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

Standard 19: FMI Links

A central counterparty that establishes a link with one or more FMIs should identify, monitor and manage link-related risks.

Rating: Observed

ASX Clear (Futures) maintains links to two other FMIs – Austraclear and NZClear. There are no financial risks associated with these links, but ASX Clear (Futures) is exposed to operational risks, which are managed in the context of the sound operational risk management practices of both FMIs (CCP Standard 19.1). The legal basis of each link is supported by finality legislation, and link arrangements have been discussed with the Bank (CCP Standards 19.2, 19.3). ASX Clear (Futures) does not maintain links with any other CCPs (CCP Standards 19.4, 19.5).

Based on this information, the Bank's assessment is that ASX Clear (Futures) has observed the requirements of CCP Standard 19 during the 2012/13 Assessment period. ASX Clear (Futures)' management of link-related risks is described in further detail under the following sub-standards.

19.1 Before entering into a link arrangement, and on an ongoing basis once the link is established, a central counterparty should identify, monitor and manage all potential sources of risk arising from the link arrangement. Link arrangements should be designed such that the central counterparty is able to comply with these CCP Standards.

Identifying link-related risks

ASX Clear (Futures) maintains two links with other FMIs. A link for the purposes of this standard is any connection that is made to another FMI according to a set of contractual and operational arrangements, regardless of the complexity or otherwise of the link and whether it is directly with the FMI or through an intermediary.

The first link is with Austraclear for AUD funds transfers and lodgement of AUD-denominated non-cash collateral. Cash transfers are entered into Austraclear by ASX Clear (Futures), and then matched in Austraclear against the respective clearing participants' cash settlement instructions. Regular margin collections, which make up the majority of cash transfers, are submitted to Austraclear by ASX Clear (Futures)' margin and collateral systems, while intraday margin collections are entered manually. AUD-denominated non-cash collateral is lodged via a collateral lodgement form, and cannot be applied to margin requirements until the day following lodgement of this form. After ASX Clear (Futures) has received the form, the relevant securities are transferred to ASX Clear (Futures) via a ‘free of payment’ trade in Austraclear.

The second link is with NZClear for settlement of New Zealand dollar payments. ASX Clear (Futures) maintains an account in NZClear to initiate and receive NZD margin payments, with settlement in central bank money via arrangements with a commercial settlement bank (see CCP Standard 9.1).

Managing operational risk

The link to Austraclear is subject to the same operational risk management framework that applies for all the ASX CS facilities, which addresses operational risks associated with software, infrastructure or network failures and manual processing errors. Incident reports are prepared for each significant technical or operational incident, with an assessment of mitigating actions to reduce the risk of reoccurrence. In addition, six-monthly risk profile assessments are prepared and presented to the Audit and Risk Committee, and an independent system-controls audit is conducted annually. Austraclear operations are also covered by the Austraclear System Business Operations Plan, which includes a ‘Step-in and Service’ agreement with the Bank.

The risks associated with ASX Clear (Futures)' link to NZClear are limited by the small size of NZD margins in comparison with total margins held by ASX Clear (Futures). NZClear is owned, operated and overseen by the Reserve Bank of New Zealand. Any operational issues that arise in NZClear are notified to all members, including ASX Clear (Futures), via email notification. NZClear has the ability to perform transactions on behalf of a member in the event of an operational disruption to ASX Clear (Futures)' link arrangements; in this case, ASX would advise NZClear to perform payment instructions via written instructions signed by ASX's authorised signatories. ASX Clear (Futures) has contingency arrangements that allow for late payment of margin on New Zealand futures products via Austraclear in AUD, with ASX Clear (Futures) applying a haircut to the NZD margin equivalent.

Managing financial risk

ASX Clear (Futures) does not assume any financial risks by virtue of its links to other FMIs.

19.2 A link should have a well-founded legal basis, in all relevant jurisdictions, that supports its design and provides adequate protection to the central counterparty and other FMIs involved in the link.

ASX Clear (Futures)' link to Austraclear has its legal basis in the Austraclear Operating Rules and Procedures. The finality of settlements made via this link is ensured by an approval of Austraclear under Part 2 of the PSNA (see CCP Standard 1.5).

The link to NZClear has its legal basis in the system rules of NZClear and Part 5C of the Reserve Bank of New Zealand Act 1989 (NZ) (see CCP Standard 8.2).

19.3 Where relevant to its operations in Australia, a central counterparty should consult with the Reserve Bank prior to entering into a link arrangement with another FMI.

ASX Clear (Futures) has discussed its current link arrangements with the Bank. ASX Clear (Futures) did not enter into any new link arrangements during the Assessment period.

19.4 Before entering into a link with another central counterparty, a central counterparty should identify and manage the potential spillover effects from the default of the linked central counterparty. If a link has three or more central counterparties, a central counterparty should identify, assess and manage the risks of the collective link arrangement.

ASX Clear (Futures) has no links with other CCPs.

19.5 A central counterparty in a central counterparty link arrangement should be able to cover, at least on a daily basis, its current and potential future exposures to the linked central counterparty and its participants, if any, fully with a high degree of confidence without reducing the central counterparty's ability to fulfil its obligations to its own participants at any time.

ASX Clear (Futures) has no links with other CCPs.