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

Standard 18: Tiered Participation Arrangements

A central counterparty should identify, monitor and manage the material risks to the central counterparty arising from tiered participation arrangements.

Rating: Observed

During 2012/13, clients of ASX Clear (Futures)' participants represented 65 per cent of initial margin held by ASX Clear (Futures) in respect of its credit exposures to both participants and (indirectly) their clients. In managing the risks associated with tiered arrangements, ASX Clear (Futures) is able to gather information on indirect participation, although with some limitations. This data limitation is mitigated to some extent by an ability to seek more granular information from participants on an ad hoc basis (CCP Standards 18.1, 18.2). ASX Clear (Futures) does not maintain formal thresholds at which substantial indirect participants are encouraged to seek direct participation, but does actively manage risks posed by indirect participant activity through its relationship with the direct participant (CCP Standard 18.3). ASX Clear (Futures) conducts daily monitoring of its client-level data, with the use of predefined triggers, and ASX is currently developing a formal policy for monitoring concentration risk in its CCPs, including the monitoring of tiered participation arrangements and mitigating steps (CCP Standard 18.4).

The Bank encourages ASX Clear (Futures) to investigate options to improve its ability to monitor risks associated with tiered participation arrangements (CCP Standard 18.1). These may include options to automate existing monitoring activities in respect of tiered participation risks, and the introduction of a suitable client indicator at trade level for futures.

Based on this information, the Bank's assessment is that ASX Clear (Futures) has observed the requirements of CCP Standard 18 during the 2012/13 Assessment period. ASX Clear (Futures)' approach to tiered participation arrangements is described in further detail under the following sub-standards.

18.1 A central counterparty should ensure that its rules, procedures and agreements allow it to gather basic information about indirect participation in order to identify, monitor and manage any material risks to the central counterparty arising from such tiered participation arrangements.

ASX Clear (Futures) gathers basic information on indirect participation in the form of a Daily Beneficial Owner Report (DBOR) from participants, which provides details of client positions. These data are aggregated and reviewed to identify positions that may be unusual, result in a concentration of risk, or breach position limits set by the facility for the expiry period. There are, however, practical limitations to the use of these data for the analysis of tiering; in particular, the account codes of an entity or related entities may vary from participant to participant. One solution to which ASX Clear (Futures) has given some consideration is the future introduction of a suitable client indicator at trade level. ASX intends to consult with clearing participants on this in due course.

If required, ASX Clear (Futures) will request more granular information on any indirect client from participants that it considers necessary to mitigate actual or perceived risks in the CCP. This information may include further details about the indirect participant, including, but not limited to, its intentions with regard to its open positions or physical delivery. In addition, ASX Clear (Futures) also has an ongoing program of ‘thematic’ participant reviews, covering risk topics of interest or concern, which could potentially encompass tiering risks if ASX Clear (Futures) were to perceive an increased risk from indirect relationships. ASX Clear (Futures) currently considers the risks from concentration of indirect participants to be low.

18.2 A central counterparty should identify material dependencies between direct and indirect participants that might affect the central counterparty.

As noted under CCP Standard 18.1, ASX Clear (Futures) monitors dependencies arising from tiered participation indirectly through a variety of means, including regular discussions with participants on developments in their business and risk management activities, participants' own risk assessments, discussions with new participants as part of the induction process, expiry monitoring activities, monitoring of delivery risk (e.g. futures options expiries), and ASX Clear (Futures)' broader array of risk management data collection and monitoring activities. Based on this information, ASX Clear (Futures) has not identified any material dependencies between direct and indirect participants.

18.3 A central counterparty should identify indirect participants responsible for a significant proportion of transactions processed by the central counterparty and indirect participants whose transaction volumes or values are large relative to the capacity of the direct participants through which they access the central counterparty in order to manage the risks arising from these transactions.

ASX encourages participants to develop appropriate risk control measures in managing their relationships with indirect participants. ASX does not set thresholds, either formal or informal, at which it would encourage direct participation by an indirect participant. In general, ASX's approach to managing risks associated with participants' business activities is based on a robust risk management framework with the flexibility to detect and react to new risks as they arise, rather than setting firm ex ante activity limits. This approach has worked well in managing risk events in recent Assessment periods, notably in managing the default of MF Global in late 2011.

18.4 A central counterparty should regularly review risks arising from tiered participation arrangements and should take mitigating action when appropriate.

ASX Clear (Futures) reviews risks arising from tiered participation on a daily basis using the DBOR client-level data described above (CCP Standard 18.1). A number of predefined triggers are applied to these data to identify positions that may be unusual, result in a concentration of risk, or breach position limits set by the facility for the expiry period. The triggers are defined at the contract level, taking into account factors such as the nature of the contract, the market liquidity, whether the contract has position limits for expiry, and whether it is deliverable. Monitoring of the DBOR data, including the DBOR triggers, is conducted by ASX Participant Compliance in the context of their daily monitoring of credit risk (see CCP Standard 4.2) and ASX's broader framework for management of risks (CCP Standard 3).

In addition, ASX is undertaking a broad review of its concentration risk policy due to be finalised in late 2013, including its approach to the risks arising from tiered participation. The policy will set out key concentration indicators for ASX Clear (Futures) to monitor, including metrics measuring concentration across clearing participants, across clients and across products. The policy will also address possible mitigating action, although ASX recognises that indicators may return a number of false positives.