Assessment of ASX Clearing and Settlement Facilities Executive Summary

Purpose In accordance with its responsibilities under the Corporations Act 2001, the Reserve Bank of Australia (the Bank) presents its annual Assessment of the ASX clearing and settlement (CS) facilities. ASX operates four CS facilities: two central counterparties (CCPs) – ASX Clear Pty Limited and ASX Clear (Futures) Pty Limited – and two securities settlement facilities (SSFs) – ASX Settlement Pty Limited and Austraclear Pty Limited. The report details the CCPs' and SSFs' compliance with the Bank's Financial Stability Standards for Central Counterparties (CCP Standards) and Financial Stability Standards for Securities Settlement Facilities (SSF Standards) (together, the Financial Stability Standards or FSS), as well as the facilities' more general obligation to do all other things necessary to reduce systemic risk. The assessment is as at the end of June 2019; however, where relevant, developments after this time are discussed.
Conclusion It is the Bank's assessment that the CS facilities ‘observed’ or ‘broadly observed’ all relevant requirements under the FSS as at 30 June, with the exception of the General Business Risk Standard (CCP Standard 14, SSF Standard 12), which was rated as ‘partly observed’ in each facility. On balance, the Bank has concluded that the facilities have conducted their affairs in a way that causes or promotes overall stability in the Australian financial system. However, the facilities will need to place a high priority on addressing the recommendations related to general business risk.
Progress towards previous priorities

ASX has made material progress against the Bank's regulatory priorities identified in its 2018 Assessment report:

  • Governance and operational risk management. ASX has implemented the majority of the recommendations of an external review of its operational risk management and technology governance carried out at the instigation of the Bank and the Australian Securities and Investments Commission (ASIC). ASX's Building Stronger Foundations program established to implement these recommendations also incorporates other ASX initiatives that were already underway in these areas.
  • Intraday exposures. ASX Clear (Futures) reviewed the margin buffer used to cover potential variation margin exposures created in the overnight session. ASX Clear (Futures) also implemented a risk-visualisation tool to aid monitoring and management of intraday exposures on a near real-time basis.
  • CCP Resilience Guidance. The ASX CCPs have progressed a work plan designed to align financial risk management practices with the CCP Resilience Guidance. Key changes include the implementation of a more comprehensive credit stress testing approach at ASX Clear (Futures) and the removal of the assumption that clients in ASX Clear could be ported in the event that their clearing participant defaulted.
  • Liquidity add-ons. ASX Clear (Futures) implemented plans to scale up margin requirements for larger portfolios based on estimated liquidation costs. ASX is continuing work to develop its approach to liquidity add-ons at ASX Clear.
Other material developments

Other material developments relevant to the supervision of the ASX CS facilities that occurred during the assessment period include:

  • Clearing House Electronic Sub-register System (CHESS) replacement. ASX continued its work on a project to replace CHESS, the clearing and settlement system that supports the cash equities market. ASX released its response to consultation on the business requirements of the new system and has commenced the build phase of the project.
  • Liquid resources. ASX completed a review of the adequacy of liquid resources held by the ASX CCPs as part of its annual default fund review. ASX Clear plans to increase its prefunded liquid resources in the coming assessment period.
Priorities for the next assessment period

The Assessment includes recommendations aimed at enabling the ASX CS facilities to either observe or continue to observe the requirements under particular FSS.

These recommendations relate to:

  • strengthening ASX's processes for identifying and managing legal risks
  • embedding enhancements to governance arrangements
  • aligning financial risk management practices with international guidance on CCP resilience
  • managing intraday exposures through real-time monitoring and management, and the calibration of default fund buffers
  • resuming the review of margin offset parameters in ASX Clear (Futures)
  • reviewing client segregation arrangements in ASX Clear after implementation of the CHESS replacement system
  • strengthening the legal basis of facilities' access to general business risk capital
  • implementing plans to strengthen operational risk management arrangements
  • ensuring core systems fully support risk management functionality.

The Assessment also identifies areas that will be an important part of the Bank's supervisory engagement with ASX over the next assessment period. These include:

  • work to formalise controls for legal risks
  • the ongoing adequacy of liquid resources at both CCPs
  • the project to replace CHESS
  • continued enhancement of the CS facilities' cyber resilience arrangements.