2015/16 Assessment of ASX Clearing and Settlement Facilities A1.1 ASX Clear 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 applies a risk-based approach to its monitoring of tiered participation arrangements, with a particular focus on client activity in exchange-traded derivatives. ASX Clear does not formally monitor concentration in tiered participation arrangements for cash market transactions due to the relatively low exposures involved. ASX Clear 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's participants represented 76 per cent of the initial margin held by ASX Clear to cover its derivatives-related credit exposures to both participants and (indirectly) their clients. In managing the risks associated with tiered arrangements, ASX Clear's ability to monitor tiering risks on cash market transactions is limited by the commingling of house and client positions. ASX can, however, gather more detailed information from participants on an ad hoc basis (CCP Standards 18.1, 18.2). ASX Clear 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 conducts daily monitoring of client-level data on derivatives-related exposures, 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 operates an individually segregated account structure for equity derivatives products (see CCP Standard 13.2). While ASX does not have access to data on indirect participants' overall financial position, this account structure means that ASX collects data on their positions in these products, and associated margin requirements and collateral.

There are, however, practical limitations in the analysis of indirect participation in cash securities clearing. Due to the commingled house/client account structure (see CCP Standard 13.2), ASX is unable to separately identify client positions at either an aggregate or an individual account level. However, ASX Clear has determined that tiered participation risks arising from cash market transactions are less material than those arising from derivatives transactions (see CCP Standard 18.4). In addition, ASX Clear is able to monitor significant changes to indirect participation arrangements in both cash and derivatives markets through its regular risk discussions with participants, including third-party clearers. Business Development, ASX Compliance, Post Trade Operations and CRPM are each involved in the discussion of changes to participants' exchange-facing business models, including those that relate to tiered participation arrangements.

If required, ASX Clear may request more detailed information from participants on any of their clients. This information may include further details about the indirect participant's profile or activities, including its intentions regarding future trading activity. ASX Clear 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 were to perceive an increased risk from indirect relationships. ASX Clear currently considers the risks from concentration of indirect participants to be low.

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 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, monitoring of delivery risk (e.g. options expiries), and ASX Clear's broader array of risk management data collection and monitoring activities, including the daily monitoring of client-level data on derivatives-related exposures. Based on this information, ASX Clear has not identified any material dependencies between direct and indirect participants. As discussed under CCP Standard 18.4, ASX Clear monitors the proportion of a participant's derivatives business attributable to a particular client and sets 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.

An important potential source of tiered participation risks in ASX Clear arises in the context of the third-party clearing market. There are a small number of participants offering third-party clearing services in the derivatives and cash markets. Although there is a greater dispersion of third-party clearing activity for derivatives, the largest third-party clearer in the cash market represented a relatively small proportion of total positions held at ASX Clear during the Assessment period. ASX monitors the third-party clearing market more broadly in the context of its participant monitoring activities described under CCP Standard 18.1.

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 recent Assessment periods, notably in managing the default of BBY in mid 2015.

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.

On the basis of the relatively low exposures generated by cash market transactions, ASX has concluded that the risks to ASX Clear from tiered participation arrangements in the cash market are low. ASX Clear therefore monitors tiering risks for the cash market as part of its ongoing monitoring of participant credit exposures, investigating whether identified issues are due to client positions (see CCP Standard 4.2).

ASX has, however, identified two main sources of tiering risk in the clearing of derivatives products in ASX Clear.

  • For low exercise price options, the potential for large mark-to-market margin requirements following exercise may be a particular issue where there is a concentration of positions in individual client accounts.
  • For ETOs more generally, clients of participants may execute strategies, such as selling deep-out-of-the-money put options for premium income, that have the potential to trigger significant margin obligations in the event of large price movements.

ASX Clear therefore monitors indirect participation in the derivatives market on a daily basis, using concentration indicators based on initial margin. If a client's ETO initial margin accounts for over 25 per cent of its clearing participant's total ETO initial margin, further investigation is 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 participant involved.