2014/15 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 is obliged under the Corporations Act to report its findings to the relevant Minister and the Australian Securities and Investments Commission (ASIC). Consistent with established policy, Assessment reports are also be 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 2015.[2] In accordance with the governance arrangements for the Bank's oversight and supervision activities, this report has been reviewed and approved by the Payments System Board.

All four facilities have made substantial progress towards addressing the recommendations and regulatory priorities identified in the Bank's 2014/15 Assessment. Many of these priorities have been fully addressed.[3] Accordingly, it is the Bank's assessment that all four facilities have either observed or broadly observed all relevant requirements under the FSS in the Assessment period (Section 2 and Appendix A). The Bank therefore concludes that the facilities have conducted their affairs in a way that causes or promotes overall stability in the Australian financial system.

The Bank has nevertheless made a number of recommendations to further strengthen the ASX facilities' observance of requirements under the FSS. Some recommendations have also been made to encourage continuous improvement, even where relevant requirements have been observed. Such improvement contributes to the ASX CS facilities' ongoing compliance with the obligation to do all other things necessary to reduce systemic risk.

The FSS are aligned with the requirements in the Principles for Financial Market Infrastructures (the PFMIs), developed by the Committee on Payments and Market Infrastructures (CPMI) and the Technical Committee of the International Organization of Securities Commissions (IOSCO) that address matters relevant to financial stability.[4] The Bank's Assessment applies the rating system used in the assessment methodology that supports the PFMIs.[5]

The Bank's Assessment also forms the basis for formal assessments of the ASX CS facilities against the principles within the PFMIs (the Principles), carried out jointly with ASIC. The Bank and ASIC have committed to carrying out these assessments periodically, with the first published in September 2014.[6]

1.1 Overview of Activity in the ASX Clearing and Settlement Facilities

In 2014/15, average price volatility in the markets cleared and settled by the ASX CS facilities was generally below the 10-year average (which includes spikes in volatility associated with the global financial crisis). Daily average values and volumes of cash equity trades cleared by ASX Clear increased during the year, by 10 per cent and 4 per cent, respectively, as did the volume of trading in the main futures contracts cleared by ASX Clear (Futures). The notional value of over-the-counter (OTC) interest rate derivatives (IRD) cleared by ASX Clear (Futures) also grew significantly. By contrast, the average daily number of equity options traded on the ASX market continued to decline, by a further 4 percent. The daily average value of debt securities settled in Austraclear also declined compared with the previous year.

As measured by margin requirements, the ASX CCPs' total credit exposure was little changed in 2014/15, compared with the previous year. In line with the increase in trading activity, average daily initial margin held by ASX Clear against unsettled cash equity transactions increased by 27 per cent to $165 million, while average daily margin held against equity derivatives was 3 per cent higher; lower open interest was offset by an increase in volatility. On ASX Clear (Futures), average daily initial margin rose by 2 per cent, driven largely by increases in the margin rate for the SPI 200 contract, as well as an increase in participants' open positions.

Key operational targets were met in the Assessment period. All key systems recorded 100 per cent availability, while peak usage was below the target of 50 per cent of all systems, ensuring adequate capacity headroom. ASX's ongoing project to insource future development of Austraclear's EXIGO system from NASDAQ OMX was progressed further during the period and is now scheduled for completion in October 2015.

1.2 Review of Regulatory Priorities and Key Recommendations

The principal focus of the 2014/15 Assessment is the ASX CS facilities' progress towards meeting the recommendations and regulatory priorities identified in the Bank's 2013/14 Assessment. These include recommendations related to CCP model validation – and, in particular, the validation of the CCPs' stress testing models – and recovery planning across all four CS facilities. These matters were the subject of ‘deep dive’ reviews during the Assessment period, summarised in Sections 5 and 6 of the Assessment report. ASX has made considerable progress in all of the areas identified and has addressed many of the stated priorities.

Some of the key actions taken by ASX are summarised below, along with related core recommendations and priorities for the 2015/16 Assessment period.

Model validation and stress testing

Recommendations on model review and validation for the CCPs were mostly addressed during the Assessment period. The first phase of refinements and enhancements to ASX's capital stress-testing approach arising from the external validation carried out by PricewaterhouseCoopers (PwC) in 2014 were implemented in late July. These included an expansion of the risk factors covered by stress testing, changes to key model parameters (such as the assumed holding period, coverage targets and correlation assumptions) and the addition of new forward-looking stress scenarios.

The Assessment recommends that ASX carry out a planned second phase of enhancements to the CCPs' stress-testing framework and encourages ASX to follow up findings of the PwC validations of its margin models. The recommendations also encourage ASX to continue to review its stress-testing and margin models in light of evolving international best practice, including outcomes of CPMI-IOSCO work on margining and stress testing.

Recovery planning

The Bank's 2013/14 Assessment recommended that ASX Clear, ASX Clear (Futures), ASX Settlement and Austraclear take steps to enhance their recovery plans. In the case of the ASX CCPs, ASX Clear and ASX Clear (Futures), the recommended steps included the implementation of arrangements to fully address any uncovered credit losses and replenish financial resources following a participant default, as well as arrangements to fully meet any liquidity shortfall. The Bank's recommendations were mostly addressed during the Assessment period. New, more detailed and comprehensive, recovery arrangements were developed, including loss and liquidity allocation tools for the two ASX CCPs, and measures to address non-default losses across all four CS facilities. These are due to come into effect in October.

It is nevertheless recommended that ASX carry out further work to enhance arrangements for the replenishment of the CCP's financial resources in the event that these were drawn down following a participant default. The objective is to establish arrangements that would allow a more timely return to full financial cover while minimising the potential for transmission of liquidity stress to participants. The Bank also encourages ASX to complete documentation of its enhanced recovery plans and to review the plans on an ongoing basis.

Treasury investment policy

The Bank's 2013/14 Assessment recommended that ASX implement plans to further reduce the concentration of unsecured exposures to the large domestic banks under its treasury investment policy, noting that the Bank had opened a dialogue with ASX on the detail of its expectations for the credit and liquidity risk profile of the CCPs' investment portfolio.

During 2014/15, ASX further reduced the concentration of unsecured exposures to the large domestic banks and the Bank continued its dialogue with ASX on changes to its treasury investment policy. This dialogue clarified the Bank's expectation that ASX should:

  • limit its unsecured credit exposures to individual non-government investment counterparties/issuers to the level of capital set aside for non-default or general business risk losses
  • ensure that other investments are with government-related obligors or secured by assets issued by government-related or other highly creditworthy obligors, subject to prudent concentration limits
  • ensure that the CCPs' minimum liquid resource requirement is invested in or secured by government/semi-government securities or cash, with other investments in, or secured by, securities eligible for repo with the Bank.

ASX's CS Boards have now endorsed further staged revisions to the CCPs' treasury investment policy, designed to meet the Bank's expectations. The Assessment recommends that ASX implement these plans by end 2016/17.

Cyber resilience

The Bank noted in its 2013/14 Assessment the increasing focus, both internationally and domestically, on the cyber resilience practices of financial market infrastructures (FMIs) and other key participants in the financial system. Given the highly disruptive impact that could result from an interruption to critical clearing and settlement services or a degradation of data integrity at an FMI, the Bank has continued a dialogue on cyber resilience matters during the 2014/15 Assessment period, in collaboration with ASIC. As part of this, the Bank requested that ASX carry out a self-assessment against the United States National Institute of Standards and Technology (NIST) Cybersecurity Framework, which is used widely by critical infrastructure providers and other organisations in a number of jurisdictions internationally. This high-level self-assessment concluded that ASX's cyber security practices generally aligned with the upper tier of maturity levels described under the framework.

ASX is encouraged to continue its dialogue with the Bank on its cyber risk management arrangements, including on the Board-level governance of its cyber risks and ongoing review of its information security strategy and policy framework. ASX is also encouraged to review its cyber risk management arrangements in light of forthcoming CPMI-IOSCO guidance on cyber resilience for FMIs.

1.3 Other Material Developments

In addition to changes to policies and processes in response to recommendations and priorities arising from the Bank's 2013/14 Assessment, there were a number of additional material developments during the period. Perhaps the most prominent of these was ASX Clear's management, in May, of the default of the broker, BBY Limited (BBY; discussed in Section 4).

The default of BBY Limited (BBY)

On 18 May 2015, ASX was advised that a broker participant of ASX Clear, BBY, had entered into voluntary administration, triggering ASX Clear's default management processes. This followed two weeks of action by ASX to manage down BBY's clearing business after BBY had missed a deadline for a capital-based position limit (CBPL) related additional initial margin (AIM) call. ASX managed BBY's default through a combination of client transfers and the close out or expiry of remaining positions. Overall, the close out proceeded without any evident market impact and all losses arising in the close-out process were sufficiently covered by margin held. The default management process nevertheless highlighted several matters relevant to ASX's risk management and default management arrangements that are worthy of further consideration.

ASX is encouraged to review its default management arrangements and consider broader experiences gained from the default of BBY.

Technology transformation

ASX launched a group-wide technology transformation project during the Assessment period. With this project, ASX aims to rationalise its core technology onto a single services platform, also taking the opportunity to replace existing proprietary standards and protocols with global standards. The Bank views the replacement of the CHESS clearing and settlement system as an important element of this project. Another key outcome from the Bank's perspective will be the delivery of a new ‘real-time’ risk management system, which will have the capacity to calculate participants' margin requirements and stressed exposures in close to real time. ASX has indicated that, as it progressively develops these capabilities over the next two to three years, it will consider how to integrate more frequent margin and stress-test calculations into a ‘real-time risk management’ approach that will remove the potential for delay in covering intraday changes to exposures. The Bank is examining prioritisation decisions, resourcing challenges, interdependencies with day-to-day business-as-usual processes, and potential change-management issues associated with ASX's technology transformation project. This includes ensuring that investment in the replacement of CHESS is appropriately prioritised.

Cross-border recognition

Both ASX Clear and ASX Clear (Futures) obtained recognition in the EU in late April. Ahead of this, the scope of the Bank's supplementary interpretation of the FSS, which had been issued for ASX Clear (Futures) in 2013, was extended to include ASX Clear. In accordance with this, ASX Clear transitioned at the end of March to covering credit and liquidity exposures on the default of its two largest participants plus affiliates (Cover 2). ASX Clear's pre-funded financial resources were already sufficient to meet the new requirement from a credit perspective, but the CCP had to source an additional $100 million liquidity facility to meet the Cover 2 requirement for liquidity exposures. ASX Clear also established a participant risk consultative committee, which held its first meeting in March.

Separately, on 18 August 2015 ASX Clear (Futures) was granted an exemption from registration as a Derivatives Clearing Organization by the US Commodity Futures Trading Commission (CFTC). The exemption allows ASX Clear (Futures) to continue to provide OTC IRD clearing services to US entities, after previously relying on time-limited no-action relief from the CFTC.

The remainder of this report is structured as follows. Section 2 summarises in tabular form each CS facility's progress towards meeting recommendations and regulatory priorities arising from the Bank's 2013/14 Assessment, as well as conclusions and recommendations arising from the 2014/15 Assessment. Section 3 draws out material developments during the Assessment period and discusses the considerations underlying each recommendation. Section 4 summarises ASX's management of the default of BBY in May 2015; in light of the experience, some areas are highlighted that may merit further consideration in the coming period. Section 5 presents a ‘special topic’ on the ASX CCPs' stress-testing framework, which was enhanced during the period following an external validation of the stress-testing model. Section 6 presents a second ‘special topic’ on recovery planning, which, further to the Bank's recommendations in the 2013/14 Assessment period, was also significantly enhanced. Appendix A concludes with the Bank's supplementary interpretation of the FSS for CCPs, 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. The Bank appreciates both 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 under the Corporations Act to carry out assessments annually. Further to a legislative amendment at that time, a CS facility licensee must be assessed annually only where this has been prescribed by regulation. While no CS facility licensee has yet been prescribed for annual assessment, the Bank has 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 <http://www.rba.gov.au/payments-system/policy-framework/frequency-of-assessments.html>. [1]

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

The Bank's 2013/14 Assessment may be found at <http://www.rba.gov.au/payments-system/clearing-settlement/assessments/2013-2014/>. [3]

As of 1 September 2014, the mandate and charter of the Committee on Payment and Settlement Systems (CPSS) have been refreshed and the Committee has been renamed. It is now known as the Committee on Payments and Market Infrastructures (CPMI). [4]

See <http://www.bis.org/cpmi/publ/d106.htm> for the Principles and related Disclosure framework and assessment methodology. [5]

The first Assessment against the Principles is available at <http://www.rba.gov.au/payments-system/policy-framework/principles-fmi/assessments-of-cs-facilities.html>. [6]