2015/16 Assessment of ASX Clearing and Settlement Facilities A1.2 ASX Clear (Futures) Standard 18: Tiered participation arrangements

A central counterparty should identify, monitor and manage the material risks to the central counterparty arising from tiered participation arrangements.

ASX Clear (Futures) applies a risk-based approach to its monitoring of tiered participation arrangements. The focus of this monitoring is on client activity in exchange-traded derivatives, since there is currently no client clearing of OTC derivatives transactions. ASX Clear (Futures) has a formal standard that governs its risk-based approach to monitoring concentration in tiered participation arrangements and documents mitigating steps (CCP Standard 18.4).

During 2015/16, clients of ASX Clear (Futures)' participants represented 76 per cent of initial margin held by ASX Clear (Futures) to cover its credit exposures to both participants and (indirectly) their clients. In managing the risks associated with tiered arrangements, ASX Clear (Futures) is able to gather information on indirect participation, although with some limitations. The individually segregated account structure available for both OTC and exchange-traded derivatives will allow ASX Clear (Futures) to obtain better data to support its monitoring of indirect participation, although use of this account structure is currently limited. Where data limitations remain, ASX can also seek more detailed information from participants on an ad hoc basis (CCP Standards 18.1, 18.2). ASX Clear (Futures) does not maintain formal thresholds at which large indirect participants are encouraged to seek direct participation, but does actively manage risks posed by indirect participant activity through its relationship with the direct participant (CCP Standard 18.3). ASX Clear (Futures) conducts daily monitoring of its client-level data, with the use of predefined triggers for further action.

18.1 A central counterparty should ensure that its rules, procedures and agreements allow it to gather basic information about indirect participation in order to identify, monitor and manage any material risks to the central counterparty arising from such tiered participation arrangements.

ASX Clear (Futures) gathers basic information on indirect participation in the form of a Daily Beneficial Ownership Report (DBOR) from participants. This report provides details of client positions. These data are aggregated and reviewed to identify positions that may be unusual, result in a concentration of risk, or breach position limits set by ASX Clear (Futures) for the expiry period. There are, however, practical limitations to the use of these data for the analysis of tiering; in particular, the account codes of a client or related clients may vary from participant to participant.

ASX Clear (Futures) offers the option of individually segregated client accounts for both OTC and exchange-traded derivatives (see CCP Standard 13.2). To date, use of this account structure has been limited. As participants and their clients make greater use of the individually segregated accounts, ASX will be able to gather better information on client positions to support its monitoring of tiered participation risks (see Standard 18.4).

If required, ASX Clear (Futures) may request more detailed information on any indirect client from that client's clearing participant. This information may include further details about the client's profile or activities, including its intentions regarding future open positions or physical delivery obligations. ASX Clear (Futures) also has an ongoing program of ‘thematic’ participant reviews, covering risk topics of interest or concern. These could potentially examine tiering risks if ASX Clear (Futures) were to perceive an increased risk from indirect relationships. ASX Clear (Futures) currently considers the risks from concentration of indirect participants to be low for OTC products and medium for futures products.

18.2 A central counterparty should identify material dependencies between direct and indirect participants that might affect the central counterparty.

As noted under CCP Standard 18.1, ASX Clear (Futures) monitors dependencies arising from tiered participation indirectly through a variety of means. These include regular discussions with participants on developments in their business and risk management activities, participants' own risk assessments, discussions with new participants as part of the induction process, expiry monitoring activities, monitoring of delivery risk (e.g. futures options expiries), and ASX Clear (Futures)' broader array of risk management data collection (including the DBOR) and monitoring activities. Based on this information, ASX Clear (Futures) has not identified any material dependencies between direct and indirect participants.

As discussed under CCP Standard 18.4, the use of individually segregated accounts will permit ASX Clear (Futures) to monitor the proportion of a participant's business attributable to a particular client and set triggers for further action based on the proportion of initial margin attributable to that client.

18.3 A central counterparty should identify indirect participants responsible for a significant proportion of transactions processed by the central counterparty and indirect participants whose transaction volumes or values are large relative to the capacity of the direct participants through which they access the central counterparty in order to manage the risks arising from these transactions.

ASX encourages participants to develop appropriate risk control measures in managing their relationships with indirect participants. ASX does not set thresholds, either formal or informal, at which it would encourage direct participation by an indirect participant. ASX's general approach to managing risks associated with participants' business activities is based on a framework that can flexibly detect and respond to new risks as they arise, rather than setting firm ex ante activity limits. This approach has worked well in managing risk events in the past, notably in managing the default of MF Global in late 2011.

18.4 A central counterparty should regularly review risks arising from tiered participation arrangements and should take mitigating action when appropriate.

ASX maintains a formal Concentration Risk Standard, which sets out a risk-based approach to monitoring concentration risks in a number of areas (see CCP Standard 4.2), including tiered participation.

Exposures arising from OTC derivatives clearing remain low relative to exchange-traded derivatives exposures, and there has not been any use of client clearing arrangements for OTC derivatives to date. Accordingly, ASX has focused on the risks from tiered participation arrangements in its exchange-traded derivatives clearing activities.

ASX Clear (Futures) reviews risks arising from tiered participation in exchange-traded derivatives on a daily basis using the DBOR client-level data. A number of predefined triggers are applied to these data to identify positions that may be unusual, result in a concentration of risk, or breach position limits set by the facility for the expiry period. The triggers are defined at the contract level, taking into account factors such as the nature of the contract, the market liquidity, whether the contract has position limits for expiry, and whether it is deliverable. Monitoring of the DBOR data, including the DBOR triggers, is conducted by ASX Participant Compliance as part of its daily monitoring of credit risk (see CCP Standard 4.2) and ASX's broader framework for management of risks (CCP Standard 3).

Once client use of individually segregated client accounts reaches a material level (see CCP Standard 13), ASX Clear (Futures) intends to enhance its monitoring of indirect participation in the exchange-traded derivatives market. In particular, on a daily basis, ASX Clear (Futures) monitors concentration indicators based on initial margin. If a client's initial margin accounts for over 25 per cent of its clearing participant's total initial margin, further investigation would be triggered. The Concentration Risk Standard notes that a number of factors will be considered when determining the appropriate response to any breaches of triggers, including the materiality of the breach and the credit standing and activity profile of the relevant participant. Clients that continue to clear via an omnibus client account will continue to be monitored using the DBOR data.