2015/16 Assessment of ASX Clearing and Settlement Facilities A1.2 ASX Clear (Futures) Standard 9: Money settlements

A central counterparty should conduct its money settlements in central bank money where practical and available. If central bank money is not used, a central counterparty should minimise and strictly control the credit and liquidity risk arising from the use of commercial bank money.

ASX Clear (Futures) conducts its AUD money settlements, which constitute 97 per cent of its settlement flows, via Austraclear instructions. Interbank payments arising from these instructions settle across ESAs at the Bank, via RITS. NZD money settlements are also conducted in central bank money via the NZClear system (CCP Standard 9.1). Other foreign currency settlements take place in commercial bank money (CCP Standard 9.2). Commercial banks involved in the settlement of foreign currency transactions must be highly rated and subject to prudential regulation to minimise associated credit, liquidity and operational risks (CCP Standard 9.3). Arrangements with commercial banks are also governed by standard legal agreements that include general information regarding the timing and availability of funds (CCP Standard 9.5).

9.1 A central counterparty should conduct its money settlements in central bank money, where practical and available, to avoid credit and liquidity risks. A central counterparty that the Reserve Bank determines to be systemically important in Australia and has Australian dollar obligations should settle its Australian dollar obligations across an Exchange Settlement Account held at the Reserve Bank, in its own name or that of a related body corporate acceptable to the Reserve Bank.

AUD and NZD money settlements in ASX Clear (Futures) are settled in central bank money, but collateral in other currencies (currently EUR, JPY, USD and GBP) is lodged via arrangements with commercial banks.

AUD settlements, which represent the vast majority of money settlement in ASX Clear (Futures), are initiated via the submission of standard settlement instructions to Austraclear. Any interbank settlements arising from these instructions occur on an RTGS basis across ESAs at the Bank, via RITS. ASX Clear (Futures) uses ASXCC's ESA to settle its obligations in RITS.

NZD settlements are undertaken in NZClear. ASXCC is a non-bank participant in NZClear. Non-bank participant interbank obligations are settled on an RTGS basis, via the Exchange Settlement Account System (ESAS), across accounts of a commercial settlement bank (known as a ‘Participating ES Accountholder’) at the RBNZ. Transfers are made in ESAS between the RBNZ Exchange Settlement account of ASXCC's Participating ES Accountholder and the RBNZ Exchange Settlement accounts of ASX Clear (Futures) participants or their Participating ES Accountholders. Settlement of these transfers occurs in central bank money in real time. ASX Clear (Futures) manages credit and liquidity exposures in respect of post-settlement balances held with its Participating ES Accountholder in accordance with the ASXCC investment mandate (see CCP Standard 15).

9.2 If central bank money is not used, a central counterparty should conduct its money settlements using a settlement asset with little or no credit or liquidity risk.

Cash payments in foreign currencies other than NZD (i.e. EUR, JPY, USD and GBP) are settled in commercial bank money via arrangements with commercial banks. Commercial bank money settlement agents and commercial settlement banks used for settlement of foreign currency transactions must be highly rated and subject to appropriate prudential regulation in order to limit any credit or liquidity risk associated with settlement in commercial bank money (see CCP Standard 9.3).

9.3 If a central counterparty settles in commercial bank money or its participants effect settlements using commercial settlement banks, it should monitor, manage and limit credit and liquidity risks arising from the commercial bank money settlement agents and commercial settlement banks. In particular, a central counterparty should establish and monitor adherence to strict criteria for commercial banks appropriate to their role in the settlement process, taking account of matters such as their regulation and supervision, creditworthiness, capitalisation, access to liquidity and operational reliability. A central counterparty should also monitor and manage the concentration of its and its participants' credit and liquidity exposures to commercial bank money settlement agents and settlement banks.

A commercial bank must meet certain criteria before it can be used by ASX Clear (Futures) as either its commercial settlement bank for NZD settlements in ESAS, or its money settlement agent for other foreign currency payments. Commercial banks must have a minimum S&P short-term rating of A1+ and offer a banking platform and connectivity that are compatible with ASX processes and procedures. Commercial banks used by ASX Clear (Futures) are ADIs regulated by APRA, and therefore subject to prudential standards encompassing, for example, capital adequacy, liquidity, credit quality, business continuity management and public disclosure. ASX Clear (Futures)' commercial settlement bank in NZClear must also meet operational requirements set by the RBNZ. Arrangements for settlement of foreign currencies other than the NZD make use of standard web interfaces for banking, with instructions via phone available as a contingency.

All foreign currency lodgements are monitored by ASX Clear (Futures)' risk management and treasury functions, and ASX Clear (Futures) is in regular contact with the participant until funds are received. ASX Clear (Futures) imposes limits on the amount of collateral held that is denominated in foreign currency as a portion of ASX CCPs' total liquid assets (see CCP Standard 5.6). Participants must lodge a request to post foreign currency, which is reviewed and then approved or denied by the Portfolio Risk Management team. In determining whether the foreign currency cover request is approved or denied, the Portfolio Risk Manager will take into account the limits on foreign currency, as well as the concentration risk in accepting the request.

It is standard practice for participants that lodge foreign currencies other than NZD to lodge excess funds with ASX Clear (Futures). This avoids having to make daily (or frequent) margin settlements. ASXCC also maintains funds in foreign currencies to cover its exposure to liquidity risk if it needed to repay a participant in a foreign currency. During the Assessment period, foreign currency holdings peaked at around $370 million (AUD equivalent) – around 10 per cent of average total collateral levels at ASX Clear (Futures) during the year. The aggregate level of foreign currency payments at ASX Clear (Futures) is low, comprising around 3 per cent of total money settlements.

9.4 If a central counterparty conducts money settlements on its own books, it should minimise and strictly control its credit and liquidity risks.

ASX Clear (Futures) does not conduct money settlements on its own books.

9.5 A central counterparty's legal agreements with any commercial bank money settlement agents should state clearly when transfers on the books of the relevant commercial bank are expected to occur, that transfers are to be final when effected, and that funds received should be transferable as soon as possible, at a minimum by the end of the day and ideally intraday, in order to enable the central counterparty and its participants to manage credit and liquidity risks.

Payments in foreign currencies made via commercial banks are generally covered by standard terms and conditions for commercial accounts at those banks, including general information about timing of transactions and availability of funds. ASX maintains close contact with its commercial banks in order to monitor and manage the risk of its foreign currency payments. As noted, standard practice is for participants to lodge excess foreign currency margin, thereby reducing credit and liquidity risk to the CCP and liquidity risk to the participant.