Assessment of ASX Clearing and Settlement Facilities 4. Special Topic – Default Management and Recovery

4.1 Background

CS facilities play a key role in managing post-trade risks in financial markets, including in the event of a participant default. Under normal conditions, CCPs operate a ‘matched book’ in which their exposures to any one participant are offset by equal and opposite exposures to others. In the event of a clearing participant default, a CCP assumes the obligations of that participant, and therefore the risk exposures of its portfolio. Until the defaulting participant's positions are closed out, a CCP must meet its outgoing obligations (such as variation margin payments) without being able to rely on incoming payments from the defaulter. A CCP therefore needs to be able to take timely action to contain any losses and liquidity pressures arising from this exposure while minimising market disruption. To facilitate this, a CCP should have effective default management rules and procedures that enable it to continue to meet its obligations and absorb any losses arising from closing out the defaulting participant's portfolio. In very extreme cases, a CCP may be unable to contain losses within prefunded financial resources or effectively restore the CCP to a matched book. In such circumstances, the CCP's rules and procedures should enable it to allocate losses to non-defaulting participants or terminate unmatched transactions, and also replenish its financial resources following the completion of the default management process.

Events in recent years have highlighted the importance of effective default management processes at CCPs. In September 2018, Nasdaq Clearing AB (Nasdaq) utilised approximately two-thirds of the Nasdaq commodities default fund when attempting to return to a matched book following the default of a single participant. Global regulators, CCPs, participants and other stakeholders have reflected on how Nasdaq's default management process contributed to the size of the losses. ASX Clear has also had recent experience of managing a default. In 2015, BBY Limited (BBY) was placed into default after missing a margin call. ASX closed out BBY's portfolio within the available margin, though some weaknesses in ASX Clear's default management approach were identified that have since been addressed.

SSFs typically do not assume financial risks in the event of a default. However, if a settlement participant were to default, an SSF should have effective default management rules and procedures to enable it to continue to achieve the timely settlement of transactions while minimising the impact on transactions not involving the defaulting participant. This may involve suspending the defaulting participant and in some cases removing transactions it has submitted for settlement.

4.2 Scope and Approach

4.2.1 FSS requirements

The key FSS requirements on default management arrangements are set out in CCP Standard 12 and SSF Standard 11. These requirements cover five main areas, summarised in Table 5:

Table 5: Key FSS Requirements for Default Management
Area(s) Standard(s) Key requirements
Rules and procedures CCP Standard 12.1 and SSF Standard 11.1

The CS facility should have:

  • clearly documented rules and procedures, which are legally binding on the CS facilities and their participants
  • a comprehensive set of powers, tools and financial resources to undertake default management actions
  • prompt access to financial resources
  • transparent and predefined procedures for utilising and replenishing financial resources to meet any losses and mitigate liquidity pressures in the event of a default.
Governance and processes CCP Standards 12.1, 12.2 and SSF Standards 11.1, 11.2

The CS facility should:

  • specify roles, obligations and responsibilities of all parties involved in managing the default; these parties should have appropriate tools and expertise to carry out their roles and responsibilities with respect to default management.
  • have appropriate oversight to return to a matched book within a short time frame and minimise market disruption by ensuring that the obligations created for non-defaulting participants are proportional to the scale and nature of their activities.
Testing and review CCP Standard 12.4 and SSF Standard 11.4

The CS facility should:

  • review its default management plan at least annually or following any material changes to its rules or procedures, or service offering
  • regularly test the default management framework with all parties that would be involved in managing the default of a participant.
Public disclosure CCP Standard 12.3 and SSF Standard 11.3 The CS facility should provide transparency over key aspects of its default management plans to provide certainty and predictability to stakeholders regarding the actions it may take in a default event.
Market impact CCP Standard 12.5 and SSF Standard 11.5 The CS facility should take into account the impact of its default management plans on all relevant financial markets.

The Bank assessed the ASX CS facilities against these requirements and selected FSS requirements for legal basis, governance, financial risk management and recovery to the extent that these were relevant to the effectiveness of the default management and recovery framework.

4.2.2 Methodology

The Bank reviewed the design of the ASX CS facilities' default management framework and supporting rules, policies and procedures against the FSS as the special topic for the 2016 Assessment, concluding that all relevant requirements were observed. The current review focuses on the practical and operational aspects of the framework. It also covers changes made since the 2016 review, including those that were made as a result of lessons learned from the BBY and Nasdaq defaults. The review looks at enhancements made to the ASX CS facilities' recovery arrangements since the Bank's last review in 2015, such as the expansion of the set of recovery tools available. The Bank took a range of approaches to assess the ASX CS facilities' ability to implement practical elements of its default management framework. These included desktop walkthroughs of different default scenarios involving participants with a variety of key roles across the Australian financial system and an additional default management fire drill initiated without notice by the Bank, designed to test ASX's preparedness to generate the reporting required to manage a default at any time.

The Bank also gave consideration to ongoing Council of Financial Regulators (CFR) work on maintaining the continuity of access to critical FMI services for an authorised deposit-taking institution (ADI) in resolution. This work is motivated by a concern that the loss of access to FMIs could impede the successful resolution of a systemically important ADI.

4.3 ASX Default Management Framework

Overall, the Bank has concluded that ASX has a well-established framework for managing the default of a participant. Since the last review in 2016, ASX has continued to improve its default management arrangements, particularly in respect of the functionality of systems underpinning default management processes, default management fire drills and auction processes. The Bank's assessment is that all ASX CS facilities have observed the relevant FSS requirements for participant default management policies and procedures (CCP Standard 12, SSF Standard 11).

This section describes the ASX CS facilities' default management framework, the findings from the review and actions required to close identified gaps. ASX's approach to managing a clearing participant default substantially differs from its approach to managing a settlement participant default and so these processes are discussed separately. Differences between the two ASX CCPs (ASX Clear and ASX Clear (Futures)) and between the two ASX SSFs (ASX Settlement and Austraclear) are also highlighted where relevant. However, as participants of the ASX CCPs are also participants in the ASX SSFs, it is likely that ASX will have to manage the default of a clearing participant and the settlement participant at the same time.

4.3.1 Governance and legal basis

Good governance is critical to maintaining a robust default management and recovery framework (DMRF). It facilitates prudent decision-making in default management that balances the interests of stakeholders.

Each of the ASX CS facilities has powers under their operating rules and procedures to deal with the default of a participant. The formal rules are supplemented by internal and public documents that form part of ASX's DMRF for the four CS facilities. Participants of the ASX CS facilities are legally bound by the operating rules of the facility, including the minimum requirements for participation in the facility. These arrangements provide ASX with the legal basis to take actions to manage a default.

Following the BBY default, ASX implemented enhancements to its rulebook taking into account lessons learned. These included additional flexibility for suspending a participant, powers to offset opposing positions between accounts held by multiple defaulting participants, broadening defined events of default and provisions for information disclosure to other FMIs. While ASX's DMRF is largely well documented, there are areas where it can be further improved, such as clarifying any overlapping responsibilities of the CS Boards and the ASX Limited Board. Ultimate responsibility for the oversight of risks faced by the ASX CS facilities lies with the board of each facility (known collectively as the CS Boards). The Chief Executive Officer (CEO) of ASX acts under delegated authority from the CS Boards, and is responsible for exercising the powers of the CCP for managing a default event. Although the CS Boards have delegated functions relating to the exercise of recovery powers to the CEO, it is expected that any final decision to trigger a recovery tool will be made following input from the relevant CS Board, other than in exceptional circumstances where a decision must be made urgently to ensure the CCP's solvency.

The DMRF assigns specific responsibilities in managing a participant default across a number of internal and external groups. Within ASX, there are functional areas responsible for monitoring participants' compliance with their participation requirements, creditworthiness and the CCPs' exposures to participants. These areas support default management processes and groups/committees responsible for managing and monitoring participant incidents and events of default, alongside advice provided by legal, compliance, and operational departments. ASX's Default Management Committee (DMC), chaired by the ASX CRO, is responsible for recommending to the CEO whether to declare a default, devising a risk reduction plan and implementing this plan. ASX also has a working group responsible for identifying potential enhancements to the DMRF through regular review and testing, and monitoring the implementation of any enhancements that are approved by the CS Boards. The ASX CCPs use external default brokers to execute the close-out and hedging trades in exchange-traded products on behalf of the CCPs. Trading and risk experts seconded from ASX's OTC clearing participants also provide advice to the DMC for the hedging of OTC interest rate swaps.

This allocation of responsibilities is broadly appropriate. However, the FSS require that a CCP's operations, risk management processes, internal control mechanisms and accounts should be subject to internal audit and where appropriate, periodic external independent expert review. The Bank was unable to find evidence of ASX's DMRF being independently reviewed to date. In recent years, ASX's Internal Audit function has considered undertaking such an audit but decided to defer this until after the implementation of substantial improvements to its DMRF that were identified following the BBY default. The Bank will discuss with ASX the appropriate frequency and scope of audit of its DMRF in the coming assessment period.

4.3.2 Declaration of default

ASX can declare the default of a CS facility participant if the participant triggers an ‘event of default’. This could include a breach of financial, operational or compliance obligations set out in the operating rules and guidance notes for each of the ASX CS facilities. Examples include the participant becoming subject to external administration, it defaulting at another exchange, or being unable to fulfil obligations such as missing a margin payment. If there are indications that an event of default has occurred, the chair of the Participant Issue Response Group (PIRG) is notified, who could convene a meeting of the PIRG. In cases where the PIRG concludes that a potential default event is likely, the matter is referred to the chair of the DMC and a meeting of the DMC will be convened.

Participants are obliged to inform ASX immediately if an event of default has occurred. A declaration of default is not automatic. Instead, ASX maintains the right to investigate the matter first, taking into account the severity of any breach or event of non-compliance, the potential consequences of declaring an event of default, and any extenuating circumstances. This allows ASX to consider alternative approaches to handling the incident, such as working with the participant to restore viability or implementing an orderly wind-down plan.

Suspension and termination

Once a default is declared, the ASX CS facilities will move to suspend the participant's authority to clear or settle all or a part of its transactions. To give immediate effect to the suspension, ASX can remove the participant's access to trading, clearing and settlement platforms as well as payment systems. Some flexibility is permitted under ASX's approach. If a participant in either ASX SSF triggers an event of non-compliance or default, ASX has the discretion to suspend, terminate or restrict the participant's access to the SSF. Unless permitted by ASX, a suspended or terminated ASX Settlement participant is unable to effect transfers of any securities holdings on the CHESS sub-register, including those of its sponsored clients. If a defaulting participant is due to receive a net payment in that day's CHESS settlement batch, ASX may allow the defaulter to continue to participate in the batch in limited circumstances. However, a suspended or terminated Austraclear participant must immediately withdraw its securities from the SSF and make alternative holding arrangements when requested by Austraclear.

Communication with external stakeholders

Should ASX determine it necessary to declare an event of default or otherwise suspend or terminate a participant, it would immediately notify the Bank and ASIC (as regulators), and a market notice would be issued for public information, including to inform non-defaulting participants as soon as possible. However, ASX's procedures are not explicit that the notification to regulators should occur in advance of declaring the default of a participant. It would be appropriate for ASX to formalise this requirement to ensure that regulators have an opportunity to discuss the decision prior to the default being formally declared.

4.3.3 Managing financial risks

The ASX SSFs do not provide a guarantee of obligations that they settle and so they are not directly exposed to financial risk in the event of a participant default. By contrast, in a default situation the ASX CCPs would assume the obligations of a defaulting participant. Where practicable, ASX would seek to transfer or port the derivatives positions of a defaulted clearing participant's clients to another participant. Porting mitigates the costs and potential market disruption associated with the close-out process, provides continuity of positions to the client, and may reduce ASX's risk exposure. However, it may be difficult to achieve in a timely manner if the client does not have an existing relationship with another clearing participant, or does not hold an individually segregated account.

Following this, a strategy for closing out the defaulted participant's portfolio is developed. The CRO is responsible for developing this strategy and proposing it to the DMC for approval, taking into account advice from OTC trading and risk experts. To do this, ASX uses a CRO loss estimate tool, which estimates the CCP's potential losses on the participant's portfolio based on judgements about prevailing market conditions and their impact on the time and cost of liquidating the defaulter's portfolio. The size of the CRO loss estimate provides the criteria for escalation to the Board and the participant Risk Consultative Committees (RCCs), for decisions regarding whether to take recovery actions and is used to inform decision-making by the DMC. ASX plans to make updates to the calculation and reporting of the CRO loss estimate, which include enhancements to the associated reporting dashboard to include additional information and building out functionality for assessing the impact of actual and hypothetical market moves on ASX Clear. The Bank will further discuss these planned updates to the calculation and reporting of the CRO loss estimate with ASX, including to understand how the principles underpinning the estimate are governed.

Risk mitigation

To manage its market risk exposure, ASX typically first seeks to reduce its risk exposure to complex products and liquidate exchange-traded products with high market liquidity through its default brokers. Beyond this, ASX's approach depends on the products in the portfolio.

  • For cash market transactions, ASX Clear will typically carry the defaulted participant's outstanding cash equity transactions through to settlement or enter into market transactions to sell or purchase securities to facilitate the settlement of novated transactions.
  • For exchange-traded derivatives (ETDs), ASX Clear and ASX Clear (Futures) may employ a variety of methods to close out or otherwise manage the positions of a defaulted participant. These include on- or off-market liquidation of the portfolio including via close-out by entering into equal-but-opposite transactions, an auction process, or exercise or expiry of contracts. For example, while ASX typically prefers to liquidate ETD positions on market, it would consider an auction process for a sufficiently large portfolio of electricity derivatives given the lower level of liquidity in these products.
  • For OTC interest rate swaps, ASX Clear (Futures) would initially look to hedge its exposure against the risk of a broad shift in yields. Once its DMG had been convened, it would provide advice on refining these hedges to further reduce risk exposure and in a way that would make the hedged portfolio most attractive to bidders in a default management auction. Following execution of these hedges, non-defaulting participants would be invited to participate in an auction of the defaulter's portfolio. All OTC clearing participants that have positions in the relevant products are required to bid.

ASX has made a number of improvements to its auction procedures since the 2016 review, for example, to provide auction participants with more clarity over the auction processes. However, this is an area in which international best practice is continuing to develop. In June, CPMI-IOSCO published a discussion paper on Central counterparty default management auctions – Issues for consideration that sets out the emerging best practice among international CCPs. The Bank will discuss with ASX how its practices compare with those set out in this paper, particularly in light of the potential for ASX to develop auction procedures for the liquidation of a broader range of its exchange-traded products.[17]

Liquidity management

Under normal circumstances, CCPs rely on incoming payments from participants to meet their obligations to other participants. If a participant were to default, the CCP could face a liquidity shortfall if it is unable to fund its payment obligations to the non-defaulting participants. These obligations arise from a range of sources, including payments of initial, variation and additional margin, for the settlement of a securities transaction, or the cash settlement of derivatives contracts. The majority of the liquid resources that the ASX CCPs would use to meet these obligations are sourced from the defaulting participant's cash collateral and ASX and participant contributions to the CCPs' default funds. These are invested in liquid assets in a pooled investment portfolio held on trust for the CCPs by their parent company, ASX Clearing Corporation Limited (ASXCC, see Appendix B.3). ASXCC has access to the Bank's domestic market operations and would be able to seek liquidity from the Bank if it was unable to liquidate sufficient assets on market to meet the CCPs' liquidity requirements.

However, ASX Clear (Futures) is currently unable to access liquidity from the Bank in respect of non-cash collateral provided by a defaulted participant. While ASX Clear (Futures) would seek to liquidate this collateral in the market in the first instance, its default management approach assumes that it can use these securities in order to enter into a repurchase agreement (repo) with the Bank as an alternative. Although the securities are themselves eligible for repo with the Bank, ASX's intragroup legal arrangements do not allow ASXCC to take custody of the securities in order to enter into a repo with the Bank. ASX Clear (Futures) cannot itself enter into a repo with the Bank in respect of those securities because, at present, it is not an eligible counterparty of the Bank.

Recommendation. ASX Clear (Futures) should take all necessary steps to establish an ability to access liquidity from the Bank in respect of a defaulting participant's non-cash collateral.

4.3.4 Loss allocation

If the ASX CCPs incurred a loss in managing the default, the CCPs would allocate these losses to their prefunded financial resources (see Appendix B.3). In the first instance, ASX would meet losses or obligations arising from the default using collateral lodged by the defaulted participant in the form of cash or eligible securities. In the event that the collateral lodged by the defaulted participant, including initial margin and its contribution to the default fund, was insufficient to cover the losses stemming from the default, the CCP could draw upon the remainder of its prefunded pooled financial resources (i.e. the CCP's default fund). ASX Clear's default fund was $250 million at the end of the assessment period, comprised of $178.5 million of own equity and $71.5 million paid into a restricted capital reserve from the National Guarantee Fund in 2005. The default fund of ASX Clear (Futures) was $650 million at the end of the assessment period, prefunded with contributions from both ASX and clearing participants.

Recovery tools and replenishment

In the event that losses at one of the ASX CCPs exceeded its prefunded financial resources, the following tools would be available to them.

  • Recovery assessments. ASX's recovery arrangements allow it to allocate uncovered losses to its clearing participants (known as ‘recovery assessments’). The size of recovery assessments allocated to each participant would be proportional to the risk that they bring to the CCP. For ASX Clear (Futures), assessments would be capped at $200 million per participant default, up to a maximum of $600 million for multiple defaults within a defined default period. For ASX Clear, assessments would be capped at $300 million for one or multiple defaults.
  • Payment haircutting. This tool allows ASX Clear (Futures) to reduce (haircut) outgoing payments to participants in order to allocate losses suffered on the defaulting participant's portfolio.
  • Partial or complete termination. Following the allocation of any losses, the CCPs would seek to restore a matched book. If the defaulter's positions could not be closed out in the market or by auction, the ASX CCPs have the power to force the termination of some or all open contracts in order to restore a matched book. Complete termination can also be used to allocate any residual losses of the CCP not addressed by other tools, by haircutting settlement payments to participants (for details, see Appendix B.3).

Once default management has been completed, all losses have been allocated and the CCP restores a matched book, the default fund will require replenishment if it has been partially drawn down or exhausted. For replenishment, the ASX CCPs would seek additional contributions to the default fund from ASX Limited and the remaining participants such that the total contributions of each group to the replenished fund are equal. ASX has put in place an intragroup agreement (Replenishment Deed) that governs ASX Limited's commitment to recapitalise the ASX CCPs in this scenario. The Bank plans to review the legal certainty of ASX Limited's commitment to replenish the CCPs' default funds in the next assessment period.

CCP recovery and replenishment arrangements depend on the ability of participants to meet their obligations under these arrangements in extreme scenarios. This may be particularly challenging for smaller participants that could face liquidity constraints in stressed market conditions, and have more limited options for raising additional funds than a large, well-capitalised participant. While participants in ASX Clear (Futures) are generally larger, well-capitalised institutions, there are a number of smaller participants at ASX Clear.

If losses following a default are so severe that they exceed the entire ASX Clear default fund, participants could be subject to recovery assessments of up to $300 million in aggregate, payable the next business day following notification. Once default management has been completed and all losses have been allocated, participants may be required to contribute up to $75 million in aggregate within 22 business days, with up to half of this payable within as few as five days. Smaller participants will bear a correspondingly smaller proportion of these obligations. However, ASX Clear does not have a process in place to periodically assess whether the risk that some participants may have difficulty in meeting recovery or replenishment obligations is unacceptably high. If participants were unable to meet these obligations they may themselves default, or in the case of replenishment obligations may choose to resign from ASX Clear. If these were smaller participants, the direct financial risk to ASX Clear from this is likely to be small, but their exit could exacerbate the prevailing situation of extreme stress.

Recommendation. ASX should assess the risk that participants may default on their obligations or choose to resign from ASX Clear due to difficulty in meeting recovery or replenishment obligations.

In 2017, CPMI and IOSCO published updated guidance on the Recovery of financial market infrastructures.[18] While ASX has previously considered the guidance in reviewing its recovery plan, the Bank identified further enhancements as part of this special topic that ASX should implement. For example, ASX should: formally analyse and document the appropriateness of its recovery tools taking into account the nature of its products and markets; describe the legal basis for its recovery tools and procedures, including consideration of whether any foreign laws or regulations could be an impediment to the implementation of the plan; and set out and explain distinct decision-making points in the default management and recovery processes. ASX will perform comprehensive benchmarking of its recovery plan to the guidance and update it to address any identified inconsistencies.

FMI Regulatory Reforms package

The Bank and other CFR agencies have developed a proposal for enhancements to the regulatory regime for CS facilities, markets, trade repositories and benchmark administrators. The proposed reforms aim to ensure that the regulators have strong and dependable powers to carry out their mandates and mitigate the risk of disruption to FMI services. The introduction of a crisis management regime for licensed CS facilities is also proposed. If the government decides to implement these reforms, ASX should review whether any updates are required to its DMRF to ensure consistency with the new crisis management regime.

4.3.5 Settlement procedures

ASX Settlement

ASX Settlement performs its cash and securities settlements in a daily multilateral net batch. If a participant was unable to settle its scheduled obligations, including in the event that it was suspended from the SSF, ASX Settlement could remove some or all of that participant's settlement instructions from the daily batch using its ‘back-out algorithm’. The back-out algorithm is an important tool used in the management of ASX Clear participant defaults. In the event that the defaulted participant had a net payment obligation, ASX Clear would first consider injecting liquidity to ensure the settlement of novated trades. If it was not possible or prudent to rely solely on available liquid resources, ASX would use the back-out algorithm to identify instructions to be settled by means of OTAs with participants that were due to deliver securities (see section 2.2.3).

Since transactions in ASX Settlement settle in a batch on a multilateral net basis, backing out a defaulter's transactions could also have an impact on the ability to settle other transactions to which the defaulter was not a counterparty. The back-out algorithm is designed to avoid increasing non-defaulting participants' net payment obligations (which would require a fresh payment authorisation), and seeks to remove or roll over as few instructions from the batch as possible, maximising settlement values and volumes, while minimising the spillover to other participants. Instructions unrelated to novated settlement obligations would typically be backed out first. If the failed instructions related to a shortfall of funds, the algorithm would remove instructions from the batch that reduced the participant's payment obligations to zero or a small receipt. Failed instructions arising from a securities shortfall would be rescheduled for settlement on the next settlement day.


The settlement of transactions in Austraclear is on a real-time gross basis. The majority of Austraclear transactions involve the simultaneous transfer of cash and securities between the buyer and seller on a trade-by-trade basis. If a participant was unable to settle its scheduled obligations, including in the event that it was suspended from the SSF, Austraclear would cancel any queued trades. The finality of any transactions of the defaulting participant that had already settled is protected under Part 2 of the PSNA.

Since Austraclear does not guarantee the settlement of trades, the impact of any cancellation of a defaulter's unsettled transactions falls only on the defaulter's counterparties. If the defaulting participant is also a participant in ASX's centralised collateral management service (ASX Collateral) then Austraclear will assist ASX Collateral in acting as the receiver's agent to enforce other participants' rights to collateral upon the notification of a default.

Where a settlement participant of Austraclear is suspended from participation, it may be required to make alternate arrangements for holding securities. For example, its clients would be required to nominate another Austraclear participant to hold their securities or securities may be held directly on the issuer's register.

4.3.6 Testing and review

ASX reviews its DMRF at least annually, or following a material change to its framework. The DMRF is also tested regularly, primarily through conducting regular default management fire drills. Within any year, ASX typically conducts three to four fire drills. The fire drills assist in ensuring that relevant ASX personnel are familiar with the default management process and identify areas where the DMRF should be updated. The Bank and ASIC are invited to observe a number of these fire drills. Findings, including any recommended enhancements to the DMRF, are reported to ASX's Default Management and Recovery Working Group, which is responsible for the ongoing review of the DMRF, after each fire drill. In addition, ASX discusses the results of the fire drills and any recommended enhancements with its RCCs and the Bank.

Planned developments

ASX intends to implement a number of enhancements to its fire drills. These include increasing the complexity and scope of fire drill scenarios, greater involvement of the CS Boards, the liquidity provider and newly appointed brokers and delegates of DMC members. ASX also plans to begin running regular unannounced internal fire drills to test reporting capability. In November 2020, ASX is planning to conduct a fire drill that simulates a recovery scenario. As part of this test, the Bank encourages ASX to test communication arrangements and decision-making processes and involve a broad set of stakeholders.

Learnings from the Nasdaq default

ASX benchmarked its DMRF to the learnings from the Nasdaq default in 2018 and identified that it had implemented the recommendations or had established initiatives to address most of the learnings from the default. Of these, ASX has planned additional work in two areas.

  • Take steps to improve the market liquidity for electricity derivatives and options. If there is sufficient market liquidity for a product, a CCP will be able to close out a defaulter's portfolio within its MPOR without an adverse price impact. ASX has self-identified that it can take additional steps to improve the market liquidity for electricity derivatives and options. ASX launched a market-making scheme for these products in July 2019. Three market makers in each regional energy market have been provided with incentives to provide quotes for a short period of time twice a day. There has been a significant increase in traded volumes following these changes. ASX also plans to review its range of electricity contracts to determine whether they are all sufficiently liquid to be suitable for clearing. ASX has implemented preliminary changes to the daily settlement process for options in order to increase traded volumes and is planning further enhancements over 2020/21.
  • Back-up clearing arrangements. If clients have arrangements with more than one clearing participant, then it is more likely to be possible to transfer positions held at one to the other in the event that the first participant defaults. Similarly, a client in that position may be able to bid on its own portfolio via its second clearing participant in the default management auction of the first participant. ASX has planned additional work to encourage the largest electricity clients to utilise back-up clearing arrangements.

Further enhancements

For large and complex portfolios, a CCP may face operational challenges if default management processes for different asset classes differ and cannot be run simultaneously. This could result in the actual time it takes to close out such a portfolio being longer than the assumed MPOR across some of these asset classes. ASX has not completed a systematic review of the consistency between its MPOR assumptions and its operational capacity to liquidate portfolios across all asset classes.

In some extreme scenarios involving payment provider resolution processes it may be useful for ASX to defer the entire CHESS batch for a day to allow additional time for the participant in resolution to meet its payment obligations and avoid a default. However, ASX has performed only limited testing of this process.


The ASX CCPs should review whether its calibration of MPOR assumptions and margin add-ons is consistent with the time it would take to liquidate large and diverse portfolios, taking into account the sequencing of liquidation in a default scenario.

ASX should test the process of deferring the CHESS batch overnight and review the implications of this approach for default management.

4.3.7 Disclosure

In accordance with the CPMI-IOSCO Public quantitative disclosure standards for central counterparties (the Quantitative Disclosures), ASX publishes quantitative disclosures on its website on a quarterly basis. In addition, it publishes biennial qualitative disclosures in accordance with the Disclosure Framework and Assessment Methodology prescribed under the PFMI. Since the last review in 2016, ASX has enhanced its public disclosures on default management. This includes increasing stakeholders' awareness of ASX's default management and recovery arrangements via engagement with the RCCs, development of participant disclosures on the potential liquidity impact from the use of OTAs, and updates to the disclosures on its website in accordance with the Quantitative Disclosures. However, there may be opportunities for ASX to implement further enhancements over time to ensure that these disclosures remain fit for purpose.


The CPMI-IOSCO discussion paper is available at <> [17]

The updated CPMI-IOSCO recovery guidance is available at <> [18]