups and other stakeholders. The improvements cover trade management, trade input, corporate action reporting, market repo trade enhancements and straight-through processing. A second part of the Austraclear System Enhancement project, with a focus on internal operational enhancements, has been superseded by the in-sourcing project, which will allow ASX to undertake future enhancements as required.

Operational Risk Management

Since mid 2008, Austraclear has been responsible for first- and second-level operational support of EXIGO. This includes business continuity arrangements, and computer system support that does not involve changes to system components or underlying source code. Previously, this support was provided by NASDAQ OMX, which continues to provide third-level and software support until the completion of the in-sourcing project (described above).

The EXIGO system was available 99.9 per cent of the time in 2010/11, meeting the 99.9 per cent target stipulated in Austraclear's ‘Step-in and Service Agreement’ with the Bank. There were several operational incidents during the Assessment period, including a 4-hour outage on 10 October 2011 following the upgrade to Release III of Austraclear; and a disruption affecting some participants' access to the system on 13 and 14 February 2012, which followed the move to the new operations centre.

  • The outage on 10 October 2011 was caused by an existing but unknown design flaw in the software that was exposed by the upgrade to Release III. This resulted in transactions submitted late in the day failing to settle; ASX was, however, able to quickly identify the problem and implement an interim solution, so that all outstanding transactions were settled before an extended end of day cut-off. A permanent solution was installed in the following month.
  • The access problems in February 2012 were related to a temporary configuration of the Austraclear system adopted during the migration to ASX's new operational site. This affected participants using one of the modes of access to Austraclear (the Austraclear National Network Infrastructure (ANNI) network), but did not prevent access to Austraclear through an internet connection. As with the earlier incident in October, ASX was able to promptly analyse the nature of the problem and implement an interim solution – in this case by switching some system operations to the backup site. A follow-up investigation confirmed that the problem was particular to the temporary configuration used during migration to the new site and would not recur on the system in its final configuration.

The Bank is satisfied with both Austraclear's immediate responses and the follow-up action taken to prevent recurrence. Going forward, completion of Austraclear's in-sourcing project will facilitate the implementation of further improvements to the stability of the EXIGO system.

Average capacity utilisation of 23 per cent was within its normal range, and peak capacity utilisation was 33 per cent. As capacity utilisation peaked above 50 per cent of total capacity in the 2009/10 Assessment period, ASX retested capacity as part of the Austraclear System Enhancement Project. The test indicated that maximum capacity was adequate to meet current requirements.


It is the Bank's assessment that Austraclear complied with the FSS for SSFs during the Assessment period. There were a small number of operational incidents related to a system upgrade and the move to the new operations centre, but the Bank is satisfied with both ASX's immediate responses to the situations, as well as the follow-up action to prevent recurrence.

ASX is in the process of increasing the level of in-house development and support for EXIGO and plans to simplify the system design to facilitate maintenance and upgrades. The Bank is supportive of these plans, which when implemented will facilitate more timely responses to operational incidents and also give ASX greater control over initiatives to enhance the stability of the Austraclear system. The Bank will, however, continue to review developments to ensure that ASX can adequately resource this function, without impacting the quality of support for other systems.

Footnote Box C

That is, the settlement of collateral provided to a collateral receiver should occur simultaneously with the settlement of collateral returned from a collateral receiver. [1]


Wrong-way risk is the risk that the value of collateral held to cover an exposure to a given participant is positively correlated with the creditworthiness of that participant. [19]

The 2007/08 and 2008/09 Assessments are available at <http://www.rba.gov.au/payments-system/clearing-settlement/compliance-reports/2007-2008/> and <http://www.rba.gov.au/payments-system/clearing-settlement/compliance-reports/2008-2009/>, respectively. [20]