Assessment of ASX Clearing and Settlement Facilities 1. Summary of Regulatory Priorities
This section summarises actions taken by the ASX CS facilities during the 12 months to June 2020 (the assessment period) in relation to recommendations identified in the Bank's 2019 Assessment of ASX Clearing and Settlement Facilities (the 2019 Assessment), and summarises the recommendations identified by the Bank in its 2020 Assessment of the facilities against the FSS. Further detail is provided in section 2, which describes the response of the ASX CS facilities to COVID-19; section 3, which describes other material developments in the CS facilities relevant to the FSS; and section 4, which provides the results of a detailed assessment conducted by the Bank of the facilities' default management and recovery arrangements. This year's Assessment does not include a detailed assessment of how the ASX CCPs met each of the FSS at the end of 2019/20; this reflects the significant other demands on both the ASX CS facilities and the supervisory team at the Bank stemming from operational and risk management responses to the COVID-19 pandemic.[1]
1.1 Progress against 2019 Recommendations
In the Bank's 2019 Assessment, the ASX CS facilities were rated ‘observed’ or ‘broadly observed’ for all FSS, with the exception of the General Business Risk Standard (CCP Standard 14, SSF Standard 12), which was rated as ‘partly observed’ in each facility. The 2019 Assessment made recommendations for steps to be taken for the CS facilities to observe or to continue to observe various standards. Table 1 summarises actions taken by the facilities in relation to these recommendations during the assessment period.
The Bank's 2019 Assessment also identified a number of areas of supervisory focus for the current assessment period. Material developments in each of these areas are described in section 3 (see Appendix A for a mapping of these sections to each area of supervisory focus).
1.2 2020 Assessment and Regulatory Priorities
It is the Bank's assessment that the CS facilities ‘observed’ or ‘broadly observed’ all relevant requirements under the FSS as at 30 June 2020, with the exception of the Margin Standard (CCP Standard 6), which was rated as ‘partly observed’ in ASX Clear (Futures), and the Operational Risk Standard (CCP Standard 16, SSF Standard 14), which was rated as ‘partly observed’ in ASX Clear and ASX Settlement (Table 2).[2] 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.[3] However, the facilities will need to place a high priority on addressing the recommendations related to margin and operational risk. Compared to the 2019 Assessment, the Bank has raised each of the CS facilities' ratings for Governance (CCP and SSF Standard 2) to ‘observed’, reflecting enhancements made under the Building Stronger Foundations program and has raised the CS facilities' ratings for General Business Risk (CCP Standard 14, SSF Standard 12) to ‘broadly observed’, reflecting changes to ASX's arrangements for holding business, operational and investment risk capital (see section 3). The rating for ASX Clear (Futures) for Margin (CCP Standard 6), and ASX Clear and ASX Settlement for Operational Risk (CCP Standard 16, SSF Standard 14) have been lowered to ‘partly observed’, reflecting issues identified as part of the Bank's detailed review of ASX's response to COVID-19 (see section 2). The rating for ASX Clear for margin (CCP Standard 6) has been lowered to ‘broadly observed’.
| Recommendation | Standard | Facility | Actions |
|---|---|---|---|
Legal Basis. The ASX CS facilities should take the following steps to strengthen their legal basis:
|
CCP and SSF Standard 1 | All facilities | Partly addressed. ASX Clear (Futures) achieved designation as a settlement system in New Zealand on 14 August. ASX established a policy and processes supporting the repatriation of NZD collateral. On 6 July, ASX implemented changes to CCP operating rules to enhance the legal certainty of default management actions. ASX established guidelines governing the commissioning, reviewing and updating of legal opinions. ASX plans to finalise enhancements to these guidelines in the coming assessment period taking into account recent feedback from the Bank. ASX plans to commence work on a process to establish a periodic review of operating rules and procedures for all CS facilities in the coming assessment period. |
Governance. The ASX CS facilities should continue to implement plans to strengthen their governance arrangements in line with the FSS and consistent with the CCP Resilience Guidance:
|
CCP and SSF Standard 2 | All facilities | Partly addressed. ASX completed the development of business unit level key risk indicators (KRIs) that provide a more detailed breakdown of the Board-level KRIs established in November 2018. These embed the Board-defined risk appetite in day-to-day operations. ASX also implemented a framework for capturing observations and challenges from its central risk oversight function (second-line risk) across its key projects to strengthen its consideration of risk in business processes and decision-making. ASX established risk forums for both first-line (i.e. business and operational areas) and second-line risk to promote improved risk reporting and present first-line considerations of current and emerging risks, controls and updates on ASX culture to ASX's leadership. ASX implemented some measures to formalise and document roles and processes in relation to the governance of risk management. This work will continue over the coming assessment period. Work to update ASX's policy to include the disclosure and feedback requirements set out in the CCP Resilience Guidance was reprioritised. ASX plans to update its policy in the coming assessment period. |
CCP Resilience Guidance. To align financial risk management practices with the CCP Resilience Guidance the ASX CCPs should continue to implement plans to:
|
CCP Standards 4 and 7 | Both CCPs | Partly addressed. The ASX CCPs are in the process of implementing a multi-year work program to address this recommendation. Key enhancements over the assessment period include the approval of new stress test scenarios and revisions to ASX's stress testing methodology to better incorporate intraday price movements. ASX also established a formal process that aims to ensure assumptions in stress tests remain consistent with the legal framework under which ASX operates. ASX enhanced its model validation process, including by introducing a benchmarking exercise by which alternative models will be considered. |
| Cover 2 breaches. ASX Clear and ASX Clear (Futures) should formalise thresholds for the frequency and magnitude of Cover 2 stress test breaches that would result in a recalibration of the overall default fund or additional initial margin (AIM) buffer. | CCP Standard 4 | Both CCPs | Fully addressed. CS Boards approved KRIs that establish a revised risk appetite for credit and liquidity Cover 2 stress test breaches. The new framework requires ASX staff to report to CS Boards on the cause of any Cover 2 breach and to propose mitigating actions if ASX's risk appetite is breached. |
| Intraday exposures. By 30 June 2020, ASX Clear (Futures) should embed, review and refine its arrangements 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. | CCP Standard 6 | ASX Clear (Futures) | Partly addressed. ASX implemented an automated alert at 2 am to identify participants that should be subject to an intraday margin call. ASX also revised the calibration of its overnight buffer margin to be more responsive to increases in market volatility. The remaining elements of this recommendation will be addressed as part of work on late-in-day price movements (see Table 3). |
| Liquidity add-ons. ASX Clear should complete the implementation of add-ons to manage liquidity risk for cash market products and products margined using the CME Standard Portfolio Analysis of Risk (SPAN) model. | CCP Standard 6 | ASX Clear | Not addressed. ASX intends to conduct analysis in the coming assessment period to determine whether there is a need to implement liquidity add-ons for cash market products and products margined using the CME SPAN model. |
| Inter-commodity spread concessions (ICCs). ASX Clear (Futures) should complete the review of its methodology for calibrating ICCs used in its margining model and resume reviews of ICCs on a regular basis. | CCP Standard 6 | ASX Clear (Futures) | Partly addressed. ASX conducted a review that determined that enhancements to its ICC methodology would lead to an immaterial change in initial margin and so were not necessary. ASX intends to conduct analysis to verify this conclusion and review its ICCs for ASX Clear (Futures) under its existing methodology on a quarterly basis from September 2020. |
| Segregation and portability. ASX Clear should conduct an assessment of whether the protections from arrangements utilising a commingled house/client account structure remain materially equivalent to those provided by omnibus or individual client segregation. ASX should consult with the Bank on the outcome of this assessment within 12 months of the CHESS replacement system going live. | CCP Standard 13 | ASX Clear |
Not addressed. No action is required until the CHESS replacement system has gone live. The go-live date has been delayed until April 2022. |
| General business risk. The ASX CS facilities should implement changes to the ASX Group Support Agreement to ensure that business, operational and investment risk capital is available to the CS facilities when required, including in circumstances where the financial standing of the CS facilities or the ASX Group entities holding the capital is in doubt. | CCP Standard 14, SSF Standard 12 | All facilities | Partly addressed. ASX has transferred business, operational and investment risk capital to be held directly by the CS facilities. However, further work is required to mitigate the risk of potential shortfalls in the CCPs' investment risk capital under the new arrangements, and to formalise changes to ASX's approach to business and operational risk capital requirements for the SSFs. |
Operational risk management. The ASX CS facilities should complete implementation of plans under ASX's Building Stronger Foundations program to:
|
CCP Standard 16, SSF Standard 14 | All facilities | Mostly addressed. ASX completed the build and rollout of its Enterprise Risk, Internal Audit & Compliance Application that allows it to capture, consolidate and analyse risk, compliance and audit data across dashboards and achieve consistent reporting and management of enterprise risks. ASX also completed the build and rollout of its IT Service Management tool to support its management of incidents and problems. The tool acts as a single source of truth by providing an end-to-end view for a majority of its infrastructure assets and systems, and lessening the reliance on its subject matter experts. Further work is required to fully achieve the benefits of these tools, as a richer history of incidents, risk and compliance data is built up and used over a longer period. |
| Risk management systems. ASX should establish a long-term plan to ensure that its core systems have the functionality to fully support its risk management approach, including migrating risk management systems currently operated on non-core systems to core systems. | CCP Standard 16 | Both CCPs | Partly addressed. ASX has established a five-year risk IT strategic roadmap that includes actions to address this recommendation. Under this plan, a rebuild of ASX's credit stress testing systems is due to complete in 2021. Other enhancements to address this recommendation are planned for later years. |
| Standard | ASX Clear | ASX Clear (Futures) | ASX Settlement | Austraclear |
|---|---|---|---|---|
| CCP and SSF Standard 1: Legal Basis | Observed (→) | Observed (→) | Observed (→) | Observed (→) |
| CCP and SSF Standard 2: Governance | Observed (↑) | Observed (↑) | Observed (↑) | Observed (↑) |
| CCP and SSF Standard 3: Framework for the Comprehensive Management of Risks | Observed (→) | Observed (→) | Observed (→) | Observed (→) |
| CCP and SSF Standard 4: Credit Risk | Broadly observed (→) | Broadly observed (→) | N/A | N/A |
| CCP and SSF Standard 5: Collateral | Observed (→) | Observed (→) | N/A | N/A |
| CCP Standard 6: Margin | Broadly Observed (↓) | Partly observed (↓) | --- | --- |
| CCP Standard 7 and SSF Standard 6: Liquidity Risk | Broadly observed (→) | Broadly observed (→) | Observed (→) | Observed (→) |
| CCP Standard 8 and SSF Standard 7: Settlement Finality | Observed (→) | Observed (→) | Observed (→) | Observed (→) |
| CCP Standard 9 and SSF Standard 8: Money Settlements | Observed (→) | Observed (→) | Observed (→) | Observed (→) |
| SSF Standard 9: Central Securities Depositories | --- | --- | Observed (→) | Observed (→) |
| CCP Standard 10: Physical Deliveries | N/A | Observed (→) | --- | --- |
| SSF Standard 10: Exchange-of-value Settlement Systems | --- | --- | Observed (→) | Observed (→) |
| CCP Standard 11: Exchange-of-value Settlements | Observed (→) | Observed (→) | --- | --- |
| CCP Standard 12 and SSF Standard 11: Participant Default Rules and Procedures | Observed (→) | Observed (→) | Observed (→) | Observed (→) |
| CCP Standard 13: Segregation and Portability | Observed (→) | Observed (→) | --- | --- |
| CCP Standard 14 and SSF Standard 12: General Business Risk | Broadly observed (↑) | Broadly observed (↑) | Broadly observed (↑) | Broadly observed (↑) |
| CCP Standard 15 and SSF Standard 13: Custody and Investment Risks | Observed (→) | Observed (→) | N/A | Observed (→) |
| CCP Standard 16 and SSF Standard 14: Operational Risk | Partly observed (↓) | Broadly observed (→) | Partly observed (↓) | Broadly observed (→) |
| CCP Standard 17 and SSF Standard 15: Access and Participation Requirements | Observed (→) | Observed (→) | Observed (→) | Observed (→) |
| CCP Standard 18 and SSF Standard 16: Tiered Participation Arrangements | Observed (→) | Observed (→) | Observed (→) | Observed (→) |
| CCP Standard 19 and SSF Standard 17: FMI Links | Observed (→) | Observed (→) | Observed (→) | Observed (→) |
| CCP Standard 20 and SSF Standard 18: Disclosure of Rules, Key Policies and Procedures, and Market Data | Observed (→) | Observed (→) | Observed (→) | Observed (→) |
| CCP Standard 21 and SSF Standard 19: Regulatory Reporting | Observed (→) | Observed (→) | Observed (→) | Observed (→) |
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(a) The arrows in brackets indicate the change in ratings from last year: a horizontal arrow indicates no change; a single vertical up arrow indicates a single upgrade (e.g. from ‘broadly observed’ to ‘observed’); a single vertical down arrow indicates a single downgrade (e.g. from ‘observed’ to ‘broadly observed’); and a double vertical down arrow indicates a downgrade by two grades (e.g. from ‘observed’ to ‘partly observed’). Green text is used for upgraded ratings and red text for downgraded ratings.
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The Bank has made recommendations that the CS facilities should address to observe or continue to observe relevant requirements in the FSS. This includes recommendations to strengthen financial and operational risk management arrangements in light of issues identified in ASX's response to COVID-19, strengthen default management and recovery arrangements, and implement the CHESS replacement system in a timely manner. These recommendations are set out in Table 3 and will be a key part of the Bank's regulatory priorities in the next assessment period.
| Recommendation | Standard | Facility |
|---|---|---|
Legal Basis. The ASX CS facilities should take the following steps to strengthen their legal basis:
For more information, see section 3.1. |
CCP and SSF Standard 1 | All facilities |
CCP Resilience Guidance. To align financial risk management practices and governance arrangements with the CCP Resilience Guidance the ASX CCPs should continue to implement plans to:
For more information, see Box B. |
CCP Standards 2, 4 and 7 | Both CCPs |
Recovery and replenishment arrangements. 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. For more information, see section 4.3.4. |
CCP Standards 3 and 12 | ASX Clear |
Procyclicality. Consistent with the CCP Resilience Guidance, the ASX CCPs should develop a systematic procyclicality framework designed to avoid destabilising increases in margin and other financial risk requirements during periods of heightened market volatility. For more information, see section 2.2.3. |
CCP Standards 5 and 6 | Both CCPs |
Margin period of risk. The ASX CCPs should review whether their calibration of margin period of risk (MPOR) assumptions and margin addons 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. For more information, see section 4.3.6. |
CCP Standards 6 and 12 | Both CCPs |
Late-in-day price movements. The ASX CCPs should put in place arrangements that allow them to monitor and manage exposures arising from large late-in-day price movements, including movements that exceed the coverage provided by initial and additional margin. For ASX Clear (Futures), this also applies to price movements during the overnight trading session. For more information, see section 2.2.3. |
CCP Standard 6 | Both CCPs |
Liquidity add-ons. ASX Clear should complete its review of add-ons to manage liquidity risk for cash market products and products margined using the CME SPAN model. ASX Clear should implement these add-ons if the review concludes they are needed. For more information, see section 3.4.2. |
CCP Standard 6 | ASX Clear |
Inter-commodity spread concessions. ASX Clear (Futures) should complete its analysis of the costs and benefits of changing its ICC methodology and, if no change is justified, resume regular reviews of ICCs under its current ICC methodology. For more information, see section 3.4.2. |
CCP Standard 6 | ASX Clear (Futures) |
Liquidity risk. 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. For more information, see section 4.3.3. |
CCP Standard 7 | ASX Clear (Futures) |
Deferral of the CHESS batch. ASX should test the process of deferring the CHESS batch overnight and review the implications of this approach for default management. For more information, see section 4.3.6. |
CCP Standard 12, SSF Standard 11 | ASX Clear and ASX Settlement |
Segregation and portability. ASX Clear should conduct an assessment of whether the protections from arrangements utilising a commingled house/client account structure remain materially equivalent to those provided by omnibus or individual client segregation. ASX should consult with the Bank on the outcome of this assessment within 12 months of the CHESS replacement system going live. For more information, see section 3.3.1. |
CCP Standard 13 | ASX Clear |
Business and operational risk capital. The Boards of the ASX SSFs should formally establish an appropriate methodology for determining the level of business and operational risk capital held at each SSF and ensuring the level of capital remains appropriate over time. For more information, see section 3.1.1. |
SSF Standard 12 | Both SSFs |
Investment risk capital. The ASX CCPs should hold an additional capital buffer to cover potential shortfalls in investment risk capital at each CCP. ASX should establish a process to periodically recalibrate the split of capital held by each CCP and make any necessary adjustments to the buffer. For more information, see section 3.1.1. |
CCP Standard 14 | Both CCPs |
CHESS capacity and system replacement. ASX should implement the new clearing and settlement system for cash market transactions as soon as this can be safely achieved by ASX and users of CHESS. In the short term, ASX should carry out plans to increase the capacity of the current CHESS system and develop contingency arrangements to address future extreme increases in volumes that exceed current processing capacity. For more information, see section 3.3.1. |
CCP Standard 16, SSF Standard 14 | ASX Clear and ASX Settlement |
Operational risk management. The ASX CS facilities should continue to embed the use of new systems and processes supporting change management, incident management and knowledge management, and use these systems to identify, monitor and manage operational risks at an enterprise-wide level. ASX internal audit should independently review the effectiveness of these systems and processes in practice. For more information, see section 3.2. |
CCP Standard 16, SSF Standard 14 | All facilities |
Risk management systems. The ASX CCPs should implement plans to ensure that their core systems have the functionality to fully support their risk management approach, including by migrating processes currently operated on non-core systems to core systems. For more information, see section 3.3.2. |
CCP Standard 16 | Both CCPs |
In addition to recommendations to enable the facilities to observe or continue to observe the FSS, the Bank has identified several areas that will be an important part of its supervisory engagement with ASX in the next assessment period. These include the 2020/21 special topic assessment of governance, and are summarised in Table 4.
| Development | Standard | Facility |
|---|---|---|
| Special topic | ||
| Governance special topic. The Bank will carry out a special topic assessment of the ASX CS facilities' governance, with a secondary focus on the facilities' framework for the comprehensive management of risks and their arrangements for identifying, monitoring and managing general business risk. | CCP Standards 2, 3 and 14, SSF Standards 2, 3 and 12 | All facilities |
Default management and recovery. The Bank will discuss with ASX the establishment of a workplan to enhance its default management and recovery frameworks, taking into account potential gaps identified in the special topic assessment. These include:
For more information see section 4. |
CCP Standards 12, 2,3, 4 7 and 14, SSF Standards 11, 2 and 3 | All facilities |
| Planned work by the ASX CS facilities | ||
Legal basis. Completion of work to enhance, formalise and document business-as-usual (BAU) controls for legal risks. For more information, see section 3.1.2. |
CCP Standard 1 and SSF Standard 1 | All facilities |
CCP Resilience Guidance. Implementation of ASX's plans to address gaps against the CCP Resilience Guidance that are minor but indicative of good practice in financial risk management. For more information, see Box B. |
CCP Standards 2, 4, 5, 6, 7 and 15 | Both CCPs |
Cyber resilience. Continued enhancement of ASX's cyber resilience via:
For more information, see section 3.3.4. |
CCP Standard 16, SSF Standard 14 | All facilities |
| Other | ||
Stress test severity. The Bank will continue to discuss with ASX whether its CCP stress test scenarios are appropriately calibrated to cover losses in ‘extreme but plausible’ market conditions. For more information, see section 2.2.4. |
CCP Standard 4, 7 | Both CCPs |
Collateral concentration limits. The Bank will discuss with ASX Clear its conclusion that it is not necessary to impose concentration limits for equity collateral. For more information, see section 3.4.3. |
CCP Standard 5 | ASX Clear |
| ASX Group support agreement. The Bank will conduct a broader review of the ASX Group Support Agreement, covering aspects outside the scope of the 2018/19 special topic assessment of the CS facilities' legal basis. | CCP Standard 14 and SSF Standard 12 | All facilities |
In addition to the recommendations and supervisory focus, the Bank expects ASX to work towards continual strengthening of its risk management arrangements. This is in accordance with the general obligation on CS facilities to do all things necessary to reduce systemic risk. ASX recognises this and has governance arrangements in place to motivate and encourage continuous improvement. As part of its ongoing supervisory engagement, the Bank will continue to discuss with ASX areas where there may be opportunities for improvement.
Footnotes
Under The Reserve Bank's Approach to Supervising and Assessing Clearing and Settlement Facility Licensees, the Bank was not due to conduct its next detailed assessment of the ASX SSFs until the end of 2020/21. [1]
In undertaking its Assessment, the Bank has applied the rating system used in the Principles for Financial Market Infrastructures: Disclosure Framework and Assessment Methodology produced by the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions in December 2012. See Appendix C for more detail on this system. [2]
Section 821A(aa) of the Corporations Act requires that a CS facility licensee, to the extent reasonably practicable to do so, comply with the FSS and do all other things necessary to reduce systemic risk. [3]