2015/16 Assessment of ASX Clearing and Settlement Facilities A1.1 ASX Clear Standard 15: Custody and investment risks
A central counterparty should safeguard its own and its participants' assets and minimise the risk of loss on and delay in access to these assets. A central counterparty's investments should be in instruments with minimal credit, market and liquidity risks.
The assets of ASX Clear and its participants are administered and held within the ASX Group in accordance with group-wide controls (CCP Standard 15.1). A portion of these assets is held in liquid form to facilitate prompt access as required (CCP Standard 15.2). ASXCC invests the assets of ASX Clear and its participants according to its Investment Mandate in instruments with low credit, market and liquidity risk. ASX Clear is in the process of reducing the degree of its reliance on unsecured investments concentrated in the large domestic banks. During the 2015/16 Assessment period, ASXCC's Board endorsed further staged revisions to its treasury investment policy in order to meet the Bank's expectations regarding the credit and liquidity risk profile of ASXCC's treasury investment portfolio by the end of June 2017 (CCP Standard 15.4). ASXCC does not use custodian banks for its investments (CCP Standard 15.3). ASX Clear's investment strategy does not allow related entity investments and is designed to allow timely liquidation in periods of market stress, consistent with the Bank's supplementary interpretation of CCP Standard 15.4 (see Introduction to Appendix A).
15.1 A central counterparty should hold its own and its participants' assets at supervised and regulated entities that have robust accounting practices, safekeeping procedures and internal controls that fully protect these assets.
The assets of ASX Clear and its participants are administered and held within the ASX Group. Intragroup arrangements allow ASX Clear to fully understand the nature of its risk exposure to ASXCC and other group entities such as Austraclear (for safekeeping of AUD-denominated debt securities). This exposure is managed within the context of ASX's overall Clearing Risk Policy Framework. ASX has accounting practices, safekeeping procedures and internal controls to protect its own and its participants' assets (as described under CCP Standard 2.7).
Non-cash collateral is held in CHESS. ASX Clear's Operating Rules and Procedures define how collateral is used. ASX Clear does not re-use non-cash collateral posted by participants.
Cash investments, including cash collateral, clearing participant contributions and shareholder funds, are controlled by ASXCC, of which ASX Clear is a subsidiary (see ‘ASX Group Structure’ in Appendix A). ASXCC makes its investments in accordance with its Investment Mandate and ASX's Investment Risk Policy, which together define investment objectives, investment specifications, and audit and maintenance of the policy (see CCP Standard 15.4).
15.2 A central counterparty should have prompt access to its assets and the assets provided by participants, when required.
Assets invested on behalf of ASX Clear and its participants are held within the ASX Group and subject to ASX's exclusive custody. ASX Clear does not use external custodians to hold its assets or participants' assets. Cash investments are held directly by ASXCC, and non-cash collateral is lodged directly with ASX Clear in CHESS. In addition, the Operating Rules require that collateral from participants is unencumbered. These arrangements aim to ensure that ASX has prompt and legally certain access to participant collateral and its own contributions to prefunded financial resources, including in the event of a participant default.
15.3 A central counterparty should evaluate and understand its exposures to its custodians, taking into account the full scope of its relationships with each.
ASXCC does not use custodians to hold assets invested on behalf of ASX Clear.
15.4 A central counterparty's investment strategy should be consistent with its overall risk management strategy and fully disclosed to its participants, and investments should be secured by, or be claims on, high-quality obligors. These investments should allow for quick liquidation with little, if any, adverse price effect.
ASXCC is the controlling entity for the investments of both CCPs. In respect of both cash margin collected and pooled risk resources, ASXCC invests funds in accordance with a defined treasury investment policy, endorsed by the Clearing Boards and itself governed by the ASX Enterprise Risk Management Policy. The treasury investment policy, set out in the high-level Investment Risk Policy document and the more detailed ASXCC Investment Mandate, articulates the basis for ASX Clear's mitigation of investment-related credit, market and liquidity risks (CCP Standard 7). The performance of the investment portfolio within the parameters of this policy is closely monitored by ASXCC, with trigger points to automatically escalate potential issues to the CRO before actual limits are reached. Trigger points are defined for weighted average maturity and percentage of total liquid assets held in non-AUD denominated securities.
The ASXCC Investment Mandate defines investment counterparty eligibility criteria and sets investment limits in order to control counterparty investment risk.
- Counterparty eligibility criteria. Counterparties must be Commonwealth or State Government entities (including the Bank), or APRA-approved ADIs that are licensed banks in Australia under the Banking Act 1959. ADIs must also have a Standard & Poor's (S&P) short-term credit rating of A1 or above. The Investment Mandate does not permit investments in securities of ASX Group entities, consistent with the Bank's supplementary interpretation of CCP Standard 15.4 (see Introduction to Appendix A). Nor is ASXCC permitted to create unsecured exposures to any investment counterparty that is a participant or affiliated with a participant, other than the four major banks.
- Counterparty investment limits. Counterparty investment limits are determined according to factors such as the credit quality of the counterparty or obligor, the size of the AFR, and whether eligible investment counterparties and their affiliates are also clearing participants. Individual unsecured exposures to non-government related issuers or counterparties will be lowered over 2016/17. At the end of June 2017, limits related to these counterparties will be set at the level of business risk capital held across the two CCPs ($75 million). Concentration limits are set on both the proportion of the portfolio and the absolute amount that can be invested with a single counterparty.
ASXCC's Investment Mandate requires that a portion of its portfolio be held in liquid asset form to cover liquidity risks from both general business risks and risks related to ASX Clear's clearing activities (see CCP Standard 7.3). The Investment Mandate aims for quick liquidation of investments with little, if any, price effect. Only investments in instruments that can be liquidated or repurchased for cash within two hours are treated as ‘liquid’ products. These are defined based on the depth of market liquidity and the terms of investment, including whether the instruments are eligible for repurchase transactions with the Bank (see CCP Standard 7.4). Such liquid assets include Australian Government securities, bank bills and certificates of deposits. The policy also sets a ‘value-at-risk’ limit. Cash collateral must be invested in the currency it is received in, and currency-specific limits are placed on relevant counterparties for the investment of NZD cash collateral.
ASXCC's Investment Mandate recognises the primacy of maintaining liquidity and credit quality against achieving investment return, given that funds under management are a critical source of liquidity in the event of a market disruption or clearing participant default. The investment policy and limits are reviewed and approved annually by the ASXCC Board with input from the Risk Consultative Committees. The broad approach to investment and investment holdings is disclosed publicly in the ASX Annual Report. In accordance with the CPMI-IOSCO Public quantitative disclosure standards for central counterparties, ASX also discloses the high-level composition of ASXCC's investment holdings on a quarterly basis (see CCP Standard 21.2). In 2015/16, ASX enhanced its disclosure on investment risk to clarify participants' contingent exposure to CCP investment losses. Under ASX's enhanced recovery arrangements, ASX would allocate any losses in excess of $75 million between participants, in proportion to the amount of cash each participant has provided to the CCPs. The enhanced disclosure provides the steps a participant could take to calculate its contingent exposure if an investment loss greater than $75 million were to be realised.
In response to concerns from the Bank and ASX's own review of its treasury investment policy in 2012/13, ASX has modified the ASXCC Investment Mandate each year since that time to reduce the unsecured limit on exposures to the large domestic banks in absolute terms. In addition, ASX has taken steps to diversify its unsecured exposures to a broader range of highly rated investment counterparties and introduced arrangements allowing it to invest cash with selected counterparties on a secured basis.
During 2014/15, the Bank continued to engage with ASX on changes to its treasury investment policy. This dialogue clarified the Bank's expectations for the credit and liquidity risk profile of ASXCC's investment portfolio that is required for ASX to fully observe Standard 15. In response, ASX has endorsed revisions to its treasury investment policy. The most recent revision, approved by the ASXCC Board in May 2016, clarifies how ASX's portfolio will change over 2016/17 to meet the Bank's expectations for the credit and liquidity risk profile of ASX treasury investments. Under these changes by end 2016/17, over half of the investment portfolio would be invested in government or semi-government bonds, or reverse repurchase agreements secured by such bonds. The remainder of the portfolio would be primarily invested in Bank eligible securities, or held in deposits with ADIs. Individual unsecured exposures to non-government related issuers or counterparties would be limited to the level of business risk capital held across the two CCPs (currently $75 million), meaning that ASX could absorb losses arising from the default of any single investment counterparty or issuer without allocating losses to participants (see CCP Standard 14.3). While the majority of the transition to this new portfolio is expected to take place in 2016/17, ASX did make small changes to its investment profile in 2015/16 (see Section 3.5.5).