2012/13 Assessment of ASX Clearing and Settlement Facilities B2.2: Austraclear

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, Austraclear is able to gather basic information on indirect participation (SSF Standard 16.1 and 16.2). Austraclear 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).

Based on this information, the Bank's assessment is that Austraclear has observed the requirements of SSF Standard 16 during the 2012/13 Assessment period. Austraclear'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 Austraclear 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. However, the nature of the wholesale OTC market in debt securities that it settles means that participation in Austraclear is generally direct. Nevertheless, any significant activity associated with indirect participation is likely to be recorded in sub-accounts within the accounts of participants that Austraclear is able to monitor. Austraclear 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.

Austraclear 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 Austraclear's broader array of monitoring activities. Based on this information, Austraclear 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 in Austraclear is direct, reflecting the wholesale OTC debt market that it serves. At end June 2013 there were 786 direct Austraclear participants.

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.

Austraclear is not exposed to financial risks from indirect participation, and its exposure to operational risks from indirect participants is limited by the bilateral nature of settlement between its participants and its relatively broad participation base. Austraclear would only be expected to face material risks from indirect participation were the nature of its participation base or activities to change significantly.