2015/16 Assessment of ASX Clearing and Settlement Facilities Appendix A1.2 ASX Clear (Futures) A1.2 ASX Clear (Futures)

ASX Clear (Futures) is a wholly owned subsidiary of ASXCC, itself a wholly owned subsidiary of ASX Limited (see ‘ASX Group Structure’ in Appendix A). ASX Clear (Futures) acts as the CCP for all futures and options products that are traded on the ASX 24 market. ASX Clear (Futures) also offers a clearing service for OTCIRD.

Summary of Ratings and Recommendations

The following table summarises the Bank's 2015/16 Assessment of ASX Clear (Futures) against the FSS using the rating system set out in the Principles for Financial Market Infrastructures: Disclosure framework and assessment methodology. The table includes the recommendations made by the Bank for ASX Clear (Futures) to observe or continue observing the requirements under the FSS, as well as recommendations to further strengthen ASX Clear (Futures)' observance of the FSS.

Table 12: ASX Clear (Futures) Ratings and Recommendations
Standard Rating Recommendations
1. Legal basis Observed  
2. Governance Observed ASX Clear (Futures) is encouraged to continue enhancing the documentation of the key elements of its financial risk management framework, including clear articulation to participants and regulators (and, where appropriate, the public) of the analytical basis and rationale for the choice and calibration of key margin and stress test model parameters and assumptions.

ASX Clear (Futures) is encouraged to review its governance arrangements in light of forthcoming CPMI-IOSCO guidance on resilience and recovery of CCPs.
3. Framework for the comprehensive management of risks Observed ASX Clear (Futures) is encouraged to continue to refine the documentation of its recovery plans, including considering further elaborating: stress scenarios; communications procedures; the methodology for determining critical services; how structural weaknesses are identified and addressed; and links to other FMIs.
4. Credit risk Observed ASX Clear (Futures) is encouraged to complete its review of spread, concentration and liquidity add-ons for its credit stress test models and incorporate these add-ons as appropriate.

ASX Clear (Futures) is encouraged to continue to progress planned enhancements to its risk management systems, including to deliver the capability to calculate credit stress test exposures on a near real-time basis.

ASX Clear (Futures) is encouraged to review its framework for credit stress testing, including its interpretation of ‘extreme but plausible’ market conditions and its framework for determining the adequacy of its prefunded financial resources, in light of forthcoming CPMI-IOSCO guidance on resilience and recovery of CCPs.

ASX Clear (Futures) is encouraged to review the assumptions it makes regarding the value of its prefunded financial resources in extreme but plausible market conditions, in light of any changes to its collateral haircuts.
5. Collateral Observed  
6. Margin Observed ASX Clear (Futures) is encouraged to complete its review of spread, concentration and liquidity add-ons for its margin models, and incorporate these add-ons as appropriate.

ASX Clear (Futures) is encouraged to continue to progress planned enhancements to its risk management systems, including the ability to calculate exposures and margin requirements using a range of models and parameters on a near real-time basis.

ASX Clear (Futures) is encouraged to review its margin models in light of forthcoming CPMI-IOSCO guidance on resilience and recovery of CCPs.
7. Liquidity risk Observed In order to continue to observe CCP Standard 7, ASX Clear (Futures) should implement plans to expand and refine its liquidity-specific stress scenarios and integrate these into its liquidity stress test framework. The expanded scenarios should include stress testing of non-AUD liquidity exposures.

ASX Clear (Futures) should also ensure that it has processes in place to respond promptly to any breaches of target liquidity coverage; these processes should be clearly documented.

ASX Clear (Futures) is encouraged to regularly test its procedures for accessing its liquid resources, including the on-market liquidation or repo of non-cash collateral and collateral investments and potential repo of eligible securities at the Bank.

ASX Clear (Futures) is encouraged to continue to progress planned enhancements to its risk management systems, including the ability to calculate liquidity stress test exposures on a near real-time basis.

ASX Clear (Futures) is encouraged to review its frameworks for liquidity stress testing and determining the adequacy of its liquid resources in light of the forthcoming CPMI-IOSCO guidance on resilience and recovery of CCPs.
8. Settlement finality Observed  
9. Money settlements Observed  
10. Physical deliveries Observed  
11. Exchange-of-value settlements Observed  
12. Participant default rules and procedures Observed ASX Clear (Futures) should continue enhancing its approach to the testing and review of its default management arrangements. Such enhancements should include increasing the complexity and scope of its default management fire drills. ASX Clear (Futures) should also ensure that these fire drills involve all relevant internal and external stakeholders and committees, and test the interaction between all relevant stakeholders.

ASX Clear (Futures) should more prominently involve its default brokers in the testing of default management arrangements for exchange-traded products. On an annual basis, ASX Clear (Futures) should engage with its default brokers on their proposed method for closing out the hypothetical portfolio used in the fire drill, including expected close-out prices and timeframes.

ASX Clear (Futures) should also involve the Risk Consultative Committees and other clearing participants in future default management fire drills that test ASX Clear (Futures)' recovery arrangements.

As part of its annual review of the DMF, ASX Clear (Futures) should assess the potential implications of any changes to the resolution regimes that govern its participants. This includes the resolution regimes of any offshore-based participants.

ASX Clear (Futures) should also review its DMF in light of the proposed establishment of a special resolution regime for FMIs in Australia, once the regime has been finalised.

ASX Clear (Futures) is encouraged to complete its review of the DMF and finalise planned enhancements to the relevant documents.

ASX Clear (Futures) is encouraged to continue examining ways in which its new risk management system could be used to facilitate, and mitigate risks arising in, the default management process. ASX Clear (Futures) is encouraged to continue developing the system functionality over time, integrating learnings from fire drills and other enhancements identified by the DMSG. In the meantime, ASX Clear (Futures) is encouraged to continue to explore options to improve the effectiveness of the default management process within its existing systems.

ASX Clear (Futures) is encouraged to carry out plans to sign on an additional default broker for the ASX 24 market.

ASX Clear (Futures) is encouraged to carry out its plans to enhance participant and client education and communication regarding its default management arrangements. As part of this, ASX Clear (Futures) is encouraged to complete its planned updates of existing participant disclosures on the key aspects of its default management arrangements. Any disclosures should be easily accessible, preferably in a centralised location.

ASX Clear (Futures) should validate through its testing and review processes its expectation that its default management arrangements take appropriate account of stability interests in other jurisdictions in which it has material activity, most notably in New Zealand.
13. Segregation and portability Observed  
14. General business risk Observed ASX Clear (Futures) is encouraged to review its assumptions in respect of the reliability and timeliness of payments under its insurance policies in calculating its general business risk capital.
15. Custody and investment risks Broadly observed In order to fully observe CCP Standard 15, ASX Clear (Futures) should implement plans to:
  • limit unsecured exposures to individual non-government investment counterparties/issuers to the level of capital set aside for non-participant-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 ASX Clear (Futures)' minimum liquid resource requirement (under CCP Standard 7.3) is invested in or secured by government/semi-government securities or cash. Other investments should be able to address effectively any additional liquidity shortfalls (e.g. be investments in, or secured by, securities eligible for repo with the Bank).
ASX Clear (Futures) is encouraged to review its risk management arrangements applicable to commercial settlement banks, and consider establishing a formal framework for the management of these risks.
16. Operational risk Observed In order to continue to observe CCP Standard 16, ASX Clear (Futures) should review its cyber risk management arrangements in light of forthcoming CPMI-IOSCO guidance on cyber resilience for FMIs. As part of this review, ASX Clear (Futures) should:
  • consider developing participant requirements in the area of cyber resilience, liaising as appropriate with the Bank and other relevant authorities
  • develop concrete plans to improve its capability to meet the two-hour recovery time objective following an extreme cyber attack.
ASX Clear (Futures) will also need to review its operational arrangements in light of the proposed special resolution regime for FMIs in Australia, once the regime has been finalised. In particular, ASX Clear (Futures) will need to ensure that its operations are organised in such a way as to facilitate effective crisis management actions under that regime.
17. Access and participation requirements Observed  
18. Tiered participation arrangements Observed ASX Clear (Futures) is encouraged to review its approach to monitoring concentration risks in tiered participation, including triggers for further investigation and actions, and it processes for ongoing review of concentration risk.
19. FMI links Observed  
20. Disclosure of rules, key policies and procedures, and market data Observed  
21. Regulatory reporting Observed