2012/13 Assessment of ASX Clearing and Settlement Facilities B2.1 ASX Settlement

Standard 16: Tiered Participation Arrangements

A securities settlement facility should identify, monitor and manage the material risks to the securities settlement facility arising from tiered participation arrangements.

Rating: Observed

In managing the risks associated with tiered arrangements, ASX Settlement is able to gather basic information on indirect participation (SSF Standard 16.1 and 16.2). ASX Settlement 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 (SSF Standard 16.3). The overlapping participation base between ASX Settlement and ASX Clear allows for tiered participation risks to be monitored and addressed jointly (SSF Standard 16.4).

Based on this information, the Bank's assessment is that ASX Settlement has observed the requirements of SSF Standard 16 during the 2012/13 Assessment period. ASX Settlement's approach to tiered participation arrangements is described in further detail under the following sub-standards.

16.1 A securities settlement facility 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 securities settlement facility arising from such tiered participation arrangements.

As ASX Settlement does not undertake credit or liquidity risk as principal, the primary risks that may arise from indirect participation are operational. In particular, indirect participation arrangements that concentrated settlement activity within a few direct participants could concentrate operational risk to the facility. ASX Settlement is able to access basic information on indirect participation via the separate participant identifiers (known as PIDs) assigned to transactions settled by direct settlement participants on behalf of trading or clearing participants in ASX Trade or ASX Clear. ASX Settlement currently considers the risks from concentration of indirect participants to be low.

16.2 A securities settlement facility should identify material dependencies between direct and indirect participants that might affect the securities settlement facility.

ASX Settlement 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 and ASX Settlement's broader array of monitoring activities. Based on this information, ASX Settlement has not identified any material dependencies between direct and indirect participants that might affect its operations.

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

In general, participation at ASX Settlement is broader and more direct than at ASX Clear – at end June 2013 there were 85 direct ASX Settlement participants (excluding temporary special-purpose participants), compared with 40 (active) direct participants in ASX Clear. Due to this, and given the vertical integration of the ASX Group, monitoring of tiered participation risks in ASX Clear would also be expected to highlight any such risks that may require further investigation in ASX Settlement (see Appendix B2.1, CCP Standard 18).

ASX encourages participants to develop appropriate risk control measures in managing their relationships with clients, including any substantial 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.

16.4 A securities settlement facility should regularly review risks arising from tiered participation arrangements and should take mitigating action when appropriate.

ASX Settlement is not exposed to financial risks from indirect participation. Significant operational risks associated with indirect participation at ASX Settlement would be identified and mitigated through ASX's concentration risk monitoring policy focused on participation in ASX Clear (see SSF Standard 16.3).