2015/16 Assessment of ASX Clearing and Settlement Facilities A1.2 ASX Clear (Futures) Standard 5: Collateral

A central counterparty that requires collateral to manage its or its participants' credit exposures should accept collateral with low credit, liquidity and market risks. A central counterparty should also set and enforce appropriately conservative haircuts and concentration limits.

ASX Clear (Futures) limits the assets it routinely accepts as collateral to cash, or assets with low credit, liquidity and market risks (CCP Standard 5.1). Assets accepted as collateral are commonly accepted in the Australian market and there is sufficient depth in these assets that their eligibility as collateral is not considered to have any material market impact (CCP Standard 5.2). ASX Clear (Futures) applies haircuts to collateral that are calibrated to stressed market conditions, to limit the need for procyclical adjustments (CCP Standards 5.3, 5.4). Non-cash collateral comprises only a small proportion of total collateral received by ASX Clear (Futures). In addition, these collateral holdings are not sufficiently concentrated as to impair ASX Clear (Futures)' ability to liquidate such assets quickly without significant adverse price effects (CCP Standard 5.5). ASX Clear (Futures) retains discretion over whether to accept foreign currency collateral on a case-by-case basis, and takes into account concentration limits in exercising this discretion (CCP Standard 5.6). ASX Clear (Futures) employs systems that adequately support the movement of collateral for securities and derivatives trades (CCP Standard 5.7).

5.1 A central counterparty should generally limit the assets it (routinely) accepts as collateral to those with low credit, liquidity and market risks.

ASX's approach to collateral is documented in a Collateral Policy and a Collateral Standard. These documents set out ASX's collateral eligibility criteria, procedures for review of eligibility, the basis for calibrating haircuts and arrangements for the review of collateral settings.

The acceptable collateral depends upon the type of margin called.

  • Futures participants generally meet their initial margin obligations using AUD cash, although they may also use high-quality non-cash collateral, such as eligible debt securities, and deposits in major foreign currencies. The acceptable types of non-cash collateral are Australian Government and some semi-government securities, and US Treasury bills. Acceptable foreign currencies are NZD, European Union euro (EUR), Japanese yen (JPY), United States dollar (USD) and United Kingdom pound (GBP). Acceptable collateral is reviewed annually, with haircuts applied to all non-cash collateral posted and all cash collateral that is not in the same currency as the product being covered.
  • Participants may meet STEL AIM obligations using AUD cash or non-cash collateral, including Australian Government and some semi-government securities, bank bills and negotiable certificates of deposit from ADIs. Foreign currencies are not eligible for STEL AIM calls.
  • Variation margin and intraday margin must be settled in cash.

ASX Clear (Futures) does not accept collateral that is issued by a clearing participant or associated entity for any margin calls. This reduces the possibility that it might face the default of both a clearing participant and a collateral issuer (‘wrong-way risk’). ASX Clear (Futures) does not accept bank guarantees or letters of credit as collateral.

5.2 In determining its collateral policies, a central counterparty should take into consideration the broad effect of these policies on the market. As part of this, a central counterparty should consider allowing the use of collateral commonly accepted in the relevant jurisdictions in which it operates.

ASX Clear (Futures) takes into account market liquidity in determining the eligibility of collateral. ASX Clear (Futures) considers the debt securities that it will accept as collateral – Australian Government and some semi-government securities, US Treasury bills, bank bills and negotiable certificates of deposit issued by Australian ADIs – to be sufficiently liquid that the eligibility of these assets as collateral will not have any material impact on market liquidity or price. In light of the depth of liquidity in these assets, ASX Clear (Futures) would also expect to be able to liquidate such collateral in a timely fashion as required. These assets are also commonly accepted in the Australian market, including by the Bank.

5.3 A central counterparty should establish prudent valuation practices and develop haircuts that are regularly tested and take into account stressed market conditions.

Since the eligible assets for non-cash collateral at ASX Clear (Futures) – Australian Government and some semi-government securities, US Treasury bills, bank bills and negotiable certificates of deposit from Australian ADIs – are highly liquid, price information is readily available. ASX revalues non-cash collateral on a daily basis using end-of-day prices.

In June 2016, ASX Clear (Futures) revised its definition of ‘stressed market conditions’ for haircut setting purposes. Under the revised approach, ASX Clear (Futures) sets haircuts on non-cash collateral to cover a fall in the collateral value of securities over a three-day period at a 99.9 per cent confidence level, based on 20 years of price history, where available. This coverage is equivalent to the fifth worst price move over the 20 years of price history. ASX also applies haircuts using the same methodology, although using a one-day holding period, to cash collateral lodged to meet margin requirements for products denominated in a currency other than the collateral (currently between 3 and 6 per cent, depending on the currency). ASX had previously calibrated haircuts to cover the largest price fall over the 20 years of price history, which is consistent with the methodology used to calculate price falls of contracts in credit stress test scenarios (see CCP Standard 4.6). To account for this change in its credit stress test framework, ASX Clear (Futures) is planning to introduce the capability to additionally stress collateral in credit stress testing to cover once-in-20-year events. These changes will be implemented through enhancements to its risk management system (see Section 3.5.1). Alongside these changes, ASX has changed the frequency for review of collateral haircuts from annually to at least semi-annually.

5.4 In order to reduce the need for procyclical adjustments, a central counterparty should establish stable and conservative haircuts that are calibrated to include periods of stressed market conditions, to the extent practicable and prudent.

ASX Clear (Futures)' collateral haircutting policy is designed to cover stressed market conditions based on the fifth-most extreme market price and volatility movement observed in the past 20 years, which includes the extreme volatility observed during the 2008-09 financial crisis. This is intended to ensure that haircuts remain stable over the business cycle, even in stressed market conditions. Prior to June 2016, haircuts had previously been set to cover the largest price fall over the 20 years of price history.

5.5 A central counterparty should avoid concentrated holdings of certain assets where this would significantly impair the ability to liquidate such assets quickly without significant adverse price effects.

Cash remains the sole form of collateral utilised by the majority of participants. The maximum holding of non-cash collateral during the Assessment period was $247.5 million (around 7.4 per cent of total initial margin). ASX also considers that the assets eligible for non-cash collateral – Australian Government and some semi-government securities, US Treasury bills, bank bills and negotiable certificates of deposit from Australian ADIs – are sufficiently liquid that concentration is unlikely to be a significant concern. Concentration risk in foreign currencies is considered whenever a participant approaches ASX for approval to lodge foreign currency collateral (see CCP Standard 5.6).

ASX maintains a risk-based policy for managing concentration risks in its CCPs (see CCP Standards 4.2, 18.4). However, this policy does not address concentrations in collateral holdings in ASX Clear (Futures) since non-cash collateral currently makes up only a small proportion of total collateral received. Should the materiality of non-cash collateral increase, ASX would expect to apply a similar policy on concentration limits to that applied in the investment mandate (see Standard 15.4). The Bank will continue to discuss with ASX its approach to monitoring collateral concentration risks.

5.6 A central counterparty that accepts cross-border collateral should mitigate the risks associated with its use and ensure that the collateral can be used in a timely manner

ASX Clear (Futures) accepts cross-border collateral for initial margin; namely, selected foreign currencies and US Treasury bills. During the Assessment period, maximum foreign cash holdings were around $370 million (AUD equivalent) in comparison to average total collateral holdings of around $3.70 billion (daily average of collateral holdings during 2015/16), while no US Treasury bills were held.

ASXCC's Investment Mandate specifies metrics for large or concentrated holdings of non-AUD collateral which trigger escalation to senior management. Escalation is triggered if non-AUD holdings exceed 25 per cent of liquid assets held by ASXCC, or if the net present value of a basis point in any single non-AUD currency exceeds $5000. Haircuts are applied to both foreign cash collateral and US Treasury bills (see CCP Standard 5.3). Participants must lodge a request to post foreign currency, which is reviewed and then approved or denied by the Portfolio Risk Management team. In making this determination, the Portfolio Risk Manager takes into account the limits on foreign currency, as well as the concentration risk in accepting the request.

ASX Clear (Futures) has the ability to use foreign exchange swaps to facilitate the timely use of collateral in foreign currencies. Arrangements for the settlement of foreign currencies are described in CCP Standard 9.

5.7 A central counterparty should use a collateral management system that is well designed and operationally flexible.

Collateral management system

ASX Clear (Futures) manages the calculation and execution of margin calls through internal risk analysis and margin management systems. These are linked to its core Genium system for information on positions, SPAN Margin Engine Service for margin parameters and margining, and Austraclear's EXIGO system for the lodgement of settlement instructions. These systems monitor initial and variation margin levels and flows on an intraday basis. The direct link to Austraclear facilitates the timely deposit, withdrawal and substitution of non-cash collateral and settlement of cash collateral.

ASX Clear (Futures)' participants can also make use of ASX's collateral management service, ASX Collateral, for the management of non-cash collateral lodged with the CCP. However, ASX Collateral was not used for the lodgement of any collateral at ASX Clear (Futures) during the Assessment period.

Re-use of collateral

ASX Clear (Futures) does not re-use non-cash collateral posted by participants and the re-use of such collateral is not permitted under its Operating Rules.