Assessment of ASX Clearing and Settlement Facilities 4. Special Topic – CCP Resilience Guidance

In July 2017 CPMI-IOSCO published the report Resilience of central counterparties: Further guidance on the PFMI.[16] The CCP Resilience Guidance builds on work conducted by CPMI and IOSCO member jurisdictions to examine the degree of consistency in the outcome of the implementation of the Principles for Financial Market Infrastructures (PFMI) by FMIs, including a review of selected major CCPs' implementation of Principles relating to financial risk management and recovery practices published in August 2016.[17] This review found that CCPs have made important and meaningful progress in implementing these Principles, but identified some gaps and shortcomings, as well as a number of other differences in the outcomes of implementation across CCPs. A follow-up review, published in May 2018, found that CCPs covered by the review had made further progress in implementing arrangements consistent with the PFMI, although remaining gaps were identified for some CCPs in the areas of risk management and recovery planning.[18]

The CCP Resilience Guidance provides further guidance on the Principles and Key Considerations in the PFMI regarding financial risk management by CCPs, but it does not create additional standards beyond those already set out in the PFMI. Instead, it aims to improve the financial resilience of CCPs by providing clarity on an acceptable way of observing the PFMI. The guidance focuses on five key elements 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
  • the contribution made by a CCP to financial resources available to absorb losses (‘skin in the game’).

Although no additional standards are imposed by the CCP Resilience Guidance, it was expected that it would prompt enhancements to risk management practices at many CCPs. CCPs were expected to identify and implement any necessary changes to ensure consistency with the guidance by the end of 2017.

At the time that the CCP Resilience Guidance was published, the Bank noted that it would take this guidance into account in its interpretation of the FSS. The Bank applies the CCP Resilience Guidance in its interpretation of the following CCP Standards within the FSS: Governance (CCP Standard 2);

Framework for the Comprehensive Management of Risks (CCP Standard 3); Credit Risk (CCP Standard 4); Collateral (CCP Standard 5); Margin (CCP Standard 6); Liquidity Risk (CCP Standard 7); and General Business Risk (CCP Standard 14).

This section provides an overview of the results of the Bank's assessment of the ASX CCPs against the CCP Resilience Guidance. As this is an assessment against guidance, rather than against the FSS, the Bank reviewed the consistency of ASX practices against the guidance and judged the overall seriousness of any gaps against the extent to which ASX addresses the minimum headline standard in the FSS.

In preparation for the Bank's assessment, ASX conducted a self-assessment in the second half of 2017, which identified several of the gaps identified below. On the basis of this self-assessment, ASX developed a work plan to address these gaps. ASX began to implement this plan in late 2017, but judged that it was not feasible to also complete the plan within this timeframe. In some cases ASX identified the need for system changes or additional analytical work that would require additional time. In June, ASX updated its plan to include actions to address all gaps of potential concern identified in the Bank's assessment (i.e. gaps that could affect the CCPs' observance of the headline standard in the FSS). The assessment presented in this section takes into account actions that had been completed as at the end of June.

In most cases, the practices described in the CCP Resilience Guidance were already part of ASX's risk management framework and are set out in detail in relevant sections of Appendix C.1. This section therefore focuses on identified gaps between the ASX CCPs' practices and the more granular expectations for financial risk management set out in the guidance. It provides only an overview of the majority of areas in which the ASX CCPs were already consistent with the CCP Resilience Guidance. It is split into five parts: governance, margin, stress testing, adequacy of coverage and skin in the game.

4.1 Governance

CCP Standard 2 sets out requirements for the governance of a CCP. The Standard states that a CCP should have clear and transparent governance arrangements, which promote the safety of the CCP and support the broader financial system, other public interest considerations and the objectives of stakeholders. It details the roles and responsibilities of the CCP's board, including the ultimate responsibility of the board to establish a clear, documented risk management framework. The CCP Resilience Guidance expands on these requirements and provides more granular detail on the ways in which the board is expected to carry out its responsibilities.

The CCP Resilience Guidance sets out that the board should have the ultimate responsibility for ensuring that the CCP's margin system and stress testing framework are appropriately designed to set and maintain the CCP's required level of resources. The guidance clarifies that the board is expected to carefully oversee management's implementation of the risk management framework, as well as any tasks delegated to a committee. This requires the board to receive an appropriate flow of information from management. The board is also expected to establish a comprehensive disclosure and stakeholder feedback mechanism to inform the board's decision-making regarding the CCP's risk management framework.

The Bank's assessment is that the roles and responsibilities of the CS Boards at ASX are consistent with the CCP Resilience Guidance. The CS Boards review key policies under ASX's Clearing Risk Policy Framework, such as the Margin Policy, Margin Standard, stress testing standards, and investment mandates. The CS Boards receive detailed quarterly reporting on the operation of the CCPs and their compliance with risk management policies and standards. These policies and standards are set to align with the FSS, and the CS Boards have a statutory obligation to ensure that the CCPs comply with the FSS. The ASX CCPs' objectives recognise the public interest, including overseeing conduct consistent with public policy objectives directed at financial market and payments system integrity.

However, there are some instances where the desired outcome of the CCP Resilience Guidance is achieved via informal or ad hoc means, rather than via a documented requirement. For example, following a breach in financial resources, there should be an immediate review of relevant aspects of a CCP's risk management framework. The process for review at ASX is less formal and is not documented: if there is a breach there is a discussion at management level on the underlying cause of the breach and the CRO may elect to carry out a review of the risk management framework. Other gaps relate to: documentation of processes to ensure that changes to the legal framework for collateral are reflected in model assumptions; identification of actions arising from monthly analysis of stress testing and model assumptions; the CS Boards' oversight of the sizing of the ASX CCPs' general business risk capital; independent review of the ASX CCPs' model validation processes; and annual review and approval by the CS Boards of ASX's Model Validation Standard and the CCPs' response to findings from model validations. The Bank views these gaps as minor in nature, but expects ASX to take steps to ensure that roles and processes in the governance of financial risk management are appropriately formalised and documented.

Both ASX CCPs have established Risk Consultative Committees as a forum for stakeholders to provide feedback on risk management matters. However, there are minor gaps in the scope of the ASX CCPs' disclosures, relating to matters such as the provision of information on ASX's sensitivity analysis, reverse stress testing and management of procyclicality. ASX plans to implement changes to its disclosures to address these gaps by the end of 2018.

4.2 Margin

A CCP's margining system is a fundamental part of its risk management framework. Margin is the first layer of protection against losses incurred in the event of the default of a clearing participant. CCP Standard 6 sets out requirements for a CCP to cover its credit exposures to its participants for all products through an effective margin system that is risk based and regularly reviewed. The CCP Resilience Guidance provides additional detail to assist CCPs in developing and maintaining a margining system that is effective in addressing the relevant risks.

The ASX CCPs use a range of different margin models for the products they clear. Table 5 summarises the margin model used for each product class. Further detail on the key margin models used by the ASX CCPs is available in the special topic on ASX's margining arrangements in section 3 of the Bank's September 2017 Assessment.[19]

Margin system design and margin period of risk

The CCP Resilience Guidance provides detail on the elements a CCP should consider when designing a margin system. One important element is the assumed MPOR in a CCP's margin model. As part of the special topic on ASX's margining arrangements in its September 2017 Assessment, the Bank recommended that ASX conduct and document analysis of the MPOR assumptions used in its initial margin models for all products, and review these assumptions in light of this analysis. ASX completed this analysis for ASX Clear (Futures) in December 2017 and identified that its margining arrangements for electricity futures did not reflect the idiosyncrasies of that market. ASX Clear (Futures) adjusted its margining approach to address this finding (see section 2.1.2). ASX completed its MPOR analysis for all products cleared by ASX Clear in June 2018, identifying that the MPOR should be increased from one to two days for products margined using HSVaR and for ASX 200 products margined using a flat rate. ASX expects to implement these changes in the coming assessment period.

The guidance clarifies that a CCP's assumed MPOR should explicitly incorporate the maximum possible time between the point at which the CCP last collected margin from the defaulting participant and the point at which the market risk on the defaulter's portfolio has been extinguished. During the assessment period ASX amended its backtesting approach to include an assumption that the point of default occurs before the collection of margin (see section 2.1.2). However ASX does not have an equivalent assumption in place for stress testing at ASX Clear and ASX Clear (Futures). ASX plans to address this gap of potential concern by determining and implementing an approach to incorporating an assumption of default prior to the receipt of variation margin in the CCPs' stress tests in 2019.

Pricing data are another important element of a CCP's margin system. The ASX CCPs source price data for cash market products and exchange-traded derivatives from the ASX Trade and ASX Trade 24 markets. OTC IRDs and some settlement prices for commodity derivatives are priced using third-party data sources. ASX runs a set of checks and validations for its price data each day to ensure they are correct, and independently validates models that calculate prices for exchange-traded options (ETOs) and OTC IRDs as part of its regular model validation process. The CCP Resilience Guidance sets out that, when using historical prices to calibrate its margin model, a CCP should carefully evaluate the appropriate historical sample period. ASX completed analysis to determine and justify historical sample periods for ASX Clear (Futures) in December 2017 (see section 2.1.2). The equivalent analysis has not yet been carried out for ASX Clear, which is a gap of potential concern. ASX plans to conduct analysis for ASX Clear during the next assessment period.

More broadly, the CCP Resilience Guidance states that a CCP should have processes to identify, clarify and evaluate the choices and trade-offs being made in the design of its margin system. As part of this, a CCP should evaluate which models and approaches are most appropriate for the products it clears.

These processes should support the board's ultimate responsibility for the design of the overall risk management framework of the CCP. ASX has conducted a one-off benchmarking exercise against parameter choices and models used by peer CCPs, which it intends to repeat alongside a formal consideration of alternative models as part of its model validation process going forward. However, this is not explicitly captured in its Model Validation Standard and the CS Boards are not given the ultimate responsibility for approving the outcome of any validation. While the Bank views this gap as minor, it expects the gap to be addressed in response to the recommendation that ASX should takes steps to ensure that roles and processes are appropriately formalised.

The CCP Resilience Guidance provides examples of the types of wrong-way risk that CCPs could be exposed to (i.e. the risk that a CCP's exposure to a counterparty is correlated with the creditworthiness of that counterparty), and requires that CCPs have in place a holistic framework to identify, monitor and manage wrong-way risks. Although ASX identifies specific sources of wrong-way risk and addresses them in a number of ways, ASX lacks a formal wrong-way risk framework. This is a minor gap that ASX intends to address by developing a formal framework by the end of 2018.

Backtesting and sensitivity analysis

CCP Standard 6.6 requires CCPs to analyse and monitor model performance and overall margin coverage through backtesting and sensitivity analysis. The CCP Resilience Guidance describes steps that a CCP should take when performing backtesting to assess whether it has collected sufficient margin to meet its coverage requirement. ASX conducts backtesting at the portfolio level for each of its margin models and also tests key margin parameters. In 2017, ASX implemented new backtests that take into account the potential composition of a defaulting participant's portfolio at the point of default, as well as enhancing statistical tests of backtesting results (see section 2.1.2).

ASX has also refined its approach to sensitivity analysis to assess the sensitivity of margin requirements to changes in key margin parameters such as MPOR, look-back period and confidence interval. ASX's revised sensitivity analysis is consistent with the CCP Resilience Guidance.

ASX intends to update its backtesting and sensitivity analysis documentation to reflect enhancements in its approach in the second half of the year.


A margin model may be procyclical if it is calibrated in a way that is likely to cause or exacerbate financial instability.[20] The FSS set high-level requirements for CCPs to limit the procyclicality of their margin models, but they are not prescriptive in how these requirements should be achieved. In the September 2017 Assessment, the Bank concluded that the ASX CCPs' practices were consistent with these high-level requirements. The CCP Resilience Guidance provides more detailed guidance on how CCPs can manage procyclicality. In particular, it states that a CCP should evaluate the appropriateness of procyclicality-limiting tools in its margin models and develop clearly articulated frameworks for assessing, disclosing and addressing procyclicality-related risks. ASX established a procyclicality framework in May, which sets out the approaches ASX takes to address procyclicality. However, ASX's procyclicality framework lacks an explicit framework for evaluating the extent to which ASX's margin models are procyclical and the effectiveness of ASX's procyclicality mitigating tools. To close this minor gap, the Bank expects ASX to update its procyclicality risk framework and related documentation and processes to include a framework for evaluating the extent to which ASX's margin models are procyclical and the effectiveness of ASX's procyclicality mitigating tools. ASX should consider the use of quantitative metrics set out in the CCP Resilience Guidance, as well as any other metrics it considers appropriate.

Portfolio margining

CCP Standard 6.5 limits the use of portfolio margining to products that have significantly and reliably correlated risk profiles. The CCP Resilience Guidance further explains that CCPs should identify, document and apply clear criteria when determining which products are correlated in this way. Almost all of ASX's margin models permit some form of offset, with the exception of flat rates applied to less-liquid cash market products. Margin calculations in ASX's Value-at-Risk (VaR)-based models implicitly recognise offsets based on historically observed price correlations between products. This includes offsets between interest rate futures and OTC derivatives positions where the futures have been allocated for portfolio margining using a VaR model. ASX's use of an extended look-back period (with a fixed start date in 2008) helps to validate the reliability of historical correlations in ASX's model for OTC derivatives. For exchange-traded derivatives, correlations observed across related contracts are explicitly incorporated through SPAN parameters, which are only applied where correlation measures exceed predefined thresholds.

4.3 Stress Testing

Stress testing is a core part of the risk management framework of a CCP. It is used to verify the sufficiency of a CCP's financial resources, even in a range of extreme but plausible scenarios. The CCP Resilience Guidance sets clear expectations on the rigour of credit and liquidity stress testing at CCPs by providing clarity on the key matters that should be taken into account when a CCP establishes its stress testing framework. It provides further guidance on the identification of risks, the development of extreme but plausible scenarios, the calculation and aggregation of stress test results, and the analysis of stress test scenarios, models, and underlying parameters and assumptions.

Structure of stress testing frameworks

The CCP Resilience Guidance clarifies the commonalities and differences between credit and liquidity stress testing. For example, it notes that a default can create a liquidity exposure in excess of, or even in the absence of, any credit exposure. This may occur if the CCP is required to convert eligible collateral (including cash in currencies other than the currency of settlement) into the currency required to meet its payment obligations when due. Consequently, CCPs are expected to maintain sufficient liquid resources, and stress test these resources, in each and every currency in which they have payment obligations. ASX Clear (Futures) has payment obligations in currencies other than AUD (i.e. NZD, euro, Japanese yen, USD and British pound). Obligations in NZD arise from clearing NZD OTC derivatives (see section 2.5.1). Payment obligations in the remaining currencies are limited to the return of margin posted in those currencies, which it holds on deposit at commercial banks or invests in overnight reverse repurchase agreements collateralised with government bonds denominated in the same currency. Consequently, ASX Clear (Futures) would face a liquidity exposure if a commercial bank holding a deposit failed or ASX was unable to liquidate its investments in a timely manner. ASX limits the size of this potential liquidity exposure by imposing limits on the amount invested with any one counterparty and the amount of non-AUD collateral it will accept. ASX also monitors whether it has sufficient liquid assets in all relevant currencies against a liquidity requirement.

Previously, the Ordinary Liquidity Requirement (OLR) and Additional Liquidity Requirement (ALR) for all currencies was set using historical outflows in ASXCC's AUD portfolio rather than observed outflows in the relevant currency. In June 2018, ASX updated its Liquidity Stress Testing and Liquidity Requirement Standard which set out a revised approach to setting liquidity requirements for non-AUD currencies in which ASX Clear (Futures) has payment obligations. To better reflect the risks posed by NZD, OLR and ALR rates under the revised approach are based on historic outflows in ASXCC's NZD portfolio. ASX also set a floor for OLR rates for both AUD and NZD at 10 per cent. In addition, the OLR rate for ‘non-matched currencies’ (i.e. non-AUD and non-NZD currencies in which cash collateral is received in a different currency to the margin requirement) is set at 100 per cent, to reflect the assumption that cash collateral in these currencies could be withdrawn by participants at any time with a one-day notice period.

However, ASX does not currently have liquidity-specific scenarios covering the NZD obligations of ASX Clear (Futures) that would further test the sufficiency of these liquidity requirements. In order to address this gap of potential concern, ASX plans to develop liquidity-specific scenarios for NZD obligations in relation to ASX Clear (Futures) by the end of the year.

Identification of risks

The CCP Resilience Guidance elaborates on the full range of risks that should be considered in stress testing. It clarifies that a CCP should identify all sources of credit and liquidity risk that it could be exposed to in extreme but plausible market conditions. In doing so, a CCP is expected to identify risks related to both exposures and the resources designed to absorb those exposures.

While ASX identifies a wide range of risks that are then incorporated in its stress tests, there are some risks that it does not fully capture. For example, ASX does not identify and subsequently capture risk factors that cannot be easily measured (such as stressed bid-ask spreads). If these risks are to be incorporated in stress tests they may need to be estimated or modelled. Other gaps of potential concern identified relate to: comprehensively identifying potential sources of liquidity risk from entities other than participants; modelling liquidity exposures that cannot be directly measured; including all sources of liquidity risk in forward-looking stress scenarios; and identifying all events that could affect the CCPs' ability to make intraday payments. ASX has plans to address these gaps over 2018/19, as well as to make more general enhancements to its identification of risks. For example, ASX has plans to establish internal monitoring and reporting of intraday stress test exposures. If this monitoring and reporting identifies shortfalls in the coverage of intraday stressed exposures, ASX intends to operationalise full intraday stress testing recalculation.

Other, minor, gaps were also identified in relation to consistently and accurately identifying and accounting for risk factors that affect both exposures and resources, and incorporating unobserved costs (such as transaction costs or bid-ask spreads) when estimating the cost of liquidating or hedging a portfolio in extreme but plausible scenarios.

Development of extreme but plausible scenarios

The CCP Resilience Guidance provides further guidance on constructing comprehensive scenarios for stress testing. It states that a CCP should model extreme but plausible market conditions in a manner that adequately captures all of the risks identified, using a mixture of historical and forward-looking scenarios. ASX uses both historical and forward-looking scenarios for its stress testing, which incorporate peak intraday and intra-period price moves as well as end-of-day price movements. However, there are a number of gaps of potential concern which could lead to the scenarios ASX uses in its stress tests not being sufficiently comprehensive:

  • Review of historical scenarios. The guidance clarifies that a CCP is expected to include all of the most extreme scenarios observed unless the CCP determines, based on a comprehensive, rigorous analysis, that it is implausible that a particular historical scenario can reoccur. ASX applies a wide range of historical scenarios based on 20 years of historical data in its stress testing approach. This means that, as time passes, historical stress events will drop out of the 20-year look-back period. ASX has no formal process to review whether stresses that were observed more than 20 years ago continue to be plausible and therefore should remain part of its stress tests. The changes required to close this gap will be implemented as part of the annual review of ASX Clear (Futures)' stress testing framework in 2018 and the review of ASX Clear's framework in 2019.
  • Trading strategies. The guidance clarifies that a CCP should ensure its stress test scenarios adequately reflect the trading strategies employed by, and different portfolios of, its direct and indirect participants are adequately reflected. ASX plans to conduct analysis to justify that the design of its stress testing framework captures these risks in August 2018 and September 2019 for ASX Clear (Futures) and ASX Clear, respectively.
  • Liquid resources. ASX currently applies stresses to its potential liquidity exposures but does not apply stresses to available liquid resources as part of its forward-looking liquidity-specific stress scenarios. ASX plans to extend these scenarios to apply stress to liquid resources during the next assessment period.
  • Alignment of liquidity and credit stress scenarios. The CCP Resilience Guidance sets out that the extreme but plausible scenarios used in liquidity stress tests should at least include all scenarios used for credit stress testing. In 2019, ASX plans to commence work to ensure that all extreme but plausible scenarios used ASX Clear's credit stress test are incorporated in its liquidity stress test. The Bank expects this work to include ensuring that all enhancements to credit stress test scenarios made as a result of gaps identified in this assessment are subsequently captured in corresponding liquidity stress test scenarios.

The scenarios used by ASX capture most of the risks it has identified but exclude some sources of risk that ASX considers to be immaterial. For example, ASX does not model liquidity risks from the non-performance of settlement banks due to the limited role that these play in its settlement and investment activities. The guidance acknowledges that the set of risk factors used in constructing stress test scenarios only needs to include those to which the CCP is most exposed, but this is expected to be justified on an ongoing basis using a combination of expert judgement and reliable statistical techniques. The Bank considers the absence of a process at ASX to ensure that an appropriate justification is provided for the exclusion of any risk factors from stress test scenarios, and that this justification is reviewed on a periodic basis, to be a minor gap. Similarly, while ASX considers its CCP's stress test scenarios to be sufficiently extreme to incorporate second-order effects resulting from the default of a clearing participant, ASX has not justified this analytically. The Bank also considers this gap to be minor in nature.

Calculation and aggregation of stress test results

The CCP Resilience Guidance sets out expectations regarding valuation models used in stress testing, how results are aggregated and how client exposures should be treated. ASX uses valuation models to measure the impact of assumed stressed market conditions on the value of positions, collateral and investments. Some of these valuation models are described in ASX's margining and stress testing standards, but other methodologies are set out less formally in ASX's internal procedural documents. ASX plans to address this minor gap by documenting all of its relevant valuation models more comprehensively by the end of the year.

Another key parameter in valuing exposures is the length of time it is assumed to take ASX to close out a position in stressed market conditions. The guidance clarifies that this ‘stressed period of risk’ (SPOR) should be at least as long as the MPOR, and that the SPOR should take into account the specific characteristics of the products and markets cleared in extreme but plausible conditions. ASX has defined and set a SPOR higher than MPOR in some products (e.g. exchange-traded derivatives and cash market products), but is still in the process of conducting comprehensive analysis to define, justify and document SPORs for all products. This is a gap of potential concern. Once this analysis is done, ASX will implement necessary system changes over the course of the next two years.

When it comes to aggregating results, the guidance clarifies that CCPs are expected to incorporate the stressed value of collateral (including cash collateral that the CCP has invested) into stress tests. The collateral haircuts applicable to participant non-cash and cross-currency collateral is based on the fifth-worst price move over a 20-year look-back period. This is not consistent with the level of stress ASX considers to be extreme but plausible. ASX Clear addresses this by applying stress to the value of collateral in its stress tests, but ASX Clear (Futures) does not. ASX Clear (Futures) plans to implement changes to address this minor gap by September 2019. As part of this work, ASX should ensure that its stress testing for collateral is consistent with its default management procedures by stressing collateral and cleared positions jointly only where they will be liquidated as a portfolio. While neither CCP incorporates the stressed value of cash collateral that ASX has invested into its stress tests, ASX has separate business risk capital set aside to absorb such losses.

ASX Clear's stress tests assume that it will be able to port client accounts. This is a gap of potential concern which, in order to more accurately reflect the extreme but plausible market conditions appropriate for stress testing, requires CCPs to assume that they will be unable to port client positions. ASX removed the porting assumption from its credit stress tests for ASX Clear in July 2018.

Analysis of parameters and assumptions

CCP Standard 4.5 states that a CCP should, ‘[o]n at least a monthly basis … perform a comprehensive and thorough analysis of stress testing scenarios, models, and underlying parameters and assumptions used to ensure they are appropriate for determining the CCP's required level of default protection in light of current and evolving market conditions’. The CCP Resilience Guidance explains that a CCP should consider using a combination of three techniques for conducting that analysis, which ASX incorporates into its stress testing approach as follows:

  • For-information scenarios, which are scenarios that ASX considers to be beyond extreme but plausible, are run on a daily basis, with the results of these tests reviewed and presented to the CS Boards on a semi-annual basis.
  • Sensitivity analysis is carried out on a monthly basis. ASX management reviews daily changes in price and implied volatility for the month to determine whether there is any evidence of stress that would support a change to scenarios.
  • Reverse stress testing is conducted monthly to determine the shock that would be required to exhaust ASX's financial resources.

The CCP Resilience Guidance provides examples of factors that CCPs could consider as part of their reverse stress testing analysis, including changes in the size and composition of cleared portfolios, or the number of simultaneous defaults. ASX's reverse stress testing approach captures some but not all of the factors identified in the guidance, which is a gap of potential concern. From November 2018, ASX plans to also model changes in the size and composition of participant portfolios as part of its annual default fund reviews.

4.4 Adequacy of Coverage

The CCP Resilience Guidance clarifies that Cover 1 or Cover 2 are minimum standards for credit or liquidity risk, and that a CCP should consider its risk profile when determining the amount of any resources that it should maintain above these minima.[21] The ASX CCPs meet their minimum Cover 2 standard for both credit and liquidity; however, ASX considers coverage beyond this, for example to cover three or more participant defaults, to be beyond extreme but plausible, since there is no historical precedent for this. ASX has not conducted analysis to justify the appropriateness of its coverage requirements, which takes into account the specific risk profile of its participants, including the composition and concentration of stress test losses across participants. The Bank considers this to be a minor gap.

The CCP Resilience Guidance also clarifies that CCPs should ignore any excess contributions from participants when assessing the sufficiency of its financial resources in credit and liquidity stress testing, since excess contributions from participants are voluntary and could be withdrawn or decreased during times of stress. This is consistent with the practice of ASX Clear (Futures); however, ASX Clear assumes that excess collateral lodged by participants and their clients (for equity derivatives) would be available to cover their stressed exposures, which is a gap of potential concern. While ASX has the ability to assess the sensitivity of stress test exposures to varying this excess collateral assumption in ASX Clear, this assessment is not conducted on a regular basis. ASX Clear plans to explicitly exclude excess collateral from its stress testing by early 2020.

4.5 Skin in the Game and Business Risk Capital

CCP Standards 4 and 14 require a CCP to maintain financial resources to cover losses resulting from clearing participant default and general business losses, respectively. These resources may come from participants or from the CCP. The guidance sets out the expectation that a CCP should contribute its own resources to address losses from both a participant default and a custody/investment loss, to increase the confidence of participants and other stakeholders that their exposure to these sources of risk are reflected in the CCP's risk management practices. The CCP Resilience Guidance also provides guidance on the form and seniority of CCP contributions to prefunded financial resources and custody and investment losses.

ASX contributes a significant portion of its own resources to address losses from a participant default. ASX Clear's $250 million default fund comprises $178.5 million of own equity and $71.5 million paid into a restricted capital reserve from the National Guarantee Fund in 2005. ASX Clear (Futures)' $650 million default fund includes $450 million of own equity and $200 million of contributions from participants. ASX engages with the participants regularly with respect to the size and composition of its default funds. This is done during ASX's annual review of its default funds, when the results of the review are reported to the participants through the ASX CCPs' Risk Consultative Committees. Both CCPs' default waterfalls are consistent with the guidance in that a portion of a CCP's own capital is used to absorb losses before contributions from non-defaulting participants.[22] ASX's contributions to the default funds are held in trust by ASXCC for the benefit of the two CCPs, and can only be used to address losses from a participant default.

To cover losses associated with custody and investment risks, ASX set aside $75 million as business risk capital – $35 million for ASX Clear and $40 million for ASX Clear (Futures). However, this capital was also available to meet other general business and operational losses, contrary to the expectation in the CCP Resilience Guidance that these funds should not be available for other purposes. To address this minor gap, in July 2018 ASX set aside an additional $71 million in capital to cover general business risk, while maintaining $75 million as a separate pool of capital to cover custody and investment risk.

4.6 Conclusions and Recommendations

The CCP Resilience Guidance raises the standards expected of a CCP's financial risk management framework across a broad range of topics by providing a more granular description of what are acceptable practices in observing the requirements of the CCP Standards. The Bank's assessment is that the ASX CCPs' practices are consistent or broadly consistent with the CCP Resilience Guidance. Although the ASX CCPs' practices are consistent with the majority of the guidance, the Bank has identified a number of gaps, some of which the Bank views as potentially of sufficient concern to affect the CCPs' observance of the CCP Standards.

The gaps of potential concern relate to the standards on Credit Risk (CCP Standard 4) and Liquidity Risk (CCP Standard 7). The Bank's assessment is that these gaps are issues of concern that should be addressed by the ASX CCPs in a defined timeline. As a result, the Bank has concluded that the ASX CCPs broadly observe these two standards. The gaps identified in relation to the standard on Governance (CCP Standard 2) were more minor, but ASX should address these gaps in order to observe this standard on a continuing basis.

ASX has plans in place to address the gaps of potential concern identified in this assessment. The Bank has set a recommendation for ASX to implement these plans in order to more fully align its practices with the CCP Resilience Guidance and fully observe the standards established under the FSS. The Bank has also set a recommendation that ASX address the minor gaps related to the governance of financial risk management. This recommendation forms part of a broader recommendation that seeks to address other governance-related shortcomings at ASX identified as part of the Review (see Section 3).

Recommendation. To align financial risk management practices with the CCP Resilience Guidance the ASX CCPs should implement plans to:

  • Enhance the comprehensiveness of stress testing to ensure risks are appropriately identified, captured and stressed.
  • Enhance analysis and justification of assumptions used stress testing models to that risks are adequately captured.
  • Remove assumptions made by ASX Clear that customer positions will be able to be ported and that excess collateral will not be withdrawn or decreased during periods of stress to more accurately reflect the extreme but plausible conditions appropriate for stress testing.

Recommendation. The ASX CCPs should take the following steps to strengthen their governance arrangements consistent with the CCP Resilience Guidance:

  • Ensure that roles and processes in relation to the governance of financial risk management are appropriately formalised and documented in order to ensure that the CS Boards have sufficient information to effectively oversee the ASX CCPs.
  • Ensure that the ASX CCPs' arrangements for disclosure to, and soliciting feedback from, stakeholders cover all relevant aspects of the CCPs' risk management frameworks, including margin sensitivity analysis, reverse stress testing and management of procyclicality.

ASX has also set out plans to address a number of gaps that the Bank views as minor but indicative of good practice in financial risk management. The Bank will continue to engage with ASX on these plans as part of its ongoing supervision of the ASX CCPs. Where there are minor gaps that ASX does not currently have specific plans to address, the Bank will engage with ASX over the coming assessment period as it considers how best to take into account the guidance in this area.


The CCP Resilience Guidance is available at <>. [16]

For more information, see ‘Implementation monitoring of PFMI: Level 3 assessment – Report on the financial risk management and recovery practices of 10 derivatives CCPs’, available at <>. [17]

For more information, see ‘Implementation monitoring of PFMI: follow-up Level 3 assessment of CCPs' recovery planning, coverage of financial resources and liquidity stress testing’, available at <>. [18]

The September 2017 Assessment. [19]

For example, a margin model might respond to heightened volatility by increasing margin requirements in a way that places significant liquidity demands on participants, in turn exacerbating the volatility in the market. [20]

In some cases, CCP Standards 4 and 7 require that, at a minimum, stress scenarios include the default of only a single participant and its affiliates; however, the higher ‘Cover 2’ standard applies to both of the ASX CCPs. [21]

In the case of ASX Clear, the default fund does not include participant contributions. [22]