Assessment of ASX Clearing and Settlement Facilities Appendix A: Summary of Progress 2021/22

The ASX Board approved an Accountability Map, which was shared with the Bank in May. A revised version of the document was provided in August following further discussion with the Bank.

See section 2.1.2.

Governance. ASX should clearly specify the roles and responsibilities of directors and of the senior executives referred to in Governance Recommendation 3. This can be done by creating, for each such person, an accountability statement containing details of:

1. the part of the CS facility's business for which that person has senior executive responsibility; and
2. the responsibilities of that person.

The accountability statement for the CEO and Managing Director should document his or her responsibility for ensuring that the CS Lead Executive has access to sufficient resources for the operation of the CS facility.

The ASX Board approved a set of Accountability Statements, which were shared with the Bank in May. The Bank considers that further work is required to ensure these documents provide a clear and comprehensive view of accountabilities.

See section 2.1.2.

The ASX Limited Board has reviewed the need for a stakeholder committee but concluded its functions could be adequately covered under existing forums.

ASX completed a stakeholder mapping process. The process of stakeholder review resulted in a number of new or enhanced initiatives to improve stakeholder engagement.

Further actions are planned for the next assessment period:

• the ERMF will be updated to incorporate a greater focus on stakeholder management
• ASX is assessing the need for enhanced representation in the Austraclear user group
• a revised CHESS replacement engagement plan is being developed
• ASX is designing new stakeholder metrics to align with KRIs and improve understanding and reporting of stakeholder sentiment.

ASX has developed a Stakeholder Charter. This information was published on the ASX website in August.

ASX has agreed to complete a self-assessment by end-2022.

See section 2.1.3.

CCP Resilience Guidelines. To align financial risk management practices and governance arrangements with the CCP Resilience Guidance, the ASX CCPs should continue to implement plans to:

1. enhance the comprehensiveness of stress testing to ensure risks are appropriately identified, captured and stressed
2. enhance analysis and justification of assumptions used in stress testing models so that risks are adequately captured
3. remove the assumption made by ASX Clear 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
4. 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 CCPs
5. ensure that their 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.

The ASX CCPs are implementing a multi-year work program to address this recommendation. During the assessment period:

1. ASX Clear and ASX Clear (Futures) progressed work to establish enhanced stress-test scenario methodologies, and expect to implement a range of new scenarios during the next assessment period.
2. ASX Clear set concentration limits to cap the amount of individual equities that can be posted as collateral.
3. ASX Clear has completed work on the approach to remove excess collateral from its stress-testing methodology, but this is yet to be implemented.
4. ASX continued to formalise and document roles and processes in relation to the governance of risk management (see section 3.7.1).
5. ASX commenced work to enhance its CCP Reporting and Disclosures Policy which it expects will be completed in the next assessment period (see section 3.9.4).

During the assessment period, the ASX CCPs completed the introduction of margin floors for all products margined using SPAN. ASX Clear will consider developing similar floor methodologies for cash market products as part of the ongoing margin model review. ASX will work to develop an appropriate methodology for measuring the degree of procyclicality in its risk models.

See section 3.4.

During the assessment period, ASX Clear (Futures) implemented a process for the collection of overnight variation margin. However, both CCPs will need to make further progress in implementing arrangements to monitor and manage exposures arising from late-in-day price movements.

See section 3.5.3.

ASX Clear (Futures) has implemented arrangements enabling it to access liquidity from the Bank via ASX Clearing Corporation. ASX Clearing Corporation will need to update its RITS membership agreement to ensure that it is consistent with this arrangement.

See section 2.5.1.

The Bank is engaging with ASX on draft legal analysis supporting the legal certainty of deferral.

See section 4.6.1.

No action is required until the CHESS replacement system goes live.

See section 4.7.2.

ASX has increased the daily capacity of the CHESS and CORE systems to support 10 million and 7.5 million trades respectively.

ASX is progressing towards implementing the CHESS replacement system, although the go-live date has been delayed from April 2023.

See sections 2.4.1 and 4.2.

The ASX CS facilities have continued to embed the use of new systems and processes, including to identify, monitor and manage operational risks at an enterprise wide level.

ASX Internal Audit completed its internal review and commissioned external reviews of ASX's risk and compliance management frameworks, which were completed during the assessment period. ASX will implement the recommendations from these reviews over the next year.

See section 2.4.2.

ASX established a five-year strategic roadmap for its risk management systems that includes actions to address this recommendation. In addition, ASX has completed a review of the systems infrastructure required to support its risk management approach over the long-term.

During the assessment period, ASX made some progress by migrating its overnight margin call calculations from a process located on non-core infrastructure to one run in its core systems.

Work to improve ASX's regulatory reporting systems and processes is underway.

See section 2.3.

Group Executives for Markets, and Securities and Payments appointed as CS lead executives.

See section 2.1.2

Governance. The application of the following arrangements for ASX Clear and ASX Settlement should be extended to ASX Clear (Futures) and Austraclear:

1. the requirement that the boards shall comprise at least 50 per cent non-executive directors who are not also directors of ASX Limited and that the non-ASX Limited directors can also comprise a quorum
2. the requirement that the Chair is not also an ASX Limited director
3. provision for meetings of non-ASX Limited directors. These meetings should consider all potential conflicts of interest between the CS facilities and other ASX Group entities.

The composition and appointment of the Chairs of the boards of ASX Clear (Futures) and Austraclear should be changed accordingly.

CS Boards Charter has been revised, reflecting changes consistent with the recommendation. A non-ASX Limited Chair has been appointed to Austraclear and ASX Clear (Futures).

See section 2.1.1.

Technology Committee must include at least one non-ASX Limited CS director. One non-ASX Limited CS director required for quorum.

Audit and Risk Committee (ARC) Charter includes a standing invitation for a representative of the non-ASX directors of the CS boards to attend. ARC may request that this person withdraw for any part of a meeting.

ASX has established the Technology Committee to oversee technology project implementation. The committee has the ability to appoint external experts to assist it in carrying out its responsibilities.

See Appendix B.1.

Governance. ASX Group should adopt:

1. structured and documented processes for director recruitment and board renewal, ultimately including a tenure policy
2. a more systematic approach to board education with an emphasis on supporting directors in the supervision of ASX's technology program
3. systems for considering and implementing feedback arising from the annual board feedback survey
4. more rigorous director performance management
5. documented guidance as to the matters which should be referred to the various board meetings.

New processes for recruitment and appointment of nonexecutive ASX and CS directors, and director tenure guidelines, have been implemented. These changes were reflected in arrangements related to director independence and the Nomination Committee Charter.

Changes to the structure of Board days took effect in June.

A set of guidelines to assist management to identify the most appropriate forum for consideration of information they wish to raise for discussion, approval or noting by directors was approved in May.

Amendments to the ASX Group Support Agreement confirm that CS directors have access to external advice, paid for by ASX Operations. Amendments to the same effect were incorporated in the revised CS Boards Charter in May.

The ASX Boards considered the issue of dedicated CS support and determined that they do not require a separate unit of staff dedicated to supporting the CS Boards.

ASX conducted an analysis concluding that the 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.

See section 3.3.3.

See chapter 3 (Margin) and chapter 4 (CHESS replacement, as well as exchange-of-value and central securities depositories for ASX Settlement).

Special topic reviews of: exchange-of-value settlement arrangements (Austraclear); central securities depository arrangements (Austraclear); and collateral were deferred.

The revised ERMF (November 2021) was updated to reflect revised documentation and ASX's new operating model (see section 2.2).

See chapter 4 for discussion of the CHESS replacement program and follow up to IBM review.

CCP Standards 12, 2, 3, 4, 7 and 14,

SSF Standards 11, 2 and 3

ASX continued to implement the work plan to enhance its default management and recovery frameworks, and this is expected to continue into the future. Of note:

• The review of the legal certainty of arrangements for ASX Limited to replenish contributions to the ASX CCPs' default funds will be deferred to 2022/23.
• ASX completed a gap analysis against the CPMI-IOSCO paper on default management auctions and shared its results with the Bank; ASX Clear (Futures) introduced amended Operating Rules and Procedures with respect to its framework for default management auctions.
• ASX will perform a gap analysis against the CPMI-IOSCO guidance on recovery of financial market infrastructures by December 2022, and share the outcome with the Bank.
• ASX updated its documentation to clarify the role of the ASX Limited Board and the CS Boards in default management.

During the assessment period, ASX continued to implement enhancements to its cyber security practices in line with actions set out in its Cyber Strategy.

See section 2.4.4.

ASX has engaged a third party to complete an independent validation of whether its stress scenarios could cover an event of similar severity as the 1987 stock market crash, taking into account differences in the current market environment.

ASX has made plans to establish a Stress Test Advisory Group during the next assessment period.