2012/13 Assessment of ASX Clearing and Settlement Facilities B1.2 ASX Clear (Futures)

Standard 3: Framework for the Comprehensive Management of Risks

A central counterparty should have a sound risk management framework for comprehensively managing legal, credit, liquidity, operational and other risks.

Rating: Observed

ASX maintains an Enterprise Risk Management Policy that sets out its framework for managing the full range of strategic, legal, financial and operational risks faced by ASX Clear (Futures). This high-level framework is supported by more granular policies (currently being refreshed) and a governance structure to oversee ASX Clear (Futures)' risk management activities (CCP Standard 3.1). ASX Clear (Futures)' risk management framework imposes proportional, risk-based obligations such as initial margin and contributions to pooled risk resources that are related to exposures, and places incentives on participants, including additional collateral requirements where required, to control the risks that they bring to the CCP (CCP Standards 3.2, 3.3). As part of its risk management framework, ASX Clear (Futures) reviews risks associated with interdependencies with other entities on an ongoing basis, and in relation to new initiatives, applying appropriate tools to manage these risks (CCP Standard 3.4).

The Bank notes the following steps that ASX Clear (Futures) should take to strengthen its observance of CCP Standard 3:

  • In order to meet the requirements of CCP Standard 3.5, which comes into effect on 31 March 2014, prepare an appropriate recovery plan based on addressing identified scenarios that may threaten ASX Clear (Futures)' ability to provide its critical services as a going concern. This plan should be consistent with forthcoming CPSS-IOSCO guidance on recovery planning.

Based on this information, and noting that CCP Standard 3.5 is not yet in force, the Bank's assessment is that ASX Clear (Futures) has observed the requirements of CCP Standard 3 during the 2012/13 Assessment period. ASX Clear (Futures)' risk management framework is described in further detail under the following sub-standards.

3.1 A central counterparty should have risk management policies, procedures and systems that enable it to identify, measure, monitor and manage the range of risks that arise in or are borne by the central counterparty. This risk management framework should be subject to periodic review.

Identification of risk

ASX's high-level framework for risk management is outlined in its Enterprise Risk Management Policy. This policy divides risks identified by ASX into two broad groupings: strategic risks and operational risks. Operational risks are further categorised into financial risks, legal and regulatory risks, and technological and operational risks. Specific risks identified by ASX are described within these broad categories. For each identified risk, ASX judges how likely it is the risk event will occur within the next 12 months and the potential impact. Reputational and participant impacts are considered along with the financial, operational and regulatory impacts of risks.

Comprehensive risk policies, procedures and controls

ASX's Enterprise Risk Management Policy has been developed with reference to the international standard ISO 31000 Risk Management – Principles and Guidelines (see CCP Standard 2.6).[1] At a high level, the ASX Enterprise Risk Management Policy outlines: the overall risk environment in the ASX Group; the objectives of risk management policies; the process by which risks are identified and assessed; the controls in place to detect and mitigate risks; and how risks are monitored and communicated. ASX's stated tolerance for financial, operational, legal and regulatory risks is ‘very low’.

ASX uses key risk indicators to measure levels of risk in the organisation and categorise risk levels according to a scale: satisfactory; within risk tolerance but requiring action to further control the level of risk; exceeding ASX's risk tolerance.

The Enterprise Risk Management Policy also assigns specific risk responsibilities across the ASX Group, including to the ASX Limited Board of Directors, the Audit and Risk Committee, the Enterprise Risk Management Committee, the General Manager, Enterprise Risk and managers of individual business units. Managers of each business unit are responsible for identifying and monitoring risks relevant to their unit's activities, as well as for designing and implementing risk management policies and controls to manage identified risks. Business unit managers assess the appropriateness and operational effectiveness of these controls twice a year; these assessments are reviewed by Internal Audit and the Enterprise Risk Management Committee.

In 2012/13, ASX adopted an updated and formalised clearing risk policy framework to better align both it and related governance structures with the new FSS. The Clearing Risk Policy Framework sets out a comprehensive set of clearing and treasury risk policies to support the risk management approach of ASX's Central Counterparties (CCPs), including ASX Clear (Futures). These policies govern more granular standards, which in turn govern detailed procedures for the management of clearing and treasury risk. The structure of policies, standards and procedures reflects the requirements of the FSS. ASX will be continuing work to finalise and update standards covering all relevant aspects of the FSS, which it aims to complete by the first quarter of 2014. The Bank will continue to monitor the progress made in this work.

A number of committees oversee clearing risk management policy, including:

  • The CS Boards. Each CS facility has a board (see ‘ASX Group Structure’ in Appendix B), which shares members with the other ASX CS facilities, has oversight of the Clearing Risk Policy Framework, and is responsible for any significant amendments. Policies and designated key standards under the framework are governed by the CS Boards.
  • The Clearing Risk Policy Committee (CRPC). The CRPC was formed in June 2013, to review and approve clearing risk policies and standards prior to submission to the CS Boards. The CRPC is chaired by the CRO and includes the ASX Group Legal Counsel, CFO and Executive General Manager of Operations. It will generally meet quarterly in line with meetings of the CS Boards.
  • The Capital and Liquidity Committee (CALCO). CALCO is constituted to ensure the structural integrity and efficient use of the liquidity, on- and off-balance sheet assets, liabilities and capital resources of the ASX Group. CALCO advises on changes to the clearing risk policies related to capital, liquidity and balance sheet management, CALCO is chaired by the CRO and comprises senior managers and executives from Finance, Risk and Internal Audit. CALCO generally meets on a quarterly basis.
  • The CCP Risk, Operations and Compliance Committee (CROCC). CROCC is chaired by the Executive General Manager of Operations and is made up of senior managers and executives from the clearing and settlement risk management, operations and compliance areas of ASX. The committee acts as an information-sharing and discussion body for the purpose of enhancing ASX's ability to identify, assess and reduce systemic risk, operational or compliance risk, and manage clearing risk. The CROCC currently meets on a monthly basis.
  • Risk Quantification Group (RQG). ASX established the RQG in early 2013 to strengthen the technical oversight of risk management policy. The RQG is chaired by the CRO and is made up of key staff from ASX's Clearing Risk Policy and Clearing Risk Management units most familiar with ASX's margin and other risk management models. The focus of the group is the review and application of quantitative risk policies, including oversight of model governance and regular reviews of margining. The group meets at least quarterly, but can (and currently typically does) meet more frequently as required.
  • Default Management Steering Group (DMSG). ASX formed the DMSG in 2010/11 to provide oversight of the CCPs' Default Management Framework (DMF). The DMSG is chaired by the CRO and comprises key representatives from ASX Legal, Compliance, Operations and Risk. The DMSG currently meets at least on a monthly basis or more frequently as required.

Information and control systems

ASX Clear (Futures) employs information systems which provide timely and accurate information to ASX Clear (Futures) in respect of its risk policies, procedures and controls, including information on risk exposures to individual participants and the aggregation of risk exposures across the central counterparty. Key information systems include:

  • Margining. In early 2012 ASX Clear (Futures) upgraded its derivatives margining system to the widely used CME SPAN system.
  • Capital and liquidity stress testing. Stress testing is carried out daily to gauge the adequacy of ASX Clear (Futures)' financial resources and to monitor the risks associated with individual participants' positions. Capital stress testing estimates the loss that would result from the realisation of extreme but plausible price changes. Liquidity stress testing estimates the liquidity exposures that would result from extreme but plausible price changes.

ASX Clear (Futures) monitors daily risk management reports produced by its information management systems to identify changes in positions that may require mitigating action. As a result of a database problem causing the failure of key risk management reports at ASX Clear in July 2012, ASX has strengthened its procedures at both CCPs, including by instituting validation checks in overnight processing procedures.

ASX Clear (Futures)' information systems also provide information to participants about positions and margin requirements, which assists in their management of credit and liquidity positions. ASX publishes detailed margining information on its website, including descriptions of the margining methodology, schedules of margin rates, and daily SPAN margin parameter files. This information is sufficient for participants to perform their own margin calculations on hypothetical or actual portfolios. To facilitate this, a third-party vendors use this information to provide margin estimation software to participants. ASX has also developed a web portal to estimate margin requirements for OTC derivatives portfolios.

Internal controls

ASX's risk management policies are generally reviewed formally every 18 months to 3 years, although more frequent reviews may occur depending on changes to technology, business drivers or legal requirements. Reviews are conducted by specific working groups and committees. Final approval of reviews for more significant policies is the responsibility of the Enterprise Risk Management Committee. Under the Enterprise Risk Management Policy, ASX's business units are required to update a risk profile every six months, which identifies relevant risks and sets out planned actions to respond to those risks.

Risk management arrangements are also subject to periodic review by Internal Audit. Such audits provide assurance that the risk management framework continues to be effective. Risk management arrangements may also be subject to review by external experts from time to time. The last such review of the Enterprise Risk Management Policy was undertaken by PWC in 2011.

To date, the Enterprise Risk Management Policy has been reviewed by the Audit and Risk Committee approximately every three years, with the committee informed of material changes in the interim. A review occurred in August and future reviews will then move to a two year cycle.

3.2 A central counterparty should ensure that financial and other obligations imposed on participants under its risk management framework are proportional to the scale and nature of individual participants' activities.

Financial obligations are imposed upon participants through ASX Clear (Futures)' ex ante and ex post risk controls. These are position-based controls.

ASX Clear (Futures) collects initial margin from participants based on actual positions. ASX Clear (Futures) may also collect additional initial margin (AIM) where positions produce relatively high stress-test losses (beyond a predetermined threshold, see CCP Standards 4.2 and 4.4) or are high compared with the participant's underlying capital. Since margins are proportional to the size and volatility of a participant's positions, they are proportional to the scale and nature of individual participants' activities.

Futures participants' prefunded contributions to pooled financial resources were $120 million during the Assessment period, reduced to $100 million in July 2013 (see CCP Standard 4.4), with each participant contributing a fixed component of $2 million and a variable component that is recalculated quarterly based on each participant's share of average initial margin over the previous quarter. ASX Clear (Futures) will require that each OTC participant contribute $12.5 million to the pool of OTC participant contributions, during a transition phase. This transition phase will continue until the end of the first quarter in which any of the following occur: there are eight or more OTC participants; all OTC participants agree to increase their aggregate OTC participant contributions to $100 million; OTC derivatives initial margin is more than $500 million; or a competent regulatory authority directs ASX Clear (Futures) that the aggregate OTC participant contributions should be $100 million. After this, ASX Clear (Futures) will calculate each OTC participant's OTC contribution in a similar way to futures participant contributions; that is, each OTC participant's OTC contribution will comprise a fixed component (proposed to be $5 million) and a variable component that is recalculated quarterly based on each participant's share of average initial margin over the previous quarter.

Furthermore, the order in which survivors' contributions to pooled financial resources will be used (i.e. the default waterfall) is proportional to the nature of the defaulter's activities. The proportion of futures and OTC participant contributions that would be used after each tranche of ASX Clear (Futures) capital will be based on the defaulter's share of initial margin for exchange-traded compared with OTC derivatives products (including cross-margined futures) over the previous 90 days (see CCP Standard 12). OTC participants are required to bid in any auction of a defaulted participant's OTC derivatives portfolio; otherwise their contributions to pooled financial resources may be used ahead of the contributions of other non-defaulting participants (see CCP Standard 12.1). ASX Clear (Futures)' Operating Rules also set out non-financial participation requirements, such as operational requirements. These requirements are not prescriptive, and take into account the size and nature of a participant's business.

3.3 A central counterparty should provide incentives to participants and, where relevant, their customers to manage and contain the risks they pose to the central counterparty.

The use of margin and additional margin at ASX Clear (Futures) creates an incentive for participants to manage the exposures that they bring to the CCP, as does the requirement to post contributions to pooled financial resources in proportion to initial margin levels. Participants are also required to post additional collateral or increase their capital levels if they create exposures that are large relative to the size of their capital. ASX Clear (Futures) may also apply sanctions to, or place additional requirements on, participants that fail to comply with its Operating Rules. Participants may ultimately be required to seek alternative clearing arrangements. ASX is proactive in monitoring participant exposures and utilises conservatively set triggers for additional monitoring or action, such as requiring participants to actively manage down exposures (see CCP Standard 4.2).

3.4 A central counterparty should regularly review the material risks it bears from and poses to other entities (such as other FMIs, money settlement agents, liquidity providers and service providers) as a result of interdependencies, and develop appropriate risk management tools to address these risks.

ASX Clear (Futures) reviews the material risks that it bears from and poses to other entities in the context of its ongoing review of enterprise risks (such as the six-monthly update of business unit risk profiles, see CCP Standard 3.1), and its processes for identifying risks associated with new activities. For the latter, ASX undertakes risk assessments when undertaking an expansion of its activities or in the event of material changes to its business. Risk assessments are built into ASX's project management framework (see CCP Standards 14.1, 16.4).

For instance, ASX Clear (Futures) has identified risks to its operational activities arising from participants' increased usage of third-party vendors for back-office systems, and participants outsourcing their back-office processing offshore. ASX Clear (Futures) has also identified interdependencies with service providers. ASX Clear (Futures)' response to these interdependencies is outlined in CCP Standard 16.5.

Interdependencies with Austraclear for the settlement of margin and other payment obligations are managed within the context of ASX Group's broader risk management framework.

3.5 A central counterparty should identify scenarios that may potentially prevent it from being able to provide its critical operations and services as a going concern and assess the effectiveness of a full range of options for recovery or orderly wind-down. A central counterparty should prepare appropriate plans for its recovery or orderly wind-down based on the results of that assessment. Where applicable, a central counterparty should also provide relevant authorities with the information needed for purposes of resolution planning.

CCP Standard 3.5 comes into effect on 31 March 2014.

ASX Clear (Futures) has begun work to develop its recovery plans and intends to further articulate these plans following the release of final CPSS-IOSCO guidance on recovery planning, expected in late 2013.


ISO is an international standard-setting body and ISO 31000 is considered to be relevant guidance for enterprise risk management. The ISO 31000 standard has been reproduced by Standards Australia and Standards New Zealand as AS/NZS 31000. [1]