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

Standard 13: Segregation and Portability

A central counterparty should have rules and procedures that enable the segregation of positions of a participant's customers and the collateral provided to the central counterparty with respect to those positions.

Rating: Observed

ASX Clear (Futures) offers omnibus segregation to customers of its clearing participants (CCP Standard 13.2). While this offers an appropriate degree of protection to customers against the default of their clearing participant, the use of a net omnibus account structure makes achieving transfer to another participant unlikely in the event of such a default (CCP Standards 13.1, 13.3). ASX Clear (Futures) proposes to introduce a model of individually segregated client positions, margined on a gross basis, that would facilitate portability and (with a planned extension to allow the posting of excess customer collateral) be consistent with the Bank's supplementary interpretation of CCP Standards 13.2 and 13.3 (see Section 3.7). ASX Clear (Futures) has publicly disclosed its current segregation and portability arrangements, including the current obstacles to portability (CCP Standard 13.4).

The Bank notes the following steps that ASX Clear (Futures) should take to meet the requirements of CCP Standard 13.3, which comes into effect on 31 March 2014:

  • Begin implementation of its proposals to complement the existing omnibus client account structure for exchange-traded products with individual client account segregation in both its exchange traded and OTC derivatives clearing services.

Based on this information, and noting that CCP Standards 13.1, 13.2 and 13.3 are not yet in force, the Bank's assessment is that ASX Clear (Futures) has observed the requirements of CCP Standard 13 during the 2012/13 Assessment period. ASX Clear (Futures)' progress towards implementing segregation and portability requirements is described under the following sub-standards.

13.1 A central counterparty should, at a minimum, have segregation and portability arrangements that effectively protect a participant's customers' positions and related collateral from the default or insolvency of that participant. If the central counterparty additionally offers protection of such customer positions and collateral against the concurrent default of the participant and a fellow customer, the central counterparty should take steps to ensure that such protection is effective.

CCP Standard 13.1 comes into effect on 31 March 2014.

ASX Clear (Futures) has the capacity to transfer (port) participants' customers' (also known as ‘clients’) positions and collateral under its Operating Rules. During the Assessment period, an amendment to Part 5 of the PSNA removed a legal impediment to portability, by allowing a CCP to transfer client collateral of a defaulting participant as provided for by its Operating Rules without the need to seek approval from the participant's external administrator.

ASX Clear (Futures) maintains omnibus segregated client accounts for its futures products and individually segregated client accounts for contracts for difference (CFDs) (see CCP Standard 13.2). During the Assessment period, ASX conducted a consultation on derivative account segregation and portability arrangements. The consultation paper invited market feedback on a number of issues, including the possible introduction of individually segregated client accounts for futures participants. Submissions were received from clearing participants, trade bodies, end clients and an external service provider.

Feedback received from participants and clients through this consultation has fed into ongoing design work of account structures for exchange-traded derivatives. In response, ASX has undertaken to implement changes to account structures for futures markets alongside its development of account structures to be used in the planned client clearing service for OTC derivatives. It is expected that the new client account structures will be in place for both futures and OTC derivatives by the end of June 2014.

13.2 A central counterparty should employ an account structure that enables it readily to identify positions of a participant's customers and to segregate related collateral. A central counterparty should maintain customer positions and collateral in individual customer accounts or in omnibus customer accounts, or equivalent.

CCP Standard 13.2 comes into effect on 31 March 2014.

Currently, ASX Clear (Futures) offers an omnibus client account for futures products. Client positions are recorded in individual client accounts for CFDs, but initial margin is calculated and called on a net basis across clients of each participant. ASX Clear (Futures) is considering the introduction of individually segregated client accounts for futures products, with clients to be provided choice between individual segregation or current omnibus segregation arrangements if their clearing participant supports individual accounts. Margin requirements would be calculated for each individual client account, with resulting margins aggregated and held at the CCP. ASX Clear (Futures) would also seek (by the end of 2014) to consult on further changes to support the lodgement of excess client collateral at the CCP. These features would be consistent with the Bank's supplementary interpretation of this sub-standard, and CCP Standard 13.2, issued in August 2013 (see Section 3.7). Based on feedback from its consultation, ASX is considering whether an account structure similar to internationally used ‘Legally Segregated, Operationally Commingled’ accounts, where segregated positions are supported by a commingled pool of collateral, could be implemented effectively in the Australian legal and regulatory environment. ASX expects to adopt a common model for account segregation across its futures products and its proposed OTC client clearing service.

13.3 To the extent reasonably practicable under prevailing law, a central counterparty should structure its portability arrangements in a way that makes it highly likely that the positions and collateral of a defaulting participant's customers will be transferred to one or more other participants.

CCP Standard 13.3 comes into effect on 31 March 2014.

Although ASX Clear (Futures) has the power under its Operating Rules to transfer client positions and collateral following a participant default, legal and operational impediments have made it unlikely that such a transfer could be achieved. The PSNA amendments referred to in CCP Standard 13.1 have now removed an important legal impediment to portability. However, an omnibus account structure creates practical difficulties for achieving portability. As client positions are margined on a net basis across all clients in the omnibus account, there may be insufficient collateral at the CCP to achieve the fully collateralised transfer of individual client positions to alternative clearing participants. The possible changes to client account structures discussed under CCP Standard 13.2 may help to address this obstacle.

In addition, clients will need to enter into agreements with alternative clearing participants that may be difficult to conclude in the short time frame available following a participant default. Accordingly, ASX Clear (Futures) envisages that it may be necessary for clients to have pre-existing arrangements in place with an alternative clearing participant to achieve porting. ASX recognises that such pre-existing arrangements may, however, pose practical difficulties, and may entail a material cost to participants and clients.

13.4 A central counterparty should disclose its rules, policies and procedures relating to the segregation of a participant's customers' positions and related collateral. In particular, the central counterparty should disclose whether customer collateral is segregated on an individual or omnibus basis. In addition, a central counterparty should disclose any constraints, such as legal or operational constraints, that may impair its ability to segregate or port a participant's customers' positions and related collateral.

Current arrangements for segregation and portability are defined in the ASX Clear (Futures) Operating Rules and Procedures. ASX has also published a public overview of clearing participant default arrangements, which outlines the current operational constraints to portability and the implications of different account structures.

In addition, ASX has publicly discussed current and proposed segregation and portability arrangements for products cleared in ASX Clear (Futures) in its consultation process. ASX will continue its dialogue with participants and clients and the Bank on its proposed model for client clearing in ASX Clear (Futures) during the second half of 2013.