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

Standard 5: Collateral

A central counterparty that requires collateral to manage its or its participants' credit exposures should accept collateral with low credit, liquidity and market risks. A central counterparty should also set and enforce appropriately conservative haircuts and concentration limits.

Rating: Observed

ASX Clear (Futures) limits the assets it routinely accepts as collateral to cash, or assets with low credit and market risks (CCP Standard 5.1). Assets accepted as collateral are commonly accepted in the Australian market and there is sufficient depth in these assets that their eligibility as collateral is not considered to have any material market impact (CCP Standard 5.2). ASX Clear (Futures) applies haircuts to collateral that are calibrated to stressed market conditions, to avoid the need for procyclical adjustments (CCP Standards 5.3, 5.4). Collateral holdings are not sufficiently concentrated as to impair ASX Clear (Futures)' ability to liquidate such assets quickly without significant adverse price effects (CCP Standard 5.5). ASX Clear (Futures) employs well-designed and operationally flexible systems to manage collateral movements for securities and derivatives trades (CCP Standard 5.7).

The Bank will monitor the outcome of ASX's review of collateral policies, including with respect to its collateral haircutting methodology, and the implementation of its planned standard on concentration risks, during the 2013/14 Assessment period (CCP Standards 5.1, 5.3, 5.5).

Based on this information, the Bank's assessment is that ASX Clear (Futures) has observed the requirements of CCP Standard 5 during the 2012/13 Assessment period. ASX Clear (Futures)' collateral acceptance policies are further described under the following sub-standards.

5.1 A central counterparty should generally limit the assets it (routinely) accepts as collateral to those with low credit, liquidity and market risks.

The acceptable collateral depends upon the type of margin called.

• Futures participants generally meet their initial margin obligations using AUD cash, although they may also use high-quality liquid non-cash collateral, such as eligible debt securities, and deposits in major foreign currencies. Acceptable collateral is reviewed annually, and haircuts are applied in respect of all non-cash collateral posted and all cash collateral that is not in the same currency as the product being covered. The acceptable types of non-cash collateral are Australian Government securities and US Treasury bills; acceptable foreign currencies are NZD, EUR, JPY, USD and GBP.
• Participants may meet STEL AIM obligations using AUD cash or non-cash collateral, including Australian Government securities, bank bills and negotiable certificates of deposit from ADIs. STEL AIM obligations may also be met by letters of credit, although this option was not used by participants in the Assessment period. Foreign currencies are not eligible for STEL AIM calls.
• Variation margin and intraday margin must be settled in cash.

ASX Clear (Futures) does not accept collateral that is issued by a clearing participant or associated entity for any margin calls, in order to reduce the possibility that it might face the default of both a clearing participant and a collateral issuer.

ASX will be reviewing its current collateral policies and developing revised formal collateral policies and standards in the first quarter of 2014. This review will be coordinated through the CRPC as part of the wider review of the Clearing Risk Policy Framework (see CCP Standard 3). The Bank will monitor the outcome of this review.

5.2 In determining its collateral policies, a central counterparty should take into consideration the broad effect of these policies on the market. As part of this, a central counterparty should consider allowing the use of collateral commonly accepted in the relevant jurisdictions in which it operates.

ASX Clear (Futures) takes into account market liquidity in determining the eligibility of collateral. Australian Government securities, US Treasury bills, bank bills and negotiable certificates of deposit from Australian ADIs are considered by ASX Clear (Futures) to be sufficiently liquid that the eligibility of these assets as collateral will not have any material impact on market liquidity or price. The depth of liquidity in these assets also enables ASX Clear (Futures) to liquidate this collateral in a timely fashion when required (see CCP Standard 5.1). Eligible collateral assets in ASX Clear (Futures) are commonly accepted in the Australian market.

5.3 A central counterparty should establish prudent valuation practices and develop haircuts that are regularly tested and take into account stressed market conditions.

Since the eligible non-cash collateral for ASX Clear (Futures) – Australian Government securities, US Treasury bills, bank bills and negotiable certificates of deposit from Australian ADIs – are highly liquid, price information is readily available. ASX revalues non-cash collateral on a daily basis using end-of-day prices.

ASX Clear (Futures) sets haircuts on non-cash collateral to cover a fall in the collateral value of stocks over a one-day period under extreme but plausible scenarios. Haircuts are calculated based on the same methodology that is used to calculate price falls of contracts in capital stress-test scenarios (see CCP Standard 4.6). Haircuts are also applied to cash collateral lodged against margin requirements for products denominated in a currency other than the collateral (currently between 6 and 13 per cent depending on the currency). Collateral haircuts are intended to be reviewed annually to take into account any changes to historically observed volatility trends. The methodology applied to set collateral haircuts will be reviewed in the first quarter of 2014 as part of the broader review of collateral policies and standards.

5.4 In order to reduce the need for procyclical adjustments, a central counterparty should establish stable and conservative haircuts that are calibrated to include periods of stressed market conditions, to the extent practicable and prudent.

ASX Clear (Futures)' collateral haircutting policy is designed to cover extreme but plausible scenarios based on market price and volatility movements observed in the past 20 years, which includes the extreme volatility observed during the 2008–09 financial crisis. This is intended to ensure that haircuts remain stable over the business cycle, even in stressed market conditions.

5.5 A central counterparty should avoid concentrated holdings of certain assets where this would significantly impair the ability to liquidate such assets quickly without significant adverse price effects.

ASX Clear (Futures) does not have formal limits on concentrations of collateral in particular assets. Most collateral is lodged in cash; there were no lodgements of non-cash collateral over the Assessment period. ASX considers that its eligible non-cash collateral – Australian Government securities, US Treasury bills, bank bills and negotiable certificates of deposit from Australian ADIs – are sufficiently liquid that concentration is unlikely to be a concern. Concentration risk in foreign currencies is considered whenever a participant approaches ASX to lodge foreign currency (see CCP Standard 5.6). During the Assessment period, ASX began a review of concentration risks, including risks associated with the concentration of collateral holdings. ASX intends to finalise a standard setting out its approach to monitoring and managing concentration risks in the first quarter of 2014.

5.6 A central counterparty that accepts cross-border collateral should mitigate the risks associated with its use and ensure that the collateral can be used in a timely manner

ASX Clear (Futures) accepts cross-border collateral for initial margin in the form of selected foreign currencies and US Treasury bills. Over the Assessment period, maximum foreign cash holdings were around $440 million (AUD equivalent) in comparison to average total collateral holdings of around $2.8 billion (daily average of initial margin held over 2012/13), while no US Treasury bills were held. Holdings of non-AUD collateral in excess of 25 per cent of liquid assets held by ASXCC trigger escalation to senior management. Haircuts are applied to both foreign cash collateral and US Treasury bills (see CCP Standard 5.3). Participants must lodge a request to post foreign currency, which is reviewed and then approved or denied by the Portfolio Risk Management team. In determining whether the foreign currency cover request is approved or denied, the Portfolio Risk Manager will take into account the limits on foreign currency, as well as the concentration risk in accepting the request. ASX Clear (Futures) has the ability to use foreign exchange swaps to facilitate the timely use of collateral in foreign currencies. Arrangements for the settlement of foreign currencies are described in CCP Standard 9.

5.7 A central counterparty should use a collateral management system that is well designed and operationally flexible.

Collateral management system

ASX Clear (Futures) manages the calculation and execution of margin calls through internal risk analysis and margin management systems that are linked to its core SECUR system for information on positions, and Austraclear's EXIGO system for the lodgement of settlement instructions. These systems are able to accurately monitor initial and variation margin levels and flows on an intraday basis. The direct link to Austraclear facilitates the timely deposit, withdrawal and substitution of non-cash collateral and settlement of cash collateral. In due course, ASX Clear (Futures) intends to make use of ASX's new collateral management service, ASX Collateral, for the management of its non-cash collateral.

Re-use of collateral

ASX Clear (Futures) does not re-use non-cash collateral posted by participants and the re-use of such collateral is not supported under its Operating Rules.