2015/16 Assessment of ASX Clearing and Settlement Facilities A1.1 ASX Clear

Standard 3: Framework for the comprehensive management of risks

A central counterparty should have a sound risk management framework for comprehensively managing legal, credit, liquidity, operational and other risks.

ASX maintains an Enterprise Risk Management Policy that sets out its framework for managing the full range of strategic, legal, financial and operational risks faced by ASX Clear. This high-level framework is supported by more granular policies and a governance structure to oversee ASX Clear's risk management activities (CCP Standard 3.1). ASX Clear's risk management framework imposes proportional, risk-based obligations such as initial margin, and places incentives on participants, including additional collateral requirements where required, to control the risks that they bring to the CCP (CCP Standards 3.2, 3.3). As part of its risk management framework, ASX Clear reviews risks associated with interdependencies with other entities on an ongoing basis and, in relation to new initiatives, applies appropriate tools to manage these risks (CCP Standard 3.4). ASX Clear has developed enhanced loss allocation and replenishment arrangements, and has updated its recovery plan, to align the CCP's recovery arrangements with CPMI-IOSCO guidance on recovery planning (CCP Standard 3.5).

3.1 A central counterparty should have risk management policies, procedures and systems that enable it to identify, measure, monitor and manage the range of risks that arise in or are borne by the central counterparty. This risk management framework should be subject to periodic review.

Identification of risk

ASX's high-level framework for risk management is described in its Enterprise Risk Management Policy. This policy divides risks identified by ASX into two broad categories: strategic risks and operational risks. Operational risks are further categorised into financial risks, legal and regulatory risks, and technological and operational risks. Specific risks identified by ASX are described within these broad categories. For each identified risk, ASX judges how likely it is the risk event will occur within the next 12 months and the potential impact. Reputational and participant impacts are considered along with the financial, operational and regulatory impacts of risks.

Comprehensive risk policies, procedures and controls

ASX's Enterprise Risk Management Policy has been developed with reference to the international standard ISO 31000 Risk Management – Principles and Guidelines (see CCP Standard 2.6).[9] At a high level, the ASX Enterprise Risk Management Policy outlines: the overall risk environment in the ASX Group; the objectives of risk management policies; the process by which risks are identified and assessed; the controls in place to detect and mitigate risks; and how risks are monitored and communicated. ASX's stated tolerance for financial, operational, legal and regulatory risks is ‘very low’.

ASX uses key risk indicators to measure levels of risk in the organisation and categorise risk levels according to a scale: satisfactory; within risk tolerance but requiring action to further control the level of risk; or exceeding ASX's risk tolerance.

The Enterprise Risk Management Policy also assigns specific risk responsibilities across the ASX Group, including to the ASX Limited Board of Directors, the Audit and Risk Committee, the ERMC, the General Manager, Enterprise Risk, and managers of individual departments. Managers of each department are responsible for identifying and monitoring risks relevant to their department's activities, as well as for designing and implementing risk management policies and controls to manage identified risks. Department managers assess the appropriateness and operational effectiveness of these controls twice a year; these assessments are reviewed by the ERMC.

ASX's Clearing Risk Policy Framework sets out a comprehensive set of clearing and treasury risk policies to support the risk management approach of ASX's CCPs, including ASX Clear. These policies govern more granular internal standards, which in turn govern detailed procedures for the management of clearing and treasury risk. The structure of policies, standards and procedures reflects the requirements of the FSS.

A number of boards and internal committees oversee clearing risk management policy, including:

  • The CS Boards. Each CS facility has a board (see CCP Standard 2.3 and ‘ASX Group Structure’ in Appendix A), which shares members with the other ASX CS facilities. The CCPs' boards have oversight of the Clearing Risk Policy Framework, and are responsible for any significant amendments. Policies and designated key standards under the Framework are also governed by the CCPs' Boards.
  • The CRPC. The CRPC reviews and approves material clearing risk policies and standards prior to submission to the CS Boards. The CRPC is chaired by the CRO and includes the ASX Group Legal Counsel, CFO and GE, Operations. If required, it will generally meet quarterly in line with meetings of the CS Boards.
  • The CALCO. CALCO is constituted to ensure the structural integrity and efficient use of the liquidity, on- and off-balance sheet assets, liabilities and capital resources of the ASX Group. CALCO advises on changes to the clearing risk policies related to capital, liquidity and balance sheet management. CALCO is chaired by the CRO and comprises senior managers and executives from Finance, Risk and Internal Audit. CALCO generally meets on a quarterly basis.
  • The CROCC. CROCC is chaired by the GE, Operations and is made up of senior managers and executives from the clearing and settlement risk management, operations and compliance areas of ASX. The Committee acts as an information-sharing and discussion body for the purpose of enhancing ASX's ability to identify, assess and reduce systemic, operational or compliance risk, and manage clearing risk. The CROCC currently meets on a monthly basis.
  • RQG. The RQG is chaired by the General Manager, CRQ (or in his absence, the CRO) and is made up of key staff from ASX's CRQ, Clearing Risk Development and CRPM departments most familiar with ASX's margin and other risk management models. The focus of the group is the review and application of quantitative risk policies and the Model Validation Framework, including oversight of model governance and the outcomes and recommendations of regular reviews of margining and stress test models. The group meets at least on a monthly basis or more frequently as required.
  • DMSG. The DMSG is chaired by the CRO and comprises key representatives from ASX Legal, Compliance, Operations and Risk. The DMSG provides oversight of the CCPs' DMF. The DMSG currently meets at least on a quarterly basis or more frequently as required.

ASX Clear also maintains a participant Risk Consultative Committee, which is consulted on material changes to default management processes, the margin methodology, the default fund, position or liquidity limits, participation criteria, and other changes affecting the risk model or related rules (see CCP Standard 2.8). The Risk Consultative Committee's proposals and recommendations are presented to the ASX Clear Board for consideration. The Committee meets three times per year.

Information and control systems

ASX Clear employs information systems that are designed to provide timely and accurate information relevant to its risk policies, procedures and controls. This includes information on risk exposures to individual participants, as well as aggregated information on risk exposures across the central counterparty. Key information systems include:

  • Margining. ASX Clear uses the CME SPAN system for margining of derivatives, and CMM for the daily margining of cash equity transactions using a mixture of Historical Simulation of Value at Risk (HSVaR) and flat rates for less liquid securities (see CCP Standard 6).
  • Credit and liquidity stress testing. Stress testing is carried out daily to gauge the adequacy of ASX Clear's financial resources and to monitor the risks associated with individual participants' positions. Credit stress testing estimates the loss that would result from the default of two participants and their affiliates in extreme but plausible market conditions (see CCP Standard 4). Liquidity stress testing estimates the liquidity exposures that would arise under such circumstances (see CCP Standard 7).

ASX Clear monitors daily risk management reports produced by its information management systems to identify changes in positions that may require mitigating action. ASX Clear's information systems also provide information to participants about positions and margin requirements, which assists in their management of credit and liquidity positions. ASX publishes detailed margining information on its website, including descriptions of the margining methodology, schedules of margin rates, and daily SPAN margin parameter files. This information is sufficient for participants to perform their own margin calculations on hypothetical or actual portfolios. To facilitate this, a number of third-party vendors use this information to provide margin estimation software to participants. ASX also maintains a web-based margin estimator that participants and their clients can use to calculate margin requirements on ETO positions.

Internal controls

ASX's documented risk management policies and standards specify requirements for periodic formal review, although more frequent reviews may occur depending on changes to technology, business drivers or legal requirements. Reviews are conducted by specific working groups and committees. Clearing risk policies and standards are reviewed on an annual basis by Clearing Risk Policy within CRPM. Final approval of reviews for enterprise-wide policies and standards is the responsibility of the ERMC. Under the Enterprise Risk Management Policy, ASX's departments are required to update a risk profile every six months, which identifies relevant risks and sets out planned actions to respond to those risks.

Risk management arrangements are also subject to periodic review by Internal Audit. Such audits provide assurance that the risk management framework continues to be effective. Risk management arrangements may also be subject to review by external experts from time to time. An external review of ASX's enterprise risk framework was conducted during the Assessment period.

The Enterprise Risk Management Policy is reviewed by the Audit and Risk Committee on a two-year cycle, with the most recent review taking place in August 2015.

3.2 A central counterparty should ensure that financial and other obligations imposed on participants under its risk management framework are proportional to the scale and nature of individual participants' activities.

Financial obligations are imposed upon participants through ASX Clear's ex ante and ex post risk controls. These are position-based controls.

ASX Clear collects initial margin from participants based on actual positions. ASX Clear may also collect AIM where positions produce relatively high stress test losses (beyond a predetermined threshold; see CCP Standards 4.2 and 4.4) or are high compared with the participant's underlying capital. Since margin is proportional to the size and volatility of a participant's positions, it is proportional to the scale and nature of individual participants' activities.

Under ASX Clear's Operating Rules, participants may be required to meet a ‘Recovery Assessment’ should a loss caused by a participant default exhaust ASX Clear's prefunded pooled financial resources, or ‘default fund’. Such an assessment is capped at $300 million in aggregate. The value of assessment obligations would be proportional to participants' quarterly average daily initial margin in the three months preceding the default, subject to a variable cap. This cap is also based on participants' quarterly average daily initial margin in the three months preceding the default, but is calculated relative to the total pool of initial margin excluding the two participants and their affiliates with the highest quarterly initial margin.

Participants may also be required to contribute to replenishment of ASX Clear's default fund if this were drawn upon in a default scenario. Initially, during a 22-business-day ‘cooling off’ period, such replenishment obligations would be linked to each participant's credit stress test exposures (see CCP Standard 4.8). Subsequent to this cooling off period, replenishment obligations would be calculated on the same basis as recovery assessments and therefore linked to the scale of participants' activities.

Participants may also be required to provide liquidity under OTAs to support the timely settlement of ASX Clear's cash equity settlement obligations, in the event that a participant default was to create significant payment obligations for the CCP (see CCP Standards 7.3 and 7.9). Participants' obligations under OTAs are linked to their positions due to settle in the relevant settlement batch.

ASX Clear's Operating Rules also set out non-financial participation requirements, such as operational requirements. These requirements are not prescriptive, and take into account the size and nature of a participant's business.

3.3 A central counterparty should provide incentives to participants and, where relevant, their customers to manage and contain the risks they pose to the central counterparty.

The use of margin and AIM at ASX Clear creates an incentive for participants to manage the exposures that they bring to the CCP. Participants are also required to post additional collateral or increase their capital levels if they create exposures that are large relative to the size of their capital. ASX is proactive in monitoring participant exposures and utilises conservatively set triggers for additional monitoring or action, such as requiring participants to actively manage down exposures (see CCP Standard 4.2).

ASX Clear may also apply sanctions to, or place additional requirements on, participants that fail to comply with its Operating Rules. Participants may ultimately be required to seek alternative clearing arrangements.

3.4 A central counterparty should regularly review the material risks it bears from and poses to other entities (such as other FMIs, money settlement agents, liquidity providers and service providers) as a result of interdependencies, and develop appropriate risk management tools to address these risks.

ASX Clear reviews the material risks that it bears from and poses to other entities in the context of its ongoing review of enterprise risks (such as the six-monthly update of department risk profiles; see CCP Standard 3.1), and its processes for identifying risks associated with new activities. In the case of new products and services, ASX undertakes risk assessments when undertaking an expansion of its activities or in the event of material changes to its business. Risk assessments are built into ASX's project management framework (see CCP Standards 14.1, 16.4).

For instance, over the past few years, ASX Clear has monitored and managed risks to its operational activities arising from participants' increased usage of third-party vendors for back-office systems, and participants outsourcing their back-office processing offshore. ASX Clear has also monitored and managed risks arising from interdependencies with service providers. ASX Clear's response to these interdependencies is outlined in CCP Standard 16.5.

Interdependencies with ASX Settlement for the settlement of securities transactions and Austraclear for the settlement of margin obligations are managed within the context of ASX Group's broader risk management framework (see CCP Standard 19).

3.5 A central counterparty should identify scenarios that may potentially prevent it from being able to provide its critical operations and services as a going concern and assess the effectiveness of a full range of options for recovery or orderly wind-down. A central counterparty should prepare appropriate plans for its recovery or orderly wind-down based on the results of that assessment. Where applicable, a central counterparty should also provide relevant authorities with the information needed for purposes of resolution planning.

During the 2015/16 Assessment period, ASX Clear implemented enhancements to its Operating Rules to align the CCP's recovery arrangements with CPMI-IOSCO guidance on recovery planning published in October 2014. The enhancements provide the CCP with the power to:

  • comprehensively address uncovered credit losses and liquidity shortfalls via Recovery Assessments and (as a last resort) complete termination of contracts (CCP Standards 4.8 and 7.9); these complement ASX Clear's existing ability to address a liquidity shortfall associated with cash equity settlement via OTAs (CCP Standard 7.9)
  • restore a matched book via partial or complete termination of contracts if normal close-out processes cannot be carried out (CCP Standard 12.1)
  • replenish its default fund via a combination of ASX and participant contributions (CCP Standards 4.8 and 12.1)
  • address non default-related losses via business risk capital and the allocation of certain treasury investment losses in excess of $75 million to participants (see CCP Standard 14.3).

These rule changes came into effect in October 2015. Further amendments to the replenishment arrangements were implemented in June 2016. In developing its new recovery tools, ASX performed an assessment in an attempt to ensure the tools: were comprehensive, effective and transparent; provided appropriate incentives; and minimised negative impacts on participants and markets.

Recovery plan

During the Assessment period, ASX has taken steps to update the documentation of its Recovery Plans. The update reflects the expanded set of recovery tools introduced in October 2015, as well as the new replenishment arrangements. Alongside this update, ASX has developed some information management tools to support decision making in a recovery scenario. ASX has also integrated the testing and review of the Recovery Plan into its broader framework for testing and review of risk and default management policies and processes.

The Recovery Plan identifies scenarios that could threaten the ASX CS facilities' ongoing provision of critical clearing services, describes events that would trigger the activation of the Recovery Plan, and sets out how ASX would respond to such scenarios. It also describes the suite of tools available to the CS facilities in recovery and details the governance arrangements both for the use of these tools and for review of the recovery planning framework.


ISO is an international standard-setting body and ISO 31000 is considered to be relevant guidance for enterprise risk management. The ISO 31000 standard has been reproduced by Standards Australia and Standards New Zealand as AS/NZS 31000. [9]