New Financial Stability Standards:
Final Standards and Regulation Impact Statement – December 2012
3. The Draft Financial Stability Standards

In response to the developments described in Section 2, the Bank published draft FSSs on 29 August 2012 comprising requirements that:

  • fully align with the requirements of the Principles that address matters relevant to financial stability
  • complement the requirements of the Principles, where appropriate, to uphold the standards to which CS facilities licensed to operate in Australia are already held under the measures of the current FSSs, and to reflect standards applied to CS facilities in other relevant jurisdictions
  • implement the key elements of the Council's framework for ensuring regulatory influence over cross-border CS facilities.

These requirements were contained in a set of detailed standards and sub-standards that reflected the structure of the Principles and associated key considerations.[1] The draft FSSs comprised 21 standards for CCPs and 19 standards for SSFs, each with one or more accompanying sub-standards. The draft guidance adopted the language of the explanatory notes that accompany the Principles and key considerations, adjusted to reflect the type of CS facility, the Australian regulatory and institutional context, and other relevant factors such as the Council's framework for ensuring regulatory influence over cross-border CS facilities.

3.1 Aligning the Financial Stability Standards with the Principles

In order to ensure that licensed CS facilities in Australia appropriately control the risks they pose to the Australian financial system, in accordance with emerging international best practice, the draft FSSs were aligned with relevant parts of the Principles. This Section sets out some of the main areas in which this alignment enhances the measures associated with the existing FSSs. Unless otherwise stated, the changes described apply both to the draft FSSs for CCPs and the draft FSSs for SSFs.

Legal and governance

The draft FSSs set out requirements that the board of a CS facility licensee take into account participant and stakeholder interests, and pursue objectives that explicitly support financial stability and other relevant public interest considerations (CCP and SSF Standard 2). The draft FSSs also add more granular and explicit requirements for governance structures.[2] These address the role, composition and skills of a CS facility licensee's board and management, documentation of lines of responsibility and accountability, and governance arrangements associated with risk management and internal controls.

Risk controls

In aligning with the Principles, the draft FSSs enhance risk controls for CS facilities, particularly in relation to credit and liquidity risks. The draft FSSs require licensed CS facilities to explicitly adopt a comprehensive risk management framework to govern their risk controls (CCP and SSF Standard 3). As part of this framework, licensed CS facilities are required to plan for their recovery or orderly wind-down in scenarios where they are no longer able to operate as a going concern, providing a credible plan for the continuity of service provision by the facility or adequate time for participants to transition to alternative arrangements.

The draft FSSs also enhance requirements for licensed CS facilities to hold financial resources to cover credit and liquidity risks. CCP Standard 4 recognises the likely correlation between the default of a participant and any affiliates by requiring that a CCP hold sufficient financial resources to cover the joint default of the participant and its affiliates that would cause the largest aggregate credit exposure. Additional coverage is required for CCPs that clear complex products or that are systemically important in multiple jurisdictions. CCP Standard 4 also adds more specific requirements for CCP stress testing, while CCP Standard 6 adds more explicit and detailed requirements for CCPs to collect margin from participants for all product types, including cash equities.

CCP Standard 7 and SSF Standard 6 introduce enhanced controls for licensed CS facilities to address liquidity risks, including specific requirements for a CCP to be able to meet its payment obligations on the intended settlement date in the event of a participant default. CCP and SSF Standard 5 also incorporates strengthened requirements around collateral eligibility criteria and collateral management, including more specific requirements for collateral eligibility and managing residual risks from collateral assets through haircuts and concentration limits.

For SSFs, the draft FSSs introduce financial risk control requirements that are not contemplated in the current FSS measures. At the time the current measures were developed it was not envisaged that SSFs operating in Australia would assume credit or liquidity risk as principal. While it remains the case that an SSF operating in Australia would not be expected to assume credit or liquidity risk as principal, the draft SSF Standards set out controls for circumstances in which an SSF did assume such risk.


CCP Standard 8 and SSF Standard 7 add more specific requirements regarding the timeliness of settlement and settlement finality for licensed CS facilities. In most cases they additionally require facilities to offer settlement finality intraday or in real time. CCP Standard 10 sets out expectations for the management of risks associated with the storage and delivery of physical instruments or commodities.

Default arrangements

The draft FSSs introduce more explicit requirements for a licensed CS facility to have in place rules and arrangements to deal with a participant default. CCP Standard 13 requires a CCP to have arrangements in place to achieve segregation of a participant's customers' positions and collateral from the participant's house positions and collateral, and portability of customer positions and collateral in the event of the participant's default. This is complemented by a requirement that SSFs operating a central securities depository should operationally support segregation and portability (SSF Standard 9).

CCP Standard 12 and SSF Standard 11 also require that licensed CS facilities test and review their default rules and procedures at least annually, and include relevant participants and other stakeholders in that process.

Business and investment risks

CCP Standard 14 and SSF Standard 12 incorporate provisions to safeguard the continuity of services provided by licensed CS facilities in situations where the facility's ability to continue as a going concern might be in doubt. This includes a requirement for licensed CS facilities to hold liquid assets funded by equity sufficient to continue operations in the event that they incur business losses for six months, or during the implementation of a recovery plan.

Licensed CS facilities would also be required to manage their treasury investments in accordance with the facility's overall risk management framework and to limit their investments to instruments with minimal credit, market and liquidity risks (CCP Standard 15 and SSF Standard 13).

Operational risks

CCP Standard 16 and SSF Standard 14 provide for greater resilience of CS facility operations by enhancing requirements for business continuity arrangements and managing operational risks arising from interdependencies with third parties. More specific business continuity requirements aim to ensure completion of settlement by the end of the day of disruption. Licensed CS facilities would also be required to manage the risks that participants, other FMIs, or service providers pose to their operations, including in relation to outsourcing arrangements.

Participation, access and links

The draft FSSs give greater attention to the potential risks faced by a CS facility arising from tiered participation arrangements and links to other FMIs. CCP Standard 18 and SSF Standard 16 require a CS facility licensee to identify and mitigate risks arising from material dependencies between direct and indirect participants, as well as indirect participants whose activities account for a significant proportion of either their direct participants' or the facility's transactions. CCP Standard 19 and SSF Standard 16 also establish new obligations for a CS facility licensee to identify, monitor and manage potential risks arising from links to other FMIs.

3.2 Complementary Measures to Uphold Current Standards and Align with Other Jurisdictions

The draft FSSs retain a number of complementary requirements from the current FSS measures that are not explicitly replicated in the Principles, but represent matters the Bank deems important, particularly in the Australian context. These include a number of additional specific requirements that the Bank has applied or considered in its oversight of currently licensed CS facilities, in part reflecting the Bank's further interpretation of what CS facilities must do in order to reduce systemic risk in complying with the current FSSs and the other requirements of the Act. Retention of these requirements is intended to ensure that licensed CS facilities adopt risk controls that are appropriately tailored to their role in the Australian financial system.

The key requirements retained from the current FSS measures and the Bank's broader oversight of CS facilities include:

  • a requirement that CS facility licensees are legally separate from other entities carrying out unrelated activities (CCP and SSF Standard 1.1)
  • requirements for CCPs to monitor and manage their exposures intraday and to receive and review timely and accurate information on participants' credit standing (CCP Standards 4.2 and 4.3)
  • a requirement for CCPs to enhance financial resources where stress tests reveal a potential shortfall (CCP Standard 4.7)
  • holding outsourcing providers to the operational risk standards to which CS facility licensees are held (CCP Standard 16.9 and SSF Standard 14.9)
  • guidance on appropriate settlement models to be utilised in exchange-of-value systems (e.g. delivery-versus-payment (DvP) models for securities settlement that are designed to eliminate principal risk between the counterparties to a trade) (CCP Standard 11 and SSF Standard 10)
  • more detailed disclosure and regulatory reporting requirements (CCP Standards 20 and 21, SSF Standards 18 and 19).

The draft FSSs also incorporate a number of proposed requirements contained in the European Securities and Markets Authority's Draft Technical Standards, in order to further align Australian regulation of CS facilities with emerging international best practice. In particular, CCP and SSF Standard 2 introduces requirements addressing management compensation, audit and review of operations, and the management of potential conflicts of interest between entities in the same corporate group.

3.3 Regulatory Influence over Cross-border Clearing and Settlement Facilities

The draft FSSs complement the international standards set out in the Principles with a number of specific measures drawn from the Council's framework for ensuring adequate cross-border regulatory influence. These measures will facilitate actions with respect to cross-border CS facilities that the Bank or other Australian regulators may need to take in order to promote financial stability and manage crises.

The requirements under the Council's regulatory influence framework would apply to facilities on the following basis:

  • All CS facilities. The draft FSSs incorporate basic legal and governance requirements for all licensed CS facilities, including those with cross-border activities. Facilities operating in multiple jurisdictions must obtain an up-to-date legal opinion addressing enforceability and conflicts of law (CCP and SSF Standard 1.6). Licensed CS facilities with material Australian-based participation or that provide services in Australian-related products would also need to ensure that any obligations they placed upon Australian participants were proportional to the scale and nature of the participants' activities and risk profile (see CCP Standards 2.8, 3.2 and 12.5; and SSF Standards 2.8, 3.2 and 11.5).
  • Systemically important licensed CS facilities. A systemically important CCP would need to hold and operate an Exchange Settlement Account at the Bank in order to manage its Australian dollar liquidity requirements (proposed CCP Standards 7.7 and 9.1).[3]
  • Systemically important licensed CS facilities with a strong domestic connection. CCP Standard 16.11 and SSF Standard 14.11 require all licensed CS facilities to organise their operations to facilitate effective crisis management actions, commensurate with the nature and scale of their operations. This requirement would be expected to have the greatest impact on a systemically important licensed CS facility with a strong domestic connection.

3.4 Institutional Scope of Application and Assessment Approach

Under the draft FSSs, all licensed CS facilities, whether domestic (i.e. licensed under section 824B(1) of the Act) or overseas (i.e. licensed under section 824B(2) of the Act), would be required to comply with the relevant standards. However, licensed SSFs would be exempt from the SSF Standards provided that the value of financial obligations they settled in a financial year did not exceed $200 million. This is an increase from the current value of $100 million, reflecting increases in settlement values in the market at large since the current threshold was introduced in 2005, and potential future increases.

The draft FSSs also remove the exemption from direct compliance with the FSS for CCPs for overseas CS facilities licensed under section 824B(2) of the Act. This exemption previously applied where the regulatory regime in the overseas CS facility's principal place of business was assessed as being sufficiently equivalent to the Australian regime. Instead, overseas-licensed CCPs would be required to comply with the CCP Standards. However, in assessing overseas-licensed CCPs against each standard, the Bank intends to place conditional reliance upon information and reports from the facility's home regulator, provided that for each standard:

  • the facility provides an independent legal opinion verifying that the facility is held to a materially equivalent standard in its home jurisdiction, and
  • the Bank receives documentary evidence from the facility's home regulator that the facility is compliant with this standard in its home jurisdiction.

Where either of these conditions were not met, the Bank would directly assess the overseas CS facility against the relevant standard(s). Guidance on the Bank's approach to assessing both overseas and domestic CS facility licensees is set out in Attachment 6.


A document setting out marked-up differences between the Principles and the new FSSs will be made available at <> by end 2012. A high-level mapping of the Principles to the current and new FSSs is set out in Table 1 of the Consultation Paper on the draft FSSs, available at <>. [1]

There is no specific governance measure accompanying the current FSS for SSFs. [2]

The Bank updated its policy on Exchange Settlement Accounts in July to reflect this requirement, and to facilitate access to accounts for CCPs more broadly. See <>. [3]