2015/16 Assessment of ASX Clearing and Settlement Facilities A1.2 ASX Clear (Futures) Standard 6: Margin

A central counterparty should cover its credit exposures to its participants for all products through an effective margin system that is risk based and regularly reviewed.

ASX Clear (Futures) applies initial and variation margin to derivatives exposures, using margin systems that are tailored to the particular attributes of the cleared products (CCP Standard 6.1). Timely price data are available for most products subject to ASX Clear (Futures)' margin systems, and ASX Clear (Futures) applies appropriate models to estimate prices when timely and reliable data are not available (CCP Standard 6.2). ASX Clear (Futures)' margin models target a single-tailed confidence level of at least 99 per cent of the estimated distribution of future exposure for exchange-traded financial instruments, and 99.5 per cent of the estimated distribution of future exposure for OTC derivatives, applying appropriate and conservative assumptions regarding holding periods, product risks, portfolio effects, product offsets and floors to limit the need for procyclical changes (CCP Standards 6.3, 6.5). In addition, ASX Clear (Futures) applies variation margin to derivatives positions daily, and may call intraday margin as part of scheduled processes or in the event of significant market movements (CCP Standard 6.4).

ASX Clear (Futures) performs daily and periodic backtesting of its margin models to assess the adequacy of initial margin against the targeted level of cover and performs an annual review of margin policy. ASX Clear (Futures) uses sensitivity analysis to validate the assumptions underpinning margin models, including to test the reliability of implicit or explicit product offsets (CCP Standard 6.6). ASX Clear (Futures) regularly reviews and validates its margin models. An external expert conducted a comprehensive review of ASX Clear (Futures)' margin models in 2014/15; the second validation of the SPAN model was completed in July 2016 using an external expert (CCP Standard 6.7). The operating hours of ASX Clear (Futures)' margin systems are consistent with those of related payment and settlement systems in Australia (CCP Standard 6.8). Consistent with the Bank's supplementary interpretation of CCP Standard 6.3, ASX Clear (Futures) applies a greater than 99.5 per cent confidence interval and a five-day holding period to its calibration of margin for OTC derivatives.

6.1 A central counterparty should have a margin system that establishes margin levels commensurate with the risks and particular attributes of each product, portfolio and market it serves.

ASX Clear (Futures) applies initial and variation margin to all derivatives products. Initial margin provides protection to a CCP in the event that a participant defaults and an adverse price change occurs before the CCP can close out the defaulted participant's positions (potential future exposure). Variation margin is levied to reflect observed price movements (current exposure); it is collected from the participant with a mark-to-market loss and (typically) passed through to the participant with a mark-to-market gain.

Exchange-traded derivatives

ASX Clear (Futures) has adopted a variant of the internationally accepted SPAN methodology for calculation of initial margin. For exchange-traded derivatives products, initial margin rates are calibrated to cover the higher of 3 standard deviations of the 60-day and 252-day historical distributions of price movements, using the higher of one- or two-day movements. Margin rates are reviewed on a three-monthly cycle for all products except SPI futures, which are reviewed on a monthly cycle. Regular margin rate reviews are supplemented with ad hoc reviews during especially volatile market conditions. ASX Clear (Futures) also levies variation margin on positions at least daily to reflect observed price movements.

OTC derivatives

ASX Clear (Futures) margins OTC derivatives portfolios (including interest rate futures that have been allocated for portfolio margining with OTC derivatives positions (see CCP Standard 6.5)) using an FHSVaR model within the Calypso margin system. The OTC IRS FHSVaR margin model is calibrated so as to cover the 99.7th percentile of the historical distribution of five-day price movements observed since June 2008. By calculating initial margin requirements on a portfolio basis using the historical distribution of price movements, this methodology adjusts for observed price volatility and correlation. The five-day holding period reflects the lower liquidity in OTC derivatives products. This approach is closely aligned with the methodology used at other OTC derivatives CCPs internationally.

6.2 A central counterparty should have a reliable source of timely price data for its margin system. A central counterparty should also have procedures and sound valuation models for addressing circumstances in which pricing data are not readily available or reliable.

ASX Clear (Futures) has access to timely price data for its exchange-traded products.

To value cleared OTC derivatives products, ASX Clear (Futures) uses a range of BBSW, ICAP and Reuters pricing points, as well as the official cash rate, pricing from 90-day bank bill futures contracts, and swap yields for contracts greater than three years. These sources provide sufficient pricing points to value the OTC derivatives products that ASX Clear (Futures) clears, even when some pricing data are not readily available or reliable. Prices are also compared against Bloomberg prices for second source validation. Prices for the OTC IRS margin system are updated hourly. Participants are given all information necessary to create the end-of-day yield curve and independently calculate the net present value of any contract.

OTC valuations and exposures based on these prices are combined with data covering other positions cleared on ASX Clear (Futures) to calculate each participant's overall margin requirement. This task may be performed on a scheduled basis (e.g. at open, at midday or at end of day), or ad hoc as market conditions warrant.

6.3 A central counterparty should adopt initial margin models and parameters that are risk based and generate margin requirements sufficient to cover its potential future exposure to participants in the interval between the last margin collection and the close out of positions following a participant default. Initial margin should meet an established single-tailed confidence level of at least 99 per cent with respect to the estimated distribution of future exposure. For a central counterparty that calculates margin at the portfolio level, this requirement applies to each portfolio's distribution of future exposure. For a central counterparty that calculates margin at more granular levels, such as at the sub-portfolio level or by product, the requirement should be met for corresponding distributions of future exposure. The model should: use a conservative estimate of the time horizons for the effective hedging or close out of the particular types of products cleared by the central counterparty (including in stressed market conditions); have an appropriate method for measuring credit exposure that accounts for relevant product risk factors and portfolio effects across products; and to the extent practicable and prudent, limit the need for destabilising, procyclical changes.

Exchange-traded derivatives

ASX Clear (Futures) calculates initial margin requirements for exchange-traded derivatives using the SPAN methodology. The SPAN methodology calculates initial margin requirements that reflect the total risk of each portfolio – for ASX Clear (Futures), each house, omnibus client or individual client account is considered a separate portfolio. The key parameters in the SPAN methodology are the PSR and VSR. These scanning ranges are individually calibrated to the distribution of price and volatility movements for a set of related contracts under normal market conditions. The scanning ranges inform a set of 16 hypothetical risk scenarios used to measure the loss from a portfolio under alternative combinations of changes in price and volatility. For example, in one risk scenario, price increases by one-third of the PSR and volatility falls by the full VSR, while in another scenario price falls by the full PSR and volatility rises by the full VSR. The margin rate is then based on the highest estimated loss across the 16 scenarios.

ASX Clear (Futures) bases the scanning ranges on key volatility statistics; namely, the higher of 3 standard deviations (a confidence interval greater than 99.7 per cent) of a 60-day or 252-day sample distribution, using the higher of one- or two-day price movements.[13] The sample periods seek to balance incorporating recent market conditions with avoiding destabilising procyclical changes. The inclusion of two-day price movements reflects an assumption that a defaulter's positions may take up to two days to close out.

ASX Clear (Futures) also applies a series of adjustments within SPAN to account for correlations and specific risks.

  • Intra-commodity spread charge. This is an adjustment to the margin requirement for a given set of related contracts, to account for less-than-perfect correlation between contracts with different expiries. This adjustment is based on a participant's actual net position at each expiry month multiplied by an ‘intra-commodity charge rate’, which is itself based on observed price correlations between the different expiries. The default setting is to apply a single charge rate. However, for some contracts ASX utilises SPAN's charge-rate tiering functionality. This allows charge rates to vary depending on the temporal difference in the pair's expiries.
  • Inter-commodity spread concession. ASX Clear (Futures) also applies offsets designed to account for reliable and economically robust correlations across different contract types (see CCP Standard 6.5). These offsets reflect that, while the scanning risk for each related contract – a ‘combined commodity’ in SPAN terminology – is set based on the worst-case risk scenario for that combined commodity, it may be highly unlikely that the set of worst-case scenarios occurs simultaneously. This is particularly the case if a participant holds net long and net short positions in different related contracts that have a robust positive correlation. The inter-commodity spread concession is calculated by applying (in a defined order) a spread ratio and concession rate to a participant's actual net positions in pairs of related contracts. The spread ratio determines the number of net positions in one related contract required to offset a position in another related contract. The concession rate is specified as a percentage of the scanning risk for both contracts in the pair. For example, for 10-year bond futures relative to 90-day bank bill futures, a spread ratio of 1:4 and a concession rate of 40 per cent would mean that one net position in the 10-year bond contract is offset against four net positions in the 90-day bank bill contract, and that the concession for that pairing will be 40 per cent of the scanning risk of the contracts subject to the offset. ASX calculates these parameters in the same manner as the price movement for the intra-commodity spread charge.
  • Other adjustments. ASX Clear (Futures) applies an adjustment to cover its exposure on the day of contract expiry, since expiring positions are otherwise not included in that day's initial margin calculations. ASX also maintains a minimum margin requirement on short positions to ensure the collection of margin on deep out-of-the-money options that would otherwise return no scanning range.

ASX targets the major inputs (including the PSR and VSR) to a minimum 99.7 per cent confidence level. Other inputs are calibrated to the requirements of the standard to exceed a 99 per cent confidence interval.

Under ASX's internal Margin Standard, management discretion can be used if the application of the standard statistical analysis would result in inappropriate outcomes; for example, if the backward-looking statistical analysis does not take appropriate account of expected future price movements. Other reasons for using management discretion include insufficient historical data (e.g. where a product is new), seasonality in some products, and isolated spikes in price movements that result in a distortion of statistical recommendations. Where such a statistical override is made outside of a RQG approved margin review, it must be authorised by the Senior Manager of CRPM or the Manager of Exposure Risk Management with notification to the CRO and the General Manager, CRQ. The ASX Margin Standard also allows exceptions to the normal margin rate-setting process based on a broader risk assessment – where such exceptions are made outside of a RQG approved margin review, they require the approval of the Senior Manager of CRPM and the General Manager of CRQ.

OTC derivatives

ASX Clear (Futures) uses an FHSVaR model to calculate margin requirements for OTC derivatives, based on the historical sample period since June 2008. Observations within the sample period are scaled based on the relative volatility of the current period to that of the historical period. These relative volatilities are calculated using an exponential decay factor (currently 0.97), which places greater weight on more recent observations. To assist in ensuring that the methodology remains conservative and to limit the need for procyclical changes, ASX Clear (Futures) continues to include the extreme observations from the second half of 2008 within its sample period, by fixing the beginning of the sample period at June 2008. ASX also imposes an explicit floor on the volatility scaling factor. This floor is currently set at one, which ensures that historical observations can only be scaled in a way that increases the volatility of returns. ASX Clear (Futures) calibrates initial margin based on a 99.7 per cent confidence interval with an assumed holding period of five days, consistent with the Bank's supplementary interpretation of this sub-standard.

ASX applies a liquidity multiplier to the FHSVaR model requirement, to account for any additional costs that might arise from the close-out of an illiquid portfolio (defined as a portfolio with a margin requirement that exceeds a particular threshold, with higher multipliers applying to portfolios with larger margin requirements). The size of the applicable liquidity multipliers are calculated as a percentage of initial margin requirements, based on participant estimates of the market capacity and liquidity costs that may be faced in a close-out scenario.

Under ASX Clear (Futures)' client clearing arrangements for OTC derivatives, initial margin requirements for client portfolios may be subject to an additional add-on. Where this add-on is applied, initial margin requirements for client portfolios are calculated by applying a scaling factor to the margin settings used for participants' house positions, which effectively increases the holding period for client positions to seven rather than five days.

6.4 A central counterparty should mark participant positions to market and collect variation margin at least daily to limit the build-up of current exposures. A central counterparty should have the authority and operational capacity to make intraday margin calls and payments, both scheduled and unscheduled, to participants.

Margin requirements for both futures and OTC participants are calculated overnight, with variation margins based on closing prices each day, and notified to participants the next morning. All margin obligations are settled via Austraclear and regular calls must be met by 10.30 am.

ASX Clear (Futures) may make intraday calls where there is significant erosion in the margin cover provided by individual participants. Intraday margin calls reflect changes in participants' positions and price movements. Participants are notified of the call by phone and email, and must make the payment within two hours of notification. In August 2015, ASX adjusted the timing of intraday margin calculations and introduced a third additional intraday margin run, in order to take into account price movements and changes in positions later in the day, with revised payment to be made within one hour of notification. Intraday margin runs are now conducted for both futures and OTC participants at 8.05 am, 11.10 am and 1.30 pm. Alongside these changes, ASX also introduced the capability to return in the third run any intraday margin posted to house accounts during earlier runs. This would most commonly occur where a call had been made on the house account of a participant due to client trades that had not yet been allocated at the time of the margin run. This may occur when the clearing and allocation of an executed trade was in progress during an intraday margin run.

Intraday margin is called if a participant's margin balance is eroded by more than a predefined percentage threshold or by more than a predefined dollar value threshold, and the call amount exceeds $1 million. The percentage erosion threshold is 25 per cent for participants that clear exchange-traded products only, 10 per cent for participants that clear OTC derivatives products only and 20 per cent for participants clearing both OTC and exchange-traded products. The dollar value threshold varies depending on the ASX's ICR of the participant; it also varies across a participants' house and client positions. It is currently set at $15 million for the house accounts of A- and B-rated participants, and $35 million for the client accounts of these participants. For C-rated participants, this threshold is set at $6 million for house accounts and $14 million for client accounts.

In addition to the scheduled intraday margin runs, ASX Clear (Futures) may conduct an ad hoc intraday margin run for if price moves exceed certain specific thresholds intraday. Ad hoc runs are triggered if the change in price of an individual contract exceeds 100 per cent of its margin rate (the PSR in SPAN))[14] or the ASX SPI 200 index price changes by 1 per cent or more intraday. Furthermore, under ASX Clear (Futures)' AIM methodology (discussed above in relation to CCP Standard 4), a participant is required to post additional collateral should stress test outcomes reveal potential losses that exceed a predetermined STEL or if participants have large portfolios relative to their capital (see CCP Standards 4.3 and 4.7).

If a margin payment is not made by the required time, ASX will contact the participant to determine the reasons for the delayed payment. Delayed payments are not common. When they do occur, they are typically the result of communication or technical issues involving the participant and/or its payment provider. Early communication by ASX aims to ensure that, in such cases, payment can still be made within a short period of the required time. In the event that the matter was more serious, ASX would investigate to decide whether a default event should be declared and, if so, how the default should be managed (see CCP Standard 12).

ASX Clear (Futures) also recalculates its exposures to participants on an approximately hourly basis as a ‘for-information’ calculation. Unlike the other margin runs, this recalculation does not trigger calls for additional collateral and the results of these calculations are not reviewed in real time. ASX uses the information from these for-information runs to inform its intraday risk management policy, particularly in respect of identifying and mitigating risks associated with participants' overnight activity.

6.5 In calculating margin requirements, a central counterparty may allow offsets or reductions in required margin across products that it clears or between products that it and another central counterparty clear, if the risk of one product is significantly and reliably correlated with the risk of the other product. Where a central counterparty enters into a cross-margining arrangement with one or more other central counterparties, appropriate safeguards should be put in place and steps should be taken to harmonise overall risk management systems. Prior to entering into such an arrangement, a central counterparty should consult with the Reserve Bank.

In applying the SPAN methodology to futures transactions, ASX allows offsets in the form of ‘inter-commodity spread concessions’ (see CCP Standard 6.3). These offsets reduce margin requirements to account for reliable and economically robust correlations observed across related contracts. Inter-commodity spread concessions are only applied where measures of correlation between contracts exceed 30 per cent and the correlation is based on economic fundamentals. ASX uses sensitivity analysis to verify the reliability of assumed correlations between products used in calculating inter-commodity spread concessions. Changes to inter-commodity spread concessions must be approved by the RQG, which considers whether changes identified by SPAN appropriately reflect underlying economic relationships, including in periods of market stress, and are subject to a cap to mitigate the risk of correlation instability.

ASX Clear (Futures) also allows OTC participants to recognise portfolio offsets between directly cleared interest rate futures and OTC derivatives. To recognise these offsets, futures positions must be reallocated from a participant's futures portfolio to its OTC derivatives portfolio. To be eligible for reallocation to the OTC portfolio, the futures positions must be risk-reducing in the OTC portfolio. Futures positions that have been reallocated to a participant's OTC derivatives portfolio are margined under the OTC IRS FHSVaR model, rather than using the SPAN methodology. While Value at Risk (VaR) margining can result in less conservative estimates of correlations, interest rate futures in the pool under the OTC IRS FHSVaR methodology are subject to a five-day rather than a one- to two-day holding period assumption. As a result, ASX has indicated that, absent an offset, outright portfolio-margined interest rate futures would generally be subject to higher margin requirements under the OTC IRS FHSVaR methodology than under the SPAN methodology.

In January 2016, ASX introduced a tool to automatically optimise the allocation of futures positions to a participants OTC derivatives portfolio. This tool identifies and allocates eligible futures contracts within a participant's portfolio that will, if reallocated to the participant's OTC derivatives portfolio, lead to a reduction in total calculated exposure – and therefore also total initial margin – across both portfolios. Prior to the introduction of this tool, participants had to manually identify and allocate specific futures contracts for portfolio-margining.

Portfolio-margining recognises the economic relationship between AUD IRS and AUD interest rate futures and, to the extent that positions are indeed offsetting, would be expected to result in a reduction in the amount of initial margin required relative to the case in which positions were margined independently. Notwithstanding the economic relationship between AUD IRS and AUD interest rate futures, analysis of historical data demonstrates that the basis does vary over time, particularly during times of stress. This observed change of basis is captured through the Historic VaR margining process. The robustness of the empirical relationship between AUD IRS and AUD interest rate futures in stressed market conditions is addressed through the introduction of stress test scenarios that capture basis risk, as discussed above under CCP Standard 4.6. In addition, margin sensitivity analysis that varies the length and composition of the historical simulation period is used to test the effect on margin coverage of variations in observed correlations across products over time. In particular, the inclusion of periods of stress in the historical simulation period tests whether changes in the relationship between products in times of stress affects margin coverage (see CCP Standard 6.6).

ASX Clear (Futures) does not currently have any cross-margining arrangements with any other CCPs.

6.6 A central counterparty should analyse and monitor its model performance and overall margin coverage by conducting rigorous daily backtesting and at least monthly, and more frequent where appropriate, sensitivity analysis. A central counterparty should regularly conduct an assessment of the theoretical and empirical properties of its margin model for all products it clears. In conducting sensitivity analysis of the model's coverage, a central counterparty should take into account a wide range of parameters and assumptions that reflect possible market conditions, including the most volatile periods that have been experienced by the markets it serves and extreme changes in the correlations between prices.


Under ASX's Model Validation Standard, daily backtesting of both the SPAN and the OTC IRS FHSVaR margin models is used to test, on an ongoing basis, whether the margin models reliably cover price movements to at least a 99 per cent confidence interval. Daily backtesting is performed against both dynamic and static actual portfolios. Backtesting against actual dynamic portfolios involves the comparison of actual initial margin collected from a representative participant or client against actual variation margin calculated over the following one or two days (for SPAN), depending on which is the larger amount, or the following five days for the OTC IRS FHSVaR model. One limitation of using variation margin on dynamic portfolios to model changes in the value of a portfolio over the holding period is that it is influenced not only by market movements but also by changes in the composition of the portfolio. To address the limitations of dynamic portfolio analysis, static portfolio backtests are used to hold the portfolio composition constant over time. When static portfolios are used, ASX calculates hypothetical variation margin obligations for each day of the validation period based on historical price movements, and compares these to initial margin calculated on the static portfolio. The static portfolio used may be an actual portfolio held by a representative participant or client, or it may be a purely hypothetical portfolio; for example, one designed to examine the implications of directionality in positions or concentrations of exposures. Under both types of backtest, when variation margin is greater than initial margin an ‘exception’ is recorded. CRPM compares the number of exceptions to the expected number of exceptions, based on a 99.7 per cent confidence interval for static portfolios, a 99.5 per cent confidence interval for dynamic OTC participant portfolios, and a 99 per cent confidence interval for dynamic exchange-traded futures portfolios.

A report summarising the results of backtesting is automatically generated and circulated to relevant staff in the Risk division. Further analysis is undertaken when an exception is recorded, both to investigate model performance and to investigate the potential financial implications of the exception given the particular participant and portfolio affected. Further investigation also takes place if the actual number of exceptions exceeds the expected number. By investigating further, ASX determines whether any follow-up actions are required, such as the calling of additional margin or the managing down of positions.

Daily backtesting reports are aggregated into a monthly backtesting report which compares the number of observed exceptions to expected exceptions for the previous month, quarter and year. This report, which also includes the results of sensitivity analysis (see below) is reviewed by the RQG and used to identify the need for further investigation of margin model performance. RQG will take into account the frequency and magnitude of any breaches in determining whether to commission additional analysis from CRQ.

On a periodic basis, approximately every four months, ASX performs a more comprehensive backtesting analysis of each of its margin models. The periodic reviews allow ASX to examine the model in more detail and provide a basis for recommending changes to the model or further analysis. Hypothetical portfolios extend the analysis, allowing ASX to test the performance of margin models when applied to portfolios with certain characteristics (e.g. mix of contracts, concentrations, directionality) that may be particularly adversely affected by market conditions during the validation period.

Sensitivity analysis

ASX applies sensitivity analysis to its SPAN and FHSVaR margin models on a monthly basis. Sensitivity analysis allows ASX to test the performance of a model beyond the boundaries of its existing assumptions, potentially also examining the implications of assumptions that would not reasonably be expected to hold. ASX has developed internal guidance setting out its approach to sensitivity analysis for margin models, which highlights three main assumptions that it varies when conducting sensitivity analysis: the confidence interval, holding period and look-back period. In addition, ASX investigates the impact of varying the historical simulation period for the OTC IRS FHSVaR model, the impact of varying the key inputs and methodology used in determining inter-commodity spread concession rates, and the application of floors to model parameters in SPAN. If varying particular inputs reveals weaknesses in the model, as evidenced by a larger number of exceptions than expected, ASX considers whether to make adjustments to the model. Where sensitivity analysis identifies potential weaknesses in margin models, the RQG will consider recommended changes to address these.

6.7 A central counterparty should regularly review and validate its margin system.

ASX Clear (Futures)' margin methodologies are also subject to a comprehensive annual validation and ongoing review under ASX's Model Validation Standard (see CCP Standard 4.5). The RQG is responsible for reviewing the regular reviews of models carried out by CRQ, while Internal Audit coordinates the independent validation process with CRQ input. 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 SPAN model must be validated using an external expert on an annual basis, while the OTC IRS FHSVaR model must be validated by an independent internal expert once every two years. During the 2014/15 Assessment period, ASX engaged external experts for a three-year period to conduct annual validations of ASX's key risk models, including both the SPAN and OTC IRS FHSVaR margin models. The first independent validations of the SPAN and OTC IRS FHSVaR models were completed in June 2015 and July 2015 respectively using an external expert, and a second validation of the SPAN model was completed in July 2016 also using an external expert. The Bank will continue to monitor the outcome of these validations.

At ASX, the margining process is governed by an internal Margin Policy and Margin Standard, which is reviewed annually, with material changes approved by the Clearing Boards. The authorisation and documentation process for margin parameter changes and guidelines for the application of management discretion are also reviewed annually.

ASX publishes detailed margining information on its website, including descriptions of the margining methodology, schedules of margin rates, and daily SPAN margin parameter files. These files allow participants to perform margin calculations on hypothetical or actual portfolios. ASX also provides a margin simulator that allows OTC participants to estimate margin requirements on OTC derivatives and portfolio-margined futures positions.

6.8 In designing its margin system, a central counterparty should consider the operating hours of payment and settlement systems in the markets in which it operates.

ASX Clear (Futures) primarily provides clearing services for the Australian-based ASX 24 market and, from July 2013 the AUD-denominated OTC interest rate swap market. ASX Clear (Futures)' timetables for margin calculation and collection are consistent with the operating hours of the relevant payment and settlement systems (Austraclear and RITS, as well as NZClear for NZD margin).


ASX assumes a normal distribution of prices in specifying its desired confidence level in standard deviations. [13]

For the NZ 90-day bank bill traded on the New Zealand Futures & Options Exchange, an ad hoc run is triggered if the change in the price of the contract exceeds 50 per cent of its margin rate. [14]