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 2017/18. Developments between the end of 2017/18 and the finalisation of this report on 28 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 Credit risk

Changes to Stress Test Exposure Limits

ASX Clear and ASX Clear (Futures) (the ASX CCPs) set STELs for each of their participants based on an internal assessment of creditworthiness. Each CCP automatically calls for collateral known as additional initial margin (AIM) when participants' credit stress test exposures are in excess of their STELs. STEL AIM calls are due before midday on the next business day. The time gap between participants entering into new trades and the payment of any resultant STEL AIM calls means that an increase in a participant's stressed exposures could potentially result in an overnight breach of the relevant CCP's requirement to cover credit losses on the default of its two largest participants and their affiliates with prefunded financial resources (‘Cover 2’). During the second half of 2017, ASX Clear (Futures) reported six Cover 2 credit stress test breaches and ASX Clear reported five breaches. Each of these projected shortfalls were covered by AIM collected the next day.

In response to these breaches, and as part of the annual review of the size and composition of the CCPs' default funds undertaken in November 2017, the ASX CCPs decided to lower STELs for all participants to reduce the potential for overnight breaches of the Cover 2 requirement. Before the reduction, STELs for the highest-rated participants were set at half the total default fund of the relevant CCP (i.e. $125 million at ASX Clear and $325 million at ASX Clear (Futures)). The reduction means that ASX CCPs will receive STEL AIM before the largest two stress test exposures exceed the size of the relevant default fund, effectively reserving part of the default fund as buffer to address increases in exposures from the previous margin call. ASX has set the minimum buffer at $80 million at each CCP.[3] ASX used the daily changes in the Cover 2 requirement, accounting for STEL AIM held, over the past three years to calibrate these buffers.

In order to help participants manage the transition to the lower STELs, ASX Clear implemented the reduction in two stages, with an initial reduction of $20 million for the highest-rated participants in December 2017, and a reduction of a further $20 million implemented in July 2018. ASX Clear (Futures) implemented the full $40 million reduction in STELs for the highest-rated participants in December. STELs for lower-rated participants were reduced proportionately in each CCP.

Reverse stress testing

CCP Standard 4.5 requires that, at least on a monthly basis, CCPs should perform comprehensive and thorough analysis of credit stress test scenarios, models and underlying parameters and assumptions to ensure that these are appropriate in light of current and evolving market conditions. ASX addresses this requirement through a combination of:

  • routine reverse stress testing, designed to identify scenarios in which the ASX CCPs would exhaust their prefunded financial resources
  • running ‘for information’ stress test scenarios that ASX considers go beyond the ‘extreme but plausible’ scenarios used in its active stress tests
  • reviewing market conditions on a monthly basis to determine whether there is any evidence of emerging stress that would support a change to scenarios.

During the previous assessment period, ASX revised its approach to reverse stress testing, suspending its routine reverse stress testing calculations while developing this modified approach. In response to this, the Bank set a recommendation in its September 2017 Assessment that the ASX CCPs should ensure that they perform comprehensive and thorough analysis of their stress test models on at least a monthly basis.

ASX implemented its modified approach to reverse stress testing in July 2017. Under the new approach, ASX scales up a selection of existing stress test scenarios that typically result in the largest stress test losses for each CCP; the aim is to determine how much more severe these shocks would need to be in order to exhaust prefunded financial resources. ASX also considers the impact of the simultaneous default of its largest three and four participant groups. ASX performs reverse stress testing on a monthly basis.

Model validation

In its September 2017 Assessment, the Bank set a recommendation for the ASX CCPs to review the frequency with which they obtain independent validation of their credit risk models, to ensure that this aligns with minimum frequencies set out in the CCP Standards. At that time, ASX's model validation methodology set the frequency of validation for each of its models based on a risk-based ‘score’. ASX's application of this methodology had resulted in a reduction of the frequency of independent validation, in some cases to a frequency below the requirements set out in the CCP Standards.

In February 2018, ASX amended its Model Validation Standard in order to reintroduce a requirement for annual, independent validation of key models used at the ASX CCPs in their credit, collateral, margining and liquidity risk management systems, consistent with requirements set out in the CCP Standards. ASX has engaged an independent third party to conduct annual validations of each of its key clearing risk models over a three-year period, under the oversight of ASX Internal Audit. Under the updated Model Validation Standard, the results and recommendations from each of these validations are reported to the Chief Risk Officer (CRO), internal risk committees and the ASX CS Boards.

2.1.2 Margin

Managing overnight risk in ASX Clear (Futures)

The September 2017 Assessment included recommendations for ASX Clear (Futures) to address the potential for participant exposures to build up during the ASX 24 Night Session, during which time the payments infrastructure for AUD margin payments is closed.[4] The recommendations were for ASX Clear (Futures) to introduce a scheduled intraday margin call during the Night Session by the end of 2017, and to put in place near real-time monitoring and management of new overnight exposures, or other steps to comprehensively manage these exposures, by 30 June 2020.

In order to address the first of these recommendations, in November 2017 ASX Clear (Futures) introduced a 2.00 am intraday margin call for participants that are most active in the Night Session.[5] Since the systems used for payment of AUD margin (Austraclear and RITS) are closed overnight, these margin calls are made in USD and settled via the US banking system. A call is made to cover any AUD initial margin shortfall greater than $3m for house accounts and $5m for client accounts on AUD futures and OTC products.

To avoid the risk of calling variation margin in USD overnight then having to fund a matching outgoing variation margin payment in AUD the following day, ASX does not typically include variation margin obligations as part of the 2.00 am intraday call. Instead, ASX has introduced a requirement for participants to maintain a margin buffer to cover potential variation margin obligations arising from overnight price moves. The margin buffer is calibrated to cover 80 per cent of variation margin obligations that arise between the last intraday margin calculation of the Day Session (at 1.30 pm) until the 2.00 am intraday call. ASX also has the ability to make additional USD margin calls to cover overnight price movements if it judges this to be necessary. ASX intends to review the size of the margin buffer on a quarterly basis.

ASX has also taken a number of additional steps to enhance its management of risk exposures arising from the ASX 24 Night Session:

  • In response to the longer-term recommendation for near real-time risk management of overnight exposures, ASX has acquired data analytics and risk-visualisation software that, once fully implemented, will allow ASX to recalculate exposures at 10-minute intervals. ASX is targeting a ‘go-live’ date for near real-time monitoring capabilities for ASX Clear (Futures) in December 2018. ASX plans to extend this risk monitoring system to ASX Clear in 2019.
  • ASX Clear (Futures) introduced an additional intraday margin call at 8.05 am, prior to the collection of the end-of-day margin call, which applies to all ASX Clear (Futures) clearing participants. This reduces the duration of overnight margin exposures by around two hours for participants not subject to overnight margining. Previously, ASX Clear (Futures) calculated intraday margin obligations at 8.05 am but did not call for intraday margin based on these calculations.
  • ASX Clear (Futures) also halved the previous risk-based erosion thresholds that applied to intraday calls, meaning that a greater proportion of intraday exposures are collateralised in the lead-up to the Night Session.

Recommendation. ASX should introduce a process for ongoing review and resizing of its margin buffer to cover potential variation margin exposures created during ASX 24's Night Session.

By 30 June 2020, ASX Clear (Futures) should put in place arrangements to be able to monitor and manage intraday exposures created during ASX 24's Night Session on a near real-time basis, or take other steps to ensure comprehensive management of intraday exposures created during ASX 24's Night Session.

Monitoring of net settlement positions

In June 2017, ASX Clear reported a breach in its Cover 2 capital requirement which was the result of a large intraday build-up in cash market positions at an individual participant. Since ASX Clear does not perform routine intraday margin calculations for cash market products, it did not call for any collateral against this position until the following morning. At that time, the participant was required to pay STEL AIM resulting from the large increase in its stressed exposures, as well as the increase in initial margin triggered by the trades. In order to provide ASX Clear with more timely notice of a large intraday change in cash market exposures, ASX Clear introduced intraday monitoring and reporting on participants' net settlement positions relative to a $500 million threshold during the assessment period. Based on the results of the report, ASX management investigate whether further action is required, including calling participants for additional intraday margin, to prevent ASX Clear being exposed to large uncovered positions overnight. ASX has made three such intraday margin calls since the introduction of this enhanced monitoring.

Margin period of risk and liquidity add-ons

The MPOR, or close-out period, is the period during which the CCP is exposed to potential losses on a defaulting participant's portfolio. It is the projected length of time between the receipt of the last margin payment from a defaulting participant, and the point at which all of that participant's positions have been closed out. In the September 2017 Assessment, the Bank made a recommendation for the ASX CCPs to conduct and document analysis of MPOR assumptions used in their initial margin models for all products, and review its assumptions in light of this analysis. Previously, ASX had set its MPORs at one day for cash market products, two days for exchange-traded derivatives, and five days for OTC interest rate derivatives (IRDs). The range of MPORs primarily reflected ASX's assessment of structural market liquidity across these products.

During the assessment period, ASX carried out analysis of the MPOR assumptions used in initial margin models for all products. Based on this analysis, ASX concluded that a two-day MPOR is appropriate for the majority of exchange-traded derivatives products at ASX Clear and ASX Clear (Futures), with the exception of electricity derivatives in ASX Clear (Futures). ASX's analysis revealed that the electricity futures market is less liquid than was implied by its previous MPOR. This is, in part, because the electricity market is primarily used by end users (i.e. energy generators and retailers) for hedging purposes, with the role of clearing participants largely restricted to facilitating client business. The size of individual positions is also typically large relative to average daily trading volumes, making it likely that the close-out period in a default scenario would be longer than for other products.

In response to this analysis, ASX increased the MPOR from two to three days for all AUD energy derivative contracts at ASX Clear (Futures) in January 2018, followed by a similar increase to the MPOR for NZD energy derivative products in May. In addition, ASX adjusted its margin methodology for these products to remove the assumption of a normal distribution of price returns, in order to better reflect the potential for extreme price movements.

ASX's analysis has also led it to consider further changes to improve its ability to manage positions in electricity derivatives in the event of a default. In particular, ASX Clear (Futures) is investigating default management mechanisms that involve end users in the market, the enhanced segregation of accounts and backup clearing arrangements. The MPOR analysis also prompted a review of the appropriate default management approach for exchange-traded derivatives products at ASX Clear, with ASX concluding that a voluntary auction mechanism would provide a more efficient method for closing out a defaulter's portfolio.

ASX's analysis for cash market products at ASX Clear concluded that it should increase the MPOR from one day to two days for products margined using the Historical Simulation Value at Risk (HSVaR) model and for ASX 200 products margined on a flat-rate basis. ASX's analysis concluded that the current two- or three-day MPORs used for remaining flat-rate products was appropriate. ASX uses its OTC default management fire drills to test its MPOR assumptions for OTC products at ASX Clear (Futures). ASX concluded that there was no need to revise the current MPOR for OTC products, set at five days for house positions and seven days for client positions.

While ASX's MPOR analysis is focused on the typical length of time needed to close out a defaulting participant's portfolio, in some cases the portfolio may be unusually large or illiquid and require longer to close out. In order to address this risk, the Bank also made a recommendation in the September 2017 Assessment that ASX should complete the implementation of add-ons to manage liquidity risk for products where a liquidity add-on was not already in place (i.e. cash market products and products margined using the CME SPAN model). During the assessment period, ASX reviewed the use of liquidity add-ons in the context of its overall approach to calibrating initial margin for exchange-traded derivatives at ASX Clear (Futures). The revised margin methodology that ASX has developed as a result of this review would, if implemented as planned, adjust the margin requirement for each portfolio based on the size and underlying liquidity of open positions. ASX is continuing work to develop its approach to liquidity add-ons at ASX Clear.

As part of ASX's review of its margin methodology, ASX increased the frequency with which it recalibrates margin parameters from quarterly to monthly, and extended the historical sample period used to calibrate margin parameters for exchange-traded derivatives at ASX Clear (Futures) from one year to five years. ASX considers that these changes, together with the stronger analytical foundations for MPOR and liquidity add-ons, provide a more robust basis for calibrating margin requirements. As a result, ASX took the decision to reduce the target level of initial margin coverage at ASX Clear (Futures) to a confidence level of 99.5 per cent, from 99.7 per cent previously.

Recommendation. ASX Clear and ASX Clear (Futures) should complete the implementation of add-ons to manage liquidity risk for cash market products and products margined using the CME SPAN model.

Enhancements to backtesting and sensitivity analysis

The CCP Standards require CCPs to analyse and monitor model performance and overall margin coverage through backtesting and sensitivity analysis. Backtesting is a comparison of actual model performance against predicted model outcomes, while sensitivity analysis tests for the responsiveness of initial margin to the underlying parameters and assumptions used to calibrate the initial margin model.

During the second half of 2017, ASX implemented an enhanced approach to both its margin backtesting and sensitivity analysis. ASX's revised backtesting approach incorporates both ‘static’ and ‘point of default’ backtests. Static tests (the basis of ASX's previous backtesting approach) are used to assess the statistical performance of the margin model by comparing whether the initial margin requirement for a participant's current portfolio would be adequate to cover historical price movements over the assumed MPOR to the desired confidence level. Point of default tests are used to assess the adequacy of initial margin to cover losses on a participant's portfolio as it would be at the point of a hypothetical default. These tests take into account that initial margin held may have been collected in respect of a participant's positions as they were on the day before default, since the default may occur before the receipt of the previous day's end-of-day margin.

ASX commenced its new approach to sensitivity analysis on its CME SPAN and OTC Filtered Historical Simulation of Value at Risk (FHSVaR) models on a monthly basis from September 2017 and expanded its analysis to cover the cash market margining (CMM) model from December. ASX's analysis covers the sensitivity of ASX's initial margin models to underlying parameters such as MPOR, confidence levels and look-back periods (i.e. the length of price history used to calibrate the model). ASX also conducts ‘reverse sensitivity analysis’ for CME SPAN margin models, which estimates the length of time over which initial margin would be sufficient to cover losses on participants' current portfolios.

Backtesting results and sensitivity analysis are reported to ASX's Risk Quantification Working Group (RQWG) and the Bank on a monthly basis. The presentation of these results has been refined over time in response to feedback from RQWG.

Consultation on settlement prices during outage

Following an ASX Trade outage in September 2016 and in response to a recommendation from ASIC, ASX reviewed its process for setting the prices used for margining purposes (i.e. settlement prices) in the event of a market disruption. As a result of this review, ASX published a consultation paper in June 2017 to seek feedback from its stakeholders on its processes for determining settlement prices in ASX Clear during a market outage. Following the consultation, ASX Clear decided that it would continue to use its current methodology of using ASX market closing prices to determine settlement prices, except in exceptional circumstances. ASX Clear also decided that participants should be provided with timely communication and transparency on the approach taken to determining settlement prices in the event of a disruption to the ASX market. ASX has published a description of its approach to determining settlement prices on its website.[6]

ASX also intends to provide further guidance to participants on the point of novation in ASX Clear of a trade matched on an Approved Market Operator (AMO) and on its ability to cancel the novation of trades.

2.1.3 Enhancements to risk systems

During the 2016/17 assessment period, ASX modified and reprioritised certain aspects of its technology transformation program. Instead of developing a new risk management system for the CCPs, ASX planned to make incremental enhancements to the CCPs' existing risk management systems as part of a five-year plan which was to be developed over 2017/18. During the current assessment period, ASX selected and commenced the implementation of a risk-visualisation tool that facilitates a near real-time view of risks, as well as implementing system changes to support the introduction of overnight margining. It has also allocated funding for enhancements to its credit stress testing system that will support implementation of ASX's plans to align with stress testing practices described in the CCP Resilience Guidance (see section 4.3). Further system changes will be required to support the planned introduction of liquidity add-ons at both CCPs.

2.1.4 Liquidity risk

Additional liquidity resources

On a daily basis, the ASX CCPs assess the adequacy of their liquid resources against the objective of covering the largest potential liquidity exposure arising from the default of two participants and their affiliates in stressed market conditions (Cover 2 liquidity requirement). The resources available to the ASX CCPs to meet the Cover 2 liquidity requirement are liquid assets held by the CCPs that derive from the defaulting participants' initial margin as well as each CCPs' default funds, currently sized at $250 million at ASX Clear and $650 million at ASX Clear (Futures). ASX Clear also has access to a $150 million committed liquidity facility from ASX Limited and can supplement its available resources with additional liquidity from offsetting transaction arrangements (OTAs) with participants (see Appendix C.1, CCP Standard 7.3). In addition to its Cover 2 liquidity requirement, ASX Clear has defined a target minimum cash market liquidity buffer of $100 million, which it would use to meet stressed liquidity exposures arising from cash market transactions before it relied on the use of OTAs.

Both CCPs hold additional liquidity resources that could be used for the purposes of meeting liquidity needs in stressed conditions; these include STEL AIM and intraday margin held as well as the overnight margin buffer at ASX Clear (Futures) and offsetting cash market inflows at ASX Clear. During the assessment period, there were 20 instances at ASX Clear and 155 instances at ASX Clear (Futures) in which there was a projected shortfall in resources available to meet the Cover 2 requirement, or the minimum cash market liquidity buffer in the case of ASX Clear, under stressed market conditions. However, in all but seven of these instances at ASX Clear and two at ASX Clear (Futures), the projected shortfall would have been covered had the additional liquidity resources that were available been taken into account.

In June 2018, ASX updated its Liquidity Risk Policy, and Liquidity Stress Testing and Liquidity Requirement Standard to formally reflect the use of these additional liquid resources to meet the CCPs' liquidity requirements. Prior to this, ASX had been reporting its liquidity stress test results for both CCPs with adjustments to include the additional liquidity resources, which was not consistent with its formally approved liquidity stress testing approach. This reliance on informal and ad hoc processes to correct an identified gap in the previous liquidity stress test model is reflective of similar findings that were identified by the Bank in its assessment of ASX's governance arrangements against the CCP Resilience Guidance (see section 4.1).

ASX will consider the smaller number of instances where there was a projected stressed shortfall in the CCPs' liquid resources as part of the annual review of the CCPs' default funds, which is expected in the second half of 2018. This review will consider whether there is a need for ASX to increase the size of the CCPs' default funds or take other steps in order to ensure the ongoing sufficiency of its liquid resources.

2.1.5 Membership requirements

Minimum core capital requirements

Clearing participants at ASX Clear are subject to base core capital requirements of $5 million for direct participants, or between $5 million and $20 million for general participants.[7] In December 2017, ASX Clear introduced additional core capital requirements in order to more adequately reflect the risk profile and complexity of a participant's business. This additional requirement is based on the extent to which the participant undertakes the following types of activity: clearing of written options on behalf of clients; proprietary trading activity; and non-ASX client activity.[8] ASX classifies each of these activities as either de minimis, material, or neither de minimis nor material, and imposes additional core capital requirements as follows:

  • de minimis – no additional requirement
  • neither de minimis nor material – additional requirement of $2.5 million
  • material – additional requirement of $5 million.

In determining the materiality of the participant's relevant activities, ASX takes into consideration factors such as initial margin held, products traded, size and utilisation of the participant's risk limits, historic and forecast revenues generated by the activity, the number of additional activities undertaken by the participant, and the relative significance of the activity to the participant's overall risk profile.

ASX has allowed a transitional period until 1 January 2019 to allow participants to meet any initial increase in core capital requirements. Going forward, ASX will review core capital requirements on a quarterly basis, providing participants with at least six months to meet any increase in requirements.

Risk-based capital requirements

In November 2017, ASX Clear implemented changes to the types of assets eligible to meet core and liquid capital requirements.

  • Subordinated debt. In November, ASX Clear removed a participant's ability to use approved subordinated debt to meet its core capital requirement. Under ASX Clear's previous rules, a participant was allowed to satisfy a portion of its core capital requirement using approved subordinated debt if it did not hold sufficient other assets to meet its core capital requirements. The exception was originally introduced to assist participants with the transition to higher minimum core capital requirements in 2009 and was subject to the prior approval of ASX Clear, and certain other conditions and limitations. At the time of the change, no participants had approval from ASX Clear to use subordinated debt for this purpose.
  • Liquid assets. In November, ASX Clear amended the definition of ‘liquid’ in its rules to include assets that may be realisable or convertible to cash in 31 days (previously 30 days). This change was made in response to the implementation of the Australian Prudential Regulation Authority's (APRA's) Liquidity Coverage Ratio requirements, which resulted in some authorised deposit-taking institutions (ADIs) changing their notice period for early withdrawal of term deposits to 30 days. As a result, a term deposit with a maturity of more than 30 days would no longer have been treated as liquid by ASX Clear, and could therefore not be used to meet the minimum liquid capital requirement.

2.2 Default Management and Recovery

2.2.1 Default management

The Bank's September 2017 Assessment acknowledged the significant progress ASX had made in responding to the Bank's recommendations to enhance its default management arrangements. However, the Bank set one recommendation relating to default management and one area of supervisory focus for ASX in the September 2017 Assessment, to address remaining plans for ASX to enhance its default management arrangements.

Additional default brokers

In order to manage exposures and restore a matched book following a default event, default brokers execute close-out and hedging trades in exchange-traded products on behalf of ASX Clear. During 2016/17, one of ASX Clear's two default brokers had resigned, taking the number of brokers below the minimum of two set out in ASX's internal Default Management Standard. In response, the Bank made a recommendation in the September 2017 Assessment for ASX to implement plans to secure an additional default broker.

During the assessment period, ASX Clear implemented rule changes which allow it to require a participant to enter into a default broker agreement with ASX Clear, making the participant an eligible default broker. Under the new rules, ASX Clear selects at least three participants from the pool of eligible default brokers to serve as active default brokers for a two-year period. ASX Clear currently has four active default brokers and expects to appoint additional default brokers during the next assessment period. ASX Clear (Futures) also engaged a third default broker during the assessment period.

Default management fire drills

The other area of supervisory focus on default management for the Bank has been in monitoring the ASX CS facilities' plans to enhance their default management fire drills, including their testing of arrangements to deal with the default of a settlement participant. ASX conducted a SSF-specific fire drill in August 2017, which focused on the default of a participant at ASX Settlement. Going forward, ASX has expanded the scope and complexity of its CCP fire drills to consider interactions between clearing and settlement participants within the one scenario. For example, the ASX Clear fire drill considered the flow-on effects of an Austraclear participant default on other participants in ASX Clear. In this way ASX will test the default procedures of the two ASX SSFs alongside those of the CCPs. ASX also broadened the scope of its OTC fire drill at ASX Clear (Futures) to test the governance and execution of its hedging strategy.

2.2.2 CPMI-IOSCO recovery guidance

The revised report of CPMI and IOSCO, Recovery of Financial Market Infrastructures (the Recovery Guidance), was adopted by the Bank as guidance to the interpretation of the FSS upon publication in July 2017.[9] The Recovery Guidance is an update of guidance that was initially published in October 2014 and contains minor clarifications in response to comments that were received during a CPMI-IOSCO consultation in 2016. The Bank had taken account of the previous version of the guidance when assessing the ASX CS facilities' recovery plans as part of the September 2015 Assessment, setting a number of recommendations that were subsequently addressed by ASX. During the assessment period the Bank assessed the ASX CS facilities against the updated Recovery Guidance, concluding that their practices are consistent with the guidance. Nevertheless, ASX has identified potential improvements to its disclosures and reporting relating to recovery tools. In November 2017 it ran educational sessions on recovery tools with both ASX Clear and ASX Clear (Futures) participants. ASX also plans to publish additional materials to support the market's understanding of the recovery tools that ASX has at its disposal in the first half of 2019.

2.3 Operations and Technology

2.3.1 CHESS replacement

ASX is in the process of replacing CHESS, its core system for clearing, settlement and other post-trade services for the Australian cash equity market. In December 2017, the ASX Board selected Digital Asset (DA), a New York-based technology company, as the vendor platform that will replace CHESS. The new platform will be built incorporating DLT. The announcement in December followed a long period of joint development by ASX and DA to ensure that a DLT-based system could meet all of the necessary functional and non-functional requirements. In April 2018, ASX publicly released its consultation paper on the CHESS functionality it intended to offer, both on Day 1 and in the longer term.[10] The consultation paper brought together two work streams that had been occurring separately – work on the DLT prototype, and the determination of proposed business requirements developed by stakeholder working groups. ASX plans to release a paper in September 2018 that provides a summary of its consultation feedback, the Day 1 functionality, implementation timelines and how it intends to engage further with stakeholders on key issues.

The Bank has continued to engage with ASX on its proposed business requirements for the CHESS replacement system, with a focus on understanding how these align with the requirements in the FSS and can support ASX's risk management capabilities. For example, ASX had confirmed through this engagement that the CHESS replacement system will have functionality that can be configured to support segregation between a participant's clients' positions and collateral from the participant's own positions and collateral, although ASX would seek further feedback from its participants before activating this functionality. ASX Clear currently does not offer this type of segregation for cash market transactions; instead it has implemented materially equivalent protections for client collateral and positions that are designed to minimise the risk of loss of principal to the client throughout the pre-settlement period (see Appendix C.1, CCP Standard 13.2).

DLT architecture and message interface

Although ASX plans to apply DLT to support its post-trade functions, its application of DLT differs significantly from the arrangements of other systems that use DLT such as Bitcoin and other cryptocurrencies. ASX is proposing to use a private, permissioned network application of DLT. Under this approach, ASX would operate, and control access to, the network according to ASX rules, creating a trusted network of nodes. The distributed ledger would provide the single source of truth regarding transactions on the market, with ASX providing access to users allowing each to see elements of the ledger relevant to them. Users would have a choice of connecting using a DLT node or by using a messaging solution based on the XML ISO 20022 format, which will replace the proprietary CHESS message protocol that is used in the current system.

Access by non-ASX trading, clearing and settlement entities

ASX has committed to providing access to its clearing and settlement infrastructure on transparent and non-discriminatory terms. ASX currently provides several non-ASX markets with access to its clearing and/or settlement services and will continue providing this access. Consistent with the Regulatory Expectations for Conduct in Operating Cash Equity Clearing and Settlement Services in Australia set out by the Council of Financial Regulators (CFR) and Australian Competition and Consumer Commission, ASX has also specifically committed to ensure that its new platforms and technology will not be designed in such a way as to raise barriers to access to operators of other markets, or to any competing CS facilities that might emerge in the future.[11]

2.3.2 Enterprise Risk Management

In November 2017, the ASX Limited Board approved a three-year enterprise risk management (ERM) plan to refresh its risk management framework, and address gaps in ASX's ERM approach that had been identified in a January 2016 review. This review concluded that ERM practices in the broader financial services industry had developed rapidly in the preceding five years, resulting in a gap between ASX's ERM approach and better industry practices. These findings also prompted ASX to review the resourcing of its ERM function, resulting in the recruitment of a new CRO with a greater focus on ERM, as well as a new General Manager responsible for ERM across ASX. This ERM plan was further updated to align with the findings identified in an external review of ASX's technology governance and operational risk and control framework carried out in late 2017 (see section 3). The broader program to implement key elements of the ERM plan and address other findings of the external review is expected to run until December 2020.

2.3.3 Secondary data centre

During the assessment period, ASX progressed work to replace its current secondary data centre with a new site. ASX has identified a suitable site following a request for proposal process and has commenced detailed specification of hardware requirements. In selecting a new site for its secondary data centre, ASX considered a range of factors including:

  • the redundancy of critical infrastructure (e.g. utilities and telecommunications)
  • physical security standards
  • geographical location relative to ASX's existing operations
  • the scalability of the facility, to allow for future growth in required capacity.

ASX has entered into a contract with the data centre provider and plans to commence the build of the new site later this year with a phased migration to follow.

2.3.4 Cyber resilience

CPMI and IOSCO published Guidance on Cyber Resilience for Financial Market Infrastructures in June 2016 (the Cyber Resilience Guidance). During the assessment period, the Bank assessed ASX against the Cyber Resilience Guidance, drawing on a self-assessment by ASX against the guidance and an external assessment of ASX against industry standards, and shared the results of this assessment with ASX. The assessment concluded that ASX's practices are consistent or broadly consistent with the guidance, apart from in relation to the expectation that ASX is able to recover critical operations safely within two hours following an extreme cyber attack. The Cyber Resilience Guidance recognises that it may take time for financial market infrastructures (FMIs) to meet this expectation. The Bank plans to maintain a focus on cyber resilience in its ongoing supervision of the ASX CS facilities, and in particular will be monitoring:

  • the implementation of actions identified in ASX's Cyber Strategy roadmap
  • ASX's evaluation of current and emerging technology that could lead to further enhancements to the abilities of ASX to recover from cyber attacks in a timely manner.

2.4 Governance

2.4.1 Management changes

Over the past 18 months, ASX has experienced significant change in its senior management team. In particular, there have been new appointments to the roles of Chief Executive Officer (CEO), CRO, Chief Information Officer (CIO), and Group General Counsel and Company Secretary. ASX has also created a new Chief Operating Officer (COO) role to provide a more holistic view of operations and technology within ASX. The refresh of the senior executive team of ASX was completed during the assessment period with the appointment of the new CIO in September 2017 and the new Group General Counsel in October 2017.[12]

The Bank has engaged closely with the new management team to understand how they intend to implement the strategy set out by the ASX Board and, in particular, the significant change program that is underway. This includes the ‘Building Stronger Foundations’ program to enhance ASX's technology governance and operational risk management (see section 3) as well as significant technology projects, such as CHESS replacement.

2.4.2 Committee structure

During the assessment period, ASX conducted a review of its management committee structure. The review found that there were opportunities to rationalise the number of committees operating within ASX, as well as to clarify the role of committees in decision making. In response, ASX has consolidated those committees with a direct role in supporting executive decision making, and recharacterised committees with a focus on information sharing or ideas generation as working groups.

ASX has three main management committees following this reorganisation:

  • The Risk Committee, which is responsible for advising the CRO on risk management decisions in the exercise of his delegated authority from the CEO. The Risk Committee replaces two previous committees – the Enterprise Risk Management Committee and the Capital and Liquidity Committee (CALCO).
  • The Regulatory Committee, which is responsible for ASX policies related to the conduct and operations of the licensed entities in the ASX Group, including the CS facilities. The committee is chaired by the ASX Group General Counsel and Company Secretary.
  • The Technology, Operations and Security Committee, which is responsible for advising the COO in the oversight of ASX's technology, operations and security strategies, and the investments that support these strategies.

The consolidation of these committees is intended by ASX to provide greater clarity on decision-making responsibilities, streamline reporting and support an organisation-wide approach to key issues.

The management committee restructuring has also allowed ASX to streamline reporting to the ASX Limited and CS Boards, by providing a clearer link between the relevant committee and decisions on the coverage, agenda and topics that will be presented at various board meetings. ASX has also made changes to better coordinate the timing of meetings of the ASX Limited and CS Boards.

2.5 International Initiatives, New Products and Services

2.5.1 New Zealand

NZD OTC derivatives

In November 2017, ASX Clear (Futures) expanded its OTC Service to clear NZD OTC derivatives. The products eligible for clearing include interest rate swaps referencing the NZ bank bill benchmark (BKBM) and NZ overnight index swaps (OIS), to a maximum maturity of 15 years and two years respectively. ASX Clear (Futures) has extended its OTC FHSVaR model, used to calculate initial margin for existing AUD OTC products, to also cover the new NZD products. OTC initial margin requirements are now calculated in AUD on a combined AUD and NZD OTC portfolio. However, variation margin on NZD products is payable in NZD.

To support the introduction of the NZD OTC clearing service, ASX Clear (Futures) implemented additional NZD stress testing scenarios involving shocks to NZD rates. Currently, these additional scenarios build on the stress scenarios applied to AUD OTC derivatives. ASX intends to add NZD-specific scenarios following the annual review of stress test scenarios, which took place in August 2018. In the interim, ASX has included conservative shocks to the assumed correlation between AUD and NZD rates and has not recognised any offsets between AUD and NZD OTC exposures in its estimation of stress testing exposures.

As part of the changes, ASX Clear (Futures) made amendments to its rules to facilitate access to the NZD OTC clearing service by institutions domiciled in New Zealand. In addition, ASX Clear (Futures) expanded the range of products available to hedge the portfolio of a defaulting participant that contains NZD OTC IRD to include NZD ETD listed on the ASX 24 market.

The Bank will continue to monitor ASX's risk management arrangements for NZD OTC IRD, including the inclusion of NZD-specific stress testing scenarios in the next assessment period.

NZD payment arrangements

ASX Clear (Futures) currently settles its NZD obligations, including variation margin for NZ OTC and exchange-traded derivatives, via an arrangement with ASX Clearing Corporation Limited (ASXCC). ASXCC settles these obligations across its exchange settlement account with the Reserve Bank of New Zealand (RBNZ), with payments initiated in the RBNZ's Exchange Settlement Account System (ESAS) via the RBNZ's central securities depository, NZClear. This follows the operationalisation of ASXCC's ESAS account in June 2017; previously, NZD payments were settled across the ESAS account of ASXCC's commercial settlement bank.

The RBNZ plans to decommission NZClear's payment functionality during the current year as part of a broader refresh of the NZClear system. ASX is therefore in the process of setting up a new payments solution to settle NZD payments directly across ASXCC's ESAS account using SWIFT messaging. In order to implement this new approach, ASXCC has obtained a SWIFT bank identification code and is seeking membership of the High Value Clearing System managed by Payments NZ.

2.5.2 Overseas recognition

In December 2017, the Bank of England (BoE) announced guidance on its approach to recognising non-UK CCPs that provide services in the UK, so that these CCPs can continue operating on the same basis following the UK's withdrawal from the EU.[13] The BoE wrote to relevant non-UK CCPs, including ASX Clear and ASX Clear (Futures) outlining the circumstances in which they would need to be recognised by UK authorities, and the approach to recognition that the BoE expects to take to the recognition process. The BoE advised that, at the point of exit, UK authorities would apply the recognition regime currently in force in the EU, under which both ASX CCPs are currently recognised. In March 2018, the BoE further clarified that non-UK CCPs would not be expected to require full recognition until the end of 2020.[14] ASX currently intends to apply for recognition for both ASX CCPs.

2.5.3 Other new products and services

During the assessment period, ASX introduced rule changes to support a new gold futures contract that will be traded on the ASX 24 derivatives market and centrally cleared by ASX Clear (Futures). The contract will be quoted in USD, consistent with most major international gold contracts, and will have a monthly expiry. The contract is deliverable (rather than cash-settled), with delivery occurring in the Perth Mint. ASX plans to launch the contract for live trading in the first half of 2019.

Both initial and variation margin for the contract will be called in USD, consistent with the quoted currency of the contract. The notification of USD margin requirements will occur around 6.00 am, in line with other products cleared by ASX Clear (Futures), but there will be a later cut-off time for participants to settle their USD margin calls to align with operating hours of the US banking system. These calls must be settled by 12.00 pm AEST (2.00 pm AEDT). This is one hour after the re-opening of Fedwire, the US real-time gross settlement funds transfer system.


This corresponds to a reduction in the maximum STEL in each CCP by half this amount, so that the Cover 2 requirement will be breached only if two participants collectively breach their STELs by $80 million. [3]

The ASX 24 Night Session runs from 5.10 pm to 7 am. [4]

11 of the 20 ASX Clear (Futures) participants (together accounting for 96 per cent of total clearing activity) are subject to overnight margining. These participants were identified based on the size of their overnight exposures and level of initial margin. [5]

This description is available at <>. [6]

‘Core capital’ is defined by ASX as the sum of: all paid-up ordinary share capital; all non-cumulative preference shares; qualifying reserves; and opening retained profits/losses, adjusted for current year movements. [7]

Non-ASX client activity includes activity that is undertaken by a participant on behalf of a client in products that are not cleared by ASX Clear or ASX Clear (Futures). [8]

This report is available at <>. [9]

The consultation document is available at <>. [10]

The CFR policy statement. [11]

Information on ASX executives is available at <>. [12]

The BoE's statement is available at <>. [13]

The BoE's letter clarifying the timeline for recognition is available at <>. [14]