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

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 maintains links to two other FMIs – ASX Settlement and Austraclear. There are no financial risks associated with these links, but ASX Clear is exposed to operational risks, which are managed in the context of ASX's group-wide framework for operational risk management (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 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 has observed the requirements of CCP Standard 19 during the 2012/13 Assessment period. ASX Clear's 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 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 funds transfers other than the settlement of securities-related payments, such as margin payments. Cash transfers are entered into Austraclear by ASX Clear, and then matched in Austraclear against the respective clearing participants' cash settlement instructions. Regular margin collections and intraday margin calls, which make up the majority of cash transfers, are submitted automatically to Austraclear by ASX Clear's margin and collateral systems.

The second link is with ASX Settlement for the settlement of securities transactions, including DvP settlement of novated securities trades and the lodgement of non-cash collateral. Instructions relating to these transactions are entered into CHESS, which operates across both ASX Clear and ASX Settlement.

Managing operational risk

The links to ASX Settlement and Austraclear are 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.

Managing financial risk

ASX Clear 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's links to ASX Settlement and Austraclear have their legal basis in the ASX Settlement Operating Rules and Procedures, and the Austraclear Regulations and Procedures. The finality of settlements made via these links is ensured by approvals of Austraclear under Part 2 of the PSNA and ASX Settlement under Part 3 of the PSNA (see CCP Standard 1.5).

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 has discussed its current link arrangements with the Bank. ASX Clear 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 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 has no links with other CCPs.