2012/13 Assessment of ASX Clearing and Settlement Facilities 1. Introduction and Executive Summary

In accordance with its responsibilities under the Corporations Act 2001, the Reserve Bank (the Bank) carries out periodic assessments of how well each clearing and settlement (CS) facility licensee is complying with applicable Financial Stability Standards (FSS) determined by the Bank and the more general obligation to do all other things necessary to reduce systemic risk.[1] The Bank's findings are reported to the Minister with portfolio responsibility for Corporations Law, and since 2007 have also been published on the Bank's website.

This report presents the Bank's Assessment of the four licensed CS facilities in the ASX Group (ASX) – the two central counterparties (CCPs), ASX Clear Pty Limited (ASX Clear) and ASX Clear (Futures) Pty Limited (ASX Clear (Futures)); and the two securities settlement facilities (SSFs), ASX Settlement Pty Limited (ASX Settlement) and Austraclear Limited (Austraclear) – for the year ending 30 June 2013.[2] This is the first assessment of these facilities against new FSS determined by the Bank in December 2012.[3]

All four facilities were found to have either observed or broadly observed all relevant requirements under the FSS in the Assessment period (Section 2 and Appendix B). Accordingly, it is the Bank's assessment that the facilities have conducted their affairs in a way that causes or promotes overall stability in the Australian financial system. The Bank has, however, made a number of recommendations to strengthen the ASX facilities' observance with the relevant FSS. The Bank also notes that ASX has governance arrangements in place that motivate and encourage continuous improvement, which contributes to the ASX facilities' compliance with the obligation to do all other things necessary to reduce systemic risk.

The new FSS are aligned with the requirements in the Principles for Financial Market Infrastructures (the Principles), developed by the Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO) that address matters relevant to financial stability. The Bank's Assessment applies the rating system used in the assessment methodology that supports the Principles.[4] The Assessment will also form the basis for future assessments against the Principles.

1.1 Overview of Activity in the ASX Clearing and Settlement Facilities

In 2012/13, price volatility was generally lower for markets cleared and settled by the ASX facilities. Daily average trading value fell for both debt securities settled by Austraclear and cash equities, while the number of derivatives contracts traded on ASX 24 continued to grow. Margins held at both the ASX CCPs increased in 2012/13, although peak levels remained well below those of 2008.

During the Assessment period, all ASX CS facilities operated in accordance with targets for availability, capacity utilisation and peak usage. Indeed, all four facilities recorded 100 per cent availability throughout the period. Some minor systems and processing issues occurred, but these were resolved with only minor impacts on operations and appropriate remedial action was taken to ensure no recurrence. Also during the period, Austraclear further progressed an ongoing project discussed in the 2011/12 Assessment to insource development and support for its core system, EXIGO.

1.2 New Products and Services

The Bank's 2011/12 Assessment identified some important strategic initiatives in train at ASX. The three main initiatives identified – over-the-counter (OTC) derivatives clearing, centralised collateral management and retail trading of Commonwealth Government securities (CGS) – were developed further during the period under review, and have now been launched.

  • On 1 July 2013, ASX launched its interdealer clearing service for Australian dollar-denominated over-the-counter (OTC) interest rate derivatives. ASX clears standardised interest rate swaps and overnight indexed swaps. These trades are negotiated bilaterally, and submitted for central clearing to ASX Clear (Futures). Nine banks have become Foundation Customers, and under the terms of the Foundation Customer Program all are expected to be admitted as participants by 1 January 2014.
  • The centralised collateral management service, ASX Collateral, has been developed jointly with Clearstream, a Luxembourg-based financial market infrastructure provider. The service automates the optimisation and allocation of collateral, initially in respect of securities held in Austraclear. ASX Collateral was launched in late July 2013, with 12 participants having signalled their intention to join the service.
  • ASX launched a retail trading, clearing and settlement service for depository interests in CGS in late May 2013. These depository interests are traded on ASX Trade, novated to ASX Clear and settled in ASX Settlement, with a three-day settlement cycle. Since launch, trading activity on the new platform has been limited.

As encouraged in the 2011/12 Assessment, ASX remained in close dialogue with the Bank as these projects progressed, providing the Bank with the opportunity to ensure that the design of the new services was consistent with the relevant facilities' ongoing observance of the FSS. Prior to the launch of the OTC derivatives and collateral management services, the Bank carried out detailed assessments relative to the FSS. These have been incorporated into the detailed assessments of ASX Clear (Futures) and Austraclear, and the key matters considered are discussed in Section 4.

1.3 Material Developments and Assessment

As foreshadowed in the 2011/12 Assessment, in December 2012 the Bank introduced two new sets of FSS, for central counterparties (CCP Standards) and securities settlement facilities (SSF Standards). The new FSS came into force on 29 March 2013. Consistent with the Principles on which they are based, the new FSS are more detailed than the pre-existing standards, and also introduce requirements in several new areas. Accordingly, many of the material developments during the Assessment period relate to steps taken by the facilities to observe the new FSS. Several other material developments relate to the introduction of new products and services and the implementation of changes recommended in previous Assessments.

1.3.1 CCP risk management

Risk management has been an important focus for the ASX CCPs over the period, and for the Bank in its Assessment. The new FSS set more detailed standards in relation to risk review, stress testing and model validation processes, as well as the coverage of financial resources.

  • Risk review, stress testing and model validation processes. During the Assessment period, stress-testing models were amended and ASX began developing analytical tools to enhance its model review, margin backtesting, sensitivity analysis and reverse stress-testing capabilities. ASX also introduced a new internal standard under which all models that are critical to ASX will undergo a full annual validation.
  • Pooled financial resources. In June 2013, ASX conducted a capital raising by means of a stock entitlement offer to support changes to the pooled financial resources of ASX Clear and ASX Clear (Futures). ASX raised $533 million, with $250 million used to replace existing resources across the two CCPs previously funded by a commercial bank loan, $20 million replacing participant funds in ASX Clear (Futures), and $180 million used to increase the level of cover of financial resources at ASX Clear (Futures). This increase was in part to support ASX's new OTC derivatives clearing service. It also anticipated the Bank's interpretation that ASX Clear (Futures) is systemically important in multiple jurisdictions, and therefore subject to higher financial resource cover requirements. The remaining funds have contributed to an increase in the business risk capital allocated to the CS facilities.

Consistent with the FSS, and also in accordance with recommendations in previous Assessments and ongoing process enhancements, ASX Clear completed the implementation of new margining arrangements for both cash equities and equity derivatives:

  • Cash market margining. On 11 June 2013, ASX Clear began to routinely collect margins on unsettled cash equity transactions, consistent with requirements under the new FSS and recommendations in previous Assessments. ASX Clear collects both initial and mark-to-market margin. Daily initial margin averaged $140 million in June.
  • CME SPAN. In December 2012, ASX introduced the CME SPAN system for margining of derivatives at ASX Clear. With CME SPAN having been introduced at ASX Clear (Futures) in the last Assessment period, both CCPs are now using a consistent approach to the margining of derivatives, which is sensitive to a broader range of risk factors. Over time, this will permit ASX to improve the consistency of margin reports and margin data.

The Bank welcomes the enhancements that have been made to the ASX CCPs' risk management framework over the Assessment period, and notes in particular the introduction of cash market margining and the increase in pooled financial resources at ASX Clear (Futures). In order to fully observe CCP Standard 4 (Credit risk), however, ASX should implement plans to strengthen both CCPs' analysis of capital stress-test models, through comprehensive annual validation, periodic reverse stress testing, and more detailed monthly reviews of stress-testing scenarios, models and underlying parameters and assumptions. These should include sensitivity analysis and analysis of concentration risk. In order to fully observe CCP Standard 6 (Margin), ASX should also implement plans to conduct monthly sensitivity analysis of material model assumptions. The Bank will also monitor the implementation of annual validation of margin and stress-testing models under ASX's new Model Validation Standard, and the implementation and further enhancement of the new margin backtesting regime.

1.3.2 Governance and comprehensive management of risks

ASX made a number of enhancements to clearing risk governance arrangements during the Assessment period, most notably establishing a new Clearing Risk Policy Committee (CRPC) to review and maintain the Clearing Risk Policy Framework. ASX also established a Risk Quantification Group in early 2013 to strengthen the technical oversight of risk management policy.

A further important enhancement to governance of risk management at ASX Clear (Futures), arising initially from participant engagement in the development of OTC derivatives clearing service, is the establishment of a Risk Committee. This committee, with membership drawn from among futures and OTC derivatives clearing participants, will be consulted on matters such as changes to risk management policies, participation criteria and new products.

In addition, further to Council of Financial Regulators (CFR) recommendations subsequently endorsed by government, ASX has enhanced transparency and user engagement in relation to its cash equity market clearing and settlement activities in ASX Clear and ASX Settlement. In particular, in July ASX released a Code of Practice for Clearing and Settlement of Cash Equities in Australia, in which ASX commits, among other things, to enhance user engagement through the establishment of an advisory forum comprising senior representatives of users and other stakeholders.[5]

The Bank notes the important enhancements made to governance arrangements during the Assessment period and will monitor their ongoing implementation.

1.3.3 Participant default rules and procedures

In the current Assessment period, ASX undertook a review of its Default Management Framework in light of new requirements of the FSS and the introduction of clearing for OTC interest rate derivatives. The emerging international standard for default management in the case of OTC derivatives products is to involve participants in the process, in particular to assist in hedging and auctioning a defaulting participant's positions, and to bid at such an auction. Accordingly, ASX Clear (Futures) has established OTC Default Management Groups, with rotating participation from among its participants, to perform this function. Particularly since ASX Clear (Futures) anticipates participation by Australian banks in its OTC derivatives clearing service, ASX has also undertaken some initial analysis on the interaction between bank resolution proceedings and CCP default management processes.

While the Bank has concluded that both ASX CCPs fully observed CCP Standard 12 (Participant default rules and procedures) during the Assessment period, in light of the launch of its OTC derivatives clearing service in July 2013, ASX Clear (Futures) should further develop its default rules and procedures. In particular, in accordance with commitments made to the Bank prior to the launch of the service, ASX should develop an appropriate mechanism to encourage competitive bidding in any auction of a defaulting participant's positions, doing so within the context of a more fully articulated default management process. Further, given the role participants play in default management, the Bank will monitor closely the implementation of ASX Clear (Futures)' plans to test default arrangements for OTC derivatives clearing participants, including through participant involvement in testing of the auction process.

1.3.4 Business and investment risks

The Bank's 2011/12 Assessment encouraged ASX to carry out a review of its treasury investment policy in consultation with the Bank. The Bank had expressed the concern that the policy allowed relatively large and concentrated credit exposures to large domestic banks. ASX carried out this review during the 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 reduced the unsecured limit on exposures to the large domestic banks. The Bank acknowledges the initial amendments to the policy and the proposed move to lower unsecured exposures to the large domestic banks. To fully observe CCP Standard 15 (Custody and investment risks), however, ASX Clear (Futures) and ASX Clear should implement plans to further reduce, over time, the concentration of unsecured exposures to the large domestic banks. The Bank will continue to monitor treasury investment policy and continues to encourage a more rapid transition to lower unsecured exposures.

Also in 2013, and in accordance with new requirements under the FSS, ASX revised its approach to setting its business risk capital requirements. The capital raising in June 2013 contributed to an increase in ASX's capital allocations for operational and business risk from $50 million to $225 million across the ASX Group. Of this, $15 million has been attributed to ASX Clear, $60 million to ASX Clear (Futures), and $140 million across the two SSFs, with a further $10 million attributed to other group entities. ASX holds this capital at the group level on behalf of the CS facilities. To fully observe CCP Standard 14 (General business risk), ASX should implement plans to enhance its intragroup legal agreements to explicitly reflect the allocation and availability of business risk capital to the CS facilities.

1.3.5 Operations

During the Assessment period, ASX progressed a number of product development projects, including in relation to delivery of its strategic initiatives. At the same time, ASX has undertaken extensive work to implement enhancements to its risk management policies and other processes in accordance with the requirements of the new FSS. This has tested the capacity of ASX's existing resources. ASX has increased its capacity by hiring additional staff, making use of consultants and establishing partnerships with external service providers, and the Bank is satisfied that resource constraints have not compromised routine risk management during the period. However, the Bank will continue to monitor developments to ensure that this remains the case.

Events during the Assessment period also highlighted operational interdependencies between ASX and participant systems, which ASX is examining further. In December 2012, following the introduction of CME SPAN at ASX Clear, ASX worked with the vendor of a third-party system to more closely align its estimates of margin requirements to those calculated by ASX's own systems. Separately, in January 2013 operational problems at a participant arising from reliance on an overseas back-office service provider highlighted potential risks from the increasing incidence of offshore outsourcing. The Bank welcomes, and will continue to monitor, actions taken by ASX to address these issues.

1.3.6 Participation and access

There were also a number of developments during the Assessment period in relation to participation requirements and access.

  • Participation in CCPs by authorised deposit-taking institutions (ADIs). In recognition of increased interest among ADIs in becoming direct participants of CCPs, ASX has taken a number of steps to accommodate greater ADI participation in the two CCPs, and has made ADI status a requirement for participants in its new OTC derivatives clearing service. The Australian Prudential Regulation Authority (APRA) has also clarified the capital treatment of bank exposures to CCPs.
  • Participation requirements. ASX has commenced a comprehensive review of both minimum capital requirements at ASX Clear and the future role of the existing risk-based capital regime. This work will continue through the second half of 2013, and the Bank will closely monitor progress.
  • Tiered participation. The new FSS place obligations on the CS facilities to monitor and manage material risks associated with indirect participation. This is of particular importance to the CCPs. Existing arrangements at the ASX CCPs, while sufficient to monitor and manage material risks, are subject to limitations that preclude comprehensive analysis of tiered participation arrangements. Both CCPs are therefore encouraged to investigate options to improve their oversight of risks associated with tiered participation.

1.3.7 Disclosure

All ASX CS facilities make publicly available their rules and procedures and a range of additional information on risk management arrangements and activities. In response to new requirements under the FSS, ASX has published a high-level disclosure document.

To fully observe CCP Standard 20 and SSF Standard 18 (Disclosure of rules, key policies and procedures, and market data), ASX should publish an expanded Disclosure Framework document in a form consistent with that prescribed by CPSS and IOSCO, that sets out in detail how each CS facility meets the requirements of the Principles. Further, ASX is encouraged to provide a central location on the ASX website linking to all information that is subject to disclosure requirements under the FSS. Currently this information is spread across a range of pages.

1.3.8 Transitional relief

Acknowledging that international guidance had yet to be finalised in respect of matters related to recovery and resolution of financial market infrastructures (FMIs), and that certain changes necessary to meet account segregation and portability and liquidity risk requirements could involve significant industry-wide or legislative change, the Bank granted transitional relief for 12 months in respect of a small number of sub-standards.[6] The Bank has, however, made it clear to ASX that it is unwilling to extend the period of transitional relief for these sub-standards, except in exceptional circumstances. It is therefore anticipated that the sub-standards for which relief is currently available will become effective from 31 March 2014.

  • Recovery and resolution. The Bank and other CFR agencies are supporting the Australian Treasury in the development of legislative proposals for a comprehensive resolution regime for FMIs consistent with international standards. In principle, however, by executing an effective recovery plan, supported by provisions in its operating rules, an FMI should be able to restore its financial soundness without the need for direct intervention by a resolution authority. To meet the requirements of the relevant standards when they come into effect, each ASX CS facility should prepare a recovery plan based on identified scenarios that may threaten the ongoing provision of critical services. Further, ASX Clear and ASX Clear (Futures) should implement mechanisms that would fully address any uncovered credit losses and replenish financial resources following a participant default, and that would fully meet any liquidity shortfall. Plans and mechanisms implemented to meet these requirements should be consistent with forthcoming CPSS-IOSCO guidance on recovery planning. The facilities should also review their operational arrangements in light of the proposed Australian FMI resolution regime, to ensure that they are consistent with the form of the regime once finalised.
  • Account segregation and portability. The new FSS require that CCPs have in place account structures that support appropriate segregation of house and client positions and associated collateral. In addition, CCPs are required to maintain effective arrangements for transferring (porting) client positions and collateral to another clearing participant in the event of participant default. The ASX CCPs have commenced work on initiatives to bring client account structures at each CCP more fully into line with these requirements. In particular, ASX Clear should complete development and commence implementation of arrangements for client account segregation in its cash equity clearing service, while ASX Clear (Futures) should begin implementation of its proposals to complement the existing omnibus client account structure for exchange-traded products with individual client account segregation in both its exchange-traded and OTC derivatives clearing services.
  • Liquidity risk. While both CCPs' liquid resources would be expected to be sufficient to meet the required level of cover in relation to derivatives obligations, this may not be the case at ASX Clear in relation to cash equity transactions. Under current arrangements, ASX Clear would address any liquidity shortfall by rescheduling trades. However, this will no longer be permitted when the new CCP Standard for liquidity risk becomes effective. ASX therefore consulted in July 2013 on a proposal under which it would replace the need to reschedule transactions by entering into committed liquidity arrangements with participants. ASX should develop and implement appropriate arrangements by March 2014.

1.4 ASX Clear (Futures) Recognition in the European Union

Under the European Regulation on OTC derivatives, central counterparties and trade repositories (EMIR), which took effect in August 2012, non-European Union (EU) CCPs that provide clearing services to participants established in the EU must obtain recognition from the European Securities and Markets Authority (ESMA). Since three of ASX Clear (Futures)' participants are branches of EU-headquartered banks, ASX Clear (Futures) must apply to ESMA for recognition by 15 September.

A prerequisite for recognition is that the European Commission (EC) deems the home regulatory regime of a CCP seeking recognition to be equivalent to that in the EU. In order to inform its decision, the EC requested that ESMA provide it with advice on the equivalence of certain jurisdictions, including Australia. Accordingly, the Bank and colleagues from the other CFR agencies have for some months been assisting ESMA in the preparation of technical advice for the EC on the equivalence of the Australian regime.

While the Bank considers that the EU regulatory framework for CCPs and that in Australia achieve equivalent regulatory outcomes, the technical standards issued by ESMA under EMIR are more detailed than the FSS. There are therefore some areas in which ESMA has sought additional clarification regarding how the Bank interprets the FSS. Accordingly, the Bank has issued supplementary interpretation of a subset of standards, by way of an exchange of letters with ASX (Appendix A). Except in the case of those standards for which transitional relief is currently in place, the supplementary interpretation was effective from 16 August.

The remainder of this report is structured as follows. Section 2 summarises in tabular form the conclusions and recommendations arising from Bank's detailed assessment of each ASX CS facility against the FSS. Section 3 draws out key developments over the Assessment period and discusses the considerations underlying each recommendation. Section 4 presents a ‘special topic’ on ASX's key strategic initiatives, OTC derivatives clearing and centralised collateral management, and retail trading, clearing and settlement of CGS. The Appendices conclude with details of the supplementary interpretation of the FSS to clarify equivalence of the Australian and EU regulatory regimes, an overview of the corporate structure of the ASX Group, and the detailed assessments against the FSS for each CS facility.

The Bank welcomes ASX's continued efforts towards ensuring its CS facilities contribute to the stability of the Australian financial system and appreciates the cooperation of ASX staff and management during the preparation of this Assessment and the open and constructive dialogue throughout the Assessment period.


Until June 2013, the Bank was obliged to carry out such assessments annually. A recent legislative amendment restricts the obligation to carry out annual assessments to CS facility licensees prescribed by regulation. No CS facility licensee has yet been prescribed for annual assessment. The Bank has nevertheless clarified in a policy statement that it intends to continue to carry out assessments of the ASX CS facility licensees on an annual basis; see <https://www.rba.gov.au/payments-and-infrastructure/payments-system-regulation/frequency-of-assessments.html>. [1]

In this report, the terms CS facility and CS facility licensee are used interchangeably. [2]

The new FSS are available at <https://www.rba.gov.au/payments-system/clearing-settlement/standards/>. Transitional relief was granted for a subset of the FSS, covering matters related to recovery and resolution, account segregation and portability, and liquidity risk. These standards will come into force on 31 March 2014. [3]

See <http://www.bis.org/publ/cpss101.htm> for the Principles and related Assessment Methodology and Disclosure Framework. [4]

See <http://www.asx.com.au/cs/documents/Code_of_Practice_9Aug13.pdf> for the Code. The CFR's advice on competition in clearing of the cash equity market is available at <http://www.treasury.gov.au/PublicationsAndMedia/Publications/2013/competition-of-the-cash-equity-market>. [5]

Details of the scope of transitional relief granted may be found at <https://www.rba.gov.au/payments-system/clearing-settlement/applications/>. [6]