2012/13 Assessment of ASX Clearing and Settlement Facilities B1.1 ASX Clear

Standard 15: Custody and Investment Risks

A central counterparty should safeguard its own and its participants' assets and minimise the risk of loss on and delay in access to these assets. A central counterparty's investments should be in instruments with minimal credit, market and liquidity risks.

Rating: Broadly observed

The assets of ASX Clear and its participants are administered and held within the ASX Group in accordance with robust group-wide controls (CCP Standard 15.1). A portion of these assets is held in liquid form to ensure prompt access as required (CCP Standard 15.2). ASXCC invests the assets of ASX Clear and its participants according to an Investment Mandate that is broadly consistent with ASX's overall risk management strategy and, following changes during the Assessment period, places less reliance on unsecured investments concentrated in the large domestic banks (CCP Standard 15.4). Changes to the ASXCC Investment Mandate go some way towards addressing recommendations made in the Bank's 2011/12 Assessment.

The Bank notes the following steps that ASX Clear should take to strengthen fully observe CCP Standard 15:

  • Implement plans to further reduce the concentration of unsecured exposures to the large domestic banks under the ASXCC Investment Mandate. The Bank will also continue to monitor treasury investment policy and continues to encourage a more rapid transition to lower unsecured exposures.

Based on this information, the Bank's assessment is that ASX Clear has broadly observed the requirements of CCP Standard 15 during the 2012/13 Assessment period. ASX Clear's management of custody and investment risks is further described under the following sub-standards.

15.1 A central counterparty should hold its own and its participants' assets at supervised and regulated entities that have robust accounting practices, safekeeping procedures and internal controls that fully protect these assets.

The assets of ASX Clear and its participants are administered and held within the ASX Group. Intragroup arrangements allow ASX Clear to fully understand the nature of its risk exposure to ASXCC and other group members such as Austraclear (for deposit of AUD-denominated debt securities), and this exposure is managed within the context of ASX's overall Clearing Risk Policy Framework. ASX has robust accounting practices, safekeeping procedures and internal controls to protect its own and its participants' assets (as described under CCP Standard 2.7).

Non-cash collateral is held in CHESS. ASX Clear's Operating Rules and Procedures define how collateral is used. ASX Clear does not re-use non-cash collateral posted by participants.

Cash investments, including cash collateral, clearing participant contributions and shareholder funds, are controlled by ASXCC, of which ASX Clear is a subsidiary (see ‘ASX Group Structure’ in Appendix B). ASXCC makes its investments in accordance with its Investment Mandate and ASX's Investment Policy, which together define investment objectives, investment specifications, and audit and maintenance of the policy (see CCP Standard 15.4).

15.2 A central counterparty should have prompt access to its assets and the assets provided by participants, when required.

ASXCC's Investment Mandate requires that a portion of its portfolio be held in liquid asset form to cover liquidity risks from both general business risks and risks related to ASX Clear's clearing activities. Only investments in instruments that can be liquidated or repurchased (repo'd) for cash within two hours are treated as ‘liquid’ products (see also CCP Standard 7.4).

15.3 A central counterparty should evaluate and understand its exposures to its custodians, taking into account the full scope of its relationships with each.

ASXCC does not use custodians to hold assets invested on behalf of ASX Clear.

15.4 A central counterparty's investment strategy should be consistent with its overall risk management strategy and fully disclosed to its participants, and investments should be secured by, or be claims on, high-quality obligors. These investments should allow for quick liquidation with little, if any, adverse price effect.

ASXCC is the controlling entity for the investments of both CCPs. In respect of both cash margin collected and pooled risk resources, ASXCC invests funds in accordance with a defined treasury investment policy, endorsed by the CS Boards of both CCPs and itself governed by the ASX Enterprise Risk Management Policy. The cash leg of transactions entered into in accordance with this policy is settled across ASXCC's ESA. The treasury investment policy, set out in a high-level policy document and the more detailed ASXCC Investment Mandate, articulates the basis for ASX Clear's mitigation of liquidity risk (CCP Standard 7). The performance of the investment portfolio in relation to this policy is closely monitored by ASXCC, with trigger points to automatically escalate potential issues to the CRO before actual limits are reached. Trigger points are defined for weighted average maturity, percentage of liquid assets in the form of safe custody bank bills, and percentage of total liquid assets held in non-AUD denominated securities.

The Bank's 2011/12 Assessment encouraged ASX to carry out a review of its treasury investment policy. The Bank had expressed concerns that the policy left open the potential for large and concentrated credit exposures to the four largest domestic banks. Further, where an entity related to the issuer counterparty was also a clearing participant, the performance of investments in the portfolio could be correlated with the very default event against which the CCP's risk resources sought to provide cover. ASX carried out this review during the 2012/13 Assessment period, concluding that a gradual move towards lower concentration of investments in the major banks and a greater reliance on secured investments would be appropriate. As a first step, ASX has modified the ASXCC Investment Mandate to reduce the unsecured limit on exposures to the large domestic banks during 2013/14 and, in the event that one of those banks became a clearing participant, would also reduce these limits by the value of the bank's STEL. The concentration of unsecured exposures to the major banks will be further reduced over time if there is growth in the size of the investment portfolio, as the limits on unsecured investments imply that all additional funds in the portfolio must be invested in secured repo arrangements or government securities. Under this approach, a resulting reduction in concentration would depend on factors such as growth in clearing activity leading to growth in the investment portfolio, and changes in the investment environment to support the planned investment strategy. Accordingly, ASX plans to review concentration limits to investment counterparties again in 2014 and 2015. Over the coming Assessment period, the Bank will continue to monitor steps taken by ASX to reduce the concentration of its unsecured investment exposures to the major banks, and will discuss with ASX the reduction in exposure concentrations required to fully observe this standard.

The ASXCC Investment Mandate defines investment counterparty eligibility criteria and sets investment limits in order to control counterparty investment risk.

  • Counterparty eligibility criteria. Counterparties must be Commonwealth or State Government entities (including the Bank), or APRA-approved ADIs that are licensed banks in Australia under the Banking Act 1959. ADIs must also have a Standard & Poor's short-term credit rating of A1 or above. The Investment Mandate does not permit investments in securities of ASX Group entities. Nor is ASXCC permitted to create unsecured exposures to any investment counterparty that is a participant or affiliated with a participant, other than the four major banks.
  • Counterparty investment limits. Investment limits are set with the overarching requirement that unsecured exposures do not exceed available ASX capital, with the current exception of the largest Australian banks. Counterparty investment limits are determined according to factors such as the credit quality of the counterparty or obligor, the size of available financial resources, and whether eligible investment counterparties and their affiliates are also clearing participants. Limits are set on the proportion of the portfolio and the absolute amount that can be invested with a single counterparty. Limits are also set on the absolute amount of ASXCC's exposure to an individual counterparty, with regard to the resources ASXCC has available to cover an investment counterparty default.

The Investment Mandate aims for quick liquidation of investments with little, if any, price effect. Only investments in instruments that can be liquidated or repo'd for cash within two hours are treated as ‘liquid’ products, which are defined based on the depth of market liquidity and the terms of investment. Such liquid assets include CGS, bank bills and certificates of deposits. The policy also sets a five-day ‘earnings-at-risk’ limit based on a defined share of the portfolio at a 99 per cent confidence interval.

ASXCC's Investment Mandate recognises the primacy of maintaining liquidity and credit quality against achieving investment return, given that funds under management are a critical source of liquidity in the event of a market disruption or clearing participant default. The investment policy and limits are reviewed and approved annually by the ASXCC Board. The broad approach to investment and investment holdings is disclosed publicly in the ASX Annual Report.