2015/16 Assessment of ASX Clearing and Settlement Facilities A1.2 ASX Clear (Futures) Standard 4: Credit risk

A central counterparty should effectively measure, monitor and manage its credit exposures to participants and those arising from its clearing processes. A central counterparty should maintain sufficient financial resources to cover its credit exposure to each participant fully with a high degree of confidence.

ASX Clear (Futures) maintains a comprehensive framework for managing its credit exposures to participants (CCP Standard 4.1). Under this framework, ASX Clear (Futures) regularly monitors information on participants' credit standing through financial reporting requirements, public information, and further investigation where required. Monitoring of participants' credit standing is risk based, and ASX maintains a list of participants deemed to warrant more intensive monitoring (CCP Standard 4.2). In responding to any issues identified through monitoring, ASX Clear (Futures) is able to impose activity restrictions or additional controls, including calls for additional collateral (CCP Standard 4.3).

ASX Clear (Futures) also monitors and manages the magnitude of exposures to participants through both daily and intraday initial and variation margin calculations (CCP Standard 4.2), and through daily stress tests that measure the effects of extreme but plausible scenarios on exposures (CCP Standard 4.5). ASX Clear (Futures) aims to hold sufficient financial resources to cover its largest potential credit exposure to any two participants and their affiliates in the extreme but plausible scenarios covered in its stress tests (‘Cover 2’), consistent with obligations for a facility that is systemically important in multiple jurisdictions (CCP Standards 4.4, 4.6). ASX Clear (Futures) has the capacity to call additional margin from participants in the event that their stress test exposures exceed predetermined STELs. ASX Clear (Futures) conducts monthly reverse stress tests to supplement the existing daily and formal annual review of scenarios. Responsibility for increasing ASX Clear (Futures)' default fund in response to persistent and widespread STEL breaches that exceed ASX Clear (Futures)' prefunded financial resources lies with the CS Boards and the ASX Limited Board (CCP Standard 4.7). During the Assessment period, ASX Clear (Futures) has implemented enhanced powers to comprehensively address uncovered credit losses and replenish its default fund (CCP Standard 4.8).

4.1 A central counterparty should establish a robust framework to manage its credit exposures to its participants and the credit risks arising from its clearing processes. Credit exposures may arise from current exposures, potential future exposures, or both.

ASX Clear (Futures) maintains a comprehensive framework for managing credit exposures to its participants. The core components of this framework comprise: a stress test regime (see CCP Standards 4.5 to 4.7); the use of variation margin to mark positions to market (see CCP Standard 6); and the maintenance of prefunded financial resources. These financial resources comprise initial margin (see CCP Standard 6), other collateral calls based on participants' positions, and a fully prefunded default fund of $650 million (see CCP Standard 4.4). Financial resources received in cash are invested in high-quality assets in accordance with ASXCC's treasury investment policy (see CCP Standard 15). ASX Clear (Futures) also has in place comprehensive arrangements to address any credit losses in excess of its prefunded resources (see CCP Standard 4.8).

4.2 A central counterparty should identify sources of credit risk, routinely measure and monitor credit exposures, and use appropriate risk management tools to control these risks. To assist in this process, a central counterparty should ensure it has the capacity to calculate exposures to participants on a timely basis as required, and to receive and review timely and accurate information on participants' credit standing.

ASX's CRPM department is responsible for monitoring participants' credit standing and ASX Clear (Futures)' credit exposures to participants.

Within CRPM, the Exposure Risk Management team monitors day-to-day developments in, among other things, open positions, market prices and settlement obligations to the CCPs. Participants' positions are marked to market and ASX Clear (Futures) calculates initial and variation margin requirements at the end of each business day. ASX Clear (Futures) also has in place intraday margining processes that enable the CCP to calculates and manages credit risk exposures on a timely basis.

For both exchange-traded and OTC products, ASX Clear (Futures) performs automated intraday margin calculations (at 8.05 am, 11.10 am and 1.30 pm since August 2015), and may also perform ad hoc calculations if there is significant movement in the prices of individual contracts (see CCP Standard 6.4). ASX Clear (Futures) calls for additional collateral in response to these intraday runs where the erosion in the margin cover provided by individual participants and the nominal call amount exceed certain predefined thresholds.

In addition to the three routine intraday margin runs, ASX Clear (Futures) also recalculates its exposures to participants on an approximately hourly basis for OTC derivatives positions and portfolio-margined futures. Unlike the other margin runs, this recalculation is a ‘for-information’ calculation; the results of this run are not reviewed in real time and do not trigger calls for additional collateral. ASX uses the information from these hourly recalculations to inform its intraday policy, especially in respect of identifying and mitigating risks associated with its overnight activity.

To manage the additional credit risk exposure arising from offering real-time novation of OTC products, ASX Clear (Futures) places a limit on the interest rate sensitivity of new transactions (currently set to $500 000 per basis point), conducts frequent portfolio exposure checks and may prevent further novation until an intraday margin call is met. By imposing pre-novation limits on the interest-rate sensitivity of each trade (set using the maximum present value of a basis point shift in interest rates), ASX Clear (Futures) minimises the possibility that novating a single large trade results in a significant increase in credit exposure.

ASX Clear (Futures) conducts daily stress testing to monitor the effects of extreme but plausible scenarios on participants' portfolios. Where stress test results are above a defined limit, AIM is called (see CCP Standard 4.4).

The CRA team is responsible for ongoing monitoring, assessment and investigation of matters relating to financial requirements (including participants' monthly financial statements). The CRA team reports directly to the General Manager, Participants Compliance and, on a secondary basis, to the Senior Manager, Clearing Risk Policy and Management. CRA is also responsible for determining and reviewing participants' credit standing, drawing in part on information provided by participants in regular financial returns to ASX. ASX determines an ICR for each participant. The ICR takes into account the participant's external credit rating as appropriate. Other metrics monitored by CRA, including factors used in determining the CROCC watch list (see below), can be used as an alternative or supplementary means for ICR determination where these indicate an assessment of credit risk that differs from external credit ratings. In other cases, the ICR is based on the participant's capital position (or that of its parent where that parent is unrated but provides a formal guarantee to the CCP). ASX Clear (Futures) may call additional margin from a participant with a large portfolio relative to its NTA, or where it has other counterparty credit risk concerns (see CCP Standard 4.3).

CRA also coordinates a ‘watch list’ of participants deemed to warrant more intensive monitoring. Inclusion on the watch list is based on a range of factors, such as: concentration risk; concerns emerging from a specific event or media report; significant changes in a participant's own share price, bond yield or credit default swap price; ICR downgrades; calls for AIM; operational issues; compliance issues; or issues arising from ASX's routine review of financial returns (for example regular losses or breaches of minimum capital requirements). The assessment of watch list factors monitored by CRA, ASX Compliance and the Operations Division is coordinated by the CROCC. Based on such an assessment, ASX Clear (Futures) may decide to place restrictions on a participant's trading, clearing and settlement activities (see CCP Standard 4.3). During the 2015/16 Assessment period, there were no ASX Clear (Futures) participants on the watch list.

ASX's Concentration Risk Standard sets out a risk-based approach to monitoring concentration risks in three areas:

  • Concentrations in participants' exposures to their clients (see CCP Standard 18).
  • Concentrations of individual participants' positions in particular products. Evidence of such concentration indicates individual participant exposure to large price movements in a particular product that could challenge its capacity to meet obligations to the CCP. CRPM monitors the concentration of participants' exchange-traded positions in single products, by number of contracts or value of underlying positions. Further review would be triggered should exposure to a particular product exceed a specified share of a participant's total portfolio, subject to a materiality threshold.
  • Concentration of positions in a market in a single participant. Evidence of a single participant accounting for a large share of positions in a particular market segment could indicate the potential for complications in closing out or transferring these positions if the participant were to default. CRPM monitors the market shares of participants in each exchange-traded product. Further review would be triggered if a single participant held more than 25 per cent of the contracts in the market for that product and the size of the position (relative to average market turnover for that product) suggested that it could take more than two days to close out that participant's position.

If a trigger were met under its Concentration Risk Standard, ASX would not automatically take action. In determining whether further investigation or action was warranted, ASX would take into account a number of factors, including the materiality of the breach and the credit standing and activity profile of the relevant participant (see CCP Standard 4.3).

Under its risk-based approach to monitoring concentration risk, ASX Clear (Futures) has prioritised formal concentration monitoring for exchange-traded products over OTC products. This reflects the currently relatively low level of exposures generated by OTC derivatives transactions. ASX Clear (Futures) nevertheless monitors concentration risks in OTC products via its ongoing monitoring of participant credit exposures.

For details of ASX Clear (Futures)' other participation requirements and participant monitoring arrangements, see CCP Standard 17.

4.3 A central counterparty should have the authority to impose activity restrictions or additional credit risk controls on a participant in situations where the central counterparty determines that the participant's credit standing may be in doubt.

Participants on ASX's watch list may be subject to trading restrictions or additional credit risk controls. For instance, they may be subject to calls for additional margin, higher capital requirements, additional capital reporting requirements, or a reduced STEL (such that additional margin would be called at a lower level of credit stress test exposure (see CCP Standard 4.7)). CRA typically also carries out a detailed credit review of participants on the watch list.

Similar steps may be taken, at ASX's discretion, where a participant exceeds a trigger under the Concentration Risk Standard.

ASX Clear (Futures) will also call CBPL AIM from a participant with a large portfolio (measured by initial margin requirements) relative to its NTA, or may make an additional cover call where it has other counterparty credit risk concerns.

4.4 A central counterparty should cover its current and potential future exposures to each participant fully with a high degree of confidence using margin and other prefunded financial resources (see CCP Standard 5 on collateral and CCP Standard 6 on margin). In addition, a central counterparty that is involved in activities with a more complex risk profile or that is systemically important in multiple jurisdictions should maintain additional financial resources to cover a wide range of potential stress scenarios that should include, but not be limited to, the default of the two participants and their affiliates that would potentially cause the largest aggregate credit exposure for the central counterparty in extreme but plausible market conditions. All other central counterparties should maintain additional financial resources sufficient to cover a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would potentially cause the largest aggregate credit exposure for the central counterparty in extreme but plausible market conditions. In all cases, a central counterparty should document its supporting rationale for, and should have appropriate governance arrangements relating to, the amount of total financial resources it maintains.

ASX Clear (Futures)' $650 million default fund consists of (in order of application in the event of a futures participant default): $120 million of own equity; $100 million from futures participants; $150 million of own equity; $100 million from OTC participants (the ordering of OTC and futures participant contributions would be switched in the event of an OTC participant default); and $180 million of own equity. Prior to 30 June 2016, $90 million of ASX Clear (Futures)' default fund had consisted of a fully drawn subordinated loan from ASXCC, which was ultimately funded by a subordinated loan from ASX Limited. The CS Boards approved the conversion of the subordinated debt tranche of ASX Clear (Futures)' default fund into equity during the 2015/16 Assessment period.

ASX Clear (Futures) conducts daily stress tests to determine whether the level of its prefunded financial resources would be sufficient to cover the default of the two participants (and their affiliates) that would potentially cause the largest aggregate credit exposure to the CCP under a wide range of scenarios (see CCP Standards 4.5 to 4.7). In practice, ASX Clear (Futures)' Cover 2 credit stress test exposures are typically well below the CCP's level of prefunded financial resources, providing the CCP with a ‘buffer’ in its coverage of potential future credit exposures. The sizing of this ‘buffer’ reflects ASX's view of the potential growth in activity (and hence exposures) at ASX Clear (Futures) over time.

Since ASX Clear (Futures) clears primarily transactions in exchange-traded futures and OTC IRS derivatives, the Bank does not consider that ASX Clear (Futures) is involved in activities with a complex risk profile. Nonetheless, the Bank has concluded that ASX Clear (Futures) is systemically important in multiple jurisdictions and is therefore subject to higher financial resource requirements (i.e. Cover 2). This conclusion reflects that ASX Clear (Futures) is recognised as a foreign CCP in the EU by ESMA and the Bank's supplementary interpretation of the FSS identifies the need to seek ‘recognition’ in other jurisdictions as one possible indicator of systemic importance in multiple jurisdictions.[8] In addition, the Reserve Bank of New Zealand (RBNZ) has also stated that ASX Clear (Futures) may be of systemic importance in New Zealand and may therefore be designated for oversight as an offshore FMI under the RBNZ's proposed new oversight regime for FMIs.[9]

Under ASX Clear (Futures)' AIM methodology, a participant is required to post additional collateral should stress test outcomes reveal that the potential loss arising from its positions (as at the close of the previous day) exceeds a predetermined STEL (see CCP Standard 4.7). The objective of this regime is to provide additional participant-specific cover against non-systematic spikes in individual participants' exposures. This mitigates the risk that the default of a participant with a large exposure, in more extreme market conditions than are contemplated by regular initial margin, may deplete or even exhaust ASX Clear (Futures)' default fund. By upholding the ‘defaulter pays’ principle, the AIM regime also provides an incentive for participants to manage the risk they bring to the CCP. However, it is not a substitute for holding sufficient prefunded pooled financial resources. There are potential shortcomings to relying too heavily on variable calls related to stress test exposures, particularly given lags in the calculation and settlement of such calls (see CCP Standard 4.7).

4.5 A central counterparty should, through rigorous stress testing, determine the amount and regularly test the sufficiency of its total financial resources available in the event of a default or multiple defaults in extreme but plausible market conditions. Stress tests should be performed daily using standard and predetermined parameters and assumptions. On at least a monthly basis, a central counterparty should perform a comprehensive and thorough analysis of stress-testing scenarios, models and underlying parameters and assumptions used to ensure they are appropriate for determining the central counterparty's required level of default protection in light of current and evolving market conditions. A central counterparty should perform this analysis of stress testing more frequently when the products cleared or markets served display high volatility, become less liquid, or when the size or concentration of positions held by a central counterparty's participants increases significantly. A full validation of a central counterparty's risk management model should be performed at least annually.

ASX Clear (Futures) uses daily credit stress tests to monitor risk exposures to individual participants and the adequacy of its financial resources. Credit stress tests are based on a range of scenarios covering extreme price moves and volatility shifts in equity, interest rate and electricity contracts (see CCP Standard 4.6). The scenarios have been developed based on statistical analysis of historical market movements, which takes into account correlations between contracts and uses a ‘student t’ distribution (allowing for more extreme events than a normal distribution), complemented by a set of forward-looking scenarios based on hypothetical macroeconomic or market-wide events (see CCP Standard 4.6). Other key underlying parameters and assumptions include that:

  • profits in client accounts (including client omnibus accounts) cannot be used to offset house losses, or losses on other client accounts
  • exchange-traded derivatives can be closed out within three days (previously one day, prior to July 2015), and OTC derivatives can be closed out within five days.

On a daily basis, ASX reviews the scenarios that underpin the credit stress test regime for ASX Clear (Futures), and on a monthly basis RQG carries out a review of market conditions to determine whether there is any evidence of stress that would support a change to scenarios. Any observed changes in price, volatility or interest rate curves in excess of the stress test scenarios would constitute an event beyond what was previously considered to be extreme but plausible. Accordingly, it is likely that a revision to the relevant stress test scenario would be presented for consideration by the Clearing Boards. In addition, ASX conducts monthly reverse stress tests to confirm the sufficiency of the ASX Clear (Futures) default fund and to cross-validate the credit stress test scenarios (see CCP Standard 4.6).

ASX's Model Validation Standard requires that all models that are critical to ASX (as measured against a series of risk factors) undergo a full annual validation (see CCP Standard 2.6). Under this framework the credit stress test model must be validated using an external expert annually. ASX's second credit stress test model validation was conducted in June 2016 using an external expert.

4.6 In conducting stress testing, a central counterparty should consider the effect of a wide range of relevant stress scenarios in terms of both defaulters' positions and possible price changes in liquidation periods. Scenarios should include relevant peak historic price volatilities, shifts in other market factors such as price determinants and yield curves, multiple defaults over various time horizons, simultaneous pressures in funding and asset markets, and a spectrum of forward-looking stress scenarios in a variety of extreme but plausible market conditions.

ASX Clear (Futures) uses its credit stress tests to establish the overall adequacy of prefunded financial resources and to determine whether a participant is required to post AIM (see CCP Standard 4.4). ASX Clear (Futures)' stresstesting framework includes both ‘for-information’ scenarios and ‘active’ scenarios; prefunded financial resources are sized to cover the Cover 2 losses under the active scenarios, and only active scenarios may trigger an AIM call.

Active stress test scenarios

The stress test regime comprises a suite of portfolio and single-contract stress test scenarios based on statistical analysis of historical market movements. Scenarios are tailored to ASX Clear (Futures)' risk tolerance, as defined by its Board. Stress test scenarios are based on either historical observations or, for forward-looking scenarios, a mix of (domestic or overseas) historical moves and non-historical correlations, and aim to capture extreme market moves that have a probability of occurrence of once-in-20 years. A holding period of three days is used for exchange-traded derivatives, allowing for the fact that it may not be possible to close out portfolios in a single day under stressed market conditions, while OTC derivatives are assumed to be closed out within five days. In February 2016, ASX Clear (Futures) modified its stress test framework to incorporate intraday price movements. Prior to the enhancement, price changes were calculated using the most extreme change in closing prices over the holding period. Price changes are now based on the most extreme close-to-high or close-to-low price movements observed over the relevant three- or five-day holding period.

To meet the targeted level of coverage, single-asset stress test scenarios use the most extreme observed movement in the previous 20 years. Multi-asset scenarios are calibrated to cover 99.98 per cent of a simulated distribution of price and volatility movements, based on a sample of 20 years of price and volatility data. In ASX's view, this look-back period remains relevant to the current structure of the market. Review of scenarios used in ASX Clear (Futures)' credit stress test against observed market movements occurs on a daily basis and against overall market conditions on a monthly basis (see CCP Standard 4.5).

ASX Clear (Futures) currently uses 48 scenarios that involve movements of price and volatility across the SPI 200 equity index futures, the five AUD interest rate futures contracts (20-year bond, 10-year bond, 3-year bond, 90-day bank accepted bill and 30-day interbank cash), and Australian electricity derivatives. Together, these contracts cover 98 per cent of ASX Clear (Futures)' potential future risk exposure (measured by initial margin requirements).

  • Four ‘multi-asset’ scenarios combine movement in the SPI 200 with parallel shifts in the yield curve, represented by approximately equal shocks to the 30-day, 90-day, 3-year,10-year and 20-year contracts. For example, ‘equities down, parallel up’ includes a fall in the SPI 200 of 9.8 per cent, and yield increases of between 10.1 and 12.9 per cent for the interest rate futures contracts.
  • Sixteen ‘multi-asset’ scenarios model combinations of price movements across the five major contracts (SPI 200, 90-day, 3-year,10-year and 20-year). These scenarios model a range of tilts, twists and bends of the yield curve, as represented by different price shocks across the 90-day, 3-year, 10-year and 20-year contracts; for example, the ‘tilt (back end up)’ scenario has progressively increasing price shocks from short-term to long-term interest rate contracts, with a 0 per cent move in the price of the 90-day contract, a 4 per cent move in the price of the three-year contract, a 7 per cent move in the price of the 10-year contract, and a 7 per cent move in the price of the 20-year contract.
  • Twelve ‘single contract’ scenarios model extreme price movements in the SPI 200 and five interest rate contracts individually.
  • Two scenarios model large movements in the interest rate contracts with no movement in equities.
  • Four ‘forward-looking’ hypothetical scenarios represent macroeconomic or market-wide events, such as commodity price collapse, or an offshore sovereign default.[10]
  • Two scenarios cover a 30 per cent change in the price of electricity contracts.
  • Eight ‘multi-asset’ scenarios combine movements in the SPI 200 and electricity contracts with parallel shifts in the yield curve.

For participants that clear OTC derivatives, ASX Clear (Futures) applies the same multi-asset scenarios, with extensions to capture movements in BBSW and AONIA for overnight indexed swaps. Accordingly, the scenarios test shocks to exchange-traded derivatives and IRS simultaneously. The BBSW and AONIA curves are split into segments based on differences in participation and activity in the underlying market. The price shocks are calibrated using 20 years of data history for the Australian IRD market, and take into account the assumed five-day holding period for OTC derivatives transactions. As for the futures-only scenario, the combined futures and OTC scenarios are sized to be equivalent to once-in-20-year events.

In addition to the scenarios mentioned above, OTC derivatives portfolios are currently subject to 12 scenarios that consider various forms of basis risk. Four scenarios model the basis risk that results from a potential change – either temporary or permanent – in the economic relationship between interest rate futures and IRS. Two other scenarios model the effect of a change in the spread between AONIA and BBSW rates at various tenors, while six scenarios model changes in the tenor spread for BBSW. Each pairwise basis risk spread has been sized to a once-in-100-year event.

In August 2016, ASX Clear (Futures) introduced a set of new scenarios for exchange-traded derivatives, and modified its existing scenarios for OTC derivatives and portfolio-margined futures, to incorporate absolute (i.e. basis point) shocks to yields. Prior to this change, ASX's stress test scenarios applied only relative (i.e. percentage) shocks to yields; this approach could have understated the magnitude of potential shocks to yields in a low interest rate environment.

For-information scenarios

In order to better understand the impact of potentially severe market events, ASX also includes 20 additional ‘for-information’ stress test scenarios. These include hypothetical event-based scenarios representing macroeconomic or market-wide events – such as a cyber attack on the ASX exchange – and other scenarios based in full or in part on historical market movements both within and outside the 20 year lookback used for credit stress testing. These scenarios are considered by ASX to go beyond the level of ‘extreme but plausible’; accordingly, AIM is not called based on the results of these scenarios. For-information scenarios may nevertheless influence management decisions on the adequacy of ASX Clear (Futures)' prefunded financial resources. For-information stress tests are run on a daily basis by ASX Clear (Futures), with the results of these tests reviewed and presented to the CS Boards on a semi-annual basis.

In addition to the active scenarios for OTC derivatives, ASX applies 30 internal scenarios which model shocks affecting a single tenor, the effect of assuming an increased holding period and the impact of an absolute interest rate shock.

Reverse stress testing

ASX Clear (Futures) conducts reverse stress testing of its credit stress test model in order to identify scenarios under which stress test exposures would exceed prefunded financial resources. The reverse stress test takes into account the impact of systematic shocks across multiple contracts and considers changes to other model assumptions. For instance, an assumed change in equities prices (up or down), which affects the size of exposures on SPI 200 positions, is combined with an assumed change to the level or shape of the interest rate curve (e.g. to steepen, twist, or effect a parallel shift up or down) which affects the major interest rate futures contracts. In developing these combinations of market movements, ASX considers the prevailing credit stress test scenarios, and observed historical and statistical relationships between the relevant market variables. The reverse stress test then simulates a level shift to this fixed combination of market movements to discover the point at which the default fund would be exhausted.

In order to test the sensitivity of the stress test models to other model assumptions, the reverse stress test is repeated for a wide range of scenarios. These include assuming the default of multiple participants, and varying assumptions on the size, concentration or directionality of participants' portfolios. To test these assumptions, reverse stress tests are applied to participant portfolios that exhibit certain characteristics, such as concentrated exposure to certain products or a highly directional interest rate exposure. ASX can also vary the size of participant positions in its reverse stress tests, and additionally conducts tests of extreme hypothetical portfolios that would generate losses sufficient to exhaust the default fund under plausible market scenarios.

In interpreting the results of reverse stress testing, ASX considers the plausibility of any scenarios that could exhaust the default fund. Any recommended changes to stress test scenarios or the size of the default fund would first be considered by ASX management and then escalated to the Clearing Boards for approval, where warranted. A summary of reverse stress test outcomes is reported alongside the monthly margin backtesting and credit stress test review reports and included in quarterly risk management reports to the Clearing Boards. In addition to its routine monthly reverse stress testing, ASX Clear (Futures) has developed a flexible framework for reverse stress testing that allows it to define particular combinations of assumptions that can be varied for the purposes of ad hoc analysis. These include increases in the size, or changes in the direction, of participants' positions and the magnitude of shocks applied to these positions, as well as changes to the number of participants that are assumed to default.

4.7 A central counterparty should have clearly documented and effective rules and procedures to report stress-test information to appropriate decision-makers and ensure that additional financial resources are obtained on a timely basis in the event that projected stress-test losses exceed available financial resources. Where projected stress-test losses of a single or only a few participants exceed available financial resources, it may be appropriate to increase non-pooled financial resources; otherwise, where projected stress-test losses are frequent and consistently widely dispersed across participants, clear processes should be in place to augment pooled financial resources.

Credit stress test exposures are routinely reported to ASX management, the Clearing Boards and the Bank. Participant stress test losses are used to gauge the adequacy of ASX Clear (Futures)' AFR, with widespread and/or large STEL breaches an indicator that resources may need to be increased. STEL breaches are reported to management and persistent breaches are escalated in the first instance to the CRO and CALCO. The CS Boards and ASX Limited Board are responsible for approving any increase to the default fund where this is considered necessary (see below).

Each participant in ASX Clear (Futures) is allocated a STEL based on its ICR. The maximum STEL represents one half of ASX Clear (Futures)' default fund, reflecting that ASX Clear (Futures) holds prefunded resources to cover two participant defaults.

Where the projected stress test losses of a participant exceed its STEL, ASX will call for STEL AIM. STEL AIM is calculated overnight, notified to participants by approximately 8.00 am the next day, and must be met by 10.30 am. Participants may meet these obligations using cash or non-cash collateral (see CCP Standard 5.1).

In deciding whether ASX Clear (Futures) has sufficient prefunded pooled financial resources, ASX considers the size, frequency, duration and distribution of AIM calls across participants. ASX Clear (Futures) would consider increasing these resources if stress test results in excess of prefunded pooled resources were persistent, significant and widespread. In other cases, ASX Clear (Futures) would generally rely on additional collateral collected under the AIM regime.

4.8 A central counterparty should establish explicit rules and procedures that address fully any credit losses it may face as a result of any individual or combined default among its participants with respect to any of their obligations to the central counterparty. These rules and procedures should address how potentially uncovered credit losses would be allocated, including the repayment of any funds a central counterparty may borrow from liquidity providers. These rules and procedures should also indicate the central counterparty's process to replenish any financial resources that the central counterparty may employ during a stress event, so that the central counterparty can continue to operate in a safe and sound manner.

To fully address any uncovered credit losses that ASX Clear (Futures) might face (despite partial mitigants such as adjustments to STELs and the collection of additional margin), ASX Clear (Futures) has developed enhanced loss allocation and replenishment arrangements as part of its broader package of enhanced recovery measures that came into effect in October 2015 (see CCP Standard 3.5). In June 2016, ASX Clear (Futures) implemented an enhanced approach for replenishing its default fund to return to the full level of cover following a participant default on a more timely basis.

Allocation of credit losses

Uncovered credit losses would initially be addressed via Recovery Assessments called from surviving participants. These would be capped at the level of participants' default fund contributions, if assessments were called in relation to a single default (a maximum of $200 million in aggregate); or at three times the level of participants' default fund contributions (a maximum of $600 million in aggregate), if assessments were called in relation to multiple participants defaulting within a defined default period.[11]

If there was a reasonable expectation that Recovery Assessments could be insufficient to address an uncovered loss, ASX Clear (Futures) would have the power to reduce (haircut) outgoing payments to participants in order to allocate losses suffered on the defaulting participant's portfolio. For example, a haircut could be applied to variation margin payments due to participants with net in-the-money positions in the event of mark-to-market loss on the defaulter's portfolio. Payment haircuts could be applied to a broad range of ASX Clear (Futures)' payment obligations, excluding the return of initial margin. There is no cap on the use of payment haircutting to allocate uncovered losses, although ASX Clear (Futures) would consult with the Risk Consultative Committee in determining whether to continue payment haircutting if losses allocated via this tool exceed $650 million or where haircutting continued for a period of more than seven business days.

Any residual losses that could not be addressed via Recovery Assessments or payment haircutting would be allocated to participants via a power to completely terminate all open contracts. Complete termination would be reserved as a last resort tool if there was no other means of addressing an uncovered loss (including via intervention of the Reserve Bank as resolution authority if current proposals for a special resolution regime for FMIs are implemented). Under complete termination all open contracts at the CCP would be settled with participants at their current market value, with any residual losses of the CCP allocated by haircutting settlement payments to participants. Reliance on complete termination is extremely unlikely, since payment haircutting provides an uncapped mechanism to allocate losses associated with market risk on the defaulter's portfolio.


In June 2016, ASX implemented an enhanced approach for replenishing ASX Clear (Futures)' financial resources following a participant default (see Box A). The new approach relies on mandatory contributions from both the CCP and its participants. As soon as practicable following the conclusion of the default management process, ASX Clear (Futures) would make an ‘initial interim replenishment’ contribution to restore its default fund up to at least the Minimum Fund Size of $100 million. At the end of a 22-business-day ‘cooling-off period’, the default fund would be fully replenished to $400 million.[12] In order to maintain the required level of financial cover during the interim period, ASX would supplement its initial contribution with AIM called from participants. ASX would also have the discretion to call a ‘further interim replenishment’ contribution from participants during the cooling-off period; this would be capped at the level of the Minimum Fund Size. Individual participant contributions to interim replenishment would be proportional to, and capped at, the level of each participant's default fund contribution prior to the default (see CCP Standard 3.2).

The composition of the default fund following final replenishment at the end of the cooling-off period would depend on the amount to be replenished; the larger the initial drawdown, the closer would be the post-replenishment composition to a 50/50 split of ASX and participant contributions. Total replenishment contributions (i.e. including both interim and final contributions) would be capped at $200 million for each of ASX Clear (Futures) and its participants, with individual participant contributions capped at twice the level of their default fund contribution prior to the default.

If further increases to the default fund were subsequently required, these would be met 50/50 by ASX and participant contributions as part of a quarterly recalibration of the default fund. ASX's plans for recapitalisation include the use of existing group cash reserves and raising additional capital through an equity issuance by ASX Limited. To support the legal certainty of its new replenishment arrangements, ASX Clear (Futures) established an intragroup Replenishment Deed, which governs the provision of funds for ASX Clear (Futures)' replenishment obligations by ASX Limited. ASX's plans to fulfil its obligations to replenish the ASX Clear (Futures) default fund include the use of existing group cash reserves and raising additional capital through an equity issuance by ASX Limited.


For more information, see ‘Supplementary interpretation of CCP Standards’ in Appendix A. [8]

For more information, see ‘Summary of submissions and final policy proposals on the Consultation Paper: Oversight of Designated Financial Market Infrastructures’, available at <http://www.rbnz.govt.nz/-/media/ReserveBank/Files/regulation-and-supervision/financial-market-infrastructure-oversight/regulatory%20developments/summary-of-submissions-and-final-policy-proposals-FMI-oversight-dec-2015.pdf?la=en>. [9]

A fifth forward-looking scenario, involving a shock to electricity prices, is included in the two electricity contract scenarios under the next point. [10]

The cap on assessments for multiple defaults remains in place until the expiry of a ‘default period’ that commences with the default of the first participant and concludes 22 business days after completion of the default management process for the final defaulting participant, where each default is separated from completion of the default management process for the preceding one by 22 business days or less. [11]

The cooling-off period concludes 22 business days after the conclusion of the final default management process initiated during the period. Subsequent defaults within this period would therefore extend the cooling-off period by a further 22 business days from the point at which the subsequent default management process was successfully concluded. [12]