2015/16 Assessment of ASX Clearing and Settlement Facilities A2.1 ASX Settlement Standard 16: Tiered participation arrangements

A securities settlement facility should identify, monitor and manage the material risks to the securities settlement facility arising from tiered participation arrangements.

In managing the risks associated with tiered arrangements, ASX Settlement is able to gather basic information on indirect participation (SSF Standards 16.1, 16.2). ASX Settlement does not maintain formal thresholds at which substantial 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 (SSF Standard 16.3). The partially overlapping participation base between ASX Settlement and ASX Clear allows for tiered participation risks to be monitored and addressed jointly (SSF Standard 16.4).

ASX Settlement's approach to tiered participation arrangements is described in further detail under the following sub-standards.

16.1 A securities settlement facility 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 securities settlement facility arising from such tiered participation arrangements.

Since ASX Settlement does not assume credit or liquidity risk as principal, the primary risks that could arise from indirect participation are operational. In particular, indirect participation arrangements that concentrated settlement activity within a few direct participants could concentrate operational risk to the facility. ASX Settlement is able to access basic information on indirect participation via the separate participant identifiers (known as PIDs) assigned to trading or clearing participants (in ASX Trade or ASX Clear, respectively) that do not settle directly. ASX Settlement currently considers the risks from concentration of indirect participants to be low.

16.2 A securities settlement facility should identify material dependencies between direct and indirect participants that might affect the securities settlement facility.

ASX Settlement monitors dependencies arising from tiered participation indirectly using a variety of means. These include regular discussions with participants on developments in their business and risk management activities, participants' own risk assessments, and discussions with new participants as part of the induction process. Based on this information, ASX Settlement has not identified any material dependencies between direct and indirect participants that might affect its operations.

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

In general, participation in ASX Settlement is broader and more direct than that in ASX Clear. At end June 2016, there were 89 direct ASX Settlement participants (excluding temporary special-purpose participants), compared with 33 (active) direct participants in ASX Clear. Due to this, and given the vertical integration of the ASX Group, monitoring of tiered participation risks in ASX Clear would also be expected to highlight any such risks that may require further investigation in ASX Settlement (see Appendix A1.1, CCP Standard 18).

ASX encourages participants to develop appropriate risk control measures in managing their relationships with clients, including any substantial 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 react to new risks as they arise, rather than setting firm ex ante activity limits.

16.4 A securities settlement facility should regularly review risks arising from tiered participation arrangements and should take mitigating action when appropriate.

ASX Settlement is not directly exposed to financial risks from indirect participation. Significant operational risks associated with indirect participation at ASX Settlement would be identified and mitigated through the application of ASX's concentration risk monitoring policy, which focuses on participation in ASX Clear (see SSF Standard 16.3).