2014/15 Assessment of ASX Clearing and Settlement Facilities 4. The Default of BBY Limited

On 18 May 2015, ASX was advised that a broker participant of ASX Clear, BBY, had entered into voluntary administration, activating 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 CBPL-related AIM call. ASX managed BBY's default through a combination of client transfers and the close out 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. The Bank encourages ASX to complete its review of experience gained from the BBY default, and to enhance its risk management and default management arrangements as appropriate.

4.1 Background

The first early warning of potential governance, control and financial issues at BBY occurred in June 2014. At that time, BBY submitted for clearing an unusually large concentrated cash market transaction, which ultimately caused it to breach its CBPL. The CBPL limits the size of positions relative to capital that a participant is able to clear; a participant that breaches this limit is required to post additional collateral. BBY did not have sufficient funds available to meet the CBPL-related AIM call. ASX permitted a delayed payment, but subsequently imposed restrictions on BBY's admission as an ASX Clear participant. ASX also proceeded to engage with BBY on the adequacy of its governance framework and risk control systems.

ASX undertook a range of compliance and enforcement actions to sanction BBY throughout 2014/15. In the context of this ongoing enforcement action, ASX identified errors in BBY's capital returns. The correction of these errors resulted in a downward restatement of BBY's capital adequacy which triggered another CBPL breach on 6 May 2015.

BBY was unable to meet the CBPL AIM call by the scheduled time. ASX permitted a delayed payment instead of calling an event of default. ASX's Default Management Committee (DMC) determined that ASX should work with BBY to achieve an orderly exit from its derivatives clearing business. This decision was conditional upon BBY's banker continuing to support BBY during the wind down. It also reflected prevailing market conditions and ASX's judgement that the CCP was adequately covered against potential credit exposures to BBY during this period.

BBY accordingly committed to a wind-down plan which involved a combination of closure and transfer of derivatives client positions. Arrangements were made such that on a daily basis ASX would be provided with a solvency statement from BBY's directors and a statement of ongoing financial support from BBY's bankers. Should an unsatisfactory report have been received, ASX was ready to declare a default and commence default management processes. ASX also continuously monitored that the collateral held from BBY would be sufficient to cover the ongoing wind-down process.

However, late on 17 May BBY entered voluntary administration. Having been notified of this early on 18 May, ASX consequently declared a default and initiated its default management processes.

4.2 Default Management Process

At the time of the missed margin call on 6 May, BBY had more than 1,000 derivatives clients, which together accounted for around 10 per cent of ASX Clear's derivatives exposures (as measured by total margin requirements). Under the agreed wind-down plan, BBY had closed out or transferred client positions representing around a third of its derivatives exposures by the time it entered voluntary administration.

ASX's strategy for managing the remaining options positions involved three measures:

  • Where arrangements to transfer client positions to another clearing participant were sufficiently well advanced as part of the ongoing wind-down plan, these transfers would proceed.
  • Out-of-the-money equity index options expiring on 21 May would be carried through to expiry.
  • Remaining positions, including positions unable to be transferred within three days, would be closed out.

Ultimately, over half of the outstanding derivatives exposures were able to be ported. The remaining open positions were closed out by ASX within five days, with around 90 per cent of these exposures closed out by the end of Thursday 21 May. All close-out costs were sufficiently covered by margin held by ASX Clear. Nevertheless, ASX utilised a limited amount of excess client collateral (a large portion of which comprised securities lodged as ‘specific cover’),[35] and two clients did not have sufficient margin or excess collateral to cover small losses on their accounts.[36]

ASX had originally intended to carry BBY's unsettled cash equity positions through to settlement. However, BBY's administrators did not consent to this strategy and ASX therefore proceeded to close out these positions. All cash equity positions were closed out by the end of Wednesday 20 May, with the exception of positions in stocks that were either suspended or subject to a trading halt. All costs from the close-out process were well within the level of cash market margin held by ASX Clear.

4.3 Experiences Gained

ASX was ultimately able to manage the default without any evident market impact and with all close-out losses sufficiently covered by margin held. Accordingly, the experience of the BBY default has not altered the Bank's assessment that ASX's risk management and default management arrangements observe the relevant minimum standards under the FSS. Nevertheless, the default management process highlighted several areas in which ASX could consider making further enhancements to its risk management and default management arrangements in the spirit of continuous improvement.

Model parameters

The costs incurred by ASX Clear in managing the event of default were covered by collateral held by the CCP, the most significant component of which related to BBY's margin requirements. This suggests that overall margin settings were adequate, at least for the observed level of price moves. However, a number of individual model assumptions were not validated in the default management process. In light of this, the Bank encourages ASX Clear to consider the experience gained from BBY's default as part of its broader review of the calibration of its margin model parameters (see Section 3.5.1).

The risk profile of individual client accounts

Overall, ASX Clear held sufficient collateral from BBY to absorb all losses arising in the close-out process. However, the risk profile of individual clients raised some matters that may be worthy of further consideration by ASX.

Where client accounts are segregated on an individual basis, as is the case for derivatives cleared by ASX Clear, only margin allocated to a particular individual account can be used to absorb losses on that account. Any shortfall in margin coverage on an individual client account must be met by house collateral posted by the participant or, failing that, ASX Clear's pooled financial resources.[37] In the case of BBY, there was sufficient collateral in individual client accounts to meet losses on the close out of those accounts in all but very few cases. Where there was insufficient collateral, realised shortfalls were very small and the house margin held by BBY to support cash equity exposures and additional margin called in respect of the CBPL breach provided an ample buffer.

However, the experience highlighted the risk that in the absence of such a ‘buffer’ – for instance, if a participant had limited cash equity clearing activity, or had not been subject to a call for additional margin – even a small shortfall on an individual client account would have to be met by a draw on ASX Clear's pooled prefunded financial resources. In the case of a default fund comprised of participant contributions, the defaulted participant's contribution would be drawn down first. However, in the case of a fund comprised entirely of the CCP's own capital, as is the case for ASX Clear, this additional ‘defaulter-pays’ protection is not available.

To the extent that correlation assumptions (and hence offsets) across derivative products in ASX Clear's margin models are conservative, diversification within each individual client account provides a layer of protection for ASX. However, portfolios with highly directional or concentrated positions do not benefit from the same degree of additional protection.

There may be a case, therefore, to consider additional safeguards to provide a buffer between margin held to support individual client accounts and prefunded pooled resources to deal with circumstances where a lack of diversification could remove the benefits of conservative margin offsets. Such safeguards could, for instance, include ‘add-on’ margin requirements for highly directional or concentrated exposures.

Participation requirements and tiered participation

ASX Clear's participation requirements are designed to promote the safety and integrity of the CCP. They cover minimum capital and financial obligations, as well as governance, operational and risk management standards. ASX has wide-ranging powers to monitor and enforce compliance with these requirements.

The BBY default has highlighted, however, that the observed variations in the scale and nature of activity across the range of ASX Clear participants may justify a more risk-sensitive approach to determining minimum capital requirements for participants. While participants are already required to meet a risk-based core capital requirement, there may be a case for determining minimum capital and liquidity requirements with reference to a broader range of factors related to a participant's risk profile, including the nature and extent of their client clearing activity.

Relatedly, the incident drew attention to potential dependencies arising from tiered participation. Efforts to identify suitable transferee participants for client positions following the default highlighted the lack of depth in indirect clearing arrangements for the ETO market. A wider distribution of retail clearing participants could reduce concentration risks for ASX Clear. In light of this, ASX intends to examine impediments to new entry in the ETO retail client clearing market, and has already been considering various options for more flexible participant structures with several of its user forums, including the Business Committee and the ETO Advisory Committee.


The availability of individually segregated derivatives client accounts at ASX Clear supports the portability of client positions and collateral in the event of a clearing participant default, since this ensures that client accounts can be transferred on a fully collateralised basis. In managing the BBY default, ASX Clear was able to complete the transfer of client accounts that together represented the majority of open positions.

It was always recognised that even with individually segregated client accounts, portability could be challenging. The BBY incident highlighted a number of specific impediments. In particular, portability relies on the willingness, and capacity, of another participant to take on the affected clients within a short period of time. The BBY default demonstrated that porting may not be possible if transfer arrangements had not already been pre-positioned prior to the clearing participant's default, due to the time required for receiving participants to complete due diligence and ‘know-your-customer’ processes. ASX has begun to consider how account structures and transfer arrangements could be enhanced to facilitate the efficient porting of clients in an event of default. This includes examining ways to improve the operational efficiency of the portability process and encouraging a wider distribution of retail clearing participants that could potentially accept transferee clients (see above).

4.4 Recommendation

The default of BBY highlighted several matters relevant to ASX's risk management and default management arrangements. The Bank has begun to discuss some of the experiences gained from this incident with ASX and will continue to do so over the coming Assessment period. The Bank encourages ASX to complete its review of experience gained from the BBY Limited default, and to enhance its risk management and default management arrangements as appropriate.


Margin obligations may be met by posting either cash or non-cash collateral, including stocks lodged as ‘specific cover’ for call options written on the same stock. Excess collateral is collateral lodged by clients in excess of their margin requirements. [35]

Client collateral posted against derivatives positions cannot be used to offset losses arising from the participant's house account or another client account. The shortfall on these client accounts was covered by the AIM lodged by BBY in respect of its CBPL breach. [36]

House collateral includes collateral posted in respect of cash market margin requirements, which are commingled between house and client positions. [37]