Assessment of ASX Clearing and Settlement Facilities 2. Material Developments

This section discusses material developments relevant to the ASX CS facilities that have occurred during 2016/17. Developments between the end of 2016/17 and the finalisation of this report on [x August] are also discussed, where relevant.

To complement this section, background information on activity and participation in the facilities, and governance and risk management in the facilities is set out in Appendix B. A detailed assessment of how the facilities meet each of the FSS (incorporating developments discussed in this section) is presented in Appendix C.

2.1 CCP Risk Management

2.1.1 Investment Risk

ASX Clearing Corporation (ASXCC) invests cash margin posted by participants and prefunded pooled financial risk resources in highly rated short-dated assets in accordance with a treasury investment policy endorsed annually by the CCPs' Boards. For a number of years, the Bank and ASX have discussed the appropriate credit and liquidity risk profile for its treasury investments and, in the 2014/15 Assessment, the Bank clarified its expectations in this area, with an implementation date of the end of June 2017. In particular, ASX was expected to:

  • limit its credit exposures to individual non-government investment counterparties/issuers to the level of capital set aside for non-default or general business risk losses
  • ensure that other investments are with government-related obligors or secured by assets issued by government-related or other highly creditworthy obligors, subject to prudent concentration limits
  • ensure that the CCPs' minimum liquid resource requirement (under CCP Standard 7.3) is invested in, or secured by, government/semi-government securities or cash, with other investments able to address effectively any additional liquidity shortfalls (e.g. investments in, or secured by, securities eligible for repo with the Bank).

After a multi-year transition period, ASX has now met the Bank's expectations. From 1 July, over half of the CCPs' investment portfolio has been invested in government or semi-government bonds, or reverse repurchase agreements secured by such bonds. The remainder of the portfolio is invested in securities issued by highly rated commercial banks, or held in deposits with these banks. Individual unsecured exposures to non-government-related issuers or counterparties are limited to the level of business risk capital held across the two CCPs (currently $75 million).

2.1.2 Liquidity risk management

Changes to eligible liquid assets and targets

A conservative investment risk policy is also an important aspect of the CCPs' liquidity risk management framework. This helps ensure that the CCPs can liquidate their investments quickly to meet payment obligations under extreme but plausible scenarios. For instance, a CCP may need to liquidate its investments quickly to cover the cost of closing out a defaulting participant's positions or to return collateral if participants were to significantly reduce their positions.

Consistent with the Bank's regulatory priorities, effective 1 July, ASX is restricting the liquid assets eligible to meet the CCPs' primary liquidity target – the ‘core liquidity requirement’ – to cash held in accounts at central banks or creditworthy commercial banks and securities issued by the Australian or state governments or the New Zealand Government (held outright or via repo).[4] Previously, certain highly rated commercial bank securities were also eligible to be held to meet this requirement. ASX will be reviewing whether it meets the core liquidity requirement on a daily basis.

ASX has also introduced a new ‘additional liquidity requirement’, which is designed to meet potential unexpected non-default-related liquidity needs. ASX has calibrated this requirement to ensure that it has sufficient liquid assets to cover the peak historical one-day outflow from the ASXCC investment portfolio in percentage terms since 2008 (the earliest date from which data are available). Certain highly rated commercial bank securities that are eligible collateral under the Bank's standing facilities, as well as assets that are eligible to meet the core liquidity requirement, are eligible to meet the additional liquidity requirement.[5]

From August 2016, ASX has applied haircuts to the value of its investments when assessing the adequacy of its liquid resources against its core and additional liquidity requirements. These haircuts incorporate extreme but plausible (once-in-20-year) movements in the prices of securities over a three-day holding period, as well as the relevant haircut that would apply if these securities were used to access liquidity via the Bank's standing facilities. Non-Australian dollar-denominated cash and investments held to meet AUD margin requirements in ASX Clear (Futures) are also adjusted by a haircut calibrated to the worst single-day foreign exchange movement in the last 20 years.

Liquidity risk management framework

Consistent with the Bank's regulatory priorities, ASX has also made broader changes to the CCPs' liquidity risk management framework. During the Assessment period, ASX formally implemented a ‘cash market liquidity buffer’ of $100 million. This buffer is designed to better align ASX Clear's liquidity stress test framework with its expected strategy for managing liquidity obligations in a default scenario. ASX now aims to maintain resources to cover a pre-specified value of stressed liquidity exposures arising from cash market transactions, while continuing to maintain sufficient liquid resources to cover the stressed liquidity exposures arising from derivatives transactions.

In May 2017, ASX formally documented its processes for responding to breaches of its liquidity requirements, including the core and additional liquidity requirements and the cash market liquidity buffer. Any breach of these requirements is reported to the Chief Risk Officer (CRO) and Chief Financial Officer (CFO) immediately, and to ASX's internal Capital and Liquidity Committee (CALCO) on a quarterly basis. In addition, if there were three breaches in a quarter, this would require an emergency meeting of CALCO, which would decide on a response. In all cases, ASX would also review the circumstances and nature of the breach, the size of the breach and possible mitigants before taking any actions.[6]

Liquidity stress testing

Consistent with the regulatory priorities, ASX has refined liquidity-specific stress test scenarios developed in 2015/16 and formally incorporated them into its liquidity risk management framework. These scenarios consider stresses to outflows of margin posted as cash arising from a variety of extreme but plausible scenarios across both CCPs. The scenarios are:

  • Market contraction resulting from a market stress event. An extreme but plausible market event is assumed to result in a significant decline in cash market turnover and derivatives open interest, resulting in margin outflows.
  • Market contraction resulting from the default of two ASX participants. The close-out of two defaulted participants' portfolios is assumed to result in a decline in open interest from non-defaulting participants, resulting in margin outflows. These liquidity obligations are in addition to payment obligations arising directly from the default (for example, variation margin outflows associated with the defaulted participants' portfolios).
  • Historical scenario (decline in open interest from other sources). ASX applies historical declines in open interest to current participant portfolios in order to determine hypothetical margin outflows. The liquidity stress test result is based on the largest hypothetical margin outflow based on historical three-day changes in open interest since 2004.
  • Collateral substitution. Participants are assumed to replace a portion (currently 25 per cent) of cash collateral with non-cash collateral, across all markets.

ASX conducts its liquidity-specific stress tests on a monthly basis. The results from these scenarios are presented to CALCO on a quarterly basis, and are used to assess the adequacy of the liquidity requirements related to the CCPs' investment portfolio and the actual liquidity of the portfolio.

ASX has also recently developed a foreign currency liquidity stress test framework. This framework measures ASX's potential stressed liquidity exposures arising from its clearing of NZD-denominated products and its acceptance of foreign currency-denominated collateral. The framework considers both default-related and non-default-related liquidity outflows in each currency and assesses these potential outflows against liquid assets held in the relevant currency. The results from these stress tests have been monitored on a daily basis since 1 July 2017. To date, these results have indicated that ASX holds sufficient liquid assets in each relevant currency to meet potential stressed outflows.

Consistent with the Bank's regulatory priorities, ASX conducted sensitivity analysis on the effect of the priming assumption on ASX Clear's liquidity stress test exposures (see Appendix C.1, CCP Standard 7.8).[7] The analysis involved varying the priming assumption to 70 and 80 per cent in its liquidity stress tests in ASX Clear, from the current assumption of 90 and 100 per cent. The results suggested that the change in stress test exposures is immaterial (below 2 per cent) when the assumption is lowered to 70 per cent. ASX intends to run this sensitivity analysis annually.

Testing and due diligence

To meet its payment obligations in the event of a participant default, the ASX CCPs may be required to sell their investments or non-cash collateral or to post them as collateral. Consistent with the Bank's regulatory priorities, ASX has improved its processes for testing the CCPs' ability to access liquidity in this way. ASX now reviews every six months the range of transactions conducted over the period to confirm that it has tested its operational capability to conduct transactions to liquidate the full range of assets held by the CCPs. ASX will also access the Bank's standing facilities and conduct repurchase agreements with commercial banks on at least a six-monthly basis to confirm its ongoing operational readiness to conduct such transactions. The results from this periodic testing will be reviewed by CALCO.

ASX Clear also has access to a $150 million liquidity commitment with ASX Limited to meet default-related liquidity obligations, of which $100 million is backed by a committed facility provided to ASX Limited by a major bank. During the Assessment period, ASX introduced additional due diligence to ensure that the committed liquidity facility from ASX Limited to ASX Clear could be drawn upon if needed. This included six-monthly checks of whether ASX Limited continues to meet the requirements set out in its agreement with the major bank liquidity provider and whether it has enough funds to deliver on its portion of the facility.

ASX Clear may further supplement its liquidity resources with offsetting transaction arrangements (OTAs) – a form of contingent liquidity provided by participants – to meet securities-related payment obligations (see Appendix C.1, CCP Standard 7.1). In the previous Assessment period, ASX Clear began to disseminate monthly disclosures to individual participants on their contingent liquidity exposures to the use of OTAs. These disclosures show each participant's ‘worst-case’ liquidity exposure arising from the default of the largest two clearing participants and their affiliates on each day in the preceding month. ASX discussed the results of these disclosures with participants during the Assessment period, to ensure that its participants understood their contingent exposures, and understand how participants would manage these obligations.

2.1.3 Analysis of credit stress testing

On at least a monthly basis, CCPs are expected to perform comprehensive and thorough analysis of credit stress test scenarios, models and underlying parameters and assumptions to ensure that they are appropriate in light of current and evolving market conditions. Before 2016/17, the ASX CCPs met this requirement through routine quarterly reverse stress testing (RST), combined with running ‘for information’ stress test scenarios that ASX considers go beyond ‘extreme but plausible’, and reviewing market conditions on a monthly basis to determine whether there is any evidence of stress that would support a change to scenarios. The RST was used to identify scenarios under which stress test exposures would exceed prefunded financial resources. The RST scenarios took into account the impact of systematic shocks to the market or across multiple contracts, as well as changes to other model assumptions. These included assuming the default of multiple participants, and varying assumptions on the size, concentration or directionality of participants' portfolios.

In 2016/17 ASX decided to revise its approach to RST and suspended RST calculations while developing a modified approach. In July 2017, ASX re-commenced RST using a modified approach, which it subsequently ran retrospectively using information from 2016/17. The Bank will be reviewing the comprehensiveness of ASX's revised approach over the coming assessment period.

Recommendation. In order to continue observing CCP Standard 4, the ASX CCPs should ensure that they perform comprehensive and thorough analysis of their stress test models on at least a monthly basis.

2.1.4 Independent model validation

Under the CCPs' model validation framework, ASX has established a methodology to determine a ‘score’ for each of its models, which represents ASX's assessment of the relative risk posed by the model. ASX then uses the score to determine the frequency of independent model validation based on a set of thresholds. During 2016/17, ASX reassessed the risks inherent in each model and changed the thresholds, resulting in a potential reduction of the frequency of independent validation in most cases (Table 5).

Recommendation. In order to continue observing CCP Standard 4, the ASX CCPs should review the frequency of the independent validation of their credit risk models, to ensure that they align with the CCP Standards.

2.1.5 Membership requirements

A key risk control in both CCPs is the imposition of risk-based requirements on participants (see Appendix B.3). During the Assessment period, ASX implemented three material changes to the CCPs' membership requirements:

  • New liquidity risk management requirements. In August 2016, ASX Clear published a guidance note that sets out new requirements in respect of ASX Clear participants' liquidity risk management frameworks. The guidance note requires that participants establish a formal liquidity risk management framework and prepare an annual liquidity plan. Participants are also required to allocate overall liquidity risk management responsibility to a named individual and maintain robust liquidity-related operational and management reporting processes. Participants that are authorised deposit-taking institutions (ADIs) or non-bank subsidiaries of ADIs (subject to ASX's approval) would be exempt from the enhanced requirements if their arrangements are deemed to be adequately covered by an equivalent prudential supervisory framework. ASX Clear participants have been required to comply with the requirements of this guidance note since the end of February 2017.
  • Changes to capital-based position limits (CBPLs). In May, ASX amended ASX Clear (Futures)' CBPL framework. Under this framework, a limit is set on the ratio of a participant's initial margin relative to its liquid capital, net tangible assets (NTA) or Tier 1 Capital. The changes were primarily motivated by the fact that banks are now subject to prudential supervision and capital adequacy requirements under new international prudential requirements that are more comprehensive than ASX's CBPL methodology. Under the changes, a bank or subsidiary of a bank or a bank holding company (where the subsidiary has a minimum $200 million of NTA) can be exempt from a CBPL. In order to qualify for the exemption, the bank or bank holding company must be subject to prudential supervision by a prudential supervisory authority in a jurisdiction approved by ASX; a bank holding company must also be designated as a global systematically important bank by the Financial Stability Board (FSB). Rather than have a CBPL, ASX Clear (Futures) imposes an aggregate limit of $1.5 billion on exempt institutions' initial margin liabilities. As part of the changes, for the remaining participants, the CBPL ratio has also been increased from two to three, which aligns the ASX Clear (Futures) ratio with that used by ASX Clear.
  • Changes to core capital requirements. To better recognise the complexity and breadth of participants' business models, ASX Clear is proposing to implement rule changes to impose add-ons to participants' existing base minimum core capital requirement to reflect their activities in own-account business, non-ASX client activity, and client written exchange-traded options (ETO) activity. The changes are expected to be implemented in 2017/18. ASX's proposed changes would apply an additional capital requirement of nil, $2.5 million or $5 million for each of these activities, depending on the level of materiality. Under the proposed requirements, the minimum amount of core capital required would range from $5 million to $35 million, up from the current range of $5 million to $20 million. ASX is proposing to grant participants an initial transitional period of up to 12 months to meet any increased capital requirements. Subsequently, ASX would expect to review the capital requirements on at least a quarterly basis, and allow a transitional period of at least six months for participants to meet any subsequent increases.

2.1.6 Collateral haircuts

In September 2016, ASX Clear changed the methodology it uses to calculate haircuts for non-cash collateral. Prior to this date, ASX Clear applied a flat 30 per cent haircut on all eligible securities. This figure was based on the largest price fall used in its capital stress test scenarios, which are calibrated to a once-in-20-year event. Under the changes, ASX Clear has introduced three haircut tiers of 15, 20 and 30 per cent. Eligible securities are assigned to each tier based on the fifth largest price fall over a three-day period over the past 20 years, corresponding to a 99.9 per cent confidence level. ASX Clear also stresses the value of its collateral beyond this haircut in its stress tests.

These changes are consistent with changes made to ASX Clear (Futures)' haircut methodology for non-cash and foreign currency collateral during the previous assessment period. That is, in June 2016, ASX Clear (Futures) moved from using the worst to the fifth-worst price fall over a 20-year look-back period to calibrate haircuts. However, ASX Clear (Futures)' credit stress test framework will require changes and associated system enhancements in order to also subject collateral to extreme but plausible price moves (i.e. beyond the haircut).[8] ASX is planning to implement this change as part of planned changes to its risk management systems (see Section 2.1.7). In the meantime, over 2016/17, ASX developed quarterly reporting of the impact of the worst stress over the last 20 years on the value of non-cash and FX margin collateral. The Bank will continue to monitor the materiality of the issue over the next assessment period, as well as ASX Clear (Futures)' progress in incorporating extreme but plausible haircuts to collateral in its stress testing framework. This monitoring will be conducted as part of the broader work to review the CCPs' arrangements against new international guidance on CCP resilience (see Section 2.2).

2.1.7 Risk systems enhancements

During the Assessment period, ASX modified and reprioritised certain aspects of its technology transformation program. Rather than developing a new risk management system for the CCPs, ASX will instead be making incremental enhancements to the CCPs' existing risk management systems as part of a five-year plan to be developed over 2017/18. ASX will also be making a number of more immediate enhancements to its risk management systems over 2017/18. These immediate plans include:

  • a new tool to facilitate more frequent and detailed risk reporting
  • the expansion of its credit stress testing system capabilities
  • enhancements to over-the-counter (OTC) default management capabilities to allow more sophisticated risk sensitivity analysis
  • system automation for overnight margin calls
  • the implementation of liquidity margin and stress test add-ons

The Bank will monitor ASX's progress in developing and implementing its short-term risk system enhancements over the next assessment period, as well as the development of its five-year plan.

2.2 Resilience, Recovery and Resolution

In July 2017, CPMI-IOSCO published new guidance on CCP resilience and updated its guidance on FMI recovery (see Box A). The Bank has adopted the new and updated guidance and will be applying the two documents in interpreting the relevant Standards in the FSS. The Bank will review the alignment of the CCPs' risk management and recovery arrangements against these guidance documents over the next assessment period.

During the Assessment period, ASX updated and refined the documentation supporting its recovery plan. This update included amendments to address some of the matters that had been identified by the Bank in the September 2016 Assessment. In particular, the updated recovery plan includes greater consideration of the critical services provided by the CS facilities and a methodology for assessing and reviewing these services on an annual basis. The recovery plan also identifies links with FMIs within and outside of the ASX Group and considers the need for communication with these FMIs in a recovery situation.

During 2017, the Council of Financial Regulators (CFR) has continued work towards the development of draft legislation to implement an Australian resolution regime for FMIs. This regime will build on a February 2015 consultation paper and feedback received through the consultation process. The FSB's Guidance on Central Counterparty Resolution and Resolution Planning, published in July, will also be an input into the development of these arrangements (see Box A).

Box A: New International Guidance on CCP Resilience, Recovery and Resolution

In recognition of the increasingly important role of CCPs in the financial system, in 2015 the international standard setting bodies established a ‘joint CCP workplan’. The workplan called for the development of further guidance in the areas of CCP resilience, recovery planning and resolvability.

Resilience and recovery

In July 2017, as part of this workplan, CPMI and IOSCO published a report Resilience of Central Counterparties: Further Guidance on the PFMI (the Resilience Guidance). The genesis of this report was a CPMI-IOSCO review of selected major market CCPs' implementation of the Principles for Financial Market Infrastructures (PFMI), which found a range of inconsistencies in how the PFMI had been interpreted and adopted. The report takes into account industry comments received as part of a CPMI-IOSCO consultation on CCP resilience and recovery conducted in August 2016.

The Resilience Guidance provides further guidance on the Principles and Key Considerations in the PFMI regarding financial risk management by CCPs. The guidance does not create additional standards beyond those set out in the PFMI, but instead is intended to enhance CCP resilience by providing clarity on an acceptable way (although not necessarily the only way) of observing the PFMI.

The Resilience Guidance focuses on five key aspects of a CCP's financial risk management framework:

  • governance of financial risk management
  • stress testing for both credit and liquidity exposures
  • coverage of financial resources
  • margin
  • a CCP's contribution of its financial resources to losses.

Although the guidance does not impose additional standards beyond the PFMI, CCPs may need to make changes to their practices to be consistent with the guidance. CCPs are expected to implement any such changes by the end of 2017.

In July, CPMI and IOSCO also published revisions to their 2014 report Recovery of Financial Market Infrastructures. As with the Resilience Guidance, this was prompted by CPMI-IOSCO implementation monitoring work and responses to an industry consultation. The revised report, which applies to all FMIs, provides additional clarifications in four areas of recovery planning: (i) operationalisation of the recovery plan; (ii) replenishment; (iii) non-default-related losses; and (iv) transparency with respect to recovery tools and how they work.

CCP resolution

Also as part of the international CCP workplan, in July, the FSB published Guidance on Central Counterparty Resolution and Resolution Planning. This guidance covers a number of aspects of CCP resolution planning which authorities will need to consider when developing their frameworks for resolving failing CCPs, including:

  • policy objectives for CCP resolution
  • powers for resolution authorities to support effective resolution of CCPs
  • steps authorities should take for CCP resolution planning
  • cooperation and information sharing arrangements regarding resolution and resolution planning for CCPs that are systemically important in more than one jurisdiction.

2.3 Participant Default Rules and Procedures

Prompted in part by the May 2015 default of BBY Limited (an ASX Clear, ASX Settlement and Austraclear participant), in 2015/16 the Bank conducted a detailed assessment of the ASX CS facilities' default management arrangements against the relevant requirements in the FSS. While the Bank assessed that all the CS facilities observed the Standard on default management rules and procedures, the Bank made a number of recommendations in the September 2016 Assessment outlining some additional steps the ASX CS facilities should take to fully meet expectations, as well as recommendations for continuous improvement. Many of the Bank's recommendations were aligned with ASX's existing plans to implement further refinements to the CCPs' and SSFs' DMRFs.

Consistent with the recommendations, ASX has made significant progress in enhancing the DMRFs over the Assessment period.

  • Enhancements to documentation. ASX has significantly enhanced and added to the documentation supporting the SSF's DMRF. These enhancements include additional detail, as well as new documents setting out the specific procedures to be followed in the event of default of a clearing participant, an Austraclear participant, ASX Settlement participant, participating bank, or payment provider. In addition, ASX Clear documentation has been updated to include guidelines around the close-out treatment of specific cover positions in a default situation.[9]
  • Enhancements to disclosure and client education. ASX has enhanced the disclosures available to participants on key aspects of the facilities' DMRFs. This includes the publication of new guidance notes on the ASX Clear (Futures) and Austraclear and updates to the existing guidance notes for ASX Clear and ASX Settlement.[10] Separately, ASX intends to improve awareness of its DMRFs among clients of participants and other stakeholders. This includes the development of a new fact sheet targeted at insolvency practitioners and the inclusion of materials on the facilities' DMRFs in its investor education roadshow.
  • Enhancing portability of ETOs. While the ability of a client to transfer or port its positions following the default of a participant is, to an extent, outside of ASX's control, ASX is intending to make certain operational changes to make such a transfer more efficient.
  • Engagement with default brokers. ASX has engaged more deeply with one of its default brokers on the close-out process. Through this process the default broker provided feedback on expected close-out timeframes and prices, and hedging strategies. The engagement also identified operational changes to more efficiently place orders with the default broker.
  • Testing its recovery arrangements. In May, ASX ran an internal fire drill that tested its recovery arrangements. This fire drill illustrated the trade-off between different recovery tools and the implications for non-defaulting participants of delaying replenishment of mutualised default resources.
  • Review of resolution regimes applicable to participants. During the Assessment period, ASX updated its analysis of the impact of resolution regimes applicable to participants and provided the analysis to the Bank.
  • Taking appropriate account of stability interests in other jurisdictions. ASX has given some initial consideration of its arrangements to consider stability interests in New Zealand and plans to engage with the Reserve Bank of New Zealand on this during 2017/18.

Separately, ASX has amended the membership of its Default Management Group (DMG).[11] Prior to the changes, all OTC derivatives participants were required to be members. Under the changes, members will not have an obligation to participate, so long as the DMG had six members. If the number of members dropped below six, ASX would have the power to co-opt members. The changes are intended to enable OTC derivative participants to better manage their commitment to assist with default management processes at multiple CCPs, while ensuring that ASX has access to the expertise and execution capability to hedge and auction default portfolios.

While ASX has made significant progress in addressing the Bank's recommendations, work to enhance the DMRFs will continue in future assessment periods.

  • Enhancements to testing. ASX has commenced plans to enhance its default management fire drills. These plans include the introduction of new SSF-specific fire drills, the first of which will be in the second half of 2017, and an increase to the complexity and scope of the CCP fire drills. ASX also intends to consider engaging more widely with stakeholders following future fire drills, including with the CCPs' Risk Consultative Committees (RCCs).[12] The Bank will monitor these developments as part of its ongoing supervision of ASX.
  • Additional default broker. During the Assessment period, one of ASX Clear's two default brokers resigned. ASX is currently in the process of securing an additional default broker and reviewing its default broker arrangements. In the meantime ASX has contingency arrangements should its one default broker not be able to facilitate the close-out of a defaulting participant's positions.

Recommendation. In order to continue observing CCP Standard 12, ASX Clear should implement its plans to secure an additional default broker.

2.4 Operations and Technology

2.4.1 Operational issues

ASX Trade disruption

On 19 September 2016, there was a major disruption to the operation of ASX's equity trading system, which prevented trades from being executed for most of that day. The incident involved a combination of technological problems and operational errors. While the Bank does not have a direct role in the regulation of trading facilities, ASX's operational risk management controls and frameworks are broadly similar across its trading and CS facilities. Consequently, issues in operational risk management of the trading system may have implications for the CS facilities. In addition, following the incident, participants asked for additional clarification around the point of novation in ASX Clear of trades matched in ASX Trade.

The Australian Securities and Investments Commission (ASIC) led the regulatory investigation of the incident and in December 2016 published a report setting out recommendations for ASX.[13] In May, ASX published an update on progress it had made in response to the recommendations, much of which was in the area of operational risk management. ASX stated that it had:

  • reviewed and strengthened its business continuity management and IT disaster recovery processes and documentation, as well as the scope and timing of current disaster recovery testing
  • completed a review of technology status monitoring across all of its core platforms and introduced a number of enhancements, including new tools to improve ASX's ability to identify and resolve issues at the commencement of an incident and during recovery
  • reviewed its arrangements for mitigating manual operator errors, specifically the ‘four eyes’ principle.[14]

On ASIC's recommendation, ASX also has consulted on its approach to determining settlement prices – the prices it would use to calculate margin – during an ASX Trade disruption (see Section 3.7). ASX also intends to provide further guidance to participants on the point of novation in ASX Clear of a trade matched in ASX Trade and on its ability to cancel trades.

Austraclear incident

On 15 February, there was a material Austraclear operational incident following a power outage, during which all services were unavailable for around half an hour in the evening. While ASX has back-up battery-based power and diesel generators at both of its operating sites, a malfunctioning switch meant that the site's power demand was not able to be routed to the diesel generators. A consequence of the power outage was that it made a component of the CHESS system inoperable at the back-up site. A contributing factor was the age of the component. As a result, for a period of a few weeks following the incident, ASX's ability to recover from an operational disruption to its CHESS operations was limited.

In response to this incident, ASX has advised ASIC and the Bank that it has completed a number of remedial actions, including replacing the faulty CHESS component. ASX has also:

  • engaged a third party to review its power supply arrangements at its second site
  • conducted further testing on back-up power supply arrangements
  • undertaken further analysis of hardware age and support across all ASX infrastructure; a key outcome of the review was ensuring the system infrastructure assets register identifies all infrastructure supporting key systems and their end-of-life date.

Operational risk review

Following the two significant operational disruptions discussed above, and in light of other incidents during 2016/17 across both its trading and CS facilities, ASX, at the instigation of the Bank and ASIC, has commissioned an external assessment of its operational risk management arrangements. The review will consider ASX's current technology governance, operational risk practices and control mechanisms. It will include a detailed review of ASX's documentation, supplemented by interviews with staff from each function and business line. The review will also benchmark ASX's practices against international best practice in this area. The Bank and ASIC will review the results of the report in 2017/18 and ASX's response to any recommendations made in the review.

2.4.2 Engagement on cyber resilience

A key regulatory priority over the Assessment period was in the area of cyber resilience. To this end, the Bank, in cooperation with ASIC, conducted a detailed assessment of the CS facilities' governance arrangements relevant to cyber resilience against the Governance chapter in the CPMI-IOSCO Cyber Guidance. This assessment did not identify any significant issues.[15] ASX is conducting a self-assessment against the remaining chapters of the guidance, which will draw in part from an external review against industry standards, both of which the Bank intends to review during the next assessment period.

Consistent with the Cyber Guidance, ASX has also developed a concrete plan to improve its capabilities to recover from a cyber attack, which builds on ASX's cyber security plan and strategy.

As part of this plan, ASX will:

  • identify potential paths or means that might be used to launch a cyber attack on the CS facilities
  • identify the consequences for the CS facilities' critical operations that may arise from successful cyber attack
  • assess the CS facilities' ability to detect, respond and recover from possible cyber attack
  • based on the findings of the previous points, and taking into account the costs and benefits of potential enhancements, identify and implement enhancements to the CS facilities' existing systems and processes that would provide a material net benefit to the CS facilities' capability to target a two-hour recovery time objective.

The Bank will monitor ASX's implementation of these plans.

Finally, ASX has reviewed the case for developing participant requirements in the area of cyber resilience, in consultation with a range of participants, industry vendors and industry bodies. While ASX will not develop detailed requirements due to concerns about the duplication of regulatory obligations, it will update guidance notes supporting the CS facilities' admission requirements to underscore the importance of cyber risk and observance of international best practice.

2.4.3 CHESS replacement

During the Assessment period, ASX continued its development work on its project to replace the CHESS clearing and settlement system. This is an important element of ensuring that ASX's core infrastructure for the cash equities market meets international best practice, and that its performance, resilience, security and functionality continue to meet the needs of its users. ASX is working with a vendor, Digital Asset Holdings, to develop a potential CHESS replacement based on a permissioned, private DLT system. Working with Digital Asset Holdings, ASX has continued to enhance a DLT prototype developed over 2016/17. ASX intends to make a final decision on whether to proceed with a DLT solution or use an alternative technology to replace CHESS towards the end of 2017. The Bank will continue to monitor the development of a new clearing and settlement system for cash securities transactions. This will include: how the new system aligns with the requirements in the FSS; the clarity, effectiveness and documentation of the default management processes; contingency plans regarding the replacement of CHESS should the decision be taken not to proceed with a DLT solution. As part of the Bank's and ASIC's engagement with ASX on the external review of the facilities' operational risk management arrangements, the Bank will also monitor ongoing maintenance and smooth functioning of the existing CHESS system in the transition to its replacement system.

The CFR, of which the Bank is a member, will also be monitoring ASX's conduct in the development of the new clearing and settlement system with regard to the CFR's Regulatory Expectations for Conduct in Operating Cash Equity Clearing and Settlement Services in Australia (Regulatory Expectations).[16] The Regulatory Expectations, which were published in October 2016, set out the regulators' expectations for ASX's conduct in operating its cash equity CS facilities as a monopoly provider, until such time as a committed competitor emerges.

2.5 New Products and Services

ASX expanded and enhanced its OTC derivatives service during the Assessment period. This includes:

  • Expansion of product scope. In October, ASX introduced two new OTC interest rate derivative (IRD) products, bank bill swap rate (BBSW) vs Australian overnight index average (AONIA) basis swaps and ‘asset swaps’. ASX also increased the maturity of some of its existing OTC IRD products.
  • Expansion of operating hours. In February, ASX extended the operating hours for the OTC service, allowing participants to submit trade registrations during the London trading hours (overnight in Australia). This did not require significant operational change, since ASX Clear (Futures) already clears contracts traded on the ASX 24 Night Session.
  • Client clearing operational processes. In June, ASX amended its operating rules to facilitate a process through which client OTC derivatives transactions are submitted for clearing. The new process is aimed at aligning ASX's arrangements with international practice and overseas regulation.

ASX launched, or further developed, several other new products and services during the 2016/17 Assessment period.

  • Securities lending in ASX Collateral. ASX Collateral is a service that allows its customers to automate the optimisation and allocation of collateral securities held within Austraclear. In January, ASX expanded the service to provide a tri-party securities lending service for fixed income securities. The service allows participants to effect securities lending transactions for which the securities lent and collateral are held within the Austraclear system on a delivery-versus-delivery (DvD) basis, thereby eliminating the principal risk that exists in the settlement of such transactions outside of ASX Collateral.
  • Renminbi (RMB) securities. In September, ASX introduced the capability to issue, settle and hold RMB-denominated securities in Austraclear. The RMB payments leg arising from settlement of these products is facilitated by Austraclear's existing Foreign Currency Settlement Service, which facilities the settlement of RMB payments.
  • Expansion of mFund product scope. In February, ASX expanded the scope of managed fund products that can be settled through its mFund service to all unlisted registered managed investment schemes, subject to certain liquidity and disclosure requirements. This change was made in response to requests by issuers of managed funds, brokers and investors. Previously, the scope of the mFund service was limited to simple managed funds.
  • Weekly and serial options. ASX expanded its listing of ETOs in October to include new weekly and serial option contracts. Similar to monthly or quarterly options contracts, weekly options offer the Standard & Poor's (S&P)/ASX 200 index or selected stock as the underlying asset, but with weekly expiries up to the first month. Serial options are equity index options that expire on a monthly basis. ASX expanded its listing of serial options to offer monthly expiries to the first six months, from the first three months previously.


The core liquidity requirement includes the results from each CCP's Cover 2 liquidity stress test, as well as an estimate of potential margin outflows from non-defaulting participants. For more information see Appendix C.1, CCP Standard 7.3. [4]

Through the Bank's standing facilities, eligible counterparties (including ASXCC, on behalf of the ASX CCPs) can access liquidity on pre-specified terms via repurchase agreements. [5]

The potential response to a breach also depends on the particular requirement: for example, a breach of the cash market liquidity buffer may require an increase in ASX Clear's default fund, whereas a breach of the core liquidity requirement may require a rebalancing of the ASXCC investment portfolio. [6]

The priming assumption refers to the proportion of securities that are assumed to be lodged in the defaulting participants' respective settlement accounts prior to default. [7]

ASX Clear already uses haircuts based on extreme but plausible price moves to value collateral in its stress testing framework. [8]

ASX Clear participants are able to lodge stocks as ‘specific cover’ collateral for call options written on that stock. All other collateral (including cash and eligible securities) posted by the participant to cover its margin requirement is treated as ‘general cover’. [9]

The update to the ASX Clear note included a new section on the impact of the ‘back-out algorithm’, which is a tool used by ASX Clear to remove a defaulted participant's cash market obligations. [10]

The primary role of the DMG, which is comprised of trading and risk experts from ASX's OTC clearing participants, is to advise the Default Management Committee (DMC) on aspects of the management of an OTC participant default specified in the Operating Rules. [11]

Each CCP has an RCC comprised of participants that provide feedback to the ASX Clear and ASX Clear (Futures) Boards on risk management matters. [12]

The report also included a detailed timeline of the incident. It is available here: <>. [13]

These statements are available in an update ASX published on the actions and progress in addressing the ASIC recommendations in relation to the outage, available here: <>. [14]

Due to the sensitivities around cyber-related information, the results of this assessment are not disclosed in this report. [15]

Available at: [16]