Assessment of ASX Clearing and Settlement Facilities – September 2022 Executive Summary

The Reserve Bank of Australia (the Bank) has carried out its annual Assessment of the ASX clearing and settlement (CS) facilities, as at 30 June 2022. On balance, the Bank has concluded that the facilities have conducted their affairs in a way that promotes overall stability in the Australian financial system. However, ASX will need to place a high priority on addressing recommendations related to operational risk. The Bank also views prompt progress in addressing recommendations on governance and the framework for the management of risks as important in ensuring that ASX continues to promote overall financial stability in the longer term, and expects ASX to take a more proactive role in ensuring that its regulatory obligations are being met.

Scope of assessment

The Assessment covers the four ASX CS facilities: two central counterparties (CCPs) – ASX Clear and ASX Clear (Futures); and two securities settlement facilities (SSFs) – ASX Settlement and Austraclear. The Bank has assessed the CS facilities' compliance with relevant financial stability standards (FSS) determined by the Bank, as well as the CS facilities' general obligation to do all other things necessary to reduce systemic risk.

Key findings

The Bank's ratings of the ASX CS facilities' compliance against relevant FSS are summarised below.

Standard(s) ASX Clear ASX Clear (Futures) ASX Settlement Austraclear
Operational risk Partly observed Partly observed Partly observed Partly observed
Regulatory reporting
Broadly observed Broadly observed Broadly observed Broadly observed
Comprehensive framework for the management of risks Broadly observed (↓) Broadly observed (↓) Broadly observed (↓) Broadly observed (↓)
Credit risk
Liquidity risk
Broadly observed Broadly observed N/A N/A
Margin Broadly observed Broadly observed (↑)
Other applicable standards Observed Observed Observed Observed

Note: Green = Observed; Yellow = Broadly Observed; Orange = Partly Observed; Grey = N/A. Blue text is used for upgraded ratings and red text for downgraded ratings.

In arriving at these ratings, the Bank took into account the following key developments at the CS facilities:

  • Operational risk: The Bank conducted a detailed review of ASX's planned replacement of the CHESS clearing and settlement system for cash equities. While the review found that the target state for the replacement system is broadly consistent with relevant FSS standards, further work is required to provide assurance that the system is being built to meet the required specifications. The review also discusses the Bank's concerns with further delays to the go-live date for CHESS replacement, which highlight the need for ASX to demonstrate that appropriate arrangements are in place to manage vendor-related risks.
  • Risk management framework: An external review highlighted weaknesses in ASX's processes supporting its risk management framework, in particular, opportunities to improve the effectiveness of its first and second lines of risk management.
  • Governance: While ASX has made some progress in addressing governance-related recommendations from the 2021 Assessment, there are several key outstanding items including the implementation of a self-assessment of compliance with the FSS, and further work to clarify lines of executive accountability. The Bank expects ASX to make demonstrable progress in strengthening its governance arrangements over the coming year. Insufficient progress will result in a ratings downgrade on this standard.
  • Margin: The Bank conducted a detailed review of ASX's margining arrangements, concluding that risk exposures had been reduced by the implementation of overnight variation margining at ASX Clear (Futures).
  • Regulatory reporting: While some improvements have been made to ASX's processes for notifying the Bank of information in a timely and transparent manner, there were significant delays in the notification of some key information.

2022/23 regulatory priorities

The Assessment includes a number of new or updated recommendations for the ASX CS facilities to strengthen their observance of relevant FSS, including in relation to:

  • implementing the CHESS replacement system, including by addressing the findings of a planned external review of the new CHESS application, strengthening arrangements for the delivery and testing of new systems and ensuring the new system has appropriate settlement finality protections and risk management functionality
  • completing a self-assessment of compliance with the FSS
  • strengthening the operating effectiveness of ASX's three-lines model under its risk management framework
  • addressing the findings of the Bank's detailed review of the CCPs' margin arrangements, including by carrying out a broad-ranging review of margin methodologies and systems
  • managing the risks to the CCPs associated with large, late-in-day price movements, and addressing risks in the overnight margining process at ASX Clear (Futures)
  • developing a systematic framework to address the risk of destabilising increases in margin and other financial risk requirements during volatile periods
  • strengthening the quality controls and systems ASX has in place for notifying the Bank of material developments relevant to the FSS in a timely and transparent manner.

Over the coming year the Bank will conduct a deep-dive assessment of the ASX CS facilities' management of credit risk, and will continue to focus on ASX's implementation of the CHESS replacement system, including the management of vendor-related risks. Other areas of focus will include ASX initiatives to enhance cyber resilience, validation of stress testing scenarios and review of its enterprise risk management framework (ERMF).