2014/15 Assessment of ASX Clearing and Settlement Facilities A1. Financial Stability Standards for Central Counterparties

The Financial Stability Standards for Central Counterparties (CCP Standards) are made up of 21 headline standards, each of which is accompanied by a number of more detailed sub-standards. In assessing whether a facility has met each of the CCP Standards, the Reserve Bank takes into account associated guidance.^[1] The following provides details of how ASX Clear Pty Limited (ASX Clear) and ASX Clear (Futures) Pty Limited (ASX Clear (Futures)) observe each of the CCP Standards (including sub-standards). It also sets out the Bank's assessment of how well ASX Clear and ASX Clear (Futures) has complied with each of the CCP Standards during the Assessment period, and provides recommendations for each of the central counterparties (CCPs) to address relevant areas of concern and to encourage steps to further strengthen the CCPs' observance of standards.^[2]

A1.1 ASX Clear

ASX Clear is a wholly owned subsidiary of ASX Clearing Corporation Limited (ASXCC), itself a wholly owned subsidiary of ASX Limited (see ‘ASX Group Structure’ in Appendix A). ASX Clear acts as the CCP for cash equities, pooled investment products, warrants, certain fixed-income products and equity-related derivatives listed on the ASX market. Under the Trade Acceptance Service (TAS), it can also act as CCP for ASX-quoted trades executed on Approved Market Operator platforms. ASX Clear currently provides clearing arrangements for Chi-X Australia Pty Ltd (Chi-X) under the TAS.

Standard 1: Legal basis

A central counterparty should have a well-founded, clear, transparent and enforceable legal basis for each material aspect of its activities in all relevant jurisdictions.

Rating: Observed

ASX Clear is a separate legal entity within the ASX Group that solely provides clearing services (CCP Standard 1.1). ASX Clear's legal basis is founded on clear and understandable rules that operate within the framework of relevant laws and regulations (CCP Standards 1.2, 1.3). The certainty of this legal basis in relevant jurisdictions is reinforced by supporting legislation, including ASX Clear's protection as a netting market under the Payment Systems and Netting Act 1998 (PSNA), and protection for settlements conducted via ASX Settlement and Austraclear under the same legislation, and is subject to periodic review by ASX Legal (CCP Standards 1.2, 1.5). ASX Clear has publicly outlined the key features of its legal basis on its website, and from time to time, for information, may provide legal opinions to participants or other stakeholders in respect of the legal basis of significant new services (CCP Standard 1.4). ASX has not identified any material risks arising from potential conflicts of law relating to the operations of ASX Clear (CCP Standard 1.6).

The Bank's assessment is that ASX Clear has observed the requirements of CCP Standard 1 during the 2014/15 Assessment period. The legal basis of ASX Clear is described in further detail under the following sub-standards.

1.1 A central counterparty should be a legal entity which is separate from other entities that may expose it to risks unrelated to those arising from its function as a central counterparty.

ASX Clear is a wholly owned subsidiary of ASXCC, which is itself a wholly owned subsidiary of ASX Limited. As a separate legal entity, ASX Clear's central clearing activities are separate from the activities conducted by ASX's other clearing and settlement (CS) facilities and the rest of the ASX Group, notwithstanding the sharing of operational resources across multiple entities within the group.

ASX Clear's services are limited to CCP clearing of ASX-quoted cash securities and derivatives transactions executed on the ASX markets and ASX-quoted cash securities transacted on the Chi-X markets, in accordance with the ASX Clear Operating Rules and Procedures. Accordingly, ASX Clear does not provide any services that have a distinct profile from, or pose additional risks to, its activity of operating a CCP.

1.2 The legal basis should provide a high degree of certainty for each material aspect of a central counterparty's activities in all relevant jurisdictions.

Legal basis

ASX Clear novates and nets transactions submitted for clearing by its participants. These activities require a high degree of legal certainty. Key components of the legal framework under which the CCP operates are:

• ASX Clear holds a CS facility licence, under Part 7.3 of the Corporations Act 2001. This licence is administered by the Australian Securities and Investments Commission (ASIC) in consultation with the Bank, with the Minister acting as ultimate decision-maker on licensing matters.
• ASX Clear has defined Operating Rules and Procedures. Under section 822B of the Corporations Act, these Rules and Procedures have effect as a contract under seal between: ASX Clear and each of its participants; each participant and each other participant; and each participant and each issuer. The Operating Rules and Procedures set out the rights and obligations of participants and ASX Clear, including in the event of default or suspension.
• ASX Clear is protected as a ‘netting market’ under Part 5 of the PSNA (see also CCP Standard 1.5).

While ASX Clear has been recognised as a third-country CCP by the European Securities and Markets Authority (ESMA) (see Section 3.6), its legal basis is governed by Australian law. ASX Clear has identified no legal risks arising from recognition in other jurisdictions. The legal basis of ASX Clear's activities is reviewed by ASX Legal whenever there are material amendments to the Operating Rules or Procedures. Five such reviews occurred for ASX Clear during the Assessment period.

Rights and interests

The rights and interests of ASX Clear, its participants and, where relevant, its participants' customers in cleared positions and collateral are defined in ASX Clear's Operating Rules and Procedures.

The capacity to deal with cash or non-cash collateral held by ASX Clear in circumstances of a participant default is an important risk protection. The ASX Clear Operating Rules provide ASX Clear with the right to deal with collateral of a defaulting participant to address losses or costs, or to meet other obligations arising from the default management process. Part 5 of the PSNA protects the enforcement of security interests held by CCPs in the event of a participant default.

1.3 A central counterparty should have rules, procedures and contracts that are clear, understandable and consistent with relevant laws and regulations.

Section 822A of the Corporations Act establishes a framework to prescribe the matters that must be dealt with in the Operating Rules and those that may instead be considered under the Procedures. Rule changes are subject to a Ministerial disallowance process.

The ASX Clear Operating Rules and Procedures are published on the ASX public website and the ASX restricted participant website, and are supplemented with explanatory material, to support participants' (and prospective participants') understanding of the risks they face through participation in the system. In addition to the Operating Rules and Procedures, publicly available material includes high-level descriptions of ASX Clear's risk management framework, the cash market margining (CMM) and Standard Portfolio Analysis of Risk (SPAN) margining methodologies, business continuity arrangements and the Default Management Framework (DMF). Participants have access to additional manuals, reports and explanatory notes covering such topics as the application process for new participants, compliance, technical and operational details, counterparty risk assessment, and fees.

There is a clear process for changing ASX Clear's Operating Rules and Procedures. Proposed rule changes may be submitted informally to ASIC. In consultation with the Bank, ASIC will consider the changes and advise ASX of any regulatory concerns. Once such concerns are satisfactorily addressed, ASIC will invite formal submission of the proposed changes, which triggers a 28-day ‘disallowance’ period (referred to above), during which the Minister may choose to disallow the changes. The Minister considers a number of factors, including whether the proposed changes are consistent with the public interest. To assist the Minister in this process, ASIC provides detailed advice, incorporating the views of the Bank as appropriate. If changes to the Operating Rules are not disallowed by the Minister, they are notified to participants via the ASX website.

1.4 A central counterparty should be able to articulate the legal basis for its activities to the Reserve Bank and other relevant authorities, participants and, where relevant, participants' customers, in a clear and understandable way.

The legal basis for the activities of ASX Clear and the facility's protection as an approved netting market under the PSNA – see also CCP Standard 1.5 – are described on the ASX public website in its Disclosure Framework document, which sets out in detail how each CS facility meets the requirements of each Principle within the Principles for Financial Market Infrastructures developed by the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) (see CCP Standard 20.5).^[3]

On behalf of each licensed entity within the ASX Group, including all CS facilities, ASX Limited submits an Annual Group Licence Report to ASIC and the Bank. This report sets out the legal basis for the CS facilities' activities under their licence obligations, and is used by ASIC in the preparation of ASIC's Market Assessment Report for the ASX Group.

ASX Clear may seek independent legal opinions on relevant legal matters relating to significant new services, including any implications that their introduction may have for the legal basis of existing functionality. These opinions may, in some circumstances, be shared with participants or other stakeholders for their information, particularly to demonstrate that new Operating Rules will have the intended legal effect.

1.5 A central counterparty should have rules, procedures and contracts that are enforceable in all relevant jurisdictions. There should be a high degree of certainty that actions taken by the central counterparty under such rules and procedures will not be voided, reversed or subject to stays, including in the event that the central counterparty enters into external administration or that one or more of its participants defaults or is suspended.

The ASX Clear Operating Rules and Procedures set out how the CCP assumes risk in relation to its participants, arrangements for netting offsetting exposures and obligations of participants, and the risk controls that apply in respect of participants' net exposures. Unlinked payment obligations arising from clearing, including those related to margin obligations, are settled in Austraclear. The point at which settlement of these obligations is final and irrevocable is established in Austraclear's Regulations. Securities transfers and related payment obligations arising from clearing are settled in ASX Settlement, and the point at which settlement is final and irrevocable is established in ASX Settlement's Operating Rules. Measures that contribute to ensuring a high degree of certainty in respect of these aspects of ASX Clear's activities are detailed below.

Settlement finality

Payment-only obligations arising between ASX Clear and its participants are settled in Austraclear and securities-related obligations are settled in ASX Settlement. The legal certainty of settlement finality is supported by Austraclear's approval as a real-time gross settlement (RTGS) system under Part 2 of the PSNA and by the approval of ASX Settlement's netting arrangements under Part 3 of the PSNA. Approval under Part 2 provides protection against application of the so-called ‘zero-hour rule’ in insolvency law, whereby transactions settled after the point at which an insolvency is legally determined to have started could potentially otherwise be reversed. Approval under Part 3 provides protection of the finality of settlements in ASX Settlement's multilateral net batch. Any interbank transactions arising from these settlements are settled in real time in the Reserve Bank Information and Transfer System (RITS), across Exchange Settlement Accounts (ESAs) held with the Bank. Finality of funds transfers in RITS is again supported by the approval of RITS under Part 2 of the PSNA.

Netting

Part 5 of the PSNA protects the effectiveness of market netting contracts, including contracts entered into in accordance with the rules of a netting market. ASX Clear is an approved netting market. This protection from the application of any other law, including insolvency provisions, is relevant to the function of a CCP. In particular, it provides protection for several aspects of the netting of exposures and payments under the ASX Clear Operating Rules:

• the process of reducing each participant's contracts to a net exposure (reflecting the CCP's exposure to the participant's portfolio of contracts)
• the CCP's rules covering default, such that future exposures may be terminated and a net payout obligation calculated
• payments made on a net basis, by protecting against the voiding of net payments in the event of insolvency of a participant.

Assumption of risk

ASX Clear assumes risk on cleared trades through the process of novation, whereby matched trades between participants are replaced by separate contracts between the buyer and the CCP, and the seller and the CCP. Through novation, the obligations of ASX Clear are to each participant as principal – irrespective of whether that participant is acting for itself or on behalf of a client. Equally, participants' obligations are to ASX Clear for all transactions that have been novated (i.e. both proprietary and client transactions).

The point of novation is established by ASX Clear's Operating Rules. For cash market transactions, ASX Clear's Operating Rules specify that an ASX-quoted security transaction on the ASX or Chi-X markets is novated with effect from the matching of a bid and offer, while for exchange-traded and over-the-counter (OTC) equity options, novation occurs upon acceptance and registration of that transaction within the clearing system.

Part 5 of the PSNA protects the effectiveness of the process of novation outlined in the ASX Clear's Operating Rules, by virtue of ASX Clear's status as an approved netting market.

Enforceability of rules under external administration or recovery

The enforceability of ASX Clear's Operating Rules in circumstances when a participant has entered external administration is protected by Part 5 of the PSNA. This protection ensures that ASX Clear can enforce rights under its Operating Rules in relation to a participant in external administration, despite any provision of insolvency law that might otherwise interfere with such rights.

ASX Legal has analysed the legal enforceability of ASX Clear's Operating Rules upon the CCP's entry into external administration, and has identified no material legal risk to enforceability. The ASX Clear Operating Rules give participants the right to close out future obligations (i.e. terminate novated contracts) in the event that ASX Clear defaulted on its obligations as established by the rules. The rules do not interfere with ASX Clear's existing liquidity management arrangements, and ASX will review the continued appropriateness of close-out netting rights in light of future developments in financial market infrastructure (FMI) resolution.

ASX Legal has carried out analysis on the legal basis of tools available under ASX Clear's recovery plan (see CCP Standards 3.5, 4.8, 7.9 and 14.3). This analysis has not identified any material legal risk to enforceability of these tools or the application of protections under Part 5 of the PSNA to termination powers, offsetting transaction arrangements (OTAs) or the allocation of investment losses. ASX has recommended amendments to the PSNA to remove any uncertainty that the protections of Part 5 of the PSNA would apply in the unlikely event that a Recovery Assessment or replenishment contribution was called from a participant that itself later entered insolvency. This change is currently under consideration by Treasury.

1.6 A central counterparty conducting business in multiple jurisdictions should identify and mitigate the risks arising from any potential conflicts of law across jurisdictions. A central counterparty should provide the Reserve Bank with a legal opinion that demonstrates the enforceability of its rules and addresses relevant conflicts of law across the jurisdictions in which it operates. This should be reviewed on a periodic basis or when material changes occur that may have an impact on the opinion, and updated where appropriate.

Although participants of ASX Clear include Australian-domiciled subsidiaries of entities that are based in foreign countries, the Operating Rules are governed by Australian law and require that all participants submit to the non-exclusive jurisdiction of New South Wales courts. ASX Legal's analysis of potential conflicts of law across jurisdictions has identified no material legal risks.

Standard 2: Governance

A central counterparty should have governance arrangements that are clear and transparent, promote the safety of the central counterparty, and support the stability of the broader financial system, other relevant public interest considerations, and the objectives of relevant stakeholders.

Rating: Observed

ASX Clear pursues objectives that place a high priority on risk management, through compliance with relevant Financial Stability Standards (FSS) and the broader Corporations Act requirement to do all other things necessary to reduce systemic risk. ASX Clear also acknowledges public policy objectives directed at financial market and payments system integrity, as well as the interests of customers and other stakeholders (CCP Standard 2.1). ASX Clear's governance arrangements are documented and publicly disclosed. These arrangements give ultimate responsibility for the oversight of operations and risk management of ASX Clear to the ASX Limited Board and the ASX Clear Board (see ‘ASX Group Structure’ in Appendix A). Board and committee charters document Board roles and lines of responsibility and accountability (CCP Standards 2.2, 2.3). The performance of each relevant Board is reviewed at least annually for both individual directors and the Board as a whole. The relevant Boards each include a majority of independent non-executive directors, and the ASX Clear Board includes members appointed for their expertise in clearing and settlement matters (CCP Standard 2.4). Board remuneration is designed to attract and retain appropriately skilled and qualified directors.

The reporting lines of management are set out in the CS Boards' Charter, along with roles and responsibilities of key management personnel. Remuneration of senior management in risk management roles is structured to provide appropriate incentives for sound and effective risk management (CCP Standard 2.5). ASX maintains a clear and documented risk management framework, subject to regular internal and external review. Governance of this risk management framework is supported by a newly established participant Risk Consultative Committee (CCP Standard 2.6). Key processes and internal controls are subject to review by ASX's Internal Audit department, which is itself subject to periodic external review (CCP Standard 2.7). ASX utilises formal and informal consultation processes to ensure that the design and decisions of ASX Clear reflect the interests of participants and other stakeholders. This includes engagement with the new participant Risk Consultative Committee and an advisory forum (the Forum), introduced in accordance with commitments under the ASX Code of Practice for Clearing and Settlement of Cash Equities in Australia (the Code of Practice), which provides user feedback in relation to the ongoing development of cash market clearing and settlement infrastructure and services (CCP Standard 2.8). ASX has conflict-handling procedures in place to address potential conflicts of interest that may arise by virtue of its group structure. These require that staff and directors act in the best interests of each facility as appropriate. The composition of the CS Boards supports the effective handling of any conflicts that might arise (CCP Standard 2.9).

The Bank's assessment is that ASX Clear has observed the requirements of CCP Standard 2 during the 2014/15 Assessment period. Details of ASX Clear's governance arrangements are described in further detail under the following sub-standards.

2.1 A central counterparty should have objectives that place a high priority on the safety of the central counterparty and explicitly support the stability of the financial system and other relevant public interest considerations.

The high-level objectives of ASX Clear are set out in the CS Boards' Charter, which is available on the ASX public website. The objectives prioritise the Boards' responsibilities in the area of risk management and, in particular, ASX Clear's responsibility for complying with relevant FSS.

ASX Clear's objectives recognise the public interest. These objectives are reflected in the ASX Limited Board Charter, which provides that the Board has a responsibility to oversee the conduct of the affairs of the ASX Group consistent with licence obligations, as well as public policy objectives directed at financial market and payments system integrity. The CS Boards' Charter also specifically acknowledges the Board's public interest responsibilities, as well as its obligations under Part 7.3 of the Corporations Act. These include that ASX Clear, to the extent that it is reasonably practicable to do so, comply with relevant FSS and do all other things necessary to reduce systemic risk arising from its services, and that it provide its services in a fair and effective way.

To support the interests of its customers, ASX has developed a Customer Charter, which is referenced in the CS Boards' Charter. The Customer Charter commits that ASX: work with its customers to deliver products and services that meet their needs and provide them with choice; make its products and services available on a non-discriminatory basis and on reasonable commercial terms; and manage its businesses and operations on a commercial basis to benefit its customers and provide appropriate returns to ASX shareholders. The Customer Charter recognises ASX's role as a provider of critical infrastructure to the Australian financial markets and commits to make the necessary investments to ensure it can fulfil this role and provide confidence to market participants, investors and regulators.

ASX Clear's governance arrangements allow for appropriate consideration of stakeholder views. When considering major operational or risk management changes, or new services, ASX uses stakeholder forums, and formal and informal consultation processes to communicate proposed changes to relevant stakeholders (see CCP Standard 2.8). Consultations and responses to consultations are made available on the ASX public website. In addition, the ASX Group has disclosure obligations under the Corporations Act and Listing Rules, which it manages in accordance with those laws and rules.

Under the Code of Practice, ASX has established an advisory Forum and supporting Business Committee.^[4] The objectives of the Forum are to: provide user feedback in relation to the ongoing development of cash market clearing and settlement infrastructure and services; consider any matters of common interest arising under the Code of Practice; and provide a mechanism for the ASX Clear and ASX Settlement Boards to report to users on strategic plans and investment decisions (see CCP Standard 2.8).

2.2 A central counterparty should have documented governance arrangements that provide clear and direct lines of responsibility and accountability. These arrangements should be disclosed to owners, the Reserve Bank and other relevant authorities, participants and, at a more general level, the public.

The governance arrangements of ASX Clear are documented on the ASX public website. This documentation includes the Charters of the ASX Limited Board, the CS Boards (which include the ASX Clear Board), and other subsidiary boards and committees. The charter documents provide information about the role and composition of the CS Boards and board committees. The CS Boards are responsible for the oversight and risk management of the ASX CS facilities (see CCP Standard 2.3). The board committees advise the ASX Limited Board on a number of matters:

• The Audit and Risk Committee is responsible for the oversight of ASX Group enterprise-wide risk. The Committee monitors ASX's financial management, internal controls, legal compliance and audit function, and assists the CS Boards in fulfilling their responsibility for the oversight of risk management of the ASX CS facilities.
• The Remuneration Committee oversees the remuneration and incentive framework for the Managing Director and Chief Executive Officer (CEO), non-executive directors, senior executives, and ASX staff more generally (see CCP Standard 2.5).
• The Nomination Committee is responsible for reviewing matters relating to board composition and performance, succession planning, and training for non-executive board members (see CCP Standard 2.4).

The charter documents also provide information about the key senior managers of the clearing facilities; namely the Managing Director and CEO, the Chief Risk Officer (CRO), and the Group Executive, Operations (GE, Operations). Profiles of CS facility directors are also publicly available online. Key governance policies and charters are reviewed regularly by the relevant boards and committees.

The ASX Limited Annual Report provides information about ASX Group's risk management arrangements, including the role of boards, key committees, key subsidiary boards (e.g. ASX Compliance), and the roles of senior group executives who report directly to the Managing Director and CEO. Explanatory documentation on the website also describes: the FSS and CPMI-IOSCO Principles; group and business structure, including an organisational chart showing senior Group Executives; and risk management policies (in summary form). ASX's response to the CPMI-IOSCO Disclosure Framework also summarises key governance and risk management arrangements (see CCP Standard 20.5).

Under the Corporations Act, ASX must notify ASIC as soon as practicable after a person becomes or ceases to become a director, secretary or senior manager of ASX Clear, including when a person changes from one of those positions to another. Changes to these positions and senior risk management personnel are also notified to the Bank.

2.3 The roles and responsibilities of a central counterparty's board of directors (or equivalent) should be clearly specified, and there should be documented procedures for its functioning, including procedures to identify, address and manage member conflicts of interest. The board should regularly review both its overall performance and the performance of its individual board members.

Ultimate responsibility for the oversight of the risks faced by ASX Clear lies with the ASX Limited Board and the ASX Clear Board. The ASX Limited Board is accountable for the overall management of the ASX Group. Its responsibilities include:

• reviewing the Group's corporate strategy and approving major initiatives
• overseeing and monitoring the Group's performance consistent with its strategic goals, licence obligations and public policy objectives
• reviewing and approving financial plans, and monitoring financial performance
• appointing and assessing the performance of the Managing Director and CEO
• overseeing the risk management, internal control, and compliance functions, including oversight of ASX's enterprise risk management policy
• ensuring that appropriate mechanisms are in place for identifying, controlling, monitoring and reporting significant risks
• reporting to, and communicating with, shareholders.

The ASX Limited Board Charter delegates certain responsibilities to the ASX Clear Board, including the review and oversight of the risk management, internal control and compliance functions related to ASX Clear's clearing- and settlement-related risks, and ensuring ASX Clear's compliance with the FSS. The CS Boards' Charter elaborates on the roles and responsibilities of the ASX Clear Board. The CS Boards' Charter places requirements on the structure of the CS Boards, including that the majority of directors and the Chair be independent. The ASX Clear Board meets regularly (nine times in the Assessment period, including four meetings of independent directors that are not also directors of ASX Limited; see CCP Standard 2.9) and receives detailed reports on ASX Clear's business and operations, risk management and financial performance.

Board performance is dealt with periodically in private session by the relevant boards. The process may be facilitated by external independent consultants. A number of tools are used, which may include private session review, skills matrices and surveys, and externally facilitated group discussions. Details of Board performance reviews are set out in the ASX Limited Annual Report (the same process applies for the key subsidiary boards).

The CS Boards' Charter sets out how the Boards address directors' interests and potential conflicts. Directors of the CS Boards must disclose all material personal interests (such as shareholdings, directorships and consultancy arrangements) which may potentially conflict with their duties. If there is a change in a director's material personal interests, the director must notify that change at the next meeting of the CS Boards. If there is a real possibility of a material conflict of interest and duty on a matter being voted on at a meeting of the CS Boards, the director must not be present for the discussion or vote related to that matter.

2.4 The board should comprise suitable members with the appropriate skills and incentives to fulfil its multiple roles. This typically requires the inclusion of non-executive board member(s).

At the end of the Assessment period, the ASX Limited Board had ten members, comprising the ASX CEO and nine independent, non-executive directors. As set out in the CS Boards' Charter, the CS Boards, in consultation with the Nomination Committee and the ASX Limited Board, determine the composition of the CS Boards, with directors selected based on relevant skills and expertise. At the end of the Assessment period, the ASX Clear Board comprised one executive director (the ASX CEO) and five non-executive directors. Two new directors were appointed during the Assessment period. Two of the non-executive directors are also members of the ASX Limited Board, while the remaining three, including the Chair, are external directors appointed for their expertise in clearing and settlement operational and risk management matters. This ensures that directors have the capacity to conduct informed independent review of relevant issues. The ASX Clear and ASX Settlement Boards share common directors, but one of these directors does not serve on the ASX Clear (Futures) or Austraclear Boards. This difference between the CS Boards is primarily for business reasons, but also supports ASX's conflict-handling arrangements (see CCP Standard 2.9).

The CS Boards' Charter sets out the ASX policy that the majority of directors on each CS Board must be independent. The Board Policy and Guideline to Relationships Affecting Independent Status is available on the ASX website.^[5] The independence of directors is assessed according to this policy, which is aligned to the ASX Corporate Governance Council's Corporate Governance Principles and Recommendations for listed companies. The policy requires, for example, that each independent director be free of business or other relationships that could interfere with the independent exercise of the director's judgement. Specifically considered is whether the director is a substantial shareholder of ASX, as well as whether in the last three years the director was previously employed by ASX or was an adviser to ASX. The biographies of the directors, which show their relationship with other ASX Group companies, are set out on the ASX website.^[6]

Selection, succession planning and training for board members are dealt with in private session by the Nomination Committee and Boards at appropriate intervals. New directors receive a comprehensive induction from Board and Nomination Committee members, as well as senior managers and other key staff. Directors' fees at both ASX Limited and ASX Clear are considered at regular intervals by the ASX Limited Remuneration Committee, to ensure that it has in place a fee scale that enables ASX to attract and retain appropriately skilled and qualified non-executive directors and recognises the workload and level of skill and expertise that a director must have to effectively meet their responsibilities. Remuneration of directors is determined in private session by the ASX Limited Board on the recommendation of the Remuneration Committee. Non-executive directors' fees are broadly aligned to the top quartile of the marketplace. In conducting a review, the Board may take advice from an external remuneration consultant. The process involves benchmarking against a group of peer companies. The last fee review took place in June 2015 to reflect the increased workload of ASX Clear directors who are not also members of the ASX Limited Board under ASX's governance arrangements for the clearing of non-ASX listed products (see CCP Standard 2.9). The revised fees took effect on 1 July 2015.

2.5 The roles and responsibilities of management should be clearly specified. A central counterparty's management should have the appropriate experience, mix of skills and integrity necessary to effectively discharge its responsibilities for the operation and risk management of the central counterparty. Compensation arrangements should be structured in such a way as to promote the soundness and effectiveness of risk management.

ASX has clear and direct reporting lines between management and the CS Boards. This is set out in the CS Boards' Charter, along with the roles and responsibilities of the Managing Director and CEO, the CRO, and the GE, Operations. The Managing Director and CEO has responsibility for the overall operational and business management and profit performance of ASX, while the CRO has responsibility for the overall clearing risk management of the CS facilities and for ensuring that CS facility licence obligations are met. The CRO has a direct reporting line to the CS Boards and is entitled to attend and be heard at CS Board meetings.

ASX has a comprehensive remuneration policy and performance management framework in place, which aims to ensure that management personnel have an appropriate mix of skills and experience to discharge their responsibilities. The ASX Limited Remuneration Committee has delegated responsibility from the ASX Limited Board to conduct detailed examination of matters including oversight of the remuneration and incentive framework, succession plans, recruitment, retention and termination strategies, and the remuneration of the Managing Director and CEO and ASX Group non-executive directors. The Committee members are appointed by the ASX Limited Board, and must consist of only non-executive directors, with at least three members, a majority of independent directors, and an independent chair who is not Chairman of ASX Limited. The Committee has direct access to ASX senior management and the authority to seek independent advice. The CS Boards have delegated responsibility to the Committee for compensation arrangements and performance management processes relating to the CRO and the GE, Operations. The CS Boards provide input on the setting of Key Performance Indicators and may review the performance outcomes for the CRO and the GE, Operations. In June 2015, ASX announced changes to compensation arrangements for senior executives, including the CRO and GE, Operations, to place greater weight on longer-term incentives. These changes did not alter the Key Performance Indicators of either the CRO or GE, Operations, which remain aligned with the objectives of sound and effective risk management.

ASX carries out succession planning and management processes in order to ensure leadership continuity in key positions, and develop intellectual depth and business knowledge. This includes the biannual review of a ‘talent assessment tool’ by Group Executives and Human Resources to identify and manage the development of high potential staff according to individual and business needs. Succession and contingency planning is conducted for Group Executives, General Managers and other key staff.

2.6 The board should establish a clear, documented risk management framework that includes the central counterparty's risk tolerance policy, assigns responsibilities and accountability for risk decisions, and addresses decision-making in crises and emergencies. Governance arrangements should ensure that the risk management and internal control functions have sufficient authority, independence, resources and access to the board, including through the maintenance of a separate and independent internal audit function.

ASX has a documented risk management framework, which is described under CCP Standard 3.1. The CS Boards are responsible for approving and reviewing high-level risk management policies relevant to clearing and settlement operations. The Boards approve all new clearing and settlement risk policies and standards, as well as material changes to existing clearing and settlement risk policies and standards. The Boards consider these policies and standards at a concurrent meeting; where the policy or standard is relevant to more than one facility, the Boards of those facilities would simultaneously determine whether to approve the policy or standard. If the policy requirements under consideration differ across facilities, the Boards of each relevant facility would separately determine whether to approve the policy or standard (during the concurrent meeting). Board feedback is incorporated before risk policies and standards are approved.

Responsibilities under the high-level risk management policy are distributed as follows:

• Key policies and standards, such as margin policy, stress-testing standards and investment mandates, are reviewed by the CS Boards on an annual basis. Detailed reporting to the CS Boards occurs quarterly on the operation of the CCPs and their compliance with risk management policies and standards, and on broader management and operational matters. Internal Audit conducts a rotational risk-based audit program, which includes ensuring that relevant operational departments comply with Board-approved policies and standards, where necessary using external specialists to assist with reviews. The CS Boards may also request external reviews. Review of clearing and settlement risk management policies and standards, along with development of new policies and standards, continued during the 2014/15 Assessment period.
• The Audit and Risk Committee has responsibility for the oversight of the Enterprise Risk Management Framework.
• The Enterprise Risk Management Committee (ERMC), comprising executives from across the departments, is responsible for enterprise risk management policy and reviewing controls, processes and procedures to identify and manage risks. This committee is also responsible for formally approving significant operational risk policies prepared by individual departments.
• Individual departments are responsible for: identifying business-specific risks; applying controls; maintaining risk management systems; reporting on the effectiveness of risk controls; and implementing enhancements and taking remedial action as appropriate. Each department is required to maintain a record of its risk profile, reviewing this on a six-monthly basis and updating as appropriate. This record includes ‘Key Risk Indicators’ and action plans to address any identified risk that is not adequately mitigated. Policies are formally reviewed every 18 months to three years. More frequent reviews are undertaken where there are potential changes to technology, legal or regulatory requirements, or business drivers.

The CRO has a direct reporting line to the CS Boards. Within ASX's management structure, those departments primarily responsible for CCP financial risk management report to the CRO, who in turn reports directly to the CEO. The CRO is not responsible for any other functions, and none of the departments within the CRO's portfolio have a primary revenue or profit objective. There are four functional departments with at least some responsibility for CCP financial risk management: the Clearing Risk Policy department; the Clearing Risk Quantification (CRQ) department; the Clearing Risk Management (CRM) department; and the Portfolio Risk Manager (see ‘ASX Group Structure’ in Appendix A). In addition, ASX maintains a number of executive committees that have some responsibility for financial risk management.

Directors are entitled to obtain independent advice. The Annual Report addresses directors' access to information, management and advice. To the extent that directors wish to seek independent advice, they can raise this in board meetings, with the Managing Director and CEO, or with the Chairman. The new participant Risk Consultative Committee (see CCP Standard 2.8) provides advice to the ASX Clear Board on risk management matters, consistent with the Bank's supplementary interpretation of this sub-standard (see Introduction to Appendix A). ASX Clear also obtains participant feedback on risk management matters through a number of other channels, including the Forum, the Business Committee, and an Advisory Committee for matters relating to exchange-traded options (ETOs).

Model validation

The Boards of ASX Clear and ASX Clear (Futures) (the ‘Clearing Boards’) regularly review and discuss with management matters of risk policy, including changes to margin and stress-testing methodologies.

ASX has developed a framework for model validation. This framework identifies models to be validated, defines what constitutes ‘model validation’, describes the model validation approach to be applied to the identified models, and specifies model validation governance arrangements. Key models at ASX Clear include SPAN margining, CMM, the pricing system for derivatives and the capital and liquidity stress-testing models. Governance arrangements specify criteria for ranking model risk, validation roles and responsibilities, validation frequency, the assessment approach and whether the validation should be carried out by an internal or external expert. ASX assigns each of its risk models a weighted risk score between one and five to determine how critical it is, based on factors such as the internal and external impact of the model, frequency of use and complexity. ASX uses the risk score to determine the frequency of comprehensive independent model validations and whether models are to be validated internally or externally.

Model validation is performed on a regular basis according to the risk score. The approach to model validation is based on objective statistical tests, including backtesting and sensitivity analysis (see CCP Standards 4.5, 4.6, 5.3, 6.5, 6.6 and 7.8), with each model validation strategy to be reviewed and approved by an internal management committee known as the Risk Quantification Group (RQG). Model validation reviews are coordinated by Internal Audit, including the use of external experts as required under the framework or where this is deemed necessary by the RQG or Internal Audit. Independent external model validations were carried out for the SPAN margining, Derivatives Pricing System (DPS), and the capital and liquidity stress-testing models during the 2014/15 Assessment period. ASX Clear's approach to independent model validation is discussed in more detail under CCP Standards 4.5 and 6.7.

2.7 A central counterparty's operations, risk management processes, internal control mechanisms and accounts should be subject to internal audit and, where appropriate, periodic external independent expert review. Internal audits should be performed, at a minimum, on an annual basis. The outcome of internal audits and external reviews should be notified to the Reserve Bank and other relevant authorities.

ASX maintains an internal audit plan that provides for a three-to-five year review cycle of key operational and risk management processes, and internal control mechanisms that are governed by ASX's Enterprise Risk Management Framework, business continuity framework, enterprise compliance framework and internal audit methodology. The internal audit plan is approved by the ASX Limited Audit and Risk Committee, and the audit work that is relevant to the CS Boards and ASX Compliance Board is endorsed by those Boards. The key governance frameworks are reviewed by external independent experts, as required. ASX's internal audit arrangements are set out in an Internal Audit Charter, which is reviewed and approved by the ASX Limited Audit and Risk Committee on an annual basis and made available on the ASX public website.

The Internal Audit department is a separate department within ASX that reports to the CRO for administrative purposes, and the Audit and Risk Committee and Managing Director and CEO for audit purposes. The Internal Audit department's reporting structure also includes reporting lines to the CS Boards and ASX Compliance Board. Internal Audit's principal objective is to ‘provide independent, objective assurance and consulting services designed to add value and improve the operations of ASX’. Its scope covers the policies, processes and procedures of all risk management and internal control systems. The General Manager of Internal Audit has direct access to the ASX Limited Audit and Risk Committee, CS Boards and ASX Compliance Board. Members of the Internal Audit department are required to hold appropriate undergraduate and postgraduate qualifications relevant to their roles.

The role and performance of the Internal Audit function is regularly reviewed by the ASX Limited Audit and Risk Committee. Internal Audit is also reviewed by external independent auditors on a three-year cycle. The last such audit was carried out in October/November 2014.

ASX has a clearly defined methodology for internal audit, based on the International Professional Practices Framework set out by the Institute of Internal Auditors.^[7] The audit process includes phases for planning, fieldwork, reporting, final sign-off, and issues logging and follow-up. The planning phase includes the preparation of terms of reference that define the purpose, timing, approach and scope of the audit.

The internal audit methodology allows for ad hoc reviews if, for example, material new risks are identified or other changes to ASX's business occur. This is a matter which the General Manager, Internal Audit and the Audit and Risk Committee consider. The ASX Compliance Board and the CS Boards may also request ad hoc reviews.

2.8 Governance arrangements should ensure that the central counterparty's design, rules, overall strategy and major decisions reflect appropriately the legitimate interests of its direct and indirect participants and other relevant stakeholders. Governance arrangements should provide for consultation and stakeholder engagement through appropriate forums on operational arrangements, risk controls and default management rules and procedures. Major decisions should be clearly disclosed to relevant stakeholders and, where there is a broad market impact, the public.

The interests of direct and indirect participants and other relevant stakeholders are recognised in the ASX Limited Board Charter, the CS Boards' Charter and the ASX Customer Charter (see CCP Standard 2.1).

Stakeholder consultation

The views of participants and other stakeholders are sought through formal and informal means. ASX Clear routinely conducts public consultations when considering major changes to existing services or new service offerings. These consultations allow for written submissions and discussion in both bilateral and open forums. Participants' views may also be gathered through the induction program for new participants, as well as ongoing participant liaison and compliance checks.

ASX Clear seeks participant feedback on matters relating to ETOs through an ETO Advisory Committee, as well as regular engagement with the ETO subcommittee of the Stockbrokers Association of Australia. The ETO Advisory Committee, representing participants and clients, was established to advise ASX in its response to declining volumes in the ETO market, but it also provides a forum for broader user feedback, including on risk management matters.

During the 2014/15 Assessment period, ASX Clear established a Risk Consultative Committee, comprising representatives from ten clearing participants and up to five clients. It is a self-governing body chaired by an elected member. The Committee is consulted on material changes to default management processes, the margin methodology, the default fund, position or liquidity limits, participation criteria, and other changes affecting the risk model or related rules. The Risk Consultative Committee's proposals and recommendations are presented to the ASX Clear Board. While the Board is not obliged to accept the Committee's proposals or recommendations, it is required to provide reasons for any decision not to do so.

Forum and Business Committee

Under the Code of Practice, ASX established the Forum, a user/stakeholder advisory body for ASX's cash market clearing and settlement services. The Forum has three objectives:

• to provide user input to the Boards of ASX Clear and ASX Settlement in relation to ongoing investment in the design, operation and development of the core clearing and settlement infrastructure for the Australian cash equity market, including the Clearing House Electronic Sub-register System (CHESS), to help ensure that these meet the needs of users and are aligned with global standards
• to consider any matters of common interest arising under the Code of Practice or in the principles set out in the 2012 Competition in Clearing Australian Cash Equities report prepared by the Council of Financial Regulators^[8]
• to provide a formal mechanism for the Boards of ASX Clear and ASX Settlement to report to users on their strategic plans and investment decisions in relation to the design, operation and development of the core clearing and settlement infrastructure for the Australian cash equity market, including CHESS.

The Forum comprises 22 senior representatives from clearing and settlement participants, an alternative market operator, and other stakeholders including system vendors, custodial service providers, share registries, investors, listed companies and the superannuation industry. Members are appointed for a term of two years. It is chaired by a non-executive member of the CS Boards and also includes a non-executive director representing ASX Limited. Under the Code, the Forum is to meet at least three times each year. Upcoming meeting dates, agendas and minutes are all published on a dedicated website, together with a summary of key issues discussed and the Forum's recommendations for the CS Boards. The Forum's proposals and recommendations are presented to the ASX Clear Board, which is not obliged to accept the Forum's advice but is required to provide reasons for any decision not to follow such advice.

Under the Code of Practice, ASX also established a Business Committee to support the Forum. This Committee comprises representatives of clearing participants, settlement participants and alternative market operators, and provides business and operational input on the Forum's forward work program. Business Committee meetings are generally held four to six weeks prior to Forum meetings, and as required.

The Forum and Business Committee continued to progress two main work streams during the Assessment period (see Section 3.5.2):

• a proposed move to a shortened two-day settlement cycle for equities
• replacement of the CHESS clearing and settlement system.

Although the Business Committee was originally devised to provide operational input on matters dealt with in the Forum, it has also provided user input to ASX on a broader range of initiatives of interest to the industry, including initiatives aimed at providing more flexible and efficient participant structures.

In December 2014, ASX issued a consultation paper seeking feedback on a number of operational amendments to the Code, including to give greater prominence to the Business Committee. ASX has advised that feedback was supportive of the proposed amendments. ASX intends to respond to this consultation when the government announces the outcome of the Council of Financial Regulators' 2015 review of competition in clearing of Australian cash equities.

The Code also provides for the establishment of technical committees to examine and provide advice on specific matters dealt with in the Forum. A Technical Committee was convened in November 2013 to provide input on the introduction of global messaging standards and the broader CHESS replacement project. The members of this Technical Committee comprise technology executives from a range of industry users, including clearing and settlement participants, alternative market operators and share registries.

2.9 A central counterparty that is part of a group of companies should ensure that measures are in place such that decisions taken in accordance with its obligations as a central counterparty cannot be compromised by the group structure or by board members also being members of the board of other entities in the same group. In particular, such a central counterparty should consider specific procedures for preventing and managing conflicts of interest, including with respect to intragroup outsourcing arrangements.

ASX has conflict-handling arrangements to help manage potential conflicts of interest that its directors and staff may face. The potential for intragroup conflicts arising from ASX's group structure is addressed by ‘intragroup’ service agreements, which set out the basis on which other group entities will provide services to the CS facilities and specify that the entities providing the services must have sufficient financial and other resources to meet their obligations. These agreements provide that ASX Group staff are under a duty to act in the best interests of the facility that is receiving the services.

ASX's governance arrangements are designed to ensure that shared directorships within the ASX Group cannot compromise each CS facility's compliance with its licence obligations, including observance of the FSS. ASX considers that there is limited potential for shared directorships to create conflicts between ASX's group-wide commercial interests and the risk management function of the CS facilities. More broadly, it considers that conflicts between directors' roles on the CS Boards and the ASX Limited Board are unlikely given the distinct roles the separate entities perform, and in view of group-wide arrangements to manage matters such as operations and compliance. If a conflict were to arise, a director sitting on multiple CS Boards would be expected to make decisions in the best interests of each facility.

The structure of the CS Boards further limits the potential for conflict. Two directors are able to form a quorum of the ASX Clear Board, allowing matters that raise potential conflicts of interest to be considered and voted on without the involvement of directors that are also on the ASX Limited Board. The independent directors of ASX Clear that are not also directors of ASX Limited met on four occasions during 2014/15 to consider conflict-sensitive information.

Standard 3: Framework for the comprehensive management of risks

A central counterparty should have a sound risk management framework for comprehensively managing legal, credit, liquidity, operational and other risks.

Rating: Observed

ASX maintains an Enterprise Risk Management Policy that sets out its framework for managing the full range of strategic, legal, financial and operational risks faced by ASX Clear. This high-level framework is supported by more granular policies and a governance structure to oversee ASX Clear's risk management activities (CCP Standard 3.1). ASX Clear's risk management framework imposes proportional, risk-based obligations such as initial margin, and places incentives on participants, including additional collateral requirements where required, to control the risks that they bring to the CCP (CCP Standards 3.2, 3.3). As part of its risk management framework, ASX Clear reviews risks associated with interdependencies with other entities on an ongoing basis and, in relation to new initiatives, applies appropriate tools to manage these risks (CCP Standard 3.4). ASX Clear is implementing enhancements to its Operating Rules that would support a more comprehensive recovery plan (CCP Standard 3.5).

The Bank's assessment is that ASX Clear has observed the requirements of CCP Standard 3 during the 2014/15 Assessment period. While existing arrangements are assessed to meet the minimum requirement under the standard, ASX Clear is encouraged to:

• complete planned updates to the documentation of its recovery plans to take into account its expanded suite of recovery tools
• integrate testing and review of its recovery plan into its broader framework for testing and review of risk management and default management policies and processes. The Bank will monitor the outcomes from this testing and review process.

ASX Clear's risk management framework is described in further detail under the following sub-standards.

3.1 A central counterparty should have risk management policies, procedures and systems that enable it to identify, measure, monitor and manage the range of risks that arise in or are borne by the central counterparty. This risk management framework should be subject to periodic review.

Identification of risk

ASX's high-level framework for risk management is described in its Enterprise Risk Management Policy. This policy divides risks identified by ASX into two broad categories: strategic risks and operational risks. Operational risks are further categorised into financial risks, legal and regulatory risks, and technological and operational risks. Specific risks identified by ASX are described within these broad categories. For each identified risk, ASX judges how likely it is the risk event will occur within the next 12 months and the potential impact. Reputational and participant impacts are considered along with the financial, operational and regulatory impacts of risks.

Comprehensive risk policies, procedures and controls

ASX's Enterprise Risk Management Policy has been developed with reference to the international standard ISO 31000 Risk Management – Principles and Guidelines (see CCP Standard 2.6).^[9] At a high level, the ASX Enterprise Risk Management Policy outlines: the overall risk environment in the ASX Group; the objectives of risk management policies; the process by which risks are identified and assessed; the controls in place to detect and mitigate risks; and how risks are monitored and communicated. ASX's stated tolerance for financial, operational, legal and regulatory risks is ‘very low’.

ASX uses key risk indicators to measure levels of risk in the organisation and categorise risk levels according to a scale: satisfactory; within risk tolerance but requiring action to further control the level of risk; or exceeding ASX's risk tolerance.

The Enterprise Risk Management Policy also assigns specific risk responsibilities across the ASX Group, including to the ASX Limited Board of Directors, the Audit and Risk Committee, the ERMC, the General Manager, Enterprise Risk, and managers of individual departments. Managers of each department are responsible for identifying and monitoring risks relevant to their department's activities, as well as for designing and implementing risk management policies and controls to manage identified risks. Department managers assess the appropriateness and operational effectiveness of these controls twice a year; these assessments are reviewed by Internal Audit and the ERMC.

ASX's Clearing Risk Policy Framework sets out a comprehensive set of clearing and treasury risk policies to support the risk management approach of ASX's CCPs, including ASX Clear. These policies govern more granular internal standards, which in turn govern detailed procedures for the management of clearing and treasury risk. The structure of policies, standards and procedures reflects the requirements of the FSS. During 2014/15, ASX introduced one new policy governing client segregation arrangements (see CCP Standard 13), and reviewed and updated standards covering most relevant aspects of the FSS.

A number of boards and internal committees oversee clearing risk management policy, including:

• The CS Boards. Each CS facility has a board (see CCP Standard 2.3 and ‘ASX Group Structure’ in Appendix A), which shares members with the other ASX CS facilities, has oversight of the Clearing Risk Policy Framework, and is responsible for any significant amendments. Policies and designated key standards under the Framework are governed by the CS Boards.
• The Clearing Risk Policy Committee (CRPC). The CRPC reviews and approves clearing risk policies and standards prior to submission to the CS Boards. The CRPC is chaired by the CRO and includes the ASX Group Legal Counsel, Chief Financial Officer (CFO) and GE, Operations. It will generally meet quarterly in line with meetings of the CS Boards.
• The Capital and Liquidity Committee (CALCO). CALCO is constituted to ensure the structural integrity and efficient use of the liquidity, on- and off-balance sheet assets, liabilities and capital resources of the ASX Group. CALCO advises on changes to the clearing risk policies related to capital, liquidity and balance sheet management. CALCO is chaired by the CRO and comprises senior managers and executives from Finance, Risk and Internal Audit. CALCO generally meets on a quarterly basis.
• The CCP Risk, Operations and Compliance Committee (CROCC). CROCC is chaired by the GE, Operations and is made up of senior managers and executives from the clearing and settlement risk management, operations and compliance areas of ASX. The Committee acts as an information-sharing and discussion body for the purpose of enhancing ASX's ability to identify, assess and reduce systemic, operational or compliance risk, and manage clearing risk. The CROCC currently meets on a monthly basis.
• Risk Quantification Group. The RQG is chaired by either the CRO or the General Manager, CRQ, and is made up of key staff from ASX's CRQ, Clearing Risk Policy and CRM departments most familiar with ASX's margin and other risk management models. The focus of the group is the review and application of quantitative risk policies and the Model Validation Framework, including oversight of model governance and regular reviews of margining and stress-test models. The group meets at least on a monthly basis or more frequently as required.
• Default Management Steering Group (DMSG). The DMSG is chaired by the CRO and comprises key representatives from ASX Legal, Compliance, Operations and Risk. ASX formed the DMSG in 2010/11 to provide oversight of the CCPs' DMF. The DMSG currently meets at least on a quarterly basis or more frequently as required.

During the 2014/15 Assessment period, ASX Clear established a user Risk Consultative Committee, which is consulted on material changes to default management processes, the margin methodology, the default fund, position or liquidity limits, participation criteria, and other changes affecting the risk model or related rules (see CCP Standard 2.8). The Risk Consultative Committee's proposals and recommendations are presented to the ASX Clear Board for consideration. The Committee meets on a quarterly basis.

Information and control systems

ASX Clear employs information systems that provide timely and accurate information relevant to its risk policies, procedures and controls. This includes information on risk exposures to individual participants, as well as aggregated information on risk exposures across the central counterparty. Key information systems include:

• Margining. ASX Clear uses the CME SPAN system for margining of derivatives, and CMM for the daily margining of cash equity transactions using a mixture of Historical Simulation of Value at Risk (HSVaR) and flat rates for less liquid securities (see CCP Standard 6).
• Capital and liquidity stress testing. Stress testing is carried out daily to gauge the adequacy of ASX Clear's financial resources and to monitor the risks associated with individual participants' positions. Capital stress testing estimates the loss that would result from the realisation of extreme but plausible price changes (see CCP Standard 4). Liquidity stress testing estimates the liquidity exposures that would result from extreme but plausible price changes (see CCP Standard 7).

ASX Clear monitors daily risk management reports produced by its information management systems to identify changes in positions that may require mitigating action. ASX Clear's information systems also provide information to participants about positions and margin requirements, which assists in their management of credit and liquidity positions. ASX publishes detailed margining information on its website, including descriptions of the margining methodology, schedules of margin rates, and daily SPAN margin parameter files. This information is sufficient for participants to perform their own margin calculations on hypothetical or actual portfolios. To facilitate this, a number of third-party vendors use this information to provide margin estimation software to participants. ASX also maintains a web-based margin estimator that participants and their clients can use to calculate margin requirements on ETO positions.

Internal controls

ASX's risk management policies are generally reviewed formally every 18 months to three years, although more frequent reviews may occur depending on changes to technology, business drivers or legal requirements. Reviews are conducted by specific working groups and committees. Final approval of reviews for more significant policies is the responsibility of the ERMC. Under the Enterprise Risk Management Policy, ASX's departments are required to update a risk profile every six months, which identifies relevant risks and sets out planned actions to respond to those risks.

Risk management arrangements are also subject to periodic review by Internal Audit. Such audits provide assurance that the risk management framework continues to be effective. Risk management arrangements may also be subject to review by external experts from time to time. The last such review of the Enterprise Risk Management Policy was undertaken by PricewaterhouseCoopers in 2011 and the next review is scheduled for the second half of 2015.

The Enterprise Risk Management Policy is reviewed by the Audit and Risk Committee on a two-year cycle, with the most recent review taking place in August 2015.

3.2 A central counterparty should ensure that financial and other obligations imposed on participants under its risk management framework are proportional to the scale and nature of individual participants' activities.

Financial obligations are imposed upon participants through ASX Clear's ex ante and ex post risk controls. These are position-based controls.

ASX Clear collects initial margin from participants based on actual positions. ASX Clear may also collect additional initial margin (AIM) where positions produce relatively high stress-test losses (beyond a predetermined threshold; see CCP Standards 4.2 and 4.4) or are high compared with the participant's underlying capital. Since margins are proportional to the size and volatility of a participant's positions, they are proportional to the scale and nature of individual participants' activities.

Under ASX Clear's Operating Rules, participants may be required to meet an ‘Emergency Assessment’ should a loss caused by a participant default exhaust ASX Clear's prefunded pooled financial resources. Such an assessment is capped at $300 million in aggregate. Promissory risk resources in ASX Clear's default waterfall are called in proportion to the average position of each participant in the preceding 3 months, subject to a cap (currently $30 million per participant; see CCP Standard 4.4).

Participants may also be required to provide liquidity under OTAs to support the timely settlement of ASX Clear's cash equity settlement obligations, in the event that a participant default was to create significant payment obligations for the CCP (see CCP Standards 7.3 and 7.9). Participants' obligations under OTAs are linked to their positions due to settle in the relevant settlement batch.

These tools will be retained under enhancements to ASX Clear's recovery arrangements due to come into effect in October 2015, with some modifications to the calculation of assessment obligations, renamed ‘Recovery Assessments’. Under the planned changes, assessment obligations will be proportional to participants' average daily initial margin in the three months preceding the default, subject to a variable cap based on each participant's quarterly average daily initial margin prior to the default. New obligations to contribute to the replenishment of ASX Clear's prefunded pooled financial resources if these were drawn upon in a default scenario will be calculated on the same basis.

ASX Clear's Operating Rules also set out non-financial participation requirements, such as operational requirements. These requirements are not prescriptive, and take into account the size and nature of a participant's business.

3.3 A central counterparty should provide incentives to participants and, where relevant, their customers to manage and contain the risks they pose to the central counterparty.

The use of margin and AIM at ASX Clear creates an incentive for participants to manage the exposures that they bring to the CCP. Participants are also required to post additional collateral or increase their capital levels if they create exposures that are large relative to the size of their capital. ASX is proactive in monitoring participant exposures and utilises conservatively set triggers for additional monitoring or action, such as requiring participants to actively manage down exposures (see CCP Standard 4.2).

ASX Clear may also apply sanctions to, or place additional requirements on, participants that fail to comply with its Operating Rules. Participants may ultimately be required to seek alternative clearing arrangements.

3.4 A central counterparty should regularly review the material risks it bears from and poses to other entities (such as other FMIs, money settlement agents, liquidity providers and service providers) as a result of interdependencies, and develop appropriate risk management tools to address these risks.

ASX Clear reviews the material risks that it bears from and poses to other entities in the context of its ongoing review of enterprise risks (such as the six-monthly update of department risk profiles; see CCP Standard 3.1), and its processes for identifying risks associated with new activities. In the case of new products and services, ASX undertakes risk assessments when undertaking an expansion of its activities or in the event of material changes to its business. Risk assessments are built into ASX's project management framework (see CCP Standards 14.1, 16.4).

For instance, ASX Clear has identified risks to its operational activities arising from participants' increased usage of third-party vendors for back-office systems, and participants outsourcing their back-office processing offshore. ASX Clear has also identified interdependencies with service providers. ASX Clear's response to these interdependencies is outlined in CCP Standard 16.5.

Interdependencies with ASX Settlement for the settlement of securities transactions and Austraclear for the settlement of margin obligations are managed within the context of ASX Group's broader risk management framework (see CCP Standard 19).

3.5 A central counterparty should identify scenarios that may potentially prevent it from being able to provide its critical operations and services as a going concern and assess the effectiveness of a full range of options for recovery or orderly wind-down. A central counterparty should prepare appropriate plans for its recovery or orderly wind-down based on the results of that assessment. Where applicable, a central counterparty should also provide relevant authorities with the information needed for purposes of resolution planning.

During the 2014/15 Assessment period, ASX Clear developed enhancements to its recovery planning arrangements consistent with CPMI-IOSCO guidance on recovery planning published in October 2014. The enhancements complement the basic recovery plan that ASX Clear developed in early 2014. The earlier plan identified scenarios that could threaten ASX Clear's ongoing provision of critical clearing services, and set out how it would respond to such scenarios on the basis of its existing powers under its Operating Rules and Procedures. This initial plan identified shortcomings in ASX Clear's ability to comprehensively address uncovered credit losses and liquidity shortfalls, and replenish financial resources as required by the FSS; in response, ASX has lodged amendments to the ASX Clear Operating Rules that provide the CCP with the power to:

• comprehensively address uncovered credit losses and liquidity shortfalls via Recovery Assessments and (as a last resort) complete termination of contracts (CCP Standards 4.8 and 7.9); these complement ASX Clear's existing ability to address a liquidity shortfall associated with cash equity settlement via OTAs (CCP Standard 7.9)
• restore a matched book via partial or complete termination of contracts if normal close-out processes cannot be carried out (CCP Standard 12.1)
• replenish pooled prefunded financial resources via a combination of ASX and participant contributions (CCP Standards 4.8 and 12.1)
• address non default-related losses via business risk capital and the allocation of certain treasury investment losses in excess of $75 million to participants (see CCP Standard 14.3).

These rule changes are due to come into effect in October 2015. In parallel, ASX Clear is in the process of updating its recovery plan in line with the expanded set of recovery tools, alongside a broader refresh of its default management plan (see CCP Standard 12). ASX Clear will also be giving consideration to how its recovery plan is maintained and tested on an ongoing basis. Section 6 discusses ASX's recovery planning arrangements in further detail.

Standard 4: Credit risk

A central counterparty should effectively measure, monitor and manage its credit exposures to participants and those arising from its clearing processes. A central counterparty should maintain sufficient financial resources to cover its credit exposure to each participant fully with a high degree of confidence.

Rating: Broadly observed

ASX Clear maintains a comprehensive framework for managing its credit exposures to participants (CCP Standard 4.1). Under this framework, ASX Clear regularly monitors information on participants' credit standing through financial reporting requirements, public information, and further investigation where required. Monitoring of participants' credit standing is risk based, and ASX maintains a list of participants deemed to warrant more intensive monitoring (CCP Standard 4.2). In responding to any issues identified through monitoring, ASX Clear is able to impose activity restrictions or additional controls, including calls for additional collateral (CCP Standard 4.3).

ASX Clear also monitors and manages the magnitude of exposures to participants through both daily and intraday initial and variation margin calculations (CCP Standard 4.2), and through daily stress tests that measure the effects of extreme but plausible scenarios on exposures (CCP Standard 4.5). On 30 March 2015, ASX Clear transitioned to the higher ‘Cover 2’ standard for covering its credit exposures, consistent with the Bank's supplementary interpretation of CCP Standard 4.4. Under the ‘Cover 2’ standard, ASX Clear calibrates its financial resources to cover its largest potential credit exposure to any two participants (previously one participant) and affiliates in the extreme but plausible scenarios covered in its stress tests, consistent with obligations for a facility that is systemically important in multiple jurisdictions (CCP Standards 4.4, 4.6). This transition did not necessitate an increase in the level of prefunded financial resources. ASX Clear retains the capacity to call additional margin from participants in the event that their stress-test exposures exceed predetermined stress-test exposure limits (STELs). ASX Clear conducts monthly reverse stress tests, and during the Assessment period integrated these tests into its broader risk management framework to supplement the existing daily and formal annual review of scenarios. Responsibility for increasing financial resources in response to persistent and widespread STEL breaches that exceed ASX Clear's available financial resources (AFR) lies with the CS Boards and the ASX Limited Board (CCP Standard 4.7). ASX Clear has developed enhanced powers to comprehensively address any uncovered credit losses and replenish prefunded financial resources, due to come into effect in October 2015. These replace and extend ASX Clear's existing power to allocate losses to participants via Emergency Assessments, which are subject to a cap (CCP Standard 4.8).

During the Assessment period, an external independent expert carried out the initial annual validation of ASX Clear's capital stress-test model. In response, ASX Clear has implemented a number of enhancements to its stress-testing framework, with additional changes to be made in a second phase during the 2015/16 Assessment period.

The Bank's assessment is that ASX Clear has broadly observed the requirements of CCP Standard 4 during the 2014/15 Assessment period. In order to fully observe CCP Standard 4, ASX Clear should:

• complement its comprehensive loss allocation arrangements by further refining its replenishment arrangements to ensure that it is able to return to the full level of cover required under CCP Standard 4.4 on a more timely basis, while minimising the potential for procyclicality. ASX is also encouraged to test and review its capacity to replenish its own contribution to the ASX Clear default fund.

ASX Clear is also encouraged to:

• periodically review its loss allocation arrangements, to ensure that these continue to strike an appropriate balance in terms of comprehensiveness, effectiveness, transparency and controllability, creating appropriate incentives and minimising negative impact
• carry out plans to develop additional disclosures to assist participants in understanding their contingent exposure to the use of loss allocation tools
• continue to review its interpretation of ‘extreme but plausible’ market conditions in light of evolving international best practice, including outcomes of CPMI-IOSCO work on stress testing

• implement the planned second phase of enhancements to its stress-testing models, including to:

  — make active ‘forward-looking’ hypothetical scenarios that represent macroeconomic or market-wide events, currently used for information only

  — incorporate further scenarios based on peak historic price volatilities within the Board-approved historical look-back period, and additional scenarios for information only based on peak historic price volatilities beyond this period

  — introduce a framework for collectively shocking individual sectors that takes into account the potential for coincident broader market-wide shocks

  — introduce additional forward-looking scenarios for information only that address the potential impact of market disruptions, multiple defaults and any dependencies on defaulting participants that might affect the default management process

  — introduce additional scenarios for information only that address situations that may be regarded as beyond ‘extreme but plausible’.

The Bank will continue to monitor: the monthly review and ongoing validation of ASX Clear's capital stress-testing model, including the annual external validation; ASX Clear's ongoing use of reverse stress testing to test the assumptions used in its capital stress tests, including its enhanced approach to reverse stress testing of sector-specific shocks; and ASX Clear's use of stress testing to review the sufficiency of its pooled financial resources and to call additional margin from participants as appropriate.

ASX Clear's approach to managing its credit risk is described in further detail under the following sub-standards.

4.1 A central counterparty should establish a robust framework to manage its credit exposures to its participants and the credit risks arising from its clearing processes. Credit exposures may arise from current exposures, potential future exposures, or both.

ASX Clear maintains a comprehensive framework for managing credit exposures to its participants. This framework comprises: a stress-testing regime (see CCP Standards 4.5 to 4.7); the use of variation margin to mark positions to market (see CCP Standard 6); and the maintenance of prefunded financial resources. These financial resources comprise initial margin (see CCP Standard 6), other collateral calls based on participants' positions, and fully prefunded pooled financial resources of $250 million (see CCP Standard 4.4). Financial resources received in cash are invested in high-quality assets in accordance with ASXCC's treasury investment policy (see CCP Standard 15). ASX Clear also has access to $300 million of promissory resources from participants if required, which from October 2015 will be integrated with broader arrangements to comprehensively address any uncovered credit losses (see CCP Standard 4.8).

4.2 A central counterparty should identify sources of credit risk, routinely measure and monitor credit exposures, and use appropriate risk management tools to control these risks. To assist in this process, a central counterparty should ensure it has the capacity to calculate exposures to participants on a timely basis as required, and to receive and review timely and accurate information on participants' credit standing.

ASX's CRM department is responsible for monitoring participants' credit standing and ASX Clear's credit exposures to participants.

Within CRM, the Exposure Risk Management team monitors day-to-day developments in, among other things, open positions, market price moves and settlement obligations to the CCPs. Participants' positions are marked to market and ASX Clear calculates initial and variation (or mark-to-market) margin requirements on both cash-equity transactions and derivative contracts at the end of each business day. When market movements exceed certain thresholds, ASX Clear calculates and, where appropriate, calls intraday margin on derivatives positions reflecting both price movements and changes in participant portfolios (see CCP Standard 6.4). ASX Clear conducts daily stress testing to monitor the effects of extreme but plausible scenarios on participants' portfolios. Where stress-test results are above a defined limit, AIM is called (see CCP Standard 4.4).

Within CRM, the Counterparty Risk Assessment (CRA) team is responsible for ongoing monitoring, assessment and investigation of matters relating to financial requirements (including participants' monthly financial statements). CRA is also responsible for determining and reviewing participants' credit standing, drawing in part on information provided by participants in regular financial returns to ASX. ASX determines an Internal Credit Rating (ICR) for each participant. The ICR takes into account the participant's external credit rating as appropriate. Other metrics monitored by CRA, including factors used in determining the CROCC watch list (see below), can be used as an alternative or supplementary means for ICR determination where these indicate an assessment of credit risk that differs from external credit ratings. In other cases, the ICR is based on the participant's capital position (or that of its parent where that parent is unrated but provides a formal guarantee to the CCP). ASX Clear may call additional margin from a participant with a large portfolio relative to its net tangible assets (NTA), or where it has other counterparty credit risk concerns (see CCP Standard 4.3).

CRA also coordinates a ‘watch list’ of participants deemed to warrant more intensive monitoring. Inclusion on the watch list is based on a range of factors, such as: concentration risk; concerns emerging from a specific event or media report; significant changes in a participant's own share price, bond yield or credit default swap price; ICR downgrades; calls for AIM; operational issues; compliance issues; or issues arising from ASX's routine review of financial returns (for example regular losses or breaches of minimum capital requirements). The assessment of watch list factors monitored by CRA, ASX Compliance and the Operations Division is coordinated by the CROCC. Based on such an assessment, ASX Clear may decide to place restrictions on a participant's trading, clearing and settlement activities (see CCP Standard 4.3). BBY Limited was placed on the watch list in March 2015 after ASX's participant monitoring team identified errors in the participant's capital returns (see CCP Standard 12.2 and Section 4). There were no other ASX Clear participants on the watch list during the 2014/15 Assessment period.

ASX's Concentration Risk Standard sets out a risk-based approach to monitoring concentration risks in three areas:

• Concentrations in participants' exposures to their clients (see CCP Standard 18).
• Concentrations of individual participants' positions in particular products. Evidence of such concentration indicates individual participant exposure to large price movements in a particular product that could challenge its capacity to meet obligations to the CCP. CRM monitors the concentration of participants' ETO positions in single products, by number of contracts or value of underlying positions. Further review would be triggered should exposure to a particular product exceed a specified share of a participant's total portfolio, subject to a materiality threshold.
• Concentration of positions in a market in a single participant. Evidence of a single participant accounting for a large share of positions in a particular market segment could indicate the potential for complications in closing out or transferring these positions if the participant were to default. CRM monitors the market shares of participants in each ETO product. Further review would be triggered if a single participant held more than 25 per cent of the contracts in the market for that product and the size of the position (relative to average market turnover for that period) suggested that it could take more than two days to close out that participant's position.

If a trigger were met under its Concentration Risk Standard, ASX would not automatically take action. In determining whether further investigation or action was warranted, ASX would take into account a number of factors, including the materiality of the breach, and the credit standing and activity profile of the relevant participant (see CCP Standard 4.3).

Under its risk-based approach to monitoring concentration risk, ASX Clear has prioritised formal concentration monitoring for derivatives products over cash market products. This reflects the currently short-term nature of exposures generated by cash market transactions (which settle on a three-day cycle). ASX Clear nevertheless monitors concentration risks in the cash market via its ongoing monitoring of participant credit exposures, investigating whether identified issues are related to concentrated holdings in particular securities.

For details of ASX Clear's other participation requirements and participant monitoring arrangements; see CCP Standard 17.

4.3 A central counterparty should have the authority to impose activity restrictions or additional credit risk controls on a participant in situations where the central counterparty determines that the participant's credit standing may be in doubt.

Participants on ASX's watch list may be subject to trading restrictions or additional credit risk controls. For instance, they may be subject to calls for additional margin, higher capital requirements, additional capital reporting requirements, or a reduced STEL (such that additional margin would be called at a lower level of capital stress-test exposure (see CCP Standard 4.7). CRM typically also carries out a detailed credit review of participants on the watch list.

Similar steps may be taken, at ASX's discretion, where a participant exceeds a trigger under the Concentration Risk Standard.

ASX Clear will also call capital-based position limit (CBPL) AIM from a participant with a large portfolio (measured by initial margin requirements) relative to its NTA, or may make an additional cover call where it has other counterparty credit risk concerns.

In June 2014, a participant in ASX Clear (BBY Limited) missed the deadline for a CBPL-related AIM call (see Section 4). Although ASX Clear determined that BBY Limited did not meet the relevant criteria for inclusion on the watch list at that time, it carried out a range of compliance and enforcement actions to sanction BBY Limited before ultimately placing BBY on the watch list in March 2015 (see CCP Standard 4.2). The compliance and enforcement actions included restrictions on BBY's trading and cash equity clearing activities, ongoing investigations by ASX's participant monitoring team, and requesting that BBY engage independent experts to advise on its risk management and governance frameworks.

4.4 A central counterparty should cover its current and potential future exposures to each participant fully with a high degree of confidence using margin and other prefunded financial resources (see CCP Standard 5 on collateral and CCP Standard 6 on margin). In addition, a central counterparty that is involved in activities with a more complex risk profile or that is systemically important in multiple jurisdictions should maintain additional financial resources to cover a wide range of potential stress scenarios that should include, but not be limited to, the default of the two participants and their affiliates that would potentially cause the largest aggregate credit exposure for the central counterparty in extreme but plausible market conditions. All other central counterparties should maintain additional financial resources sufficient to cover a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would potentially cause the largest aggregate credit exposure for the central counterparty in extreme but plausible market conditions. In all cases, a central counterparty should document its supporting rationale for, and should have appropriate governance arrangements relating to, the amount of total financial resources it maintains.

ASX Clear's $250 million of prefunded financial resources currently consist of (in order of application): funds held in a restricted capital reserve ($71.5 million); own equity ($3.5 million); fully drawn subordinated loans from ASXCC (totalling $75 million), which are ultimately funded by a subordinated loan from ASX Limited; and a second tranche of own equity ($100 million).

From 30 March 2015, ASX Clear has conducted daily stress tests and used the results of these to ensure that the level of its prefunded financial resources is sufficient to cover the default of the two participants and their affiliates that would potentially cause the largest aggregate credit exposure to the CCP (‘Cover 2’) under a wide range of scenarios (see CCP Standards 4.5 to 4.7). Prior to this, ASX Clear only used its stress tests to ensure that its prefunded financial resources could cover the joint default of one participant and its affiliates. The change has not, however, necessitated an increase in the level of prefunded financial resources.

Since ASX Clear clears only transactions in cash securities and equity derivatives, the Bank does not consider that ASX Clear is involved in activities with a complex risk profile. However, while ASX Clear clears only domestic products and has a largely domestic participant base, during the Assessment period it sought recognition from ESMA in the EU (see Section 3.6 and ‘Supplementary interpretation of CCP Standards’ in Appendix A). Recognition is required in the EU if a foreign CCP is to be regarded as a ‘qualifying central counterparty’ under EU bank capital regulations. In October 2014, the Bank issued updated supplementary interpretation of the FSS which clarified how it would determine systemic importance in multiple jurisdictions. One indicator, among other things, is the need to seek ‘recognition’ in other jurisdictions. Reflecting this supplementary interpretation, the Bank has concluded that ASX Clear is systemically important in multiple jurisdictions and therefore subject to higher financial resource requirements (i.e. to cover the default of two participants and their affiliates).

Under ASX Clear's AIM methodology, a participant is required to post additional collateral should stress-test outcomes reveal that the potential loss arising from its positions (as at the close of the previous day) exceeds a predetermined STEL (see CCP Standard 4.7). The objective of this regime is to provide additional participant-specific cover against non-systematic spikes in individual participants' exposures. This mitigates the risk that the default of a participant with a large exposure, in more extreme market conditions than are contemplated by regular initial margin, may deplete or even exhaust prefunded pooled financial resources. By upholding the ‘defaulter pays’ principle, the AIM regime also provides an incentive for participants to manage the risk they bring to the CCP. However, it is not a substitute for holding sufficient prefunded pooled financial resources. There are potential shortcomings to relying too heavily on variable calls related to stress-test exposures, particularly given lags in the calculation and settlement of such calls (see CCP Standard 4.7).

4.5 A central counterparty should, through rigorous stress testing, determine the amount and regularly test the sufficiency of its total financial resources available in the event of a default or multiple defaults in extreme but plausible market conditions. Stress tests should be performed daily using standard and predetermined parameters and assumptions. On at least a monthly basis, a central counterparty should perform a comprehensive and thorough analysis of stress-testing scenarios, models and underlying parameters and assumptions used to ensure they are appropriate for determining the central counterparty's required level of default protection in light of current and evolving market conditions. A central counterparty should perform this analysis of stress testing more frequently when the products cleared or markets served display high volatility, become less liquid, or when the size or concentration of positions held by a central counterparty's participants increases significantly. A full validation of a central counterparty's risk management model should be performed at least annually.

ASX Clear uses daily capital stress tests to monitor risk exposures to individual participants and the adequacy of its financial resources. Capital stress tests are based on a range of scenarios covering extreme price moves and volatility shifts at the market-wide, sector and individual-stock levels (see CCP Standard 4.6). ASX Clear applies a set of underlying parameters and assumptions in performing capital stress tests, including that:

• profits in client accounts cannot be used to offset house losses, or losses on other client accounts
• the 50 per cent of loss-making client accounts with the smallest losses are able to be transferred
• prices may rebound following a large fall; price and volatility move independently
• from July 2015, the holding period is three days (previously one day).

On a daily basis, ASX reviews the scenarios which underpin the capital stress-testing regime for ASX Clear, and on a monthly basis RQG carries out a review of market conditions to determine whether there is any evidence of stress that would support a change to scenarios. Any observed changes in price, volatility or interest rate curves in excess of the stress-test scenarios would constitute an event beyond what was previously considered to be extreme but plausible. Accordingly, it is likely that a revision to the relevant stress-test scenario would be presented for consideration by the Clearing Boards. In addition, ASX conducts monthly reverse stress tests to confirm the sufficiency of pooled financial resources and to cross-validate the capital stress-test scenarios (see CCP Standard 4.6).

ASX's Model Validation Standard requires that all models that are critical to ASX (as measured against a series of risk factors) undergo a full annual validation (see CCP Standard 2.6). The first such validation was carried out by external independent experts in late 2014. ASX Clear has implemented several enhancements to its capital stress-test model, partly motivated by recommendations from the validation. These include changes to the targeted confidence level and assumed holding period, and the development of ‘for-information’ forward-looking and historical event-based scenarios (see CCP Standard 4.6). Work to implement a second phase of enhancements is expected to commence in the coming Assessment period. ASX Clear's stress-testing approach and the recent planned enhancements to it are described in further detail in Section 5.

4.6 In conducting stress testing, a central counterparty should consider the effect of a wide range of relevant stress scenarios in terms of both defaulters' positions and possible price changes in liquidation periods. Scenarios should include relevant peak historic price volatilities, shifts in other market factors such as price determinants and yield curves, multiple defaults over various time horizons, simultaneous pressures in funding and asset markets, and a spectrum of forward-looking stress scenarios in a variety of extreme but plausible market conditions.

ASX Clear uses its capital stress tests to establish the overall adequacy of prefunded financial resources and to determine whether a participant is required to post AIM (see CCP Standard 4.4).

Stress-test scenarios

The stress-testing regime is based on 110 scenarios, calibrated to cover a once-in-20-year event (i.e. covering 99.98 per cent of price and volatility movements), assuming a holding period of three days. These parameters were adjusted in July 2015, from a once-in-30-year confidence interval and a one-day holding period, as part of the first phase of enhancements to ASX Clear's stress-testing approach.

To meet the target level of coverage, market-wide and sector-specific stress-test scenarios are calibrated to cover the most extreme observed movement in the previous 20 years of price and volatility data. Scenarios for individual stocks are calibrated to ensure that the assumed price movements always provide at least the targeted level of cover, verified by backtesting based on 20 years of price history where available. In ASX's view, this look-back period remains relevant to the current structure of the market. Review of these scenarios against observed market movements occurs on a daily basis and against overall market conditions on a monthly basis (see CCP Standard 4.5).

Following implementation of the first phase of its stress-testing enhancements ASX Clear currently uses the following suite of scenarios:

• Six market-wide scenarios that cover price movements ranging from a 14 per cent decrease to an increase of either 10 per cent or 13 per cent (depending on recent market conditions), increases in volatility of up to 150 per cent, and scenarios that combine changes in price and increases in volatility.
• Other scenarios that cover 10 broad market sectors (such as consumer staples, energy and financials; new scenarios were added for the consumer discretionary, utilities and information technology sectors in July), applying hypothetical extreme increases and decreases in price across these sectors, and increases in volatility of up to 100 per cent.
• Scenarios for 25 individual stocks, chosen based on total open derivatives positions; these scenarios cover a 30 per cent increase in price, a 30 per cent decrease in price and a 250 per cent increase in volatility.
• Five ‘forward-looking’ hypothetical scenarios representing macroeconomic or market-wide events, such as commodity price collapse, or an offshore sovereign default. These scenarios are initially for information only, but ASX plans to make these scenarios active for purposes of calculating AIM requirements in ASX Clear alongside planned enhancements to its risk management system (see Section 3.5.6).

In order to better understand the impact of severe historical events, ASX also includes additional ‘for information only’ scenarios based on historical events both within and outside the 20-year look-back period, including the 1987 stock market crash. As with the forward-looking hypothetical scenarios, these scenarios are not active for purposes of calculating AIM requirements.

During 2014/15, ASX reviewed its approach to stressing correlations between equity prices in different sectors in ASX Clear. Currently, the stress-testing approach for ASX Clear applies sector-specific shocks in isolation, assuming that prices remain stable in all other sectors and the market as a whole. In order to provide a more meaningful estimate of stressed exposures arising from shocks that fall primarily on a particular sector, ASX Clear is planning to add scenarios that apply sector-specific shocks in the context of a broader market-wide price movement. These will come into effect in ASX's second phase of stress-test enhancements and were incorporated into ASX Clear's reverse stress tests (see below) in June 2015.

In practice, the largest stress-test exposures are commonly generated by market-wide price movements, i.e. the market down or market up scenarios. However, small or medium-sized participants that have less diversified/more concentrated positions often record their largest stress-test results against single-stock stress-test scenarios.

In using 20 years of historical price and volatility data, ASX Clear's capital stress tests are based on relevant peak historical price volatilities and price determinants, in the context of a ‘Cover 2’ default assumption. As noted above, ASX Clear has also introduced a range of forward-looking stress scenarios as part of the first phase of its stress-testing enhancements, although these are currently used for information only. ASX intends to introduce additional hypothetical scenarios that address the potential impact of multiple defaults over various time horizons and market disruptions, as well as any dependencies on defaulting participants that might affect the default management process as part of the second phase of stress-testing enhancements (see below).

Reverse stress testing

ASX Clear introduced reverse stress testing of its capital stress-test model in June 2014, in order to identify scenarios under which stress-test exposures would exceed prefunded financial resources. The reverse stress test applies both a uniform movement in equity prices and, from June 2015, scenarios in which the prices of securities in different market sectors change in different directions or at different rates.

In order to test the sensitivity of the stress-test models to other model assumptions, the reverse stress test is repeated for a wide range of scenarios. These include assuming the default of multiple participants, and varying assumptions on the size, concentration or directionality of participants' portfolios. To test these assumptions, reverse stress tests are applied to participant portfolios that exhibit certain characteristics, such as concentrated exposure to a particular contract or a highly directional equities exposure. ASX also conducts tests of extreme hypothetical portfolios that would generate losses sufficient to exhaust pooled financial resources under plausible market scenarios.

In interpreting the results of reverse stress testing, ASX considers the plausibility of any scenarios that could exhaust pooled financial resources. Any recommended changes to stress test scenarios or pooled financial resources would first be considered by ASX management and then escalated to the Clearing Boards for approval, where warranted. A summary of reverse stress-testing outcomes is reported alongside the monthly margin backtesting and capital stress-test scenario review reports and included in quarterly risk management reports to the Clearing Boards. In addition to its routine monthly reverse stress testing, ASX Clear has developed a flexible framework for reverse stress testing that allows it to define particular combinations of assumptions that can be varied for the purposes of ad hoc analysis. These include increases in the size, or changes in the direction, of participants' positions and the magnitude of shocks applied to these positions, as well as changes to the number of participants that are assumed to default.

Future enhancements

Implementation of a second phase of enhancements to ASX Clear's stress-testing approach is expected to commence over the coming Assessment period. The Bank will continue to monitor the implementation of these enhancements, which include:

• making active ‘forward-looking’ hypothetical scenarios that represent macroeconomic or market-wide events, such as commodity price collapse, or an offshore sovereign default
• adding further scenarios based on peak historic price volatilities within the Board-approved historical look-back period, and additional scenarios for information only based on peak historic price volatilities beyond this period
• introducing a framework for collectively shocking individual sectors that takes into account the potential for coincident broader market-wide shocks
• introducing additional forward-looking scenarios for information only that address the potential impact of market disruptions, multiple defaults and any dependencies on defaulting participants that might affect the default management process
• introducing additional scenarios for information only that address situations that may be regarded as beyond ‘extreme but plausible’.

4.7 A central counterparty should have clearly documented and effective rules and procedures to report stress-test information to appropriate decision-makers and ensure that additional financial resources are obtained on a timely basis in the event that projected stress-test losses exceed available financial resources. Where projected stress-test losses of a single or only a few participants exceed available financial resources, it may be appropriate to increase non-pooled financial resources; otherwise, where projected stress-test losses are frequent and consistently widely dispersed across participants, clear processes should be in place to augment pooled financial resources.

Capital stress-test exposures are routinely reported to ASX management, the Clearing Boards and the Bank. Participant stress-test losses are used to gauge the adequacy of ASX Clear's AFR, with widespread and/or large STEL breaches an indicator that resources may need to be increased. STEL breaches are reported to management and persistent breaches are escalated in the first instance to the CRO and CALCO. The CS Boards and ASX Limited Board are responsible for approving any increase to prefunded pooled financial resources where this is considered necessary (see below).

Each participant in ASX Clear is allocated a STEL based on its ICR. ASX Clear adjusted its STELs during the Assessment period, reflecting the move to setting pre-funded financial resources on a ‘Cover 2’ basis (see CCP Standard 4.4). The maximum STEL now represents one half of ASX Clear's total pooled prefunded financial resources, reflecting that ASX Clear holds prefunded financial resources to cover two participant defaults (and the default of their affiliates). Where a group of participants are affiliated (i.e. part of the same corporate group), and the sum of affiliated participants' STELs that would apply if based solely on ICRs exceeds the maximum STEL, an adjustment is applied to the STELs of the affiliated participants. The adjustment ensures that ASX Clear's combined exposure to affiliated participants cannot therefore increase above the assigned group-wide STEL (which in turn cannot exceed one half of ASX Clear's prefunded financial resources) without triggering an AIM call (see below). Since there are only a limited number of affiliated participant groups with combined ICR-based STELs that would exceed ASX Clear's prefunded financial resources, ASX Clear allows input from these groups as to how the required reduction in STELs is distributed across the group.

Where a participant's projected stress-test losses exceed its STEL, ASX will call for STEL AIM. Typically AIM calls are made by 9.30 am and must be settled within two hours via the transfer of cash in Austraclear. During the Assessment period ASX Clear formally removed references from its internal standards and procedures providing for highly rated (i.e. A-rated and B-rated) participants to receive discounts on their STEL AIM calls. These discounts had not been applied since April 2010, initially on the basis that market conditions were abnormal. ASX had determined in the previous Assessment period that it would no longer apply these discounts even in apparently normal market conditions.

In deciding whether ASX Clear has sufficient prefunded pooled financial resources, ASX considers the size, frequency, duration and distribution of AIM calls across participants. ASX Clear would consider increasing these resources if stress-test results in excess of prefunded pooled resources were persistent, significant and widespread. In other cases, ASX Clear would generally rely on additional collateral collected under the AIM regime.

4.8 A central counterparty should establish explicit rules and procedures that address fully any credit losses it may face as a result of any individual or combined default among its participants with respect to any of their obligations to the central counterparty. These rules and procedures should address how potentially uncovered credit losses would be allocated, including the repayment of any funds a central counterparty may borrow from liquidity providers. These rules and procedures should also indicate the central counterparty's process to replenish any financial resources that the central counterparty may employ during a stress event, so that the central counterparty can continue to operate in a safe and sound manner.

Currently, if ASX Clear's prefunded pooled financial resources were insufficient to fully cover its credit losses following a participant default, ASX Clear may call up to $300 million in Emergency Assessments from surviving participants to cover residual losses. In acknowledgement that this may not be sufficient to fully address any uncovered credit losses that ASX Clear might face (despite partial mitigants such as adjustments to STELs and the collection of additional margin) ASX Clear has developed enhanced loss allocation and replenishment arrangements as part of its broader package of enhanced recovery measures due to come into effect in October 2015 (see CCP Standard 3.5 and Section 6).

Allocation of credit losses

Uncovered credit losses would initially be addressed via Recovery Assessments called from surviving participants, which replace the current Emergency Assessment power. As with the current power, Recovery Assessments are capped at $300 million across all participants and distributed in proportion to each participant's average daily initial margin in the three months prior to the default triggering the loss. However, the current fixed cap of $30 million on individual participant assessments will be removed and replaced with a variable cap based on the participant's average daily initial margin for the quarter prior to the default (see CCP Standard 3.2).

Any residual losses that could not be addressed via Recovery Assessments would be allocated to participants via a new power to completely terminate all open contracts. Complete termination would be reserved as a last resort tool if there was no other means of addressing an uncovered loss (including via intervention of the Reserve Bank as resolution authority if current proposals for a special resolution regime for FMIs are implemented). Under complete termination, all open contracts at the CCP would be settled with participants at their current market value, with any residual losses of the CCP allocated by haircutting settlement payments to participants. Recovery Assessments are set at a level that seeks to minimise the potential for reliance on complete termination as a loss allocation tool.

Replenishment

ASX also acknowledged that additional tools and powers may be necessary to adequately and reliably replenish financial resources following a participant default (see CCP Standard 3.5). Under current arrangements, ASX Limited would be the ultimate source of funds to replenish pooled financial resources. Responsibility for determining if these resources will be replenished and, if so, how this should be achieved, therefore lies with the ASX Limited Board, which would make this decision in consultation with the ASX Clear Board. ASX has documented replenishment intentions, which include several options; the particular approach taken to replenishment would depend on the specific circumstances, including the severity of the loss and the market environment (see CCP Standard 12.1). ASX Limited has also committed to maintaining a certain level of equity capital in ASX Clear (including via ASXCC), provided certain conditions are met, including that the CCP is solvent.

ASX Clear's enhanced recovery approach will replace the current replenishment arrangements with an approach that relies partly on participant contributions (see CCP Standard 12.1 and Section 6). ASX would initially contribute up to $75 million to the replenished default fund, with participants contributing up to the same amount. The post-replenishment composition of the default fund would depend on the amount to be replenished; the larger the initial drawdown, the closer would be the post-replenishment composition to a 50/50 split of ASX and participant contributions. In the case of a drawdown of less than $75 million, ASX would meet the entire replenishment requirement, preserving the current default fund composition of 100 per cent ASX funds. If further increases to the default fund were subsequently required, these would be met 50/50 by ASX and participant contributions as part of a quarterly recalibration of the default fund.

Standard 5: Collateral

A central counterparty that requires collateral to manage its or its participants' credit exposures should accept collateral with low credit, liquidity and market risks. A central counterparty should also set and enforce appropriately conservative haircuts and concentration limits.

Rating: Observed

ASX Clear limits the assets it routinely accepts as collateral to cash, or highly liquid stocks or exchange-traded funds with low credit, liquidity and market risks (CCP Standard 5.1). These assets are widely held and there is sufficient depth of liquidity of these assets that their eligibility as collateral is not considered to have any material market impact (CCP Standard 5.2). ASX Clear applies haircuts to collateral. These are calibrated to stressed market conditions, to limit the need for procyclical adjustments (CCP Standards 5.3, 5.4). Collateral holdings are not sufficiently concentrated as to impair ASX Clear's ability to liquidate such assets quickly without significant adverse price effects (CCP Standard 5.5). ASX Clear employs well-designed and operationally flexible systems to manage collateral movements for securities and derivatives trades (CCP Standard 5.7).

The Bank's assessment is that ASX Clear has observed the requirements of CCP Standard 5 during the 2014/15 Assessment period. While existing arrangements meet the minimum requirement under the standard, the Bank will continue to discuss with ASX its approach to monitoring collateral concentration risks.

ASX Clear's collateral acceptance policies are described in further detail under the following sub-standards.

5.1 A central counterparty should generally limit the assets it (routinely) accepts as collateral to those with low credit, liquidity and market risks.

ASX's approach to collateral is documented in a Collateral Policy and a Collateral Standard. These documents set out ASX's collateral eligibility criteria, procedures for review of eligibility, the basis for calibrating haircuts and arrangements for the review of collateral settings.

Initial and premium margin obligations may be met by posting either cash or non-cash collateral.^[10] Non-cash collateral is subject to a haircut. Variation and intraday margin obligations must be settled in cash (see CCP Standard 6).

ASX Clear specifies criteria for eligible securities collateral. Acceptable collateral includes S&P/ASX 200 index constituent stocks (with the exception of ASX Limited stock); exchange-traded funds that ASX Clear determines to be mature and liquid, and for which issuer risk is considered low (currently only the SPDR S&P/ASX 200 Fund); and other stocks lodged as specific cover for call options written on the same stock. The list of acceptable collateral is reviewed at least quarterly, including to reflect changes to the S&P/ASX 200 constituent list. ASX Clear prohibits the use by participants of stock issued by related entities except when it is used as specific cover for a call option written on that stock. ASX Clear also restricts the use as collateral of related entity issued stocks to client transactions (subject to strict concentration limits), in order to manage the potential risk of the simultaneous default of a participant and the collateral issuer (‘wrong-way risk’). Collateral must be unencumbered.

In normal circumstances, ASX Clear does not accept bank guarantees as collateral. However, in limited circumstances and at the discretion of ASX, it may accept guarantees from banks with a short-term S&P credit rating of at least A-1+, as long as the bank is not a related entity of the participant. As a transitional measure for three years, following the introduction of margining for cash securities in June 2013, ASX Clear permits participants to meet cash market margin obligations with bank guarantees, but only in exceptional circumstances and at the discretion of ASX. The use of bank guarantees to meet ETO margin obligations is also at the discretion of ASX. ASX intends to use this discretion sparingly to avoid growth in the use of bank guarantees, which is currently low. ASX Clear has established a standard format for eligible bank guarantees, and any requests by banks or participants for material deviations from this format require clearance from ASX Legal.

5.2 In determining its collateral policies, a central counterparty should take into consideration the broad effect of these policies on the market. As part of this, a central counterparty should consider allowing the use of collateral commonly accepted in the relevant jurisdictions in which it operates.

ASX Clear takes into account market liquidity in determining the eligibility of collateral. ASX Clear considers the equity securities that it will accept as collateral – stocks in the S&P/ASX 200 Index and the SPDR S&P/ASX 200 Fund – to be sufficiently liquid that the eligibility of these assets as collateral will not have any material impact on market liquidity or price. In light of the depth of liquidity in these assets, ASX Clear would also expect to be able to liquidate such collateral in a timely fashion as required. These assets are also well known and understood to participants in the Australian market.

5.3 A central counterparty should establish prudent valuation practices and develop haircuts that are regularly tested and take into account stressed market conditions.

Since S&P/ASX 200 stocks and the SPDR S&P/ASX 200 Fund are highly liquid, price information is readily available. ASX revalues collateral on a daily basis using end-of-day prices. If there is no price information available for a particular day (for example due to a corporate action), ASX Clear uses the previous day's price to value the relevant asset.

ASX Clear sets haircuts on non-cash collateral to cover a fall in the collateral value of stocks over a three-day period in a once-in-20-year scenario. Haircuts are based on the largest price falls used in corresponding capital stress-test scenarios (see CCP Standard 4.6), currently 30 per cent. Haircuts for individual stocks that are not included among the 25 individual stock stress-test scenarios are similarly set at 30 per cent. Collateral haircuts are reviewed at least annually to take into account any changes to historically observed volatility trends, with the ongoing review of capital stress-test scenarios also verifying the appropriateness of haircut rates (see CCP Standard 4.4). Collateral haircuts were most recently reviewed in April 2015, aligning them to ASX's updated stress testing framework, with changes implemented in July 2015 (see CCP Standard 4.6).

5.4 In order to reduce the need for procyclical adjustments, a central counterparty should establish stable and conservative haircuts that are calibrated to include periods of stressed market conditions, to the extent practicable and prudent.

ASX Clear's collateral haircutting policy is designed to cover extreme but plausible scenarios based on the most extreme market price and volatility movement observed in the past 20 years, which includes the extreme volatility observed during the 2008–09 financial crisis. This is intended to ensure that haircuts remain stable over the business cycle, even in stressed market conditions.

5.5 A central counterparty should avoid concentrated holdings of certain assets where this would significantly impair the ability to liquidate such assets quickly without significant adverse price effects.

ASX maintains a risk-based policy for managing concentration risks in its CCPs (see CCP Standards 4.2, 18.4). While this policy does not address concentrations in collateral holdings, ASX limits and mitigates the risk of such concentrations by restricting non-cash collateral (other than specific cover) to ASX 200 securities and applying a conservative haircut of 30 per cent. During the Assessment period, the maximum holding of non-cash collateral was $4.6 billion; this was used to cover less than $600 million of collateral requirements, after haircuts, with the remaining amount representing excess collateral lodged by participants or their clients. ASX's analysis of the concentration in the most commonly posted securities relative to average daily turnover has not identified any significant impediments to the timely liquidation of such assets within the assumed haircut. On average, around 42 per cent of margin requirements were met using cash collateral during 2014/15. The Bank will continue to discuss with ASX its approach to monitoring collateral concentration risks.

5.6 A central counterparty that accepts cross-border collateral should mitigate the risks associated with its use and ensure that the collateral can be used in a timely manner.

ASX Clear does not accept any cross-border or foreign currency collateral.

5.7 A central counterparty should use a collateral management system that is well designed and operationally flexible.

Collateral management system

ASX Clear manages the calculation and execution of margin calls for its equity derivative products through its Derivatives Clearing System (DCS) and Intraday Margining System, and for cash securities, through its CMM Razor System. These systems accurately monitor initial and variation margin levels and flows on an intraday basis (although intraday margin is not calculated or called for cash securities). The timely deposit, withdrawal and substitution of non-cash collateral are facilitated by CHESS. Over time, ASX intends to extend its collateral management service, currently available for debt securities held in Austraclear, to securities in CHESS. This would increase the ease of collateral substitution for ASX Clear participants.

Re-use of collateral

ASX Clear does not re-use non-cash collateral posted by participants and the re-use of such collateral is not supported under its Operating Rules.

Standard 6: Margin

A central counterparty should cover its credit exposures to its participants for all products through an effective margin system that is risk based and regularly reviewed.

Rating: Observed

ASX Clear applies initial and variation margin to both derivatives exposures and cash securities transactions, using margin systems that are tailored to the particular attributes of these product types (CCP Standard 6.1). Timely price data are available for most products subject to ASX Clear's margin systems, and ASX Clear applies appropriate models to estimate prices when timely and reliable data are not available (CCP Standard 6.2). ASX Clear's margin models for both cash securities and derivatives ensure that initial margin meets a single-tailed confidence level of at least 99 per cent of the estimated distribution of future exposure, applying appropriate and conservative assumptions regarding holding periods, product risks, portfolio effects, product offsets and floors to limit the need for procyclical changes (CCP Standards 6.3, 6.5). In addition, ASX Clear applies variation margin to both securities and derivatives positions daily, and may call intraday margin on derivatives positions in the event of significant market movements (CCP Standard 6.4).

ASX Clear performs daily and periodic backtesting of its margin models to assess the adequacy of initial margin against the targeted level of cover, and performs an annual review of margin policy. ASX Clear uses quarterly sensitivity analysis to validate the assumptions underpinning margin models, including to test the reliability of implicit or explicit product offsets (CCP Standard 6.6). ASX Clear regularly reviews and validates its margin models. An external expert commenced a comprehensive review of ASX Clear's margin models in 2014/15; the results of the SPAN model validation were reported to ASX in June 2015, and the results of the DPS validation were reported to ASX in July 2015 (CCP Standard 6.7). The operating hours of ASX Clear's margin systems are consistent with those of related payment and settlement systems in Australia (CCP Standard 6.8).

The Bank's assessment is that ASX Clear has observed the requirements of CCP Standard 6 during the 2014/15 Assessment period.

While existing arrangements are assessed to meet the minimum requirement under the standard, ASX Clear is encouraged to review its margining approach in light of the external validation of its margin models, experience gained from the BBY Limited default, and evolving international best practice, including outcomes of CPMI-IOSCO work on margining. The review should examine key parameter assumptions, including the holding and look-back periods, and mitigants against shortfalls in relation to individual client accounts.

ASX Clear's margin system is described in further detail under the following sub-standards.

6.1 A central counterparty should have a margin system that establishes margin levels commensurate with the risks and particular attributes of each product, portfolio and market it serves.

ASX Clear applies initial and variation margin to both derivatives products, and cash securities transactions. Initial (risk) margin provides protection to a CCP in the event that a participant defaults and an adverse price change occurs before the CCP can close out the defaulted participant's positions (potential future exposure). Variation margin is levied on cash market positions, long and short low exercise price options (LEPOs), and all futures positions to reflect observed price movements (current exposure); it is collected from the participant with a mark-to-market loss and, depending on the product, either passed through in cash to the participant with a mark-to-market gain, or recognised as a credit (see CCP Standard 6.4). ASX Clear also levies so-called ‘premium’ margin on short ETO positions, updating this daily to reflect mark-to-market changes in the close-out price.

Cash equities

ASX Clear's CMM approach involves the collection of initial margin and mark-to-market margin in respect of unsettled cash securities transactions. The selected methodology for initial margin calculation is primarily based on the historical simulation of value at risk (HSVaR). The HSVaR methodology uses historical price moves to calculate hypothetical changes in the value of a portfolio of securities, and determines a margin requirement from these taking into account the desired degree of confidence (see CCP Standard 6.3). For less liquid stocks, or securities with an insufficient price history to apply HSVaR, ASX Clear applies flat rate margins. Currently 77 of the 500 stocks that make up the All Ordinaries Index are margined on a flat-rate basis. Margins calculated using HSVaR currently make up around 45 per cent of initial margins collected through the CMM system. Around 57 per cent of flat-rate margin collections relate to trades in warrants and stocks outside the All Ordinaries Index, which attract higher margin rates. Transactions in Australian Government securities depository interests are margined according to the flat rate applied to fixed-interest products.

Derivatives

ASX Clear uses a variant of the internationally accepted SPAN methodology for the margining of derivatives positions (see CCP Standard 6.3). All margin rates are reviewed on a three-monthly cycle, supplemented with ad hoc reviews during especially volatile market conditions.

During the Assessment period, ASX amended its approach to the margining of exercised LEPOs. Under the new arrangements, the cash securities transaction triggered by exercise of the LEPO is margined in CHESS using CMM between exercise and settlement. The settlement obligations of the LEPO buyer include the exercise price, final margin payments and the outstanding balance of the premium.^[11] These changes align the post-exercise margining process for LEPOs with that used for other ETOs.

ASX Clear predominantly clears standardised, exchange-traded products with risks that are well known to both ASX Clear and its participants. The only OTC products cleared by ASX Clear are equity options that share similar characteristics to exchange-traded products.

6.2 A central counterparty should have a reliable source of timely price data for its margin system. A central counterparty should also have procedures and sound valuation models for addressing circumstances in which pricing data are not readily available or reliable.

ASX Clear has access to timely price data for the majority of its exchange-traded products. For less liquid stocks (e.g. stocks outside the All Ordinaries Index and warrants) and new stocks for which there is insufficient historical price data, ASX Clear applies flat rate margins. These are based on available price information for individual stocks in the All Ordinaries Index, or for grouped categories of other products. The settlement value of ETOs is calculated throughout the day using the DPS. Where available, the DPS uses traded prices, but the system is able to extrapolate prices from previous pricing periods or untraded bids and offers where traded price data are not available. For less liquid stocks, DPS cross-checks calculated prices against trades in similar options, takes into account limits on implied volatilities, and smooths and imposes restrictions on the slope and convexity of deemed volatility curves. For OTC equity options, ASX Clear interpolates the value using the prices of similar ETOs.

The DPS is considered a key risk model and accordingly will be subject to annual external validation under ASX's Model Validation Standard; the first such validation was completed in July 2015.

6.3 A central counterparty should adopt initial margin models and parameters that are risk based and generate margin requirements sufficient to cover its potential future exposure to participants in the interval between the last margin collection and the close out of positions following a participant default. Initial margin should meet an established single-tailed confidence level of at least 99 per cent with respect to the estimated distribution of future exposure. For a central counterparty that calculates margin at the portfolio level, this requirement applies to each portfolio's distribution of future exposure. For a central counterparty that calculates margin at more granular levels, such as at the sub-portfolio level or by product, the requirement should be met for corresponding distributions of future exposure. The model should: use a conservative estimate of the time horizons for the effective hedging or close out of the particular types of products cleared by the central counterparty (including in stressed market conditions); have an appropriate method for measuring credit exposure that accounts for relevant product risk factors and portfolio effects across products; and to the extent practicable and prudent, limit the need for destabilising, procyclical changes.

ASX Clear applies different margin models to securities and derivatives transactions.

Securities

For most securities transactions, ASX applies an HSVaR-based model, which is calibrated and adjusted to meet a single-tailed confidence interval of 99.7 per cent of the estimated distribution of future exposure. Estimates of the distribution of future exposure under this model are based on 2 years of 1-day price moves applied to current participant portfolios (see CCP Standard 6.5). While ASX targets 99.7 per cent coverage of the distribution of future exposures from CMM, as a first step ASX identifies the 99th percentile of the sample distribution. Since HSVaR requires reliable and uninterrupted price data, it is only applied to transactions in sufficiently liquid securities, namely those in the ASX 500 All Ordinaries. Even so, the small number of observations of price movements beyond the 99th percentile makes it difficult to construct reliable estimates of the desired 99.7 per cent margin coverage. ASX therefore applies a Portfolio Add-on Factor (currently 30 per cent) to the HSVaR estimate of potential future exposure at a 99 per cent confidence level to achieve the desired 99.7 per cent level of cover.

For securities that do not have the required price history to apply HSVaR, ASX applies, consistent with its overall CMM approach, flat rate margins intended to cover 1-day price moves with a 99.7 per cent confidence at a portfolio level. In order to achieve the desired confidence level at the portfolio level, confidence intervals and holding periods applied to individual stocks differ according to liquidity and available price information. Stocks in the ASX 200 target a 99.7 per cent confidence interval applied to a 1-day holding period; other stocks in the All Ordinaries target a 97 per cent confidence interval over a 2-day holding period; and all other products target a 95 per cent confidence interval over a 3-day holding period. The lower confidence intervals for the latter two groups reflect the difficulty of constructing reliable estimates of the extremities of the distributions of price movements for securities with limited price history and/or liquidity. However, longer holding periods for these securities are assumed. Backtesting seeks to verify that the flat rates for less liquid securities provide cover both to the target confidence interval and holding period at an individual security level, and to at least a 99.7 per cent confidence interval at the portfolio level (see CCP Standard 6.6).^[12]

In May 2015, ASX Clear closed out the unsettled cash equity positions of the defaulting participant BBY Limited. This process was completed within three days (with the exception of positions in stocks that were either suspended or subject to a trading halt, as well as a small number of stocks outside the ASX 500 All Ordinaries). Although the actual holding period exceeded that targeted in the CMM model, the level of margin held by ASX Clear was nevertheless sufficient to cover all losses from the close out (see CCP Standard 12.2 and Section 4).

Derivatives

For derivatives transactions, ASX Clear calculates initial margin requirements using the SPAN methodology. The SPAN methodology calculates initial margin requirements that reflect the total risk of each portfolio – for ASX Clear, each house or client account is considered a separate portfolio. The key parameters in the SPAN methodology are the ‘price scanning range’ (PSR) and ‘volatility scanning range’ (VSR). These scanning ranges are individually calibrated to the distribution of price and volatility movements for a set of related contracts under normal market conditions. The scanning ranges inform a set of 16 hypothetical risk scenarios used to measure the loss from a portfolio under alternative combinations of changes in price and volatility. For example, in one risk scenario, price increases by one-third of the PSR and volatility falls by the full VSR, while in another scenario price falls by the full PSR and volatility rises by the full VSR. The margin rate is then based on the highest estimated loss across the 16 scenarios.

ASX Clear bases the scanning ranges on key volatility statistics; namely, the higher of three standard deviations (a confidence interval of 99.7 per cent) of a 60-day or 252-day sample distribution, using the higher of one- or two-day price movements.^[13] The sample periods seek to balance incorporating recent market conditions with avoiding destabilising procyclical changes. The inclusion of two-day price movements reflects a conservative assumption that a defaulter's positions may take up to two days to close out.

ASX Clear also applies a series of adjustments within SPAN to account for correlations and specific risks.

• Intra-commodity spread charge. This is an adjustment to the margin requirement for a given set of related contracts, to account for less-than-perfect correlation between contracts with different expiries. This adjustment is based on a participant's actual net position at each expiry month multiplied by an ‘intra-commodity charge rate’, which is itself based on observed price correlations between the different expiries. The default setting is to apply a single charge rate. However, for some contracts ASX utilises SPAN's charge-rate tiering functionality. This allows charge rates to vary depending on the temporal difference in the pair's expiries.
• Inter-commodity spread concession. ASX Clear also applies offsets designed to account for reliable and economically robust correlations across different contract types (see CCP Standard 6.5). These offsets reflect that, while the scanning risk for each related contract – a ‘combined commodity’ in SPAN terminology – is set based on the worst-case risk scenario for that combined commodity, it may be highly unlikely that the set of worst-case scenarios occurs simultaneously. This is particularly the case if a participant holds net long and net short positions in different related contracts that have a robust positive correlation. The inter-commodity spread concession is calculated by applying (in a defined order) a spread ratio and concession rate to a participant's actual net positions in pairs of related contracts. The spread ratio determines the number of net positions in one related contract required to offset a position in another related contract. The concession rate is specified as a percentage of the scanning risk for both contracts in the pair. ASX calculates these parameters in the same manner as the price movement for the intra-commodity spread charge.
• Other adjustments. ASX Clear applies an adjustment to cover its exposure on the day of contract expiry, since expiring positions are otherwise not included in that day's initial margin calculations. ASX also maintains a minimum margin requirement on short positions to ensure the collection of margin on deep out-of-the-money options that would otherwise return no scanning range.

ASX targets the major inputs (including the PSR and VSR) to a 99.7 per cent confidence level. Other inputs are calibrated to the requirements of the standard to exceed a 99 per cent confidence interval.

To the extent that correlation assumptions (and hence offsets) across products in ASX Clear's margin models are conservative, diversified portfolios can provide additional protection for ASX. However, individual client accounts with highly directional or concentrated positions do not benefit from the same degree of additional protection. While all close-out costs were sufficiently covered by margin held by ASX Clear, ASX was required to use a limited amount of excess client collateral, and two clients did not have sufficient collateral to cover small losses on their accounts. As with BBY's cash equities positions, the close out of outstanding derivatives exposures took longer than assumed; full close out was completed within six days of the declaration of default, with around 90 per cent closed out within four days (see CCP Standard 12.2 and Section 4).

The Bank encourages ASX Clear to consider the event of BBY Limited's default in reviewing the calibration of its margin model parameters, including the adequacy of safeguards against shortfalls in relation to individual client accounts.

Under ASX's internal Margin Standard, the Manager of Exposure Risk Management (part of CRM) can approve adjustments to margin rate settings jointly with the CRO, the General Manager, CRQ, or the Senior Manager, Clearing Risk Policy. Such adjustments may be made if application of the standard statistical analysis would result in inappropriate outcomes; for example, if the backward-looking statistical analysis does not take appropriate account of expected future price movements. Other reasons for using management discretion include insufficient historical data (e.g. where a product is new), seasonality in some products, and isolated spikes in price movements that result in a distortion of statistical recommendations. The ASX Margin Standard also allows exceptions to the normal margin rate-setting process based on a broader risk assessment – such exceptions require the approval of the Senior Manager of Clearing Risk Policy and the General Manager of CRQ.

6.4 A central counterparty should mark participant positions to market and collect variation margin at least daily to limit the build-up of current exposures. A central counterparty should have the authority and operational capacity to make intraday margin calls and payments, both scheduled and unscheduled, to participants.

Margin requirements are calculated overnight, with variation margins based on closing prices each day. These are notified to participants the next morning. All margin obligations are settled via Austraclear and regular calls must be met by 10.30 am.

• For cash market transactions, mark-to-market margin is calculated in respect of securities in the All Ordinaries Index and added to initial margin if prices have moved against the participant. If prices have moved in favour of the participant then an offset may be applied to the participant's initial margin requirement, but this is capped by the level of initial margin. Mark-to-market margin is not called on flat rate-margined securities that are not within the All Ordinaries as up-to-date price data may not be available for all of these securities. However, adjustments are made to the overall margin called for these securities to ensure that ASX Clear is adequately covered in the case of adverse market movements.
• Variation margin is also levied on all LEPO and futures positions to reflect observed price movements. Variation margin is collected from the participant with a mark-to-market loss and passed through in cash to the participant with a mark-to-market gain.
• ASX Clear levies ‘premium’ margin on short ETO positions, updating this daily to reflect mark-to-market changes in the close-out price. Since premium margin is collected only on short positions, it not passed through to participants with mark-to-market gains on long positions.

ASX Clear calculates intraday margin requirements on derivatives positions when market movements on derivatives positions exceed a certain threshold. That is, ASX calculates the net mark-to-market losses on all positions, and the initial margin on any new positions opened during the day. Where a participant's margin shortfall relative to the calculated requirement is greater than $100,000 and represents an erosion of initial margin of 40 per cent or more, ASX Clear calls intraday margin. This must be met by participants within two hours of notification.

Under ASX Clear's AIM methodology (discussed above in relation to CCP Standard 4), a participant is also required to post additional collateral should stress-test outcomes reveal potential losses that exceed a predetermined STEL, or if participants have large portfolios relative to their capital (see CCP Standards 4.3 and 4.7).

If a margin payment is not made by the required time, ASX contacts the participant to determine the reasons for the delayed payment. Delayed payments are not common. When they do occur, they are typically the result of communication or technical issues involving the participant and/or its payment provider. Early communication by ASX aims to ensure that, in such cases, payment can still be made within a short period of the required time. In the event that the matter was more serious, ASX would investigate to decide whether a default event should be declared and, if so, how the default should be managed (see CCP Standard 12 and Section 4).

6.5 In calculating margin requirements, a central counterparty may allow offsets or reductions in required margin across products that it clears or between products that it and another central counterparty clear, if the risk of one product is significantly and reliably correlated with the risk of the other product. Where a central counterparty enters into a cross-margining arrangement with one or more other central counterparties, appropriate safeguards should be put in place and steps should be taken to harmonise overall risk management systems. Prior to entering into such an arrangement, a central counterparty should consult with the Reserve Bank.

ASX Clear applies margin at a portfolio (clearing participant) level for its cash market securities using its HSVaR methodology. This implicitly reduces the margin requirements for the participant where individual securities within the portfolio have displayed negatively correlated risks over the previous two years. The use of historical simulation over a two-year period establishes the significance and reliability of these correlations. ASX has identified that the direction of participant portfolios is a more significant contributor to the events captured in HSVaR margin settings than implicit price correlations, while flat rate margins do not assume any price correlations between securities. The significance and reliability of the correlations underlying the implicit offsets in HSVaR, which do not represent a significant proportion of ASX Clear's overall risk exposure, are subject to regular verification through backtesting and sensitivity analysis (see CCP Standard 6.6).

In applying the SPAN methodology to derivatives transactions, ASX allows offsets in the form of ‘inter-commodity spread concessions’ (see CCP Standard 6.3). These offsets reduce margin requirements to account for reliable and economically robust correlations observed across related contracts. Inter-commodity spread concessions are applied where the correlation is significant and based on economic fundamentals. ASX uses sensitivity analysis to verify the reliability of assumed correlations between products used in calculating inter-commodity spread concessions (e.g. analysis of the effect of retaining stressed data from 2008 in the historical simulation period (see CCP Standard 6.6)). Changes to inter-commodity spread concessions must be approved by the RQG, which considers whether changes identified by SPAN appropriately reflect underlying economic relationships, including in periods of market stress.

ASX Clear does not have any cross-margining arrangements with any other CCP.

6.6 A central counterparty should analyse and monitor its model performance and overall margin coverage by conducting rigorous daily backtesting and at least monthly, and more frequent where appropriate, sensitivity analysis. A central counterparty should regularly conduct an assessment of the theoretical and empirical properties of its margin model for all products it clears. In conducting sensitivity analysis of the model's coverage, a central counterparty should take into account a wide range of parameters and assumptions that reflect possible market conditions, including the most volatile periods that have been experienced by the markets it serves and extreme changes in the correlations between prices.

Backtesting

Under ASX's Model Validation Standard, daily backtesting of both the SPAN and CMM margin models is used to test, on an ongoing basis, whether the margin models reliably cover price movements to at least a 99 per cent confidence interval. Daily backtesting is performed against both dynamic and static actual portfolios. Backtesting against actual dynamic portfolios involves the comparison of actual initial margin collected from a representative participant or client against actual variation margin calculated over the following one or two days, depending on which is the larger amount. One limitation of using variation margin on dynamic portfolios to model changes in the value of a portfolio over the holding period is that it is influenced not only by market movements but also by changes in the composition of the portfolio. To address the limitations of dynamic portfolio analysis, static portfolio backtests are also used to hold the portfolio composition constant over time. When static portfolios are used, ASX calculates hypothetical variation margin obligations for each day of the validation period based on historical price movements, and compares these to initial margin calculated on the static portfolio. The static portfolio used may be an actual portfolio held by a representative participant or client, or it may be a purely hypothetical portfolio; for example, one designed to examine the implications of directionality in positions or concentrations of exposures. Under both types of backtest, when variation margin is greater than initial margin an ‘exception’ is recorded. CRM compares the number of exceptions to the expected number of exceptions, based on a 99.7 per cent confidence interval for static portfolios and a 99 per cent confidence interval for dynamic portfolios.

A report summarising the results of backtesting is automatically generated and circulated to relevant staff in the Risk division. Further analysis is undertaken when an exception is recorded, both to investigate model performance and to investigate the potential financial implications of the exception given the particular participant and portfolio affected. Where an exception is recorded against an individual client account, this investigation will proceed only if the dollar value of the exception breaches a materiality threshold. Further investigation also takes place if the actual number of exceptions exceeds the expected number. By investigating further, ASX determines whether any follow-up actions are required, such as the calling of additional margin or the managing down of positions.

Daily backtesting reports are aggregated into a monthly backtesting report which compares the number of observed exceptions to expected exceptions for the previous month, quarter and year. This report, which also includes the results of sensitivity analysis (see below) is reviewed by the RQG and used to identify the need for further investigation of margin model performance. RQG will take into account the frequency and magnitude of any breaches in determining whether to commission additional analysis from CRQ.

On a periodic basis, approximately every four months, ASX performs a more comprehensive backtesting analysis of each of its margin models. The periodic reviews allow ASX to examine the model in more detail and provide a basis for recommending changes to the model or further analysis. Hypothetical portfolios extend the analysis, allowing ASX to test the performance of margin models when applied to portfolios with certain characteristics (e.g. mix of contracts, concentrations, directionality) that may be particularly adversely affected by market conditions during the validation period.

Sensitivity analysis

ASX applies sensitivity analysis to its margin models as part of its quarterly margin rate reviews for SPAN and CMM. Although margin rate reviews for CMM are conducted only for flat rates, sensitivity analysis for the HSVaR component of CMM is carried out at the same time. Sensitivity analysis allows ASX to test the performance of a model beyond the boundaries of its existing assumptions, potentially also examining the implications of assumptions that would not reasonably be expected to hold. ASX has developed internal guidance setting out its approach to sensitivity analysis for margin models, which highlights three main assumptions that it varies when conducting sensitivity analysis: the confidence interval, holding period and look-back period. In addition, ASX investigates the impact of varying the historical simulation period for CMM, the impact of varying the key inputs and methodology used in determining inter-commodity spread concession rates, and the application of floors to model parameters in SPAN. If varying particular inputs reveals weaknesses in the model, as evidenced by a larger number of exceptions than expected, ASX considers whether to make adjustments to the model. Where sensitivity analysis identifies potential weaknesses in margin models, the RQG will consider recommended changes to address these.

6.7 A central counterparty should regularly review and validate its margin system.

ASX Clear's margin methodologies are also subject to a comprehensive annual validation and ongoing review under ASX's Model Validation Standard (see CCP Standard 4.5). The RQG is responsible for reviewing the regular reviews of models carried out by CRQ, while Internal Audit coordinates the independent validation process with CRQ input. ASX's Model Validation Standard requires that all models that are critical to ASX (as measured against a series of risk factors) undergo a full annual validation (see CCP Standard 2.6). Under this framework the SPAN and DPS models must be externally validated annually, while CMM must be externally validated once every two years. During the Assessment period, ASX engaged external experts for a three-year period to conduct annual validations of ASX's key risk models, including both the SPAN and DPS models. The first validation of the SPAN model was completed in June 2015, and the validation of the DPS was completed in July 2015. A full external validation of CMM is scheduled for completion in 2015/16. The Bank will continue to monitor the outcome of these validations.

At ASX, the margining process is governed by an internal Margin Policy and Margin Standard which is reviewed annually, with material changes approved by the Clearing Boards. The authorisation and documentation process for margin parameter changes and guidelines for the application of management discretion are also reviewed annually.

ASX publishes detailed margining information on its website, including descriptions of the margining methodology, schedules of margin rates, and daily SPAN margin parameter files. These files allow participants to perform margin calculations on hypothetical or actual portfolios. A number of third-party vendors use this information to provide margin estimation software to participants. ASX also maintains a web-based margin estimator that participants and their clients can use to calculate margin requirements on ETO positions.

6.8 In designing its margin system, a central counterparty should consider the operating hours of payment and settlement systems in the markets in which it operates.

ASX Clear primarily provides clearing services for the Australian-based ASX market and for Chi-X in relation to ASX-quoted securities transacted on its market, as well as some OTC equity options on Australian stocks. ASX Clear's operating hours are consistent with the relevant payment and settlement systems (ASX Settlement, Austraclear and RITS).

Standard 7: Liquidity risk

A central counterparty should effectively measure, monitor and manage its liquidity risk. A central counterparty should maintain sufficient liquid resources in all relevant currencies to effect same-day and, where appropriate, intraday and multiday settlement of payment obligations with a high degree of confidence under a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would generate the largest aggregate liquidity obligation for the central counterparty in extreme but plausible market conditions.

Rating: Observed

ASX Clear maintains a robust framework for managing its liquidity risk (CCP Standard 7.1). Under this framework, ASX Clear provides participants with information to assist them in managing their liquidity needs and risks, and employs an experienced Portfolio Risk Manager to monitor and manage ASX Clear's own settlement and funding flows (CCP Standard 7.2). On 30 March 2015, ASX Clear transitioned to a higher ‘Cover 2’ standard for covering its liquidity exposures, consistent with the Bank's supplementary interpretation of CCP Standard 7.3. Under the ‘Cover 2’ standard, ASX Clear calibrates its liquid resources to ensure that it can meet its payment obligations on time in the event that the two participants (previously one participant) and their affiliates with the largest aggregate payment obligation to the CCP were to default in the extreme but plausible scenarios envisaged in its stress tests, consistent with obligations for a facility that is systemically important in multiple jurisdictions (CCP Standards 7.3, 7.8). To support this transition, ASX Clear obtained an additional $100 million in liquid resources through an increase in the committed liquidity facility from ASX Limited, from $50 million to $150 million. This increase is backed by a $100 million committed liquidity facility from one of the major banks to ASX Limited. The liquid resources held to cover liquidity obligations under stressed scenarios comprise a portfolio of high-quality assets managed by ASXCC on ASX Clear's behalf, supported by procedures to ensure timely and reliable access to liquidity from the portfolio as required (CCP Standards 7.4, 7.6). In addition, ASX Clear is able to source liquidity from participants via OTAs to address liquidity shortfalls related to cash equity transactions. To enhance its management of liquidity risk, ASX Clear has access, via ASXCC's ESA, to Australian dollar liquidity from the Reserve Bank against eligible collateral (CCP Standard 7.7). The use of OTAs with participants should ensure that ASX Clear does not face a liquidity shortfall in respect of cash market transactions, while ASX will implement measures that can address any residual uncovered liquidity shortfalls in respect of derivatives transactions as part of broader enhancements to its recovery arrangements in October 2015 (CCP Standard 7.9). During the Assessment period, a validation of ASX Clear's liquidity stress-testing models was completed by an external expert.

The Bank's assessment is that ASX Clear has observed the requirements of CCP Standard 7 during the 2014/15 Assessment period.

While existing arrangements are assessed to meet the minimum requirement under the standard, ASX Clear is encouraged to continue to refine and enhance the sensitivity analysis of its liquidity stress-testing model and its reverse stress-testing framework for liquidity, and to continue to integrate these into its broader stress-testing and liquidity management processes. This includes examining further the sensitivity of outcomes to certain underlying assumptions. One matter in particular that ASX Clear is encouraged to consider further is how it models the degree of reliance on OTAs in its liquidity risk management framework.

ASX Clear is also encouraged to:

• continue to review its approach to liquidity stress testing more broadly in light of the external validation of its liquidity stress-testing model and evolving international best practice, including outcomes of CPMI-IOSCO work on liquidity stress testing
• periodically review its arrangements to address a liquidity shortfall, to ensure that these continue to strike an appropriate balance in terms of comprehensiveness, effectiveness, transparency and controllability, creating appropriate incentives and minimising negative impact
• carry out plans to develop additional disclosures to assist participants in understanding their contingent exposure to the use of tools to address a liquidity shortfall.

ASX Clear's arrangements to measure, monitor and manage its liquidity risk are described in further detail under the following sub-standards.

7.1 A central counterparty should have a robust framework to manage its liquidity risks from its participants, commercial bank money settlement agents, nostro agents, custodians, liquidity providers and other entities.

Sources of liquidity risk

The primary source of liquidity risk in ASX Clear is the potential default of a participant with payment obligations to the CCP. To the extent that the CCP relies on such incoming payment flows to meet its obligations to other participants, it could face a liquidity shortfall. Payment obligations to and from participants may be in the form of payments for settlement of a securities transaction, or initial and variation margin. ASX Clear does not rely on commercial bank money settlement agents, nostro agents, custodians or liquidity providers (other than participants providing liquidity via OTAs (see CCP Standard 7.3) and liquidity provision by ASX Limited under a $150 million committed liquidity facility) in meeting its Australian dollar payment obligations.

Managing liquidity risk

ASX Clear minimises the size of its liquidity obligations to participants through daily (and in the case of significant market movements, intraday) settlement of variation margin. This prevents the build-up of large liquidity (and credit) exposures. ASX Clear's framework for managing its remaining liquidity risks involves the monitoring of liquidity exposures through daily stress testing (see CCP Standard 7.8) and the maintenance of sufficient liquid resources to be able to meet payment obligations in the event of a participant default (see CCP Standard 7.3).

ASX Clear also provides participants with information to help them manage their liquidity needs and risks, which in turn protects the CCP. Participants are provided with sufficient information to understand their intraday margin call obligations, and replicate stress-test outcomes. ASX publishes a daily SPAN and CMM margin parameter file that allows participants to estimate payment obligations associated with margin requirements for actual or hypothetical portfolios. Advance warnings and communications in respect of calls for additional margin and margin rate changes also assist participants in their liquidity planning. For example, participants are notified if their stress-testing results approach their STELs. Additionally, ASX works closely with participants where new obligations are likely to affect their liquidity needs. ASX Clear plans to develop additional disclosures to assist participants in understanding their contingent exposure to the use of tools to address a liquidity shortfall, including the potential liquidity impact of the use of OTAs (see CCP Standards 7.3 and 7.9).

7.2 A central counterparty should have effective operational and analytical tools to identify, measure and monitor its settlement and funding flows on an ongoing and timely basis, including its use of intraday liquidity.

Daily cash flows and investment of funds across the ASX CCPs are monitored and managed by an experienced Portfolio Risk Manager. In addition, the CRM department reviews a daily report of key risk indicators, related to liquidity demands. Any issues are escalated to the CRO. Funding arrangements, such as settlement flows, are also monitored in real time by the CRM and Treasury functions.

Portfolio Risk Management uses reports provided by CRM to monitor SPAN-calculated margin flows originating from DCS, which feed into ASX's Treasury Management System. Portfolio Risk Management enters trades required to manage daily cash-flows into ASX's Treasury Management System. Clearing and Settlement Operations uses daily settlement reports produced by the Treasury Management System to generate settlement instructions in Austraclear. Resulting cash flow movements are monitored in RITS. Margin payments from participants must be made by 10.30 am, while outward payments to participants are manually managed in the RITS queue, and are only released once all incoming margin obligations have been settled (generally by 12.00 pm).

ASX Clear mitigates potential liquidity risks in several ways. ASX Clear maintains $250 million in prefunded financial resources invested in liquid assets (see CCP Standards 4 and 15). In addition, ASX Clear has $150 million available to it under a committed standby liquidity facility from ASX Limited. This was increased from $50 million on 5 May 2015, with the increase of $100 million supported by a committed liquidity facility established with one of the major banks. ASX Clear does not include promissory commitments in its liquidity calculations, including in its stress tests, in recognition of the potential delay in receipt of these resources.

ASX Clear's liquid assets are invested and managed on its behalf by ASXCC (see ‘ASX Group Structure’ in Appendix A). ASXCC's Investment Mandate establishes a clear definition of liquid assets: liquid assets comprise cash available for use within two hours, and securities traded in a liquid market which can be sold for same day value with settlement proceeds available within two hours and which are eligible for repurchase with the Reserve Bank (see CCP Standard 7.4).

7.3 A central counterparty should maintain sufficient liquid resources in all relevant currencies to settle securities-related payments, make required variation margin payments and meet other payment obligations on time with a high degree of confidence under a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would generate the largest aggregate payment obligation to the central counterparty in extreme but plausible market conditions. In addition, a central counterparty that is involved in activities with a more complex risk profile or that is systemically important in multiple jurisdictions should consider maintaining additional liquidity resources sufficient to cover a wider range of potential stress scenarios that should include, but not be limited to, the default of the two participants and their affiliates that would generate the largest aggregate payment obligation to the central counterparty in extreme but plausible market conditions.

ASX Clear's liquid resources include margin and other collateral posted by participants, as well as its own holdings of liquid assets and a committed liquidity facility from ASX Limited. ASX Clear's holdings of liquid assets and cash collateral posted by participants are invested on its behalf by ASXCC in accordance with its Investment Mandate. The ASX Liquidity Risk Policy requires that ASX hold liquid assets sufficient to cover the sum of:

• The Default Liquidity Requirement (DLR) across the ASX CCPs. The DLR for ASX Clear is calculated as the sum of the AFR and the cash margin requirement for two defaulted participants. For the purposes of calculating the DLR, an amount of $300 million is included for the AFR of ASX Clear – this includes $50 million of the $150 million committed liquidity facility from ASX Limited. The $100 million portion which is backed by a committed liquidity facility from one of the major banks is not included on the basis that it is undrawn. The AFR is calibrated to cover the largest stressed liquidity exposures to two participants and their affiliates, with the exception of peak liquidity exposures to A-rated and B-rated participants (see CCP Standard 7.8). The cash margin requirement is an estimate of the largest margin requirement for any two participants of ASX Clear and their affiliates, based on participants' margin obligations over the previous quarter. The calculation of ASX Clear (Futures)' DLR is described in Appendix A1.2, CCP Standard 7.3.
• An ‘ordinary liquidity requirement’. This is intended to cover day-to-day liquidity requirements, such as the return of margin to participants. This is calibrated to the maximum margin outflow in normal market conditions in the ASXCC cash collateral portfolio (as a percentage of portfolio value) over the last 12 months and is reviewed annually.

The requirement to cover the DLR across both CCPs takes a conservative approach in that it provides for the simultaneous default, under extreme but plausible market conditions, of the two largest participant and their affiliates in each of ASX Clear and ASX Clear (Futures).

Consistent with the Bank's supplementary interpretation of this sub-standard (updated in October 2014) that, among other things, clarifies when a CCP is systemically important in multiple jurisdictions, ASX Clear is held to the higher standard that it have sufficient liquid resources to cover obligations arising in the event of the default of its two largest participants and their affiliates (see Section 3.6). Prior to 30 March 2015, ASX Clear held sufficient liquid resources to meet its payment obligations in the event of the joint default of the one participant and its affiliates with the largest aggregate payment obligation to the CCP To support the transition to the higher minimum standard, ASX Clear obtained an additional $100 million in liquid resources through an increase in the committed liquidity facility from ASX Limited.

In the event of the default of a participant with net securities-related payment obligations, ASX Clear's liquidity needs may be significantly greater than its credit exposure. From a credit risk perspective, ASX Clear is exposed only to replacement cost risk from an adverse price movement in the resale of any securities due to be purchased. Funds received from the sale may be used to offset its payment obligation. However, there is a timing mismatch between the point at which ASX Clear must meet the defaulted participant's payment obligation in relation to the purchased securities and that at which it receives funds from the resale of these (typically three days later). This creates a gross liquidity exposure for ASX Clear that may significantly exceed any replacement cost exposure on the same default. As a result, ASX Clear's AFR may be insufficient to meet its full liquidity exposure on a default.

With this in mind, ASX Clear introduced OTAs in April 2014 to ensure access to sufficient liquidity to settle cash market transactions when due, while avoiding the costs of maintaining a significantly increased quantum of outright liquid resources. If a participant were to default due to a shortfall of funds, the ASX Default Management Committee (DMC) would first determine whether ASX Clear could inject sufficient liquidity, from the existing AFR of $400 million, to ensure that settlement of payment obligations occurred as expected.

It is expected that available resources would first be injected. However, if it was not possible or prudent to rely solely on available liquidity, ASX Clear would settle transactions by entering into OTAs with participants that were due to deliver securities to the defaulted participant. In these circumstances, ASX Settlement's back-out algorithm would identify transactions in the batch that, if removed, would reduce ASX Clear's payment obligations on behalf of the defaulted participant to zero, while avoiding an increase in net payment obligations for other participants (see Appendix A2.1, SSF Standard 10.2). ASX Clear would then settle the novated trades that have been identified by the back-out algorithm by entering into OTAs with participants due to deliver securities under these trades. OTAs enable the CCP to settle its payment obligations with these participants on the intended settlement date through an arrangement to offset the underlying settlement obligations to and from those participants.

Under the first leg of the OTA, ASX Clear would, in effect, re-deliver the stock to the relevant non-defaulting participant in return for payment equal to the amount of the payment obligation of ASX Clear to that participant. Under these arrangements, ASX Clear would agree to repurchase the stock the next business day under the second and final leg of the transaction. If this transaction was unable to be settled on the next business day, subsequent OTAs would be entered into on a daily basis until the settlement of on-market close-out trades had taken place.

7.4 For the purpose of meeting its minimum liquid resource requirement, a central counterparty's qualifying liquid resources in each currency include cash at the central bank of issue and at creditworthy commercial banks, committed lines of credit, committed foreign exchange swaps and committed repos, as well as highly marketable collateral held in custody and investments that are readily available and convertible into cash with prearranged and highly reliable funding arrangements, even in extreme but plausible market conditions. If a central counterparty has access to routine credit at the central bank of issue, the central counterparty may count such access as part of the minimum requirement to the extent it has collateral that is eligible for pledging to (or for conducting other appropriate forms of transactions with) the relevant central bank. All such resources should be available when needed.

ASXCC holds an ESA at the Bank to facilitate money settlements on behalf of ASX Clear (and ASX Clear (Futures)) (see CCP Standard 7.7). As an ESA holder, ASXCC is eligible for access to Australian dollar liquidity under the Bank's overnight and intraday liquidity facilities (against eligible collateral specified by the Bank that is held within its investment portfolio), including in times of market stress.

The ASXCC Investment Mandate requires the Portfolio Risk Manager to maintain high-quality liquid assets to meet ASX Clear's minimum liquidity requirements, consistent with the definition of qualifying liquid assets under this standard. Liquid assets must be cash available for use within two hours or held in a restricted set of highly liquid securities eligible for repurchase transactions with the Bank. Investments held in the form of short-dated fixed bonds, bank bills, negotiable certificates of deposit and floating rate notes issued by approved counterparties or obligors are required to be tradable on a robust secondary market. At 30 June 2015, term deposits accounted for 18 per cent of the ASXCC investment portfolio, at-call deposits 9 per cent, with holdings of other approved securities making up the balance. OTAs with participants (see CCP Standard 7.3) also meet the definition of qualifying liquid resources for the purpose of this standard, since they are prearranged, committed and reliable (given that they effectively utilise funds otherwise due to participants). Eligible investment counterparties are discussed under CCP Standard 15.

ASX Clear's committed liquidity facility with ASX Limited is contractually based, and can be considered highly reliable due to the corporate relationship between the two entities. These funds would be sourced from a combination of ASX Limited's cash resources ($50 million), which are not routinely utilised in any other part of ASX's operations, and a committed liquidity facility with one of the major banks ($100 million). The bank facility is also contractually based, and could only be drawn down by ASX Limited for the purposes of funding ASX Clear's default management liquidity requirements.

7.5 A central counterparty may supplement its qualifying liquid resources with other forms of liquid resources. If the central counterparty does so, these liquid resources should be in the form of assets that are likely to be saleable or acceptable as collateral for lines of credit, swaps or repos on an ad hoc basis following a default, even if this cannot be reliably prearranged or guaranteed in extreme market conditions. Even if a central counterparty does not have access to routine central bank credit, it should still take account of what collateral is typically accepted by the relevant central bank, as such assets may be more likely to be liquid in stressed circumstances. A central counterparty should not assume the availability of emergency central bank credit as part of its liquidity plan.

ASX Clear does not supplement its qualifying liquid resources with other forms of liquid resources.

7.6 A central counterparty should obtain a high degree of confidence, through rigorous due diligence, that each provider of its minimum required qualifying liquid resources, whether a participant of the central counterparty or an external party, has sufficient information to understand and to manage its associated liquidity risks, and that it has the capacity to perform as required under its commitment. Where relevant to assessing a liquidity provider's performance reliability with respect to a particular currency, a liquidity provider's potential access to credit from the central bank of issue may be taken into account. A central counterparty should regularly test its procedures for accessing its liquid resources at a liquidity provider.

The Portfolio Risk Manager, in consultation with the CRO, is responsible for the provision of timely liquidity to fund margin and settlement obligations to non-defaulting participants. The DMF (see CCP Standard 12.1) covers liquidation of participant non-cash collateral, as well as the liquidation of treasury investments representing participant cash collateral and other prefunded financial resources. While the order of use of particular collateral types will depend on the particular circumstances, a typical order of use may be cash first, followed by non-cash collateral. The order of liquidation of non-cash collateral to meet funding requirements will depend on factors such as prevailing market conditions, liquidity needs and the amount of funds required relative to the size of each collateral lodgement. Procedures for dealing with liquid assets in the treasury investment portfolio are documented, and are available for Portfolio Risk Management staff at both primary and backup sites.

7.7 A central counterparty with access to central bank accounts, payment services or securities services should use these services, where practical, to enhance its management of liquidity risk. A central counterparty that the Reserve Bank determines to be systemically important in Australia and has obligations in Australian dollars should operate its own Exchange Settlement Account, in its own name or that of a related body corporate acceptable to the Reserve Bank, to enhance its management of Australian dollar liquidity risk.

ASXCC holds an ESA. Accordingly, ASX Clear may, via ASXCC, access Australian dollar liquidity under the Bank's overnight and intraday liquidity facilities (against eligible collateral specified by the Bank). ASXCC's Investment Mandate clarifies its ability to make use of these services, by specifying the list of securities (from the Bank's approved list) available for repurchase, including the securities of the Commonwealth, certain states and major banks (CCP Standard 15).

ASX Clear uses ASXCC's ESA to settle its AUD margin and cash settlement obligations in RITS (see also CCP Standard 9).

7.8 A central counterparty should determine the amount and regularly test the sufficiency of its liquid resources through rigorous stress testing. A central counterparty should have clear procedures to report the results of its stress tests to appropriate decision-makers at the central counterparty and to use these results to evaluate the adequacy of, and adjust, its liquidity risk management framework. In conducting stress testing, a central counterparty should consider a wide range of relevant scenarios. Scenarios should include relevant peak historic price volatilities, shifts in other market factors such as price determinants and yield curves, multiple defaults over various time horizons, simultaneous pressures in funding and asset markets, and a spectrum of forward-looking stress scenarios in a variety of extreme but plausible market conditions. Scenarios should also take into account the design and operation of the central counterparty, include all entities that might pose material liquidity risks to the central counterparty (such as commercial bank money settlement agents, nostro agents, custodians, liquidity providers and linked FMIs) and, where appropriate, cover a multiday period. In all cases, a central counterparty should document its supporting rationale for, and should have appropriate governance arrangements relating to, the amount and form of total liquid resources it maintains.

ASX Clear uses daily liquidity stress testing to assess the adequacy of its liquidity arrangements. The stress-testing model, which is adapted from ASX Clear's capital stress tests (described under CCP Standard 4), calculates the maximum liquid funds that ASX Clear would need to access in order to meet obligations arising in the event of the joint default of two clearing participants and their affiliates. Prior to 30 March 2015, ASX Clear calculated the maximum liquid resources that would be required to meet obligations arising in the event of the joint default of a clearing participant and its affiliates. The transition to a higher minimum standard reflects the Bank's updated supplementary interpretation of CCP Standard 7.3, including the Bank's view that ASX Clear is systemically important in multiple jurisdictions.

The liquidity stress tests assume that a default occurs just prior to receipt of the previous day's option premium payments, if owed by the defaulter. The stress tests thereby calculate the worst-case liquidity requirement under each stress-test scenario.

ASX Clear's liquidity stress tests currently apply different assumptions depending on the size and credit standing of the defaulted participant. The liquidity stress testing combines the results from two independent models: one for derivatives transactions and one for the cash market. Since securities settle on a three-day cycle, liquidity stress tests for the cash market uses projected cash inflows and outflows from settlements and margin payments to calculate the cumulative liquidity requirement for each of the four days following a participant default. The stress-test result used in the liquidity stress-test model is taken from the day with the largest cumulative requirement. The cash market and derivatives stress tests each apply three default scenarios, combined with a number of market change scenarios. For A-rated and B-rated participants, however, the cash market liquidity stress calculations are based on the assumption that, for these large participants, excess liquidity exposures generated by the securities settlement cycle would be addressed through OTAs entered into with non-defaulting participants (see CCP Standard 7.3). The cash market liquidity stress-test calculations for these participants therefore reflect mark-to-market close-out losses under the various market scenarios; the liquidity obligations associated with such losses would be crystallised on the fourth day following participant default. The market change scenarios for the liquidity stress tests were amended in July 2015 to reflect changes made to the capital stress-testing model (see CCP Standard 4.6).

For the liquidity stress test, two market change scenarios are applied: an increase of either 10 per cent or 13 per cent (depending on recent market conditions), and a decrease of 14 per cent. In the cash market stress test, the default scenarios apply different assumptions to:

• the priming of settlement accounts before default (either 90 per cent or 100 per cent of deliverable securities are assumed to be in the defaulted participant's settlement account)
• the use of non-novated transactions to offset obligations in respect of novated transactions
• whether the defaulter's sell transactions are deferred for three days or settled as soon as securities are available.

The three default scenarios for the derivatives stress test assume that ASX Clear is able to transfer all, some or no loss-making client accounts.

The results of the liquidity stress tests give the DLR, which is compared with ASX Clear's AFR (currently set to $400 million). A stress-test result above the AFR for three consecutive trading days is considered a breach of the AFR and triggers a detailed investigation into the breach. When assessing the materiality of a liquidity stress-test breach, the CCPs will consider contributing and mitigating factors, such as changes in the ICR of the participant, atypical trading activity, and any AIM that is being held. Given that liquidity resources are maintained on an aggregate basis (in ASXCC), in order to test the sufficiency of ASX's overall liquid resources the results of liquidity stress testing for each CCP are aggregated to calculate the total DLR.

The results of liquidity stress testing are regularly reported to ASX senior management, the Clearing Boards and the Bank. All liquidity stress-test breaches are reported to: the CRO; the Senior Manager, Clearing Risk Policy; the General Manager, Finance; and the Portfolio Risk Manager. A sustained or widely distributed breach may lead to a review of the adequacy of the AFR. Over the Assessment period, there were a number of occasions on which liquidity stress-test results exceeded the AFR due to ASX Clear's exposures to C-rated participants. Since none of these occasions constituted a breach, ASX concluded that an increase in the AFR was not required. This decision was supported by the narrow base of participants affected, the ability to call additional margin under the AIM regime (see CCP Standard 4.7), and the availability of OTAs to provide additional liquidity to settle cash market transactions (see CCP Standard 7.3).

Review and validation

In July 2015, ASX Clear developed a liquidity reverse stress test for ETOs. This differs from the capital reverse stress-testing approach (see CCP Standard 4.6) by isolating the liquidity implications of ETO positions (since, in extremis, cash market settlement obligations can be met using OTAs). As for the capital stress-testing model, the ETO liquidity reverse stress test is repeated for a wide range of scenarios. These include assuming the default of multiple participants, and conducting tests of extreme hypothetical portfolios that would generate losses sufficient to exhaust pooled financial resources under plausible market scenarios.

ASX's Model Validation Standard requires that all models that are critical to ASX (as measured against a series of risk factors) undergo a full annual validation (see CCP Standard 2.6). Under this framework the liquidity stress-test model must be externally validated annually. ASX engaged an external expert to conduct a validation of the liquidity stress-test model during 2014/15. The recommendations from the external validation are broadly consistent with the recommendation and other regulatory priorities relating to liquidity stress testing set out in the Bank's 2013/14 Assessment. Since ASX Clear's liquidity stress tests are a variant of its capital stress tests, a number of enhancements have already been made to the liquidity stress-testing model in July 2015 (see CCP Standard 4.6), with further enhancements planned over the coming Assessment period (both specific to liquidity stress testing and common to both capital and liquidity stress tests).

ASX Clear is encouraged to implement planned enhancements to ensure that its liquidity stress testing can routinely provide more information on the degree to which prefunded liquid resources can be relied on to meet payment obligations on a participant default, without the need to utilise OTAs.

The Bank also encourages ASX to continue regular reviews of close-out assumptions, and refine and integrate into risk management processes its reverse stress testing of liquid resources in ASX Clear. While the price scenarios used in liquidity stress testing are currently subject to regular analysis in reverse stress testing of the capital stress-test model (see CCP Standard 4.6) and ASX Clear has developed a liquidity reverse stress-testing framework, the Bank will further discuss how this framework can be used to validate assumptions unique to liquidity stress testing for cash equities. These assumptions relate to the timing of settlement for cash market positions and the extent to which settlement accounts are ‘primed’ with securities available for settlement before default. Refinements to the liquidity reverse stress test for ASX Clear will depend on ongoing enhancements to the capital stress-test model (see CCP Standard 4.5), as well as planned enhancements to liquidity stress tests to take into account the availability liquidity from OTAs with participants.

The Bank will continue to monitor ASX's progress in this area, in light of the recommendations from the external validation and continued international work on CCP stress testing.

7.9 A central counterparty should establish explicit rules and procedures that enable the central counterparty to effect same-day and, where appropriate, intraday and multiday settlement of payment obligations on time following any individual or combined default among its participants. These rules and procedures should address unforeseen and potentially uncovered liquidity shortfalls and should aim to avoid unwinding, revoking or delaying the same-day settlement of payment obligations. These rules and procedures should also indicate the central counterparty's process to replenish any liquidity resources it may employ during a stress event, so that it can continue to operate in a safe and sound manner.

ASX Clear's OTAs ensure that the CCP would, in all circumstances, be able to fully address any liquidity obligations related to the settlement of securities transactions (see CCP Standard 7.3). Although OTAs cannot be directly used to address liquidity shortfalls related to derivatives transactions or the return of cash market margin, OTAs used to meet payment obligations for settlements may allow for greater use of prefunded liquid resources for these other obligations.

ASX Clear has developed enhanced arrangements allowing it to comprehensively address a liquidity shortfall (including on derivatives transactions), as part of its broader package of enhanced recovery measures due to come into effect in October 2015 (see CCP Standard 3.5 and Section 6). Under these arrangements, prefunded liquid resources and OTAs are supplemented by two additional tools.

• Recovery Assessments of up to $300 million, called in cash from surviving participants, provide an additional source of liquid resources from the point at which they are received by ASX Clear (see CCP Standard 4.8). ASX Clear has the flexibility to call for assessments where it anticipates a liquidity shortfall resulting from a participant default, increasing the likelihood that these funds will be available to meet liquidity needs on a timely basis.
• Any residual liquidity shortfall that could not be addressed via Recovery Assessments would be addressed via a new power to completely terminate all open contracts. Complete termination would be reserved as a last resort tool if there was no other means of addressing a liquidity shortfall (including via intervention of the Reserve Bank as resolution authority if current proposals for a special resolution regime for FMIs are implemented). Under complete termination, all open contracts at the CCP would be settled with participants at their current market value, with any residual liquidity shortfall of the CCP addressed by haircutting settlement payments to participants. Pre-funded liquid resources and Recovery Assessments are set at a level that seeks to minimise the potential for reliance on complete termination to address a residual derivatives-related liquidity shortfall.

Standard 8: Settlement finality

A central counterparty should ensure clear and certain final settlement, at a minimum by the end of the value date. Where necessary or preferable, a central counterparty should facilitate final settlement intraday or in real time.

Rating: Observed

ASX Clear's settlements involve AUD cash payments between participants and the CCP for the purposes of margin payments and other derivative related payments such as options premia, and the settlement of cash securities trades. Cash settlements of margin occur via Austraclear, with interbank obligations settled on an RTGS basis across ESAs at the Bank, via RITS. Settlement of securities trades and lodgement of non-cash collateral takes place in ASX Settlement, with securities delivery obligations effected within CHESS and interbank cash obligations also settled via RITS on an RTGS basis.

ASX Clear defines the point at which settlement is final through contract specifications set out in its Operating Rules and Procedures, and those of ASX. The finality of its settlements is further defined in the Austraclear Regulations and ASX Settlement Operating Rules, supported by the PSNA (CCP Standard 8.1). Contract specifications set out in ASX Clear's and ASX's Operating Rules and Procedures also specify procedures and timetables for final settlement (CCP Standard 8.2). Participants are not able to submit payment or transfer instructions in ASX Clear that may be revoked (CCP Standard 8.3).

The Bank's assessment is that ASX Clear has observed the requirements of CCP Standard 8 during the 2014/15 Assessment period. ASX Clear's arrangements for ensuring finality of these settlements are described in further detail under the following sub-standards.

8.1 A central counterparty's rules and procedures should clearly define the point at which settlement is final.

The settlement of obligations in ASX Clear is final according to the terms of ASX Clear's and ASX's Operating Rules and Procedures, which set out the means of settlement. For payments settled in Austraclear, settlement is final according to Austraclear's Regulations and Procedures and its approval under Part 2 of the PSNA. This approval protects the finality of payments made in the event of a participant entering external administration (see Appendix A2.2, SSF Standard 7.1). For payments and securities obligations settled through ASX Settlement, finality is supported both by ASX Settlement's Operating Rules and Procedures and the approval of its netting arrangements under Part 3 of the PSNA (see CCP Standard 1.2). This approval protects ASX Settlement's netting arrangements for securities and payment obligations. Any interbank transactions arising from settlements in either Austraclear or ASX Settlement are settled in real time across ESAs held with the Bank. Payments within this system are also final and irrevocable; this is supported by the approval of RITS under Part 2 of the PSNA. With this approval, a payment executed in RITS at any time on the day on which a RITS participant enters external administration has the same standing as if the participant had gone into external administration on the next day. Accordingly, in the event of insolvency all transactions settled on the day of the insolvency are irrevocable and cannot be unwound.

8.2 A central counterparty should ensure final settlement no later than the end of the value date, and preferably intraday or in real time, to reduce settlement risk.

The settlement of obligations in ASX Clear is governed by ASX Clear's and ASX's Operating Rules and Procedures. These specify that securities-related obligations use the settlement facility provided by ASX Settlement, while other (e.g. margin) payments to and from the CCP must use the facility provided by Austraclear. In each case, ASX Clear calculates bilateral net positions between itself and its clearing participants that reflect both cash payment and securities obligations. The relevant netting arrangements are outlined in the ASX Clear Operating Rules and Procedures, and ASX Clear is protected as a netting market under Part 5 of the PSNA.

Margin payments

Participants settle routine margin payments via cash transfers in Austraclear, which settle in real time via RITS. Daily margin payments are due by 10.30 am each day, and are settled using ASXCC's ESA. Intraday margin requirements are calculated and notified to participants following significant market movements (see CCP Standard 6.4) and must be settled within the notified time frame, which is generally two hours. Participants may also meet margin obligations via securities that have been lodged in CHESS for this purpose.

Delivery of securities

ASX Settlement's settlement process involves the use of a delivery-versus-payment (DvP) Model 3 mechanism, whereby cash payments and securities transfers are settled simultaneously in a single daily multilateral net batch (see CCP Standard 11). Within this batch, ASX Settlement nets both novated transactions cleared by ASX Clear and non-novated transactions from outside the CCP. As the outcome of this process, ASX Settlement participants face a net cash settlement obligation to or from ASX Settlement and a net securities settlement obligation for each line of stock.

Participants are required to have sufficient securities in their settlement account by 10.30 am on the day of settlement. Once participants' net delivery obligations have been determined, ASX Settlement confirms that sufficient securities are available in each participant's settlement account in CHESS. The transfer of securities within the system is then restricted until the settlement process has been completed. Net cash payment obligations are forwarded for settlement in RITS across Payment Providers' ESAs (see CCP Standard 9). Once cash settlement has been confirmed, ASX Settlement effects the net transfer of securities within CHESS and settlement is usually completed by around 11.30 am.

Failed settlements are removed from the multilateral net batch via the CHESS back-out algorithm (for a securities shortfall), and rescheduled for settlement on the next day as long as the participant is not in default (see Appendix A2.1, SSF Standard 11). In the case of a failed settlement caused by a funds shortfall, ASX Clear will inject funds into the settlement batch or enter into an OTA with sellers of affected securities to ensure timely settlement (see CCP Standard 7.3).

Options settlement

Payments to settle up-front premium amounts for equity options occur via Austraclear, and are due by 10.30 am on the day following a trade. Following the exercise of an equity option contract, obligations are settled in the same manner as cash securities transactions. Any contract which is in-the-money on the day of its expiry is automatically exercised, unless the account holder requests otherwise. When an options contract is exercised, performance obligations are allocated via a random process to a seller of a contract within the same series.

Settlement values for cash-settled derivatives are calculated according to contract specifications, generally on the last trading day. For example, for ASX/S&P 200 Index Options, ASX Clear calculates the final settlement price of the contract on the morning of the day of expiry, with resulting cash flows settled by 10.30 am on the first business day after expiry (the value date for this contract). These cash flows in Austraclear are settled with finality in real time, as are margin-related payments (see CCP Standard 8.1).

8.3 A central counterparty should clearly define the point after which unsettled payments, transfer instructions or other obligations may not be revoked by a participant.

Participants are not able to revoke a payment or transfer instruction once it has been submitted to ASX Clear.

Standard 9: Money settlements

A central counterparty should conduct its money settlements in central bank money where practical and available. If central bank money is not used, a central counterparty should minimise and strictly control the credit and liquidity risk arising from the use of commercial bank money.

Rating: Observed

ASX Clear conducts its money settlements across ESAs at the Bank, via RITS (CCP Standard 9.1). Margin payments are settled in RITS via Austraclear instructions, while securities-related payment obligations are settled in RITS via the CHESS batch operated by ASX Settlement. ASX Clear does not conduct settlement across its own books or in commercial bank money (CCP Standards 9.2, 9.3, 9.4, 9.5). The role and responsibilities of commercial settlement banks acting on behalf of participants for money settlements, known as Payment Providers, are governed by legal agreements between those banks, ASX Clear, ASX Settlement and the Australian Payments Clearing Association (APCA) (CCP Standard 9.3).

The Bank's assessment is that ASX Clear has observed the requirements of CCP Standard 9 during the 2014/15 Assessment period.

ASX Clear's money settlement arrangements are described in further detail under the following sub-standards.

9.1 A central counterparty should conduct its money settlements in central bank money, where practical and available, to avoid credit and liquidity risks. A central counterparty that the Reserve Bank determines to be systemically important in Australia and has Australian dollar obligations should settle its Australian dollar obligations across an Exchange Settlement Account held at the Reserve Bank, in its own name or that of a related body corporate acceptable to the Reserve Bank.

ASX Clear's money settlements are all settled in central bank money. Margin payments are settled via Austraclear on an RTGS basis across ESAs at the Bank, via RITS. ASX Clear uses ASXCC's ESA to settle these obligations in RITS.

Settlement of net securities-related payment obligations arising in the CHESS settlement batch operated by ASX Settlement (see CCP Standard 8.2) also occurs across ESAs at the Bank, via RITS. These obligations are settled on behalf of participants between commercial settlement banks known as Payment Providers.

9.2 If central bank money is not used, a central counterparty should conduct its money settlements using a settlement asset with little or no credit or liquidity risk.

ASX Clear's money settlements are all settled in central bank money.

9.3 If a central counterparty settles in commercial bank money or its participants effect settlements using commercial settlement banks, it should monitor, manage and limit credit and liquidity risks arising from the commercial bank money settlement agents and commercial settlement banks. In particular, a central counterparty should establish and monitor adherence to strict criteria for commercial banks appropriate to their role in the settlement process, taking account of matters such as their regulation and supervision, creditworthiness, capitalisation, access to liquidity and operational reliability. A central counterparty should also monitor and manage the concentration of its and its participants' credit and liquidity exposures to commercial bank money settlement agents and settlement banks.

ASX Clear does not settle in commercial bank money or effect settlement using a commercial settlement bank. The role of commercial settlement banks acting on behalf of participants is covered by the terms of the CHESS Payment Interface Standard Payments Provider Deed entered into by ASX Clear, ASX Settlement, APCA and the relevant commercial bank. This deed sets out payment authorisation deadlines and other operational requirements for Payment Providers that act as commercial settlement banks for participants. Changes to the deed were implemented during 2014/15 to support the introduction of enhanced client protection arrangements (see CCP Standard 13). Further changes to the deed have been agreed to support the transition from a three-day to a two-day equities settlement cycle in March 2016 (see Appendix A2.1, SSF Standard 10.2).

The process of updating the deed involves negotiation with APCA and Payment Providers, which can create delays in implementing changes to authorisation deadlines or other operational requirements required to support changes to the settlement process. During 2014/15, ASX worked with APCA to establish a framework for formally engaging Payment Providers on changes to settlement processes in response to regulatory or market-driven change. This took the form of an APCA standing sub-committee comprising representatives of the Payment Providers, with ASX acting as an ‘observer’. The role of the committee is to consider and provide feedback on proposed amendments to the Standard Payments Provider Deed, facilitate consultation with Payment Providers, and ensure that Payment Providers are notified of any upcoming developments. The Bank will monitor ASX Clear's interaction with the sub-committee.

9.4 If a central counterparty conducts money settlements on its own books, it should minimise and strictly control its credit and liquidity risks.

ASX Clear does not conduct money settlements on its own books.

9.5 A central counterparty's legal agreements with any commercial bank money settlement agents should state clearly when transfers on the books of the relevant commercial bank are expected to occur, that transfers are to be final when effected, and that funds received should be transferable as soon as possible, at a minimum by the end of the day and ideally intraday, in order to enable the central counterparty and its participants to manage credit and liquidity risks.

ASX Clear does not conduct settlements via commercial bank money settlement agents.

Standard 10: Physical deliveries

A central counterparty should clearly state its obligations with respect to the delivery of physical instruments or commodities and should identify, monitor and manage the risks associated with such physical deliveries.

Rating: Not applicable

ASX Clear did not clear any contracts with physical delivery obligations during the Assessment period.

The Bank has concluded that CCP Standard 10 does not apply to ASX Clear.

10.1 A central counterparty's rules should clearly state its obligations with respect to the delivery of physical instruments or commodities.

Not applicable to ASX Clear.

10.2 A central counterparty should identify, monitor and manage the risks and costs associated with the storage and delivery of physical instruments or commodities.

Not applicable to ASX Clear.

Standard 11: Exchange-of-value settlements

If a central counterparty is involved in the settlement of transactions that comprise two linked obligations (for example, securities or foreign exchange transactions), it should eliminate principal risk by ensuring that the final settlement of one obligation is conditional upon the final settlement of the other.

Rating: Observed

ASX Clear eliminates principal risk in the settlement of cash equity transactions by ensuring that the transfer of securities occurs if and only if the associated payment is settled at the same time (CCP Standard 11.1). In order to eliminate principal risk, ASX Clear employs the DvP Model 3 settlement mechanism in ASX Settlement (CCP Standard 11.2).

The Bank's assessment is that ASX Clear has observed the requirements of CCP Standard 11 during the 2014/15 Assessment period. ASX Clear's arrangements for DvP settlement of linked obligations are described in further detail under the following sub-standards.

11.1 A central counterparty should eliminate principal risk associated with the settlement of any obligations involving two linked obligations by ensuring that the payment system or securities settlement facility employed operates in such a way that the final settlement of one obligation occurs if and only if the final settlement of the linked obligation also occurs, regardless of whether the securities settlement facility settles on a gross or net basis and when finality occurs.

ASX Clear eliminates principal risk by ensuring that settlement of all securities transactions takes place in ASX Settlement using a DvP Model 3 settlement mechanism (see CCP Standard 11.2).

11.2 A central counterparty should eliminate principal risk associated with the settlement of linked obligations by ensuring that it employs an appropriate delivery versus payment (DvP), delivery versus delivery (DvD) or payment versus payment (PvP) settlement mechanism.

ASX Clear employs the DvP Model 3 settlement mechanism in ASX Settlement to eliminate principal risk associated with its securities transactions. Under this arrangement, settlement of novated and non-novated transactions takes place in a daily batch process run in CHESS. All scheduled securities transfers are reduced to a single multilateral net transfer per line of stock for each participant. Payments associated with these transactions are similarly settled on a multilateral net basis, in RITS, contemporaneously with the securities transfers (see Appendix A2.1, SSF Standard 10.2 for a detailed description of ASX Settlement's settlement model).

During the Assessment period, ASX Clear implemented changes to mitigate potential principal risk around the LEPO expiry settlement process. Under the new arrangements, securities delivered at expiry are settled on a DvP basis in the CHESS batch at the prevailing stock price, rather than the nominal $0.01 option strike price.^[14] The changes provide a long-term solution to address the potential principal risk to ASX Clear that could arise from settling the balance of the premium separately from the underlying securities. This risk was previously mitigated by withholding outgoing payments to participants until the linked securities had settled within the batch.

The use of a DvP Model 3 settlement mechanism is acceptable for ASX Clear given the relatively low average value of securities transactions involved. In 2014/15, the average value of individual gross settlement instructions in ASX Settlement for novated transactions cleared by ASX Clear was around $4,850. This compares with an average of $30.1 million for an individual DvP settlement instruction for debt securities in Austraclear. In particular, the value of Australian Government securities and mFund service transactions cleared by ASX Clear and settled within the CHESS batch remains relatively low compared with values settled within Austraclear (see Appendix A2.1, SSF Standard 10.2).

DvP Model 1 settlement (real time exchange of individual obligations) has certain risk management advantages over DvP Model 3 settlement, since the latter framework may only settle on an all or nothing basis. However, DvP Model 3 may be advantageous for a settlement system servicing a CCP that manages its risk on a net portfolio basis. Partial settlement (due to a clearing participant default) under DvP Model 1 would alter net exposures upon which the CCP's risk controls are based. This issue may be addressed within a DvP Model 1 framework by managing the order in which obligations are settled. However, achieving this may be complex and introduce inefficiencies from a liquidity viewpoint. Accordingly, while in its 2008 Review of Settlement Practices for Australian Equities the Bank encouraged ASX to consider introducing a DvP Model 1 settlement mechanism for cash equities over the medium term, the Bank accepts that, taking into account these complexities, neither ASX nor market participants are persuaded of the need to move to a new settlement model.^[15] Furthermore, ASX has taken actions since the 2008 review to further strengthen the resilience of the batch settlement process.

Standard 12: Participant default rules and procedures

A central counterparty should have effective and clearly defined rules and procedures to manage a participant default. These rules and procedures should be designed to ensure that the central counterparty can take timely action to contain losses and liquidity pressures and continue to meet its obligations.

Rating: Observed

ASX Clear has powers under its Operating Rules and Procedures to manage a participant default, and has documented an internal framework setting out its default management approach (CCP Standard 12.1). Powers available to ASX Clear include powers to suspend a defaulted participant, apply margin and pooled financial resources to meet losses, and a range of close-out and hedging tools (CCP Standards 12.1, 12.2). Participants are also required to report default events or an expected default to the CCP. ASX Clear has published its Operating Rules that set out its default management powers, and a high-level overview of its approach to default management (CCP Standard 12.3). Default management procedures are tested and reviewed on at least an annual basis (CCP Standard 12.4). ASX Clear's default management arrangements are designed for the particular characteristics of its activities, and take into account potential impacts on Australian markets (CCP Standard 12.5).

In May 2015, ASX Clear employed its default management procedures to address the appointment of an external administrator to BBY Limited (CCP Standard 12.2 and Section 4).

The Bank's assessment is that ASX Clear has observed the requirements of CCP Standard 12 during the 2014/15 Assessment period. While ASX Clear's default management arrangements are assessed to meet the minimum standard and were recently utilised without material problems, the Bank encourages ASX Clear to complete its review of experience gained from the BBY Limited default, and to enhance its default management arrangements as appropriate.

ASX Clear's default management arrangements are described in further detail under the following sub-standards.

12.1 A central counterparty should have default rules and procedures that enable the central counterparty to continue to meet its obligations in the event of a participant default and that address the replenishment of resources following a default. A central counterparty should ensure that financial and other obligations created for non-defaulting participants in the event of a participant default are proportional to the scale and nature of individual participants' activities.

Rules and procedures

The Operating Rules and Procedures provide ASX Clear with the authority and flexibility to deal with a participant default using a variety of methods to manage its exposure. For cash market transactions, ASX Clear may enter into market transactions to sell or purchase securities to facilitate the settlement of novated transactions, and is also able to enter into an OTA in respect of any settlements involving the failed participant, or those affected by its failure (see CCP Standard 7.3). For derivatives, ASX Clear has the ability to close out any open contracts, to exercise or terminate open contracts, or to seek to transfer (port) client positions. The specific close-out method will depend on market conditions and the composition of the defaulted participant's portfolio.

The formal Rules and Procedures are supplemented by an internal DMF, applicable to both ASX Clear and ASX Clear (Futures), to assist in the management of a clearing participant default. The DMF is based on high-level principles regarding the management of a default that have been approved by the CS Boards. In particular, these principles specify that the key aim in handling a default is to minimise the impact of the event on the CCP, clearing participants and the market. The DMSG provides oversight and review of the DMF, including discussion of proposed changes prior to submission to the CS Boards.

The DMF covers each stage of a default, from the identification of a default event, to the management of the defaulter's position, real-time monitoring of financial solvency, and financial offset and reconciliation. It is intended to be flexible, rather than prescriptive, and may be developed and adapted as appropriate.

The DMF outlines the key roles and responsibilities in managing a clearing participant default. The ASX Group has established a DMC, comprising senior management from relevant policy and operational areas, to be the primary decision-making forum for the management of a default. The DMC's responsibilities range from recommending declarations of default and suspensions, to devising a risk neutralisation plan and overseeing its implementation.

Default management

The DMF and the Operating Rules and Procedures allow ASX Clear to employ a variety of methods to close out or otherwise manage the positions of a defaulted participant. These include transfer, on- or off-market liquidation, expiry, exercise, and hedging (see CCP Standard 12.2(b) for more information on close-out arrangements). If standard close-out processes could not be successfully carried out, under ASX Clear's enhanced recovery approach ASX would be able to terminate (on a pro rata basis to the extent practicable) positions held by non-defaulting participants that were opposite to those that the CCP had inherited from the defaulter (see Section 6). These positions would be terminated at their current market value, restoring the CCP to a matched book. As a last resort, ASX Clear would have the power to completely terminate all open contracts in order to restore its matched book.

Use and sequencing of financial resources

Following a declaration of default, ASX Clear would suspend the defaulted participant's authority to clear. Suspension, rather than termination, ensures that the participant remains bound by the CCP's rules. There would be no further payments or collateral movements to the clearing participant following declaration of a default. This enables the CCP to ‘crystallise’ the defaulted participant's position and generate detailed account and position data (including collateral held). This establishes the basis for the close out of exposure to the defaulted participant.

In the first instance, ASX Clear would meet obligations arising from a participant default using collateral lodged by that participant. Collateral may be in the form of cash or eligible securities (see CCP Standard 5.1). In the event that the defaulted participant's contributions were insufficient, ASX Clear could draw upon pooled financial resources (see CCP Standard 4).

In addition to its $250 million of prefunded resources, ASX Clear has the capacity to call a further $300 million in Emergency Assessments from participants. Under ASX Clear's enhanced recovery approach, due to come into effect in October 2015, this assessment power will be retained, with some adjustments to the way that individual participant assessment obligations are calculated (see CCP Standard 4.8 and Section 6). As a last resort, ASX would have a power in recovery to allocate losses by reductions to settlement payments in the context of complete termination of all open contracts.

ASX has documented, in an internal paper provided to the ASX Limited Board, a process for making decisions regarding replenishment of ASX Clear's financial resources following any draw down arising from a participant default. Responsibility for determining whether to replenish financial resources and how this might best be achieved ultimately lies with the ASX Limited Board. The decision would be taken in consultation with the ASX Clear Board. ASX's documented replenishment intentions canvass several options, including the injection of additional funds from within the ASX Group, from participants or from third-party institutions. The particular approach taken would depend on the specific circumstances, including the severity of the loss and the market environment (see also CCP Standard 4.8). ASX Limited has also committed to maintaining a certain level of equity capital in ASX Clear (including via ASXCC) provided certain conditions are met, including that ASX Clear is solvent. For its part, the Bank would require that any potential new composition of financial resources continued to meet the CCP Standards. ASX Clear's enhanced recovery approach will replace the current replenishment arrangements with an approach that relies partly on participant contributions (see CCP Standard 4.8 and Section 6). ASX would initially contribute up to $75 million to the replenished default fund, with participants contributing up to the same amount. The post-replenishment composition of the default fund would depend on the amount to be replenished; the larger the initial drawdown, the closer would be the post-replenishment composition to a 50/50 split of ASX and participant contributions. In the case of a drawdown of less than $75 million, ASX would meet the entire replenishment requirement, preserving the current default fund composition of 100 per cent ASX funds. If further increases to the default fund were subsequently required, these would be met 50/50 by ASX and participant contributions.

12.2 A central counterparty should be well prepared to implement its default rules and procedures, including any appropriate discretionary procedures provided for in its rules. This requires that the central counterparty should:

1. require its participants to inform it immediately if they:
   1. become subject to, or aware of the likelihood of external administration, or have reasonable grounds for suspecting that they will become subject to external administration; or
   2. have breached, or are likely to breach, a risk-control requirement of the central counterparty; and
2. have the ability to close out, hedge or transfer, a participant's open contracts in order to appropriately control risk of a participant that:
   1. becomes subject to external administration; or
   2. breaches a risk-control requirement of the central counterparty.

To facilitate early identification of a default event, the ASX Clear Operating Rules and Procedures require that a participant inform ASX Clear immediately in the event of a default, or if there is a reasonable expectation of such an event. This requirement is legally binding and would continue to apply even in the event that an external administrator was appointed to the clearing participant. The Operating Rules and Procedures envisage a number of possible events of default. These include: becoming subject to external administration; being unable to meet obligations relating to open contracts; default of the clearing participant at another CCP or exchange; and being in breach of the CCP's risk-control requirements, such as failing to fulfil margin or other payment obligations to the CCP.

Although the ASX Clear Operating Rules set out specific events of default, declaration of a default would never be automatic. Instead, ASX Clear maintains the right to investigate a potential default fully, taking into account any extenuating circumstances. This was the approach initially taken by ASX in relation to events of default relating to BBY Limited, which was unable to meet margin requirements in a timely manner (see Section 4 and below). The process of investigating, and the subsequent handling of, a potential default would depend on its nature. Specifically, the rules distinguish between ‘operational’, ‘compliance’ and ‘financial’ defaults. This differentiation appropriately reflects the gravity and potential ramifications of a declaration of default. The Participant Incident Response Committee (PIRC), chaired by the GE, Operations and made up of senior staff from operational, risk management, compliance and legal departments, is responsible for monitoring and managing clearing participant incidents and the escalation of potential default events to the DMC (see Appendix A2.1, SSF Standard 3.1 for further detail on the PIRC). Ultimately, the declaration of any default is the responsibility of the Managing Director and CEO of ASX (or relevant delegates), under delegated responsibility from the CS Boards.

The DMF and the Operating Rules and Procedures allow ASX Clear to employ a variety of methods to close out or otherwise manage the positions of a defaulted participant. These include hedging, transfer, on- or off-market liquidation, expiry and exercise. As a last resort, partial or complete termination powers would be available to ASX Clear once its enhanced recovery arrangements are in place (see CCP Standard 12.1 and Section 6). There are advantages and disadvantages to each close-out method and therefore the specific method used in practice would depend on market conditions and the composition of the defaulted participant's portfolio. For example, subject to other legal and practical impediments, the account structure used by the CCP would be a relevant factor in determining whether client positions could be transferred following a default event. The individually segregated client account structure for derivative positions at ASX Clear makes it more likely that transfer of these positions could be achieved than in the case of cash securities, for which client positions and house positions are commingled. In practice, it is likely that the scope for transfer of cash market positions would be limited under any account structure due to the short (three-day) equity settlement cycle (see CCP Standard 13).

Default of BBY Limited

In May 2015, ASX Clear employed its default management procedures to address the appointment of an external administrator to BBY Limited. Earlier in the month, BBY Limited had missed the deadline for settlement of a CBPL-related AIM call. Although this constituted an event of default under the ASX Clear Operating Rules, ASX determined not to declare an immediate default and instead permitted a delayed payment. The DMC convened to address this incident imposed restrictions on BBY Limited's derivatives clearing activity, and engaged with the participant on a plan to achieve an orderly exit from its derivatives clearing business; this included the close out or transfer of client positions.

Two weeks after the initial missed AIM call, BBY Limited was placed into voluntary administration, activating ASX Clear's default management process. ASX managed the default through a combination of client transfers (where these had already been sufficiently advanced prior to the default being declared) and close out or expiry of remaining derivatives positions. Unsettled cash equity positions were also closed out since BBY Limited's voluntary administrators did not consent to ASX carrying these positions through to settlement. All cash equity positions (with the exception of positions in stocks that were either suspended or subject to a trading halt, as well as a small number of stocks outside the ASX 500 All Ordinaries) and most of the derivatives exposures were closed out within four days, with all losses incurred in the close-out process covered by margin held by ASX Clear. The steps taken by ASX to manage this default are described in more detail in Section 4.

12.3 A central counterparty should publicly disclose key aspects of its default rules and procedures.

ASX Clear's Operating Rules are available on the ASX public website. These rules outline when ASX Clear may take action against a participant and the powers of ASX Clear in the event of a default, including the ability of ASX to transfer client derivative positions to other participants. ASX Clear's Operating Rules set out the treatment of proprietary and customer positions. In addition, ASX has published a high-level overview of its approach to managing a participant default on its website.

12.4 A central counterparty should involve its participants and other stakeholders in the testing and review of the central counterparty's default procedures, including any close out procedures. Such testing and review should be conducted at least annually and following material changes to the rules and procedures to ensure that they are practical and effective.

The DMF is reviewed on an annual basis, or more frequently as needed, and is regularly tested by in-house default management ‘fire drills’. These tests ensure that relevant ASX personnel are familiar with the default management process and identify areas where the DMF should be updated. Findings, including any recommended enhancements to the DMF, are reported to the DMSG after each fire drill. The Bank observed the ASX fire drill exercise conducted in early 2014 and will continue to observe future fire drills. No fire drill was held in 2014/15 since default management arrangements were tested in the context of the default of BBY Limited. In recent years, the DMF has been updated on several occasions: during the 2011/12 Assessment period to incorporate experiences gained from the default of MF Global; in the 2012/13 Assessment period in anticipation of the launch of the OTC derivatives clearing service; and then in May and October 2014 to account for the use of OTAs, changes to client segregation arrangements, and the implementation of the ‘juniorisation’ mechanism in ASX Clear (Futures). A further update to the DMF is expected in coming months, to take into account ASX's enhanced recovery arrangements, experience gained from the default of BBY Limited, and (at a later stage) the proposed FMI resolution regime.

Currently, participants are not directly involved in default management fire drills for ASX Clear. This allows ASX to more freely incorporate scenarios based on actual participants and portfolios into its fire drills, involving the use of confidential information that cannot be shared with other participants. Nevertheless, after each fire drill a sample order file is sent to each of the default brokers that would be used by ASX to execute close-out trades, in order to test the compatibility of the file with their systems.

In addition to the default management information provided on its website, ASX provides detailed responses to any targeted requests for information by clearing participants. Clearing participants have the ability to provide feedback and seek further information on default processes through this mechanism.

ASX Clear's default arrangements take into account, as far as possible, the implementation of any resolution regime that governs the CCP's participants. ASX has undertaken analysis on the impact of resolution proceedings for authorised deposit-taking institutions (ADIs) on a CCP's default management processes. While acknowledging that ADI resolution authorities may have broad powers to intervene in the arrangements of an insolvent ADI participant, the analysis suggests that, in general, resolution proceedings should not impede a CCP's default management processes. ASX will be conducting further analysis on the interaction between ADI and FMI resolution once the proposed framework for FMI resolution has been finalised.

12.5 A central counterparty should demonstrate that its default management procedures take appropriate account of interests in relevant jurisdictions and, in particular, any implications for pricing, liquidity and stability in relevant financial markets.

The DMF identifies that the key aim in handling a default is to minimise the impact of the event on ASX Clear, its participants and the market. Since close-out decisions by the DMC are complex and involve careful consideration of the specific circumstances surrounding the default, documented default management procedures are not prescriptive. Rather, ASX Clear would consider a range of high-level factors in a default situation, including: any systemic risk implications; potential contagion and implications for wider market liquidity; interdependencies with other entities; the impact on the CCP's risk profile and financial standing; additional risks that could be incurred by participants; and market conditions and default portfolio complexity.

Participants include both Australian and overseas brokers with a significant domestic presence, including subsidiaries of Australian and overseas banks. Products cleared by ASX Clear are traded on Australian markets and denominated in AUD. Accordingly, default management actions would be taken during the local time zone for all participants.

Standard 13: Segregation and portability

A central counterparty should have rules and procedures that enable the segregation of positions of a participant's customers and the collateral provided to the central counterparty with respect to those positions.

Rating: Broadly observed

ASX Clear offers three types of account structure: individual client segregation for options and futures; omnibus segregation with net margining for futures; and single accounts for all house and client cash market transactions (CCP Standard 13.2). Individual client segregation for options and futures provides protection to customers (or ‘clients’) against the default of both their clearing participant and a fellow client, and supports transfer to another clearing participant in such a scenario. ASX has completed enhancements to client protection arrangements for cash market transactions, which ensure that commingled accounts provide materially equivalent protection to that provided by omnibus account segregation (CCP Standards 13.1, 13.2 and 13.3). ASX Clear plans to implement arrangements to support the posting of excess client cash collateral in respect of derivatives, consistent with the Bank's supplementary interpretation of CCP Standards 13.2 and 13.3. ASX Clear has publicly disclosed its current segregation and portability arrangements, including the current obstacles to portability (CCP Standard 13.4).

The Bank's assessment is that ASX Clear has broadly observed the requirements of CCP Standard 13 during the 2014/15 Assessment period. In order to fully observe CCP Standard 13, ASX Clear should:

• complete the implementation of enhanced client segregation arrangements that support the lodgement of excess client cash collateral in respect of derivatives positions.

ASX Clear is also encouraged to consider any implications for portability arrangements arising from management of the default of BBY Limited.

ASX Clear's segregation and portability arrangements are described in further detail under the following sub-standards.

13.1 A central counterparty should, at a minimum, have segregation and portability arrangements that effectively protect a participant's customers' positions and related collateral from the default or insolvency of that participant. If the central counterparty additionally offers protection of such customer positions and collateral against the concurrent default of the participant and a fellow customer, the central counterparty should take steps to ensure that such protection is effective.

ASX Clear maintains a segregated account structure for its options and futures products which separates client positions from the participant's proprietary (house) positions. For these products, clients are able to access individually segregated accounts that offer protection against the concurrent default of the participant and a fellow client (see CCP Standard 13.2).

ASX Clear utilises a single account for each participant's house and client cash market transactions. During the Assessment period, ASX Clear completed implementation of arrangements to offer clients enhanced protections that are materially equivalent to the protections afforded by segregated house/client omnibus accounts (see CCP Standard 13.2). These alternative arrangements were introduced in response to concerns raised in a July 2013 stakeholder consultation that omnibus segregation for the cash market would be costly and deliver minimal benefits in terms of protection for clients of participants.

In addition to these arrangements, ASX Clear already has the capacity to transfer (port) participants' clients' positions and collateral under its Operating Rules (see CCP Standard 13.3). Part 5 of the PSNA allows a CCP to transfer client collateral of a defaulted participant as provided for by its Operating Rules without the need to seek approval from the participant's external administrator. During 2014/15, ASX introduced a new internal policy governing the segregation and portability arrangements at ASX Clear and ASX Clear (Futures), in order to formally align these with the requirements of this standard.

13.2 A central counterparty should employ an account structure that enables it readily to identify positions of a participant's customers and to segregate related collateral. A central counterparty should maintain customer positions and collateral in individual customer accounts or in omnibus customer accounts, or equivalent.

ASX Clear offers individual client segregation for options and a choice of individual client segregation or omnibus segregation for futures transactions. For these products, client collateral cannot be used to offset losses arising from a participant's proprietary (house) account. Non-cash collateral (including excess collateral) lodged with ASX Clear in respect of options transactions remains under the beneficial ownership of clients. ASX Clear plans to implement arrangements that will also allow excess client cash collateral against options positions to be held directly with ASX Clear and attributed to an individual client account, should participants choose to offer this option to their clients. Under these arrangements, ASX Clear would transfer or return to the participant's client trust account any excess collateral that had been attributed to an individual client account (net of any close-out costs). The system functionality to support the lodgement of excess client cash collateral is expected to be in place by November 2015.

While ASX Clear employs a commingled house/client account structure for cash market transactions, it has implemented arrangements that provide clients with materially equivalent protection to that offered under house/client omnibus segregation. ASX Clear introduced the first of two stages of its enhancements to client protections for the cash market in April 2014. These enhancements ensure that participants employ best practice in processing client trades during the pre-settlement period, namely: that client securities due for delivery that are held in the participant's accumulation account remain the beneficial property of the client until they are placed into the participant's settlement account (see Appendix A2.1, SSF Standard 10.2); and that client monies to fund a purchase must remain in trust accounts until the purchased stock is registered in the client's name.^[16] The ASX Clear Operating Rules also require daily reconciliation by participants of unsettled stock held beneficially for the client.

The second stage of enhanced protections came into effect in May 2015. This included changes to settlement processing designed to minimise client principal exposure to the participants acting on their behalf. Under the new arrangements, participants are required to fund any movements of beneficially held client stock to the settlement account on the day that the movement occurs, by placing the required amount into trust for the client concurrent with the CHESS batch settlement process. The changes to messaging in support of this process allow participants to pre-schedule movements of beneficially held client stock to their settlement account. These ‘pre-positioning’ transactions settle in the first stage of batch processing, with Payment Providers being notified of a net amount to be transferred between participants' general accounts and client trust accounts. These arrangements ensure that client assets and funds remain in the beneficial ownership of clients for all but a brief window during the settlement period.

These arrangements will protect clients from principal losses in the event of a participant default but will not protect clients against the cost of replacing trades in such an event. Even if omnibus segregation was adopted, however, clients could not be effectively protected against replacement cost losses in the event of a participant default. This reflects that Australian law currently prevents a clearing participant from passing through to a CCP margin posted by a client in respect of cash equities.

13.3 To the extent reasonably practicable under prevailing law, a central counterparty should structure its portability arrangements in a way that makes it highly likely that the positions and collateral of a defaulting participant's customers will be transferred to one or more other participants.

ASX Clear has the power under its Operating Rules to transfer client positions and collateral following a participant default. The availability of individually segregated client accounts for both options and futures supports the transfer of client positions and collateral to another participant in the event of a clearing participant default. Under individual client segregation, margin requirements are calculated on a gross basis (i.e. individually for the positions held by each client). Accordingly, there should be sufficient collateral available to support the transfer of each client's positions to another clearing participant. Portability is further supported by Part 5 of the PSNA (see CCP Standard 13.1). However, portability cannot be guaranteed since it relies on the willingness, and capacity, of another participant to take on the affected clients within a short period of time. The time window available for porting will also depend on market conditions, since ASX Clear would remain exposed to market risk until such time as a defaulted participant's client positions were ported or closed out (see CCP Standard 12).

ASX Clear's portability arrangements were utilised in managing the default of BBY Limited in May 2015 (see CCP Standard 12.2 and Section 4). Following the declaration of default, ASX Clear completed the transfer of around 25 per cent of BBY Limited's client accounts (by number), representing the major portion of the open positions and exposure. ASX had determined that it could only facilitate the transfer of client derivatives positions where the appropriate documentation was already in place between the client and the transferee participant, reflecting the length of time required for transferee participants to complete the necessary due diligence checks. Any client derivatives positions that were not notified to ASX during the ‘porting window’ or otherwise could not be transferred within three days were closed out by ASX. ASX Clear is considering the implications for portability arrangements as part of its broader review of experience gained from the BBY Limited default.

The commingled account structure used for cash market transactions creates practical difficulties for portability. The commingled account structure makes it difficult to identify client positions and, even if positions could be identified, since house and client positions are margined on a net basis across the commingled account, there is unlikely to be sufficient collateral at the CCP to achieve the fully collateralised transfer of individual client positions to alternative clearing participants. However, even under a segregated account structure the scope for transfer of cash market positions would be limited due to the short (three-day) equity settlement cycle.

13.4 A central counterparty should disclose its rules, policies and procedures relating to the segregation of a participant's customers' positions and related collateral. In particular, the central counterparty should disclose whether customer collateral is segregated on an individual or omnibus basis. In addition, a central counterparty should disclose any constraints, such as legal or operational constraints, that may impair its ability to segregate or port a participant's customers' positions and related collateral.

Current arrangements for segregation and portability are defined in the ASX Clear Operating Rules and Procedures. ASX has also published a public overview of clearing participant default arrangements, which outlines the current operational constraints to portability and the implications of different account structures.^[17] ASX will be updating the overview to incorporate experience gained from the default of BBY Limited.

Since 2012/13, ASX has publicly consulted stakeholders on segregation and portability arrangements for derivatives transactions cleared in ASX Clear. During 2013/14, ASX also consulted stakeholders on segregation and portability arrangements for cash market participants. These consultations have identified operational constraints to portability and the implications of different account structures used by ASX Clear. Following the default of BBY Limited, ASX provided regular updates to affected clients and other market participants on key aspects of the default management process, including arrangements for the transfer of client positions.

Standard 14: General business risk

A central counterparty should identify, monitor and manage its general business risk and hold, or demonstrate that it has legally certain access to, sufficient liquid net assets funded by equity to cover potential general business losses so that it can continue operations and services as a going concern if those losses materialise. Further, liquid net assets should at all times be sufficient to ensure a recovery or orderly wind-down of critical operations and services.

Rating: Observed

ASX Clear identifies, monitors and manages its general business risks in the context of its overall Enterprise Risk Management Policy (CCP Standard 14.1). It has access to sufficient funds held at group level to support continued operations as a going concern if it incurs general business losses. These funds are backed by equity and invested in liquid assets. The legal basis of ASX Clear's access to funds held at group level is set out in the ASX Group Support Agreement (CCP Standards 14.2, 14.3, 14.4). During the Assessment period, ASX Clear made enhancements to its recovery arrangements in line with CPMI-IOSCO guidance on recovery planning (CCP Standard 14.3). ASX maintains viable arrangements to raise additional equity for its CS facilities as required (CCP Standard 14.5).

The Bank's assessment is that ASX Clear has observed the requirements of CCP Standard 14 during the 2014/15 Assessment period. While existing arrangements are assessed to meet the minimum standard, the Bank encourages ASX Clear to:

• periodically review its arrangements to allocate investment-related losses, to ensure that these continue to strike an appropriate balance in terms of comprehensiveness, effectiveness, transparency and controllability, creating appropriate incentives and minimising negative impact
• test and review its capacity to raise additional equity to replenish general business risk capital.

ASX Clear's management of general business risk is described in further detail under the following sub-standards.

14.1 A central counterparty should have robust management and control systems to identify, monitor and manage general business risks, including losses from poor execution of business strategy, negative cash flows or unexpected and excessively large operating expenses.

ASX's approach to business risk is consistent with its overall Enterprise Risk Management Policy and Framework (see CCP Standard 3). Under the framework, formal policies are in place for individual risk categories such as accounting, authorisations, business continuity, technology, fraud control and procurement.

ASX monitors a variety of financial business risks, including market risk, credit risk, liquidity risk and capital risk.

• Group funds (as distinct from collateral lodged by participants) may be exposed to market risk due to changes in market variables such as interest rates, foreign exchange rates and equity prices. Mitigants for market risk include hedging of foreign exchange risk and monitoring of equity price risk, with appropriate capital allocation.
• Credit risk for the Group's general business activities arises in the collection of receivables, which principally comprise fees from market participants, issuers, users of market data and other customers. Mitigants include active collection procedures on trade receivables and ‘ageing’ of receivable amounts.
• Liquidity risk arises from the Group's time-critical payables, and is mitigated by prudent liquidity management, with forward planning and forecasting of liquidity requirements.
• ASX may be exposed to capital risk if equity in group entities falls below prudent or regulatory minimum levels. ASX manages its capital at a group level, in accordance with an objective of maintaining a prudent level of surplus net tangible equity. Ongoing monitoring of cash flows and capital adequacy is conducted via quarterly meetings of CALCO.

ASX undertakes periodic strategic risk assessments in the context of its overall business plans. Through this process, ASX identifies new strategic business initiatives, such as the projects that delivered the ASX Collateral and OTC derivatives clearing services. These are subject to financial analysis, which includes high, low and base case revenue assumptions and forecasts. Impacts on capital are also determined and analysed.

ASX undertakes risk assessments when undertaking any expansion of its activities or in the event of material changes to its business. Risk assessments are built into ASX's project management framework (see CCP Standard 16.4). Under this framework, an initial high-level risk indication is defined at the project concept stage. This is followed by a formal project risk assessment covering both project delivery risks and impacts to business activities at the project definition stage. ASX typically conducts a series of workshops involving project staff to discuss risks associated with any planned new service. Prior to the approval of a project for launch/production, ASX prepares an operational readiness summary and conducts a final workshop to discuss possible risks associated with initial launch. This includes consideration of potential failure scenarios and workarounds, procedures for escalation of issues, and help desk and key staff availability.

Following launch, the risks of a new activity are captured in risk profiles that are prepared by department management every six months. CALCO also monitors actual and forecast capital and liquidity requirements on a quarterly basis, including requirements related to new projects.

14.2 A central counterparty should hold, or demonstrate that it has legally certain access to, liquid net assets funded by equity (such as common stock, disclosed reserves or other retained earnings) so that it can continue operations and services as a going concern if it incurs general business losses. The amount of liquid net assets funded by equity a central counterparty should hold, or have access to, should be determined by its general business risk profile and the length of time required to achieve a recovery or orderly wind-down, as appropriate, of its critical operations and services if such action is taken.

ASX has set aside $241 million for operational and business risk across the four ASX Group CS facilities, $15 million of which has been attributed specifically to ASX Clear's operational and business risks. Since ASX has identified constraints to making business risk capital bankruptcy remote within the CCP, this capital is held at the ASX Group level to ensure that it cannot be applied to meet losses caused by a participant default. Each CS facility has a separate allocation for business risk capital that is explicitly recognised within group-wide capital holdings. These holdings include an additional buffer against potential losses sustained elsewhere in the group. The ASX Group Support Agreement places an obligation on ASX to maintain sufficient capital to support ASX Clear's continued operations in the event of general business losses, supporting the legal certainty of ASX Clear's access to business risk capital as required.

In determining the sufficiency of the $15 million in operational and business risk capital set aside for ASX Clear, ASX has estimated the capital required to cover six months of current operating expenses, with an additional buffer to allow for future growth (see CCP Standard 14.3). These funds are also sufficient to cover the estimated largest general business loss that ASX Clear may incur. Loss scenarios considered include facility closure due to external events such as pandemics, the fraudulent redirection of a participant margin payment, or the unauthorised transfer of invested funds. ASX Clear intends to review its methodology for determining the sufficiency of its operational and business risk capital during 2015/16, in light of its recognition under EU regulation.

14.3 A central counterparty should maintain a viable recovery or orderly wind-down plan and should hold, or have legally certain access to, sufficient liquid net assets funded by equity to implement this plan. At a minimum, a central counterparty should hold, or have legally certain access to, liquid net assets funded by equity equal to at least six months of current operating expenses. These assets are in addition to resources held to cover participant defaults or other risks covered under CCP Standard 4 on credit risk and CCP Standard 7 on liquidity risk. However, equity held under international risk-based capital standards can be included where relevant and appropriate to avoid duplicate capital requirements.

ASX Clear has prepared a plan setting out options for its recovery or wind-down based on its existing Operating Rules, and developed enhancements to this plan, due to come into effect in October 2015, in line with CPMI-IOSCO guidance on recovery planning (see CCP Standard 3.5). ASX will be formally documenting its enhanced recovery arrangements over the coming period. In calculating the quantum of business risk capital described under CCP Standard 14.2, ASX has sought to ensure access to sufficient liquid net assets to fund operations during the execution of ASX Clear's recovery plan or to cover a minimum of six months of current operating expenses.

ASX Clear's enhanced recovery approach establishes arrangements to address non-default losses that may arise from losses on treasury investments or a range of general business risks.

• In the case of investment losses (other than those resulting from fraud of, or material non-compliance with the investment policy of, the ASX CCPs; see CCP Standard 15), ASX would apportion any losses in excess of $75 million between participants (see CCP Standard 14.5).
• Other non-default, general business losses to ASX Clear would be absorbed by ASX through application of general business risk capital. Unlike investment losses (referred to above), general business losses from causes such as a decline in revenues or an increase in operating expenses are likely to be relatively slow-moving in nature. This recovery approach takes into account that ASX supplements its business risk capital through the use of insurance to cover its exposure to a broad range of risks (including coverage of professional indemnity and fraud risks). ASX Limited has also committed to maintaining adequate levels of business risk capital for the CCPs and SSFs, recapitalising these funds as required (see CCP Standard 14.5).

14.4 Assets held to cover general business risk should be of high quality and sufficiently liquid in order to allow the central counterparty to meet its current and projected operating expenses under a range of scenarios, including in adverse market conditions.

The risk capital for ASX's CS facilities is invested in accordance with the ASX Limited and ASX Operations Pty Limited Investment Mandate. The Investment Mandate specifies investment objectives, responsibilities, approved products and counterparties, and audit and maintenance of the mandate. Approved products are generally highly rated and liquid products such as: cash deposits; bank bills, negotiable certificates of deposit and floating rate notes issued by ADIs approved by the Australian Prudential Regulation Authority (APRA); foreign exchange in specified currencies; Australian Government securities; and selected semi-government securities. Limits are applied against counterparty, liquidity and market risks. Liquidity limits are specified for maximum instrument maturity and weighted average maturity.

14.5 A central counterparty should maintain a viable plan for raising additional equity should its equity fall close to or below the amount needed. This plan should be approved by the board of directors and updated regularly.

As noted, ASX Limited manages its operational and business risk capital at the group level. The ASX Limited Board monitors the ongoing capital adequacy of the ASX Group as part of its regular capital planning activities. The Board determines the most appropriate means of raising additional capital when needed, giving due consideration to prevailing market conditions and available alternative financing mechanisms. For example, in June 2013, ASX Limited conducted a capital raising by way of a $553 million share entitlement offer, with the bulk of the funds being used to increase the business risk capital of the CS facilities and their pooled financial resources to deal with a participant default.

ASX Clear's enhanced recovery approach depends on timely and reliable recapitalisation processes to address general business losses. ASX Clear is therefore reviewing its recapitalisation arrangements to ensure consistency with its enhanced recovery plan. The Bank will continue to discuss recapitalisation arrangements with ASX Clear over the 2015/16 Assessment period. In the case of investment losses, reliance on recapitalisation alone is unlikely to be sufficiently timely to address losses in excess of general business risk capital. ASX would apportion any losses (other than those resulting from fraud of, or material non-compliance with the investment policy of, the ASX CCPs; see CCP Standard 15) in excess of $75 million (an amount equal to the ASX CCPs' total general business risk capital) between participants. This would be done in proportion to the amount of cash each participant has provided to the CCPs (including margin, default fund contributions and excess cash).

Standard 15: Custody and investment risks

A central counterparty should safeguard its own and its participants' assets and minimise the risk of loss on and delay in access to these assets. A central counterparty's investments should be in instruments with minimal credit, market and liquidity risks.

Rating: Broadly observed

The assets of ASX Clear and its participants are administered and held within the ASX Group in accordance with robust group-wide controls (CCP Standard 15.1). A portion of these assets is held in liquid form to ensure prompt access as required (CCP Standard 15.2). ASXCC invests the assets of ASX Clear and its participants according to its Investment Mandate in instruments with low credit, market and liquidity risk. ASX Clear is in the process of reducing the degree of its reliance on unsecured investments concentrated in the large domestic banks. During the 2014/15 Assessment period, ASXCC's Board endorsed further staged revisions to its treasury investment policy in order to meet the Bank's expectations regarding the credit and liquidity risk profile of ASXCC's treasury investment portfolio. The transition to the new investment portfolio is expected to be complete by the end of 2016/17 (CCP Standard 15.4). ASXCC does not use custodian banks for its investments (CCP Standard 15.3). ASX Clear's investment strategy does not allow related entity investments and is designed to allow timely liquidation in periods of market stress, consistent with the Bank's supplementary interpretation of CCP Standard 15.4 (see Introduction to Appendix A).

The Bank's assessment is that ASX Clear has broadly observed the requirements of CCP Standard 15 during the 2014/15 Assessment period. In order to fully observe CCP Standard 15, ASX Clear should, by end 2016/17, implement plans to:

• limit unsecured exposures to individual non-government investment counterparties/issuers to the level of capital set aside for non-participant-default or general business risk losses
• ensure that other investments are with government-related obligors or secured by assets issued by government-related or other highly creditworthy obligors, subject to prudent concentration limits
• ensure that ASX Clear (Futures)' minimum liquid resource requirement (under CCP Standard 7.3) is invested in or secured by government/semi-government securities or cash. Other investments should be able to address effectively any uncovered liquidity shortfalls (e.g. be investments in, or secured by, securities eligible for repo with the Bank).

The Bank will discuss with ASX Clear its approach to disclosing investment risks to participants in light of plans to allocate investment losses in excess of $75 million to participants (see CCP Standards 14.3 and 14.5).

ASX Clear's management of custody and investment risks is described in further detail under the following sub-standards.

15.1 A central counterparty should hold its own and its participants' assets at supervised and regulated entities that have robust accounting practices, safekeeping procedures and internal controls that fully protect these assets.

The assets of ASX Clear and its participants are administered and held within the ASX Group. Intragroup arrangements allow ASX Clear to fully understand the nature of its risk exposure to ASXCC and other group entities such as Austraclear (for safekeeping of AUD-denominated debt securities). This exposure is managed within the context of ASX's overall Clearing Risk Policy Framework. ASX has robust accounting practices, safekeeping procedures and internal controls to protect its own and its participants' assets (as described under CCP Standard 2.7).

Non-cash collateral is held in CHESS. ASX Clear's Operating Rules and Procedures define how collateral is used. ASX Clear does not re-use non-cash collateral posted by participants.

Cash investments, including cash collateral, clearing participant contributions and shareholder funds, are controlled by ASXCC, of which ASX Clear is a subsidiary (see ‘ASX Group Structure’ in Appendix A). ASXCC makes its investments in accordance with its Investment Mandate and ASX's Investment Policy, which together define investment objectives, investment specifications, and audit and maintenance of the policy (see CCP Standard 15.4).

15.2 A central counterparty should have prompt access to its assets and the assets provided by participants, when required.

Assets invested on behalf of ASX Clear and its participants are held within the ASX Group and subject to ASX's exclusive custody. ASX Clear does not use external custodians to hold its assets or participants' assets. Cash investments are held directly by ASXCC, and non-cash collateral is lodged directly with ASX Clear in CHESS. In addition, the Operating Rules require that collateral from participants is unencumbered. These arrangements aim to ensure that ASX has prompt and legally certain access to participant collateral and its own contributions to prefunded financial resources, including in the event of a participant default.

15.3 A central counterparty should evaluate and understand its exposures to its custodians, taking into account the full scope of its relationships with each.

ASXCC does not use custodians to hold assets invested on behalf of ASX Clear.

15.4 A central counterparty's investment strategy should be consistent with its overall risk management strategy and fully disclosed to its participants, and investments should be secured by, or be claims on, high-quality obligors. These investments should allow for quick liquidation with little, if any, adverse price effect.

ASXCC is the controlling entity for the investments of both CCPs. In respect of both cash margin collected and pooled risk resources, ASXCC invests funds in accordance with a defined treasury investment policy, endorsed by the Clearing Boards and itself governed by the ASX Enterprise Risk Management Policy. The treasury investment policy, set out in a high-level policy document and the more detailed ASXCC Investment Mandate, articulates the basis for ASX Clear's mitigation of investment-related credit, market and liquidity risks (CCP Standard 7). The performance of the investment portfolio within the parameters of this policy is closely monitored by ASXCC, with trigger points to automatically escalate potential issues to the CRO before actual limits are reached. Trigger points are defined for weighted average maturity and percentage of total liquid assets held in non-AUD denominated securities.

The ASXCC Investment Mandate defines investment counterparty eligibility criteria and sets investment limits in order to control counterparty investment risk.

• Counterparty eligibility criteria. Counterparties must be Commonwealth or State Government entities (including the Bank), APRA-approved ADIs that are licensed banks in Australia under the Banking Act 1959, or supranational agencies that issue in the Australian bond market. ADIs must also have a Standard & Poor's short-term credit rating of A1 or above, while supranational agencies must have a rating of AAA. The Investment Mandate does not permit investments in securities of ASX Group entities, consistent with the Bank's supplementary interpretation of CCP Standard 15.4 (see Introduction to Appendix A). Nor is ASXCC permitted to create unsecured exposures to any investment counterparty that is a participant or affiliated with a participant, other than the four major banks.
• Counterparty investment limits. Counterparty investment limits are determined according to factors such as the credit quality of the counterparty or obligor, the size of the AFR, and whether eligible investment counterparties and their affiliates are also clearing participants. Limits are set on both the proportion of the portfolio and the absolute amount that can be invested with a single counterparty.

ASXCC's Investment Mandate requires that a portion of its portfolio be held in liquid asset form to cover liquidity risks from both general business risks and risks related to ASX Clear's clearing activities (see CCP Standard 7.3). The Investment Mandate aims for quick liquidation of investments with little, if any, price effect. Only investments in instruments that can be liquidated or repurchased for cash within two hours are treated as ‘liquid’ products. These are defined based on the depth of market liquidity and the terms of investment, including whether the instruments are eligible for repurchase transactions with the Bank (see CCP Standard 7.4). Such liquid assets include Australian Government securities, bank bills and certificates of deposits. The policy also sets a ‘value-at-risk’ limit. Collateral must be invested in the currency it is received in, and currency-specific limits are placed on relevant counterparties for the investment of NZD cash collateral.

ASXCC's Investment Mandate recognises the primacy of maintaining liquidity and credit quality against achieving investment return, given that funds under management are a critical source of liquidity in the event of a market disruption or clearing participant default. The investment policy and limits are reviewed and approved annually by the ASXCC Board with input from the Risk Consultative Committees. The broad approach to investment and investment holdings is disclosed publicly in the ASX Annual Report. The Bank will discuss with ASX its approach to disclosing investment risks to participants in light of its plans to allocate investment losses in excess of $75 million to participants (see CCP Standard 14.3).

The Bank's 2011/12 Assessment encouraged ASX to carry out a review of its treasury investment policy. The Bank had expressed concerns that the policy left open the potential for large and concentrated credit exposures to the four largest domestic banks. Further, where an entity related to the issuer counterparty was also a clearing participant, the performance of investments in the portfolio could be correlated with the very default event against which the CCP's risk resources sought to provide cover. ASX carried out this review during the 2012/13 Assessment period, concluding that a gradual move towards lower concentration of investments in the major banks and a greater reliance on secured investments would be appropriate. ASX has since modified the ASXCC Investment Mandate to each year reduce the unsecured limit on exposures to the large domestic banks in absolute terms. In addition, ASX has taken steps to diversify its unsecured exposures to a broader range of highly rated investment counterparties and introduced arrangements allowing it to invest cash with selected counterparties on a secured basis.

During the 2014/15 Assessment period, the Bank continued to engage with ASX on the detail of its expectations for the credit and liquidity risk profile of ASXCC's investment portfolio, as well as the time frame over which these expectations should be met (see Section 3.5.4). In response, the CS Boards endorsed further staged revisions to its treasury investment policy designed to meet the Bank's expectations once these changes have been fully implemented. Over half of the portfolio approved by the Board would be invested in government or semi-government bonds, or reverse repurchase agreements secured by such bonds. The remainder of the portfolio would be invested primarily in securities issued by supranationals, or held in deposits with ADIs. Individual ADI exposures would be limited to the level of business risk capital held across the two CCPs (currently $75 million), meaning that ASX could absorb losses from the default of any single investment counterparty without drawing upon financial resources earmarked for covering a participant default (see CCP Standard 14.3). ASX has updated its Investment Mandate to reflect the transition to this new investment profile. The majority of the transition to this new portfolio is expected to take place in 2016/17, with smaller changes to ASX's investment profile expected during 2015/16.

Standard 16: Operational risk

A central counterparty should identify the plausible sources of operational risk, both internal and external, and mitigate their impact through the use of appropriate systems, policies, procedures and controls. Systems should be designed to ensure a high degree of security and operational reliability and should have adequate, scalable capacity. Business continuity management should aim for timely recovery of operations and fulfilment of the central counterparty's obligations, including in the event of a wide-scale or major disruption.

Rating: Observed

ASX Clear's key operating systems are DCS and CHESS.

ASX Clear manages its operational risks in the context of its group-wide Enterprise Risk Management Framework (CCP Standard 16.1). Responsibility for approving and reviewing operational risk management policy is shared between the ASX Limited and CS Boards, the Audit and Risk Committee and individual departments. The management of each department is responsible for implementing operational risk controls in their respective areas (CCP Standard 16.2). ASX Clear sets clear operational reliability objectives and pursues policies designed to achieve those objectives. Key objectives for DCS and CHESS, such as minimum availability of 99.8 per cent and peak capacity utilisation of 50 per cent, were met during the Assessment period. ASX Clear maintains physical and information security policies based on relevant domestic and international standards (CCP Standard 16.3). ASX Clear considers that it has sufficient well-trained and competent personnel and other resources to operate DCS and CHESS. ASX Clear prioritises its projects to ensure that business development work does not risk the availability of these resources for key systems (CCP Standard 16.4).

ASX Clear manages operational interdependencies with participants, and with ASX Settlement and Austraclear, through its participant monitoring processes and group-wide risk management framework, respectively (CCP Standard 16.5). Its dependencies on service providers and utilities are subject to ongoing monitoring and contingency arrangements where appropriate. ASX Clear has introduced clauses in its legal agreements with key outsourcing and critical service providers that impose requirements on those providers equivalent to those under the FSS, access to information for the Bank, and notice to the Bank in the case of termination (CCP Standards 16.9, 16.10, 16.11).

ASX Clear also maintains business continuity arrangements that provide a high degree of redundancy and, through the use of dual sites, target the resumption of operations within two hours following disruptive events. These arrangements are regularly tested in real time during live operations (CCP Standard 16.7). Participants are required to maintain appropriate operational and business continuity arrangements that complement ASX Clear's own arrangements, and are appropriate to the nature and scale of their business. ASX Clear monitors participants' compliance with these requirements, and broader operational performance, on an ongoing basis (CCP Standards 16.6, 16.8).

The Bank's assessment is that ASX Clear has observed the requirements of CCP Standard 16 during the 2014/15 Assessment period. In order to continue to observe this standard, ASX Clear will need to review its operational arrangements in light of the proposed establishment of a special resolution regime for FMIs in Australia. In particular, ASX Clear will need to ensure that its operations are organised in such a way as to facilitate effective crisis management actions under that regime once finalised.

In addition, ASX Clear is encouraged to continue its dialogue with the Bank on its cyber risk management arrangements, including on the Board-level governance of its cyber risks and ongoing review of its information security strategy and policy framework. ASX Clear is also encouraged to review its cyber risk management arrangements in light of forthcoming CPMI-IOSCO guidance on cyber resilience for FMIs.

The Bank will continue to examine prioritisation decisions, resourcing challenges, interdependencies with day-to-day business-as-usual processes, and potential change-management issues associated with ASX's technology transformation project. This includes the prioritisation of investment in the replacement of CHESS. The Bank will also discuss with ASX Clear how it applies the CPMI-IOSCO oversight expectations in managing its relationships with external providers of critical services, including the role of the recently released CPMI-IOSCO Assessment Methodology in its oversight of these critical service providers.

ASX Clear's arrangements for managing operational risks are described in further detail under the following sub-standards.

Identifying and managing operational risk

16.1 A central counterparty should establish a robust operational risk management framework with appropriate systems, policies, procedures and controls to identify, monitor and manage operational risks.

ASX's operational risk policies and controls have been developed in accordance with ASX's group-wide Enterprise Risk Management Framework (see CCP Standard 3.1). Under this framework, the ASX Limited Board is responsible for reviewing and overseeing the group's risk management systems (see CCP Standard 2.6). The Board delegates review of the Enterprise Risk Management Framework to its Audit and Risk Committee. An ERMC, comprising executives from across ASX's departments, is responsible for approving enterprise risk policies and reviewing controls, processes and procedures to identify and manage risks, as well as the formal approval of significant operational risk policies prepared by individual departments (see CCP Standard 16.2). Under the Enterprise Risk Management Framework, individual departments are also responsible for: identifying business-specific risks; applying controls; maintaining risk management systems; reporting on the effectiveness of risk controls; and implementing enhancements and taking remedial action.

Dedicated security teams have responsibility for assessing both physical and cyber security risks, and are overseen by an internal Security Steering Committee (see CCP Standard 16.3). The Security Steering Committee is responsible for approving, implementing and overseeing ASX's information and physical security strategies, and coordinating ASX's security initiatives with management of its Technology (IT security) and Finance (physical security) divisions. It is chaired by the Information Technology (IT) Security Manager, and comprises: the Chief Information Officer (CIO); CFO; GE, Operations; General Manager, Technology Governance; General Manager, Corporate Technology; National Facilities Manager; and General Manager, Internal Audit. The Security Steering Committee provides reports to the Audit and Risk Committee and the executive-level ERMC, including regular Technology status and enterprise risk reports as well as ad hoc security reports.

16.2 A central counterparty's board of directors should clearly define the roles and responsibilities for addressing operational risk and should endorse the central counterparty's operational risk management framework. Systems, operational policies, procedures and controls should be reviewed, audited and tested periodically and after significant changes.

The roles and responsibilities for addressing operational risk are defined in the CS Boards' Charter, the Audit and Risk Committee Charter, and the Enterprise Risk Management Framework. As described above, risk responsibilities are shared between the ASX Limited Board, the CS Boards, the Audit and Risk Committee, the ERMC and individual departments.

Ultimate responsibility for the management of ASX's cyber-related risks lies with the ASX Limited Board, reflecting that different business areas share common vulnerabilities to cyber threats and that the response to such threats may require group-wide coordination. In practice, however, the Board delegates its ongoing oversight of cyber resilience to the ASX Limited Audit and Risk Committee, subject to the Board's stated very low tolerance for residual operational risks. The Board remains informed of significant cyber-related developments or issues, including where cyber incidents could threaten the availability or integrity of ASX systems, and in considering cyber risks in the approval of major projects. The Audit and Risk Committee receives regular updates on information security matters and oversees the cyber resilience activities of ASX management and staff. ASX's governance arrangements for cyber resilience are described in more detail in Section 3.5.6, Box B.

Policies and procedures are the subject of internal and external review. ASX's Internal Audit department routinely monitors compliance with operational policy, reporting to the Audit and Risk Committee on a quarterly basis. Scheduled reviews carried out by Internal Audit include business unit process and operational audits and information technology reviews. Internal Audit also reviews major projects and carries out special investigations as required (e.g. following a major operational incident). Audit findings may prompt a review of policy, which would be conducted in consultation with key stakeholders. Technology-related security policy is considered by external auditors annually.

ASX benchmarks its operational risk policy against relevant international standards. For example:

• ISO 31000 – Risk Management Principles and Guidelines is used to benchmark ASX's overarching framework for operational risk management.
• The business continuity framework is benchmarked against the Business Continuity Institute's Good Practice Guidelines 2013, and the international standard ISO 22301:2012 Business Continuity Management Systems.
• The technology risk management framework is benchmarked against ISO 17799 (which covers principles for information security management) and ISO 27001 (requirements for information security management systems). Cyber security strategies are further benchmarked against the Australian Signals Directorate's Strategies to Mitigate Targeted Cyber Intrusions.
• The compliance framework is benchmarked to the AS 3806-2006: Compliance Programs.
• The ASX Fraud Control Policy is benchmarked against AS 8001-2008: Fraud and Corruption Control.

During the Assessment period, ASX carried out a high-level self-assessment of its cyber resilience practices against the United States National Institute of Standards and Technology (NIST) Cyber Security Framework.^[18] This self-assessment concluded that ASX's cyber security practices generally aligned with the upper two tiers of maturity levels under the NIST Framework (see Section 3.5.6, Box B).

The risk framework defines a variety of control procedures to support the core operational systems. These include audit logs, segregation of duties controls such as dual input checks and approval, management sign-off and processing checklists as the primary preventative controls, supported by reconciliations and management reviews of activity.

Change management and project management

ASX Clear operates a separate test environment for its core systems (DCS and CHESS), and has a formal change management process which is documented in the ASX Technology Change Management Policy and Guideline. The policy and guidelines cover the requirements for the notification, risk assessment, testing and implementation of technology changes for all ASX CS facilities, as well as the key roles and responsibilities in relation to technology change management. There are also defined procedures for communicating with participants and vendors details of technology upgrade releases, which include regular notices to participants of upcoming changes. Aspects of the change management process are reviewed each year by the external auditor.

Major projects are overseen by the Enterprise Portfolio Steering Committee (EPSC), which is comprised of representatives of the Group Executive. The EPSC is responsible for determining project priorities across the ASX Group and overseeing the quality of project execution. Project management of major projects is undertaken by the Project Management Office (PMO). Projects incorporate testing processes, which verify that systems or services meet benchmarks set prior to implementation. Testing addresses both technical and operational aspects of projects. The project management process includes engagement with customers and third-party vendors of supporting systems where appropriate, particularly in customer testing. Project plans also include formal checkpoints to ensure all appropriate risk management controls are in place prior to live use of a new or updated system or service.

In February 2015, ASX announced a technology transformation program to upgrade all of its major trading and post-trading systems over the next three to four years (see Section 3.5.6). The program is intended to rationalise ASX's core technology onto a single services platform, removing interdependencies that currently exist between unrelated systems. The first phase of the program will upgrade ASX's trading, risk management and market monitoring systems. A subsequent phase of the technology transformation program will focus on ASX's clearing and settlement platforms. This includes the consolidation of derivatives clearing onto a common platform and the replacement of the CHESS clearing and settlement system for cash equities.

Given the significance of the technology transformation program for ASX's critical trading, clearing, settlement and risk management systems, the ASX Limited Board and CS Boards will receive regular status updates throughout the life of the project, with executive-level oversight of project management provided by the EPSC. ASX's Audit and Risk Committee, together with the ERMC, oversees the management of operational and strategic risks associated with execution of the program, with internal and external audit providing review of key elements. ASX has formally adopted an ‘Agile project management’ approach for its technology transformation. This seeks to streamline decision making by bringing together the human and technological resources that support the design, development and testing processes, and delivering project outputs in a series of incremental stages (so-called ‘sprints’).

The Bank is receiving detailed monthly updates on the progress of the technology transformation program. These updates also provide an opportunity for the Bank to examine interdependencies with day-to-day business-as-usual processes and potential change-management issues.

16.3 A central counterparty should have clearly defined operational reliability objectives and should have policies in place that are designed to achieve those objectives. These policies include, but are not limited to, having: exacting targets for system availability; scalable capacity adequate to handle increasing stress volumes; and comprehensive physical and information security policies that address all potential vulnerabilities and threats.

Operational reliability and availability

Availability targets are documented and defined formally for critical services. DCS and CHESS are required to meet a minimum availability target of 99.8 per cent; during the 2014/15 Assessment period both were available 100 per cent of the time.

Operational capacity

System capacity is monitored on an ongoing basis, with monthly reviews of current and projected capacity requirements. The results are reviewed against established guidance for capacity headroom over peak recorded values for all critical systems; that is, to maintain capacity 50 per cent over peak recorded daily volumes, with the ability to increase to 100 per cent over peak within six months. Capacity data are reported monthly to the CEO. Average capacity utilisation of DCS and CHESS during the Assessment period was 11 per cent and 15 per cent respectively, while peak utilisation was 23 per cent for DCS and 20 per cent for CHESS. ASX Clear considers that it has sufficient technical and human resources to operate DCS and CHESS during peak periods, including in the event of operational incidents or system failure.

Information and physical security

ASX's cyber resilience approach is defined by the Information Security Strategy approved by the Security Steering Committee, and more granular policies and standards set out in ASX's Information Security Policy Framework. The Information Security Strategy sets out six high-level objectives for ASX's information security approach:

• ensuring that information security supports enterprise-wide strategy and governance, safeguarding the confidentiality, integrity and availability of critical data and systems
• ensuring that information security is implemented using a risk-based approach
• ensuring that information security considers interdependencies with external stakeholders (including participants and regulators)
• supporting the development of a culture of security and the acceptance of information security responsibilities throughout the organisation
• ensuring information security is flexible enough to adjust to meet changing market demands
• pursuing continual improvement in the effective and efficient deployment of information security controls.

The Information Security Strategy and Policy Framework are reviewed on a regular basis by the IT Security Team, with formal review by the Security Steering Committee carried out on an ad hoc basis in response to material changes to the security environment. The last such review was in October 2014.

Information security policy is tested at a number of levels. This includes penetration testing against the ASX perimeter and vulnerability testing within the perimeter. ASX Clear performs DCS and CHESS security testing on a quarterly basis. ASX operates a suite of controls designed to prevent and detect cyber attacks on its systems, such as denial of service or malware threats. These include continuous monitoring of its network for cyber intrusions and malicious code, steps to monitor suspicious internet traffic, regular scans to ensure that both the network perimeter and system assets remain secure, and the maintenance of spare capacity to manage legitimate or malicious surges in internet traffic, as well as steps to regulate access to ASX systems (described below).

User access for the key systems is restricted to prevent inappropriate or unauthorised access to application software, operating systems and underlying data. User activities are uniquely identifiable and can be tracked via audit trail reports. The level of access is authorised by the system owner with users granted the minimum level of access to systems necessary to perform their roles effectively. External access to ASX systems must pass through multiple layers of firewalls and intrusion prevention, and individual networks are segregated. ASX's system architecture is designed to minimise the risk of a cyber threat spreading, via the segregation of critical systems. ASX has also recently commenced a project to implement a new identity management application to enhance the identity management capability and automate many of the set-up, maintenance and removal processes associated with user access administration.

Application testing is carried out in test environments (see CCP Standard 16.2). Testing reports are documented, with identified problems escalated to management and tracked through to remediation. Similarly, any technology-based operational incidents are reported to senior management and issues are tracked through to resolution via regular updates to management.

Physical access is controlled at both an enterprise and departmental level. The key systems supporting ASX's clearing and settlement processes are operated within secure buildings. Clearing operations are separated from general office areas with permitted access determined at a senior manager level and records of access maintained. Physical security arrangements for the primary and backup data centres are broadly equivalent.

16.4 A central counterparty should ensure that it can reliably access and utilise well-trained and competent personnel, as well as technical and other resources. These arrangements should be designed to ensure that all key systems are operated securely and reliably in all circumstances, including where a related body becomes subject to external administration.

Access to resources

ASX Clear has arrangements in place to ensure that it has well-trained and competent personnel operating DCS and CHESS. Staff are provided with relevant policies and guidelines from commencement of employment, with weekly communications thereafter. Staff are evaluated with reference to each defined operational process and broader skills matrices, with training provided for identified areas of weakness. ASX Clear has a formal succession planning and management process in place for key staff. ASX has sought to automate routine operational processes and reporting over recent years, freeing up additional staff resources that would otherwise be devoted to these tasks.

In April 2015, ASX launched a new customer support centre within ASX's Australian Liquidity Centre.^[19] The customer support centre brings together operations, technology and market surveillance staff in a single location, which is now ASX's primary operations base as well as primary data centre.^[20] The current customer support centre was previously ASX's secondary operations site for business continuity purposes. To facilitate rapid recovery in the event of an operational disruption, around 30 per cent of ASX's operational staff are now based at its secondary operations site (formerly the primary operations site). In case of a disruption to staffing arrangements at the primary site for staff, the secondary operations site has capacity to house 65 per cent of all operational staff.

Following the opening of the centre, ASX established a new Customer Experience team under a new Executive General Manager. This team brings together the main customer-facing functions from across ASX and is responsible for the development and delivery of the ASX customer experience.

Alongside these changes to broader customer support arrangements, ASX introduced changes to the organisation of its operations division in June 2015. Most notable was the creation of a new ‘Risk Manager, Operations’ position, reporting directly to the GE, Operations; the new Risk Manager will have responsibility for matters such as operational business continuity, incident reporting and management, and will work closely with the General Manager responsible for enterprise-wide risk management. The new role is intended to enhance support for risk identification and management in operational processes.

Resources shared with a related body

Within the ASX group structure, most operational resources are provided by ASX Operations Pty Limited, a subsidiary of ASX Limited (see ‘ASX Group Structure’ in Appendix A), under a contractual Support Agreement. ASX Operations is also required under the Support Agreement to provide the Bank with reasonable rights of access in respect of information relating to its operation of critical functions provided to ASX Clear (see CCP Standard 16.10 in respect of broader rights of access provided to the Bank by ASX Clear's critical service providers).

In the event that ASX Operations became subject to external administration, to the extent permissible by law, provisions within the Support Agreement provide for ASX Clear and the other clearing and settlement corporate entities to retain the use of operational resources. Under proposals currently under consideration by the government in the context of establishing of a special resolution regime for CS facilities (see CCP Standard 16.11), the Bank would have the power to issue directions in day-to-day oversight, recovery and resolution to related entities such as ASX Operations that provide critical services to a CS facility under ex ante legal agreements. This proposed directions power would further safeguard ASX Clear's access to critical services provided by ASX Operations.

Resourcing of major projects

The EPSC is tasked with ensuring that ASX has sufficient well-qualified personnel to cope with periods in which it is simultaneously undertaking a number of projects, including those resulting in significant changes to business (see CCP Standard 16.2). In managing projects affecting core systems (including DCS and CHESS), the PMO rates projects to ensure that they receive appropriate access to resources.

For example, in its oversight of ASX's technology transformation program (see CCP Standard 16.2), the EPSC determines the prioritisation of resourcing for key projects. The Bank is receiving detailed monthly updates on the progress of the technology transformation program. These updates also provide an opportunity for the Bank to examine prioritisation decisions and resourcing challenges. This includes ensuring that investment in the replacement of CHESS is appropriately prioritised.

16.5 A central counterparty should identify, monitor and manage the risks that key participants, other FMIs and service and utility providers might pose to its operations. A central counterparty should inform the Reserve Bank of any critical dependencies on utilities or service providers. In addition, a central counterparty should identify, monitor and manage the risks its operations might pose to its participants and other FMIs. Where a central counterparty operates in multiple jurisdictions, managing these risks may require it to provide adequate operational support to participants during the market hours of each relevant jurisdiction.

Dependencies on participants and other FMIs

ASX identifies, monitors and mitigates potential dependencies on participants in a number of ways:

• by holding regular discussions with participants on risk management processes (see CCP Standard 3.1)
• through participation requirements related to operational resources and capabilities, and business continuity arrangements (see CCP Standards 16.6 and 17.2)
• as part of its assessments of project-related risks (see CCP Standard 14.1)
• through general monitoring of risks under its risk management framework (see CCP Standard 3.1).

For ASX Clear, ASX has identified risks relating to its operational activities arising from participants' increased usage of third-party vendors for back-office systems, and participants outsourcing their back-office processing offshore.

• If multiple participants use the system of a vendor that experiences difficulties, these participants may have difficulty connecting to ASX's clearing and settlement infrastructure. If a vendor issue requires significant system changes, ASX Clear's operations may be affected for an extended period. This risk is managed in part through technical and business continuity requirements placed on participants, but there are limitations to this approach. As a result, and notwithstanding that there are no contractual relationships between ASX and vendors, ASX has implemented a program to develop stronger direct relationships with key participant vendors. The program supports vendors' knowledge of ASX technical updates through early engagement before system changes are rolled out, as well as ASX's knowledge of vendor systems and business continuity arrangements.
• Participants' outsourcing of back-office processes and technology to overseas domiciled hubs or third-party vendors may complicate incident management due to differences in time zones and languages, and in some cases a lack of familiarity with local market practices and conventions. Such factors, if inadequately mitigated, could increase operational risk. During the Assessment period, ASX reviewed and standardised its offshoring and outsourcing regime across its markets and CS facilities, including ASX Clear, and has published a guidance note setting out its expectations in relation to participants' offshoring and outsourcing arrangements.

ASX Clear has an operational interdependence with Austraclear, which is used to settle margin payments, and ASX Settlement, with which it shares the CHESS system (see CCP Standard 19). Operational risk associated with this interdependence is managed within the context of the ASX Group's operational risk management framework. ASX Clear does not have significant operational interdependencies with other FMIs.

Dependencies on service providers

ASX has a formal policy that sets out the process for entering into, maintaining and exiting key outsourcing arrangements. If a key service is to be provided by an external service provider, ASX first conducts a tender process in which proposals from potential vendors are assessed against relevant criteria. Arrangements have been implemented under which ASX would consult with the Bank before entering into new agreements with third parties for critical services. ASX also provides the Bank with a list of critical outsourcing arrangements on an annual basis. Issues relating to outsourcing and service provision are escalated as appropriate to executive management via the ASX Technology vendor management group and the relevant operational support area.

ASX assesses the operational performance of its service providers on an ongoing basis against its own operational policies, to ensure that service providers meet the resilience, security and operational performance requirements of the FSS. ASX maintains current information on its service providers' operations and processes through ongoing liaison, and in turn provides relevant updates to service providers regarding ASX operations. Service providers are also assessed through software regression testing when there is a major system upgrade.^[21] Contractual arrangements with critical service providers require the approval of ASX Clear before the service provider can itself outsource material elements of its service.

All core ASX Clear operational functions are performed within ASX. However, external suppliers are used for utilities, hardware maintenance, operating system and product maintenance, and certain security-related specialist independent services.

ASX has put in place a number of mitigants to address the risks associated with dependencies on utilities and service providers.

• Primary and backup data centres are connected to different electricity grids and telecommunication exchanges.
• Each data centre has backup power generators with capacity to run the site at full load for 72 hours.
• All external communications links to data centres are via dual geographically separated links.
• ASX conducts regular testing of backup arrangements. Major systems are tested on a two year cycle. Participants are notified of business continuity tests in advance through ASX notices.
• ASX also performs a periodic assessment of suppliers, including consideration of contingency arrangements should externally provided services not be available (such as the use of alternative suppliers), as well as incident escalation procedures and contacts.

Disclosure

The nature and scope of ASX Clear's dependencies on critical service providers are disclosed to participants through: Operating Rules; Guidance Notes; Notices and Bulletins; technical documentation available on the ASX participant website; more general information available on the ASX public website; and in one-on-one meetings with participants, both during the induction process for new participants and on an ongoing basis.

Operational Support

ASX Clear provides telephone and email support to participants via a helpdesk, which operates from 8.00 am to 7.30 pm. In April 2015, ASX launched a new customer support centre that brings together operations, technology and market surveillance staff in a single location (see CCP Standard 16.4).

16.6 A participant of a central counterparty should have complementary operational and business continuity arrangements that are appropriate to the nature and size of the business undertaken by that participant. The central counterparty's rules and procedures should clearly specify operational requirements for participants.

Business continuity requirements are set out in the ASX Clear Operating Rules and Procedures, supplemented by additional guidance issued by ASX on 1 July 2014. These require large participants to maintain adequate business continuity arrangements (see CCP Standard 16.8) to allow the recovery of usual operations within two hours, and no more than four hours, following a contingency event. The targeted recovery time for smaller participants is four hours (and no more than six). If a participant fails to maintain business continuity arrangements consistent with these recovery targets, it may become subject to sanctions or restrictions on its activities. Spot checks of participants' business continuity management are conducted if risk factors are identified, such as where a participant has experienced operational problems. These spot checks examine the participant's governance and processes for resilience and business continuity.

The Operating Rules and Procedures also require more broadly that participants have facilities, procedures and personnel that are adequate to meet technical and performance requirements. ASX's preferred approach to dealing with operational issues is to work collaboratively with the participant to educate them on their obligations. If the matter is serious, ASX may require that the participant address the weakness as a matter of priority. ASX may also impose conditions on participation, or require that the participant appoint an independent expert to assist with the remediation task.

Business continuity arrangements

16.7 A central counterparty should have a business continuity plan that addresses events posing a significant risk of disrupting operations, including events that could cause a wide-scale or major disruption. The plan should incorporate the use of a secondary site and should be designed to ensure that critical information technology systems can resume operations within two hours following disruptive events. Business continuity arrangements should provide appropriate redundancy of critical systems and appropriate mitigants for data loss. The business continuity plan should be designed to enable the central counterparty to facilitate settlement by the end of the day of the disruption, even in case of extreme circumstances. The central counterparty should regularly test these arrangements.

Business continuity management

ASX Clear's approach to business continuity is defined in the ASX Business Continuity Management Policy. This policy describes the incident management and business continuity arrangements for all ASX CS facilities, including the appropriate operational response to a CS facility disruption, and the key roles and responsibilities in relation to business continuity. The Business Continuity Policy is supported by a range of other internal documents, including the Business Resumption Plan, the Pandemic Response Plan, and the testing policy for ASX's Business Continuity and Disaster Recovery Plans.

The Group Business Continuity Manager is responsible for developing the ASX business continuity management policies and procedures, and coordinating business continuity activities and training across the CS facilities. The outcomes of these activities are overseen by the Business Continuity Steering Committee, which is chaired by the General Manager Enterprise Risk and includes the Chief Information Officer, CRO, CFO and GE, Operations. The ERMC is responsible for approving ASX's overall business continuity strategy and any related policies.

ASX Clear policy requires that failover to the backup data centre should occur within two hours for all systems. Plans for recovery of key systems apply to both physical and cyber threats to business continuity; these cover scenarios such as the loss of systems or site access (with or without damage to internal site infrastructure), mass unavailability of staff or a pandemic event. The Bank will discuss further with ASX its plans for recovery of key systems in the event of a cyber-related incident in the context of forthcoming CPMI-IOSCO guidance on cyber resilience.

ASX Clear employs a variety of technologies to ensure a high degree of redundancy in its systems – both across sites and within a single site. ASX maintains both primary and backup data centres, with broadly equivalent operational requirements. Key plant and equipment at the primary site are designed to the Uptime Institute Tier 3 standard of concurrent maintainability.^[22] The main computer network is connected via point-to-point optical fibre, which ASX operates with its own technology, thereby reducing the potential for outages due to operational problems with the telecommunications provider. All core systems employ multiple servers with spare capacity. Front-end servers handling communications with participants are configured to provide automatic failover across sites. Failover of the more critical data servers is targeted to take place within two hours, but would generally be expected to occur within an hour, under the control of management.

Disruption to participants in such circumstances would be mitigated by the high degree of redundancy in front-end system components. In most circumstances, these would be expected to maintain communications with participants' systems and queue transactions until the data servers were reactivated. The integrity of transactions would be supported by: queuing messages until they could be processed; storing all transactions in the database with unique identifiers, thereby preventing the loss or duplication of transactions; and synchronising replication of database records between the primary and backup data centres. Furthermore, in the event that a significant part of a system or an operational site failed, ASX Clear has contingency arrangements to activate an additional tier of ‘cold’ redundancy arrangements (either by converting test systems into production systems or rebuilding systems from readily available hardware) within 24 hours to meet the contingency of any further service interruption.

ASX Clear regularly tests its business continuity and technology disaster recovery arrangements against the range of identified business interruption scenarios. The testing requirements are set out in ASX's Business Continuity and Disaster Recovery Plans Testing Policy. Dual site operational teams across the primary and secondary operations sites effectively test backup operational processes on a continuous basis. These arrangements are supplemented by periodic desktop simulations, and exercises testing remote access and full attendance at the secondary site. ASX also participates in industry-wide tests of business continuity arrangements. For those teams not located across both sites, connectivity and procedural testing of the secondary site are performed monthly by representatives from ASX Clear. Live technology tests, where clearing services are provided in real time from the backup data centre, are conducted on a two-year cycle. The use of live tests ensures that participant connectivity to the backup data centre is also tested. Test results are formally documented and reported to ASX senior management and are also made available to internal and external auditors. In addition to receiving the results of business continuity tests, Internal Audit also reviews Technology operational incidents, contributes to business continuity policy updates, and ensures that business continuity elements have been considered in project risk assessments. ASX's business continuity framework is audited externally every three to five years; the most recent audit, conducted in August 2015, found that ASX's business continuity standards were broadly consistent with widely recognised global standards and did not identify any major areas of concern.

Incident management

ASX Clear has clearly defined procedures for crisis and event management. These procedures, as well as key roles and responsibilities for managing an incident, are documented in ASX's Major Incident Management Plan. The procedures cover incident notification (including notification and incident reporting to the Bank and ASIC), emergency response (including building evacuation), incident response (including overall incident assessment and monitoring), and incident management testing. These include the use of Twitter to advise stakeholders of market-wide operational or technical incidents. ASX maintains a major incident management team that includes senior representatives of the core business activities, as well as facilities management, business continuity, and media and communications. The procedures identify responsibilities, including for internal communication and external communication to emergency services, the market, industry and media. As part of these procedures, ASX maintains a ‘multi-market communication protocol’ for communicating information to participants and stakeholders should any disruption to market, clearing or settlement services eventuate, including where this affects market operators accessing ASX Clear via the TAS.

The ASX Technology Incident Management Procedure would be invoked in the event of a high severity technology incident. The Incident Management Procedure provides guidelines for system recovery prioritisation and resource allocation, and the actions that would need to be taken in the event of an incident. The Procedure also outlines the key roles and responsibilities for managing an incident, as well as indicative communication and notification requirements.

16.8 A central counterparty should consider making contingency testing compulsory for the largest participants to ensure they are operationally reliable and have in place tested contingency arrangements to deal with a range of operational stress scenarios that may include impaired access to the central counterparty.

The ASX Clear Operating Rules and Procedures require participants to maintain adequate business continuity arrangements that are appropriate to the nature and size of their business as a participant. The Operating Rules specify that participants must have arrangements that allow for the recovery of usual operations (see CCP Standard 16.6). It is ASX Clear's expectation (set out in guidance) that this would be within two hours following a contingency event for large participants. These arrangements are reviewed as part of the participant admissions process. Participants are also subject to spot checks of their ongoing compliance with the ASX Clear Operating Rules. Spot checks may be based on topical themes, in some cases arising from observations of general business developments, and in other cases motivated by a participant that has been experiencing operational problems. If a participant fails to implement any recommendations arising from a check, ASX may impose sanctions.

Participants are involved in the contingency testing of ASX Clear's systems, as this testing is conducted in a live environment. ASX conducts comprehensive business continuity testing of key systems at least every two years, with participants being notified of the start and completion of testing. Participants are also involved in testing of major system changes or in advance of the introduction of a new system. ASX Clear conducts regular connectivity tests and maintains an external testing environment for system changes.

Outsourcing and other dependencies

16.9 A central counterparty that relies upon, outsources some of its operations to, or has other dependencies with a related body, another FMI or a third-party service provider (for example, data processing and information systems management) should ensure that those operations meet the resilience, security and operational performance requirements of these CCP Standards and equivalent requirements of any other jurisdictions in which it operates.

ASX has developed a set of standard clauses for inclusion in contracts with third-party service providers of critical services to ASX Clear (see CCP Standard 16.5). Similar clauses are also included in the Support Agreement between ASX Clear and ASX Operations Pty Ltd, which provides all internal operational services for the facilities. The clauses seek to ensure that the agreements meet the resilience, security and operational performance requirements of the FSS. The clauses also allow the Bank to gather information from the service provider about the operation of critical functions (see CCP Standard 16.10). In the event that the Bank concluded that the terms of the service provider agreement did not meet FSS requirements, the clauses also require the service provider to negotiate acceptable new terms with ASX in good faith. Furthermore, if ASX Clear were to become insolvent, the clauses provide for the Bank to negotiate with the service provider to continue service provision (see CCP Standard 16.11). ASX applies these clauses to all new agreements with service providers, and has incorporated them into all of its key existing service agreements. This includes ASX Clear's agreement with a third-party vendor for support of risk management software for CMM.

In December 2014, CPMI and IOSCO published a finalised Assessment Methodology for the oversight expectations applicable to organisations providing critical services to FMIs.^[23] The Assessment Methodology provides a framework for considering how to apply the oversight expectations for critical service providers set out in Annex F of the Principles and the Bank's guidance to CCP Standard 16.9. The Bank will discuss with ASX how it applies these oversight expectations in managing its relationships with external providers of critical services, including the role of the CPMI-IOSCO Assessment Methodology in its oversight of these critical service providers.

16.10 All of a central counterparty's outsourcing or critical service provision arrangements should provide rights of access to the Reserve Bank to obtain sufficient information regarding the service provider's operation of any critical functions provided. A central counterparty should consult with the Reserve Bank prior to entering into an outsourcing or service provision arrangement for critical functions.

ASX's standard clauses for service providers require the provider to grant reasonable access to the Bank in respect of information relating to its operation of a critical function provided to ASX Clear. ASX applies these clauses to all new agreements with service providers, and has incorporated them into all of its key existing service agreements, including its agreement with a third-party vendor for support of CMM software.

16.11 A central counterparty should organise its operations, including any outsourcing or critical service provision arrangements, in such a way as to ensure continuity of service in a crisis and to facilitate effective crisis management actions by the Reserve Bank or other relevant authorities. These arrangements should be commensurate with the nature and scale of the central counterparty's operations.

Standard clauses in ASX Clear's agreements with service providers (described in CCP Standards 16.9 and 16.10) require that providers give the Bank notice of any intention to terminate the agreement as a consequence of ASX Clear's failure to pay fees, or in the event of the insolvency of ASX Clear or any other relevant ASX entity. This is intended to give the Bank an opportunity to take action to remedy the breach or otherwise ensure continued service provision.

ASX Clear's arrangements to ensure continuity of operations in the event of a crisis will be shaped by the proposed introduction into Australian law of a special resolution regime for FMIs. For example, under the proposed regime the Bank would have powers to direct related entities (such as ASX Operations) to perform obligations under ex ante agreements to provide critical services (see CCP Standard 16.4). The government, on the advice of the Council of Financial Regulators, progressed work on the proposed FMI resolution regime via a February 2015 consultation paper. ASX Clear will need to ensure that its arrangements to support continuity of operations in a crisis are appropriately adapted to the proposed FMI resolution regime once finalised.

Standard 17: Access and participation requirements

A central counterparty should have objective, risk-based and publicly disclosed criteria for participation, which permit fair and open access.

Rating: Observed

ASX Clear has objective and transparent participation requirements set out in its Operating Rules and Procedures (CCP Standard 17.1). These include minimum capital and other financial requirements, as well as operational and risk management arrangements tailored to the specific activities of ASX Clear (CCP Standard 17.2). ASX Clear monitors participants' compliance with requirements on an ongoing basis, and has the authority to suspend or terminate participation, or take other disciplinary or remedial action in the event of a breach of these requirements (CCP Standard 17.3).

The Bank's assessment is that ASX Clear has observed the requirements of CCP Standard 17 during the 2014/15 Assessment period. ASX Clear's access and participation requirements are described in further detail under the following sub-standards.

17.1 A central counterparty should allow for fair and open access to its services, including by direct and, where relevant, indirect participants and other FMIs, based on reasonable risk-related participation requirements.

ASX Clear has objective and transparent participation requirements, which are publicly available and form part of its Operating Rules and Procedures. ASX has also issued formal guidance to assist applicants' and participants' understanding of the participation requirements. ASX has an internal policy and supporting standards that summarise the financial and operational requirements placed on participants under the Operating Rules and Procedures (see CCP Standard 17.2), and document the responsibilities of the CS Boards, CRPC, CRO and relevant departments for ensuring these requirements are met and periodically reviewed. The Operating Rules and Procedures provide for an appeals process should an application for participation be rejected or a participant's access be terminated.

Under the Code of Practice, ASX has committed to providing transparent and non-discriminatory terms of access to ASX Clear's cash equity clearing services, including to participants and alternative market operators.

At the end of June 2015, ASX Clear had 34 participants (excluding inactive participants) – 12 of these were participants that offer clearing services to related entities or third parties.

17.2 A central counterparty's participation requirements should be justified in terms of the safety of the central counterparty and the markets it serves, be tailored to and commensurate with the central counterparty's specific risks, and be publicly disclosed. Subject to maintaining acceptable risk control standards, a central counterparty should endeavour to set requirements that have the least restrictive impact on access that circumstances permit.

ASX Clear's participation requirements are designed to promote the safety and integrity of the CCP. They cover: minimum capital and financial obligations; requirements related to legal structure, governance and regulatory status; business and managerial requirements; operational resources and capabilities; business continuity arrangements; and risk and liquidity management arrangements.

Participants are required to comply with a risk-based capital regime under which participants must hold ‘liquid capital’ in excess of a ‘total risk requirement’.^[24] Calculation of the total risk requirement considers counterparty risk, large-exposure risk, position risk and operational risk. Brokers that have insufficient capital, or that do not wish to undertake their own clearing, may use the services of a General Participant (see CCP Standard 18). A General Participant is a participant that may offer clearing services to third-party trading participants.

Direct Participants, who do not clear for other brokers, must maintain a minimum of $5 million in ‘core capital’.^[25] ASX management has discretion to impose a higher requirement. During 2014/15, ASX introduced tiered core capital requirements for General Participants, under which a General Participant must hold $5 million in core capital for each trading participant for which it clears, up to a maximum of $20 million. That is:

• a General Participant that clears only for itself or for one other trading participant is required to hold $5 million in core capital
• a General Participant that clears for itself and one other participant, or on behalf of two third-party trading participants, is required to hold $10 million in core capital
• a General Participant is required to hold an additional $5 million in core capital for each additional trading participant that it clears for, to a maximum of $20 million.

Prior to these changes, all General Participants were required to maintain a minimum of $20 million in core capital.

General and Direct Participants may elect to be covered by an alternative capital regime that recognises compliance with the requirements of a prudential supervisor. This is intended to encourage domestic ADIs to become active participants for the full range of products cleared by ASX Clear. Participants that clear only futures may also elect to be covered by a capital regime that is based on a NTA requirement. At the end of the Assessment period all but one of ASX Clear's 37 participants were subject to the risk-based regime.^[26]

Under the Operating Rules and Procedures, a potential participant must satisfy ASX Clear that it has the resources and processes in place to comply with its obligations under the applicable Operating Rules. For these purposes, ‘resources’ include financial, technological and human resources, and ‘processes’ include management supervision, training, compliance, risk management, business continuity and disaster recovery processes. A participant must also demonstrate that it has the capacity to make an immediate transfer of funds, on demand, should this be required to meet its obligations.

In June 2015, ASX implemented changes to streamline the admission and notification requirements for the ASX and ASX 24 markets and the CS facilities that serve them (i.e. ASX Clear, ASX Clear (Futures) and ASX Settlement). This was intended to make it administratively simpler for organisations to become participants in ASX's markets and CS facilities and reduce the ongoing compliance cost for participants, while leaving substantive obligations unchanged. As part of this process, ASX provided additional guidance to participants on: the admission process and criteria; notification obligations; offshoring and outsourcing arrangements; and business continuity requirements.

17.3 A central counterparty should monitor compliance with its participation requirements on an ongoing basis and have clearly defined and publicly disclosed procedures for facilitating the suspension and orderly exit of a participant that breaches, or no longer meets, the participation requirements.

The CRM department, which covers both CCPs and reports to the CRO, is responsible for the risk management of exposures to clearing participants. CRM monitors day-to-day developments regarding, among other things, financial requirements, risk profiles, open positions and settlement obligations to the CCPs. Within CRM, the Counterparty Risk Assessment team is responsible for monitoring, assessing and investigating matters relating to financial requirements, including monitoring participants' monthly financial statements for any matters of concern.

CRM also carries out a range of participant monitoring spot checks and other initiatives designed to validate the accuracy of the financial and operational information that participants submit to ASX Clear. Participants are required to inform ASX if at any stage their capital falls below the minimum requirement. CRM is also responsible for determining and reviewing participants' ICRs, drawing in part on information provided by participants in their regular financial returns to ASX, and coordinating a ‘watch list’ of participants deemed to warrant more intensive monitoring (see CCP Standard 4.1). In addition, Operations and ASX Compliance perform regular and ad hoc compliance monitoring activities.

ASX Clear's arrangements for monitoring and enforcing compliance with its Operating Rules are published on the ASX public website. Under these, ASX Clear has wide-ranging powers to sanction its participants in order to preserve the integrity of the CCP. ASX Clear may restrict, suspend or terminate a participant's authority to clear some or all market transactions in the event of a default, or in the event of a breach of the Operating Rules and Procedures that may have an adverse effect on the CCP. The action taken will depend on a number of factors, including the materiality of the incident, the participant's financial and operational capacity, as well as the participant's history of compliance. Where a breach has been identified and the participant has taken appropriate steps to rectify it, ASX Clear will typically continue to monitor the participant closely for a period of time. Significant breaches are also referred to ASIC and, depending on the nature of the breach, may be investigated by ASX Compliance for formal disciplinary action. For example, during the Assessment period a participant in ASX Clear (BBY Limited) was unable to meet a CBPL-related margin call. ASX Clear initially took steps to manage down the participant's clearing business without a declaration of default. However two weeks after the initial breach, BBY Limited was placed into voluntary administration, activating ASX Clear's default management process. The initial CBPL breach was itself triggered by a downward revision to the participant's declared capital levels (see Section 4).

Standard 18: Tiered participation arrangements

A central counterparty should identify, monitor and manage the material risks to the central counterparty arising from tiered participation arrangements.

Rating: Observed

ASX Clear applies a risk-based approach to its monitoring of tiered participation arrangements, with a particular focus on client activity in exchange-traded derivatives. ASX Clear does not formally monitor concentration in tiered participation arrangements for cash market transactions due to the relatively low exposures involved. ASX Clear has a formal standard that governs its risk-based approach to monitoring of concentration in tiered participation arrangements and documents mitigating steps (CCP Standard 18.4).

During 2014/15, clients of ASX Clear's participants represented 78 per cent of the initial margin held by ASX Clear to cover its derivatives-related credit exposures to both participants and (indirectly) their clients. In managing the risks associated with tiered arrangements, ASX Clear's ability to monitor tiering risks on cash market transactions is limited by the commingling of house and client positions. ASX can, however, gather more detailed information from participants on an ad hoc basis (CCP Standards 18.1, 18.2). ASX Clear does not maintain formal thresholds at which substantial indirect participants are encouraged to seek direct participation, but does actively manage risks posed by indirect participant activity through its relationship with the direct participant (CCP Standard 18.3).

ASX Clear conducts daily monitoring of client-level data on derivatives-related exposures, with the use of predefined triggers for further action.

The Bank will continue to monitor the operation of ASX Clear's risk-based approach to monitoring concentration risks in tiered participation in light of experience gained from the default of BBY Limited.

The Bank's assessment is that ASX Clear has observed the requirements of CCP Standard 18 during the 2014/15 Assessment period. ASX Clear's approach to tiered participation arrangements is described in further detail under the following sub-standards.

18.1 A central counterparty should ensure that its rules, procedures and agreements allow it to gather basic information about indirect participation in order to identify, monitor and manage any material risks to the central counterparty arising from such tiered participation arrangements.

ASX Clear operates an individually segregated account structure for equity derivatives products (see CCP Standard 13.2). This facilitates the gathering of information on indirect clearing of these products, since the positions, collateral and margin requirements of clients are recorded in individual accounts.

There are, however, practical limitations in the analysis of indirect participation in cash securities clearing. In particular, with a commingled house/client account structure (see CCP Standard 13.2), ASX is unable to separately identify client positions at an aggregate level, nor at an individual level. However, ASX Clear has identified that tiered participation risks arising from cash market transactions are less material than those arising from derivatives transactions (see CCP Standard 18.4). In addition, ASX Clear is able to monitor significant changes to indirect participation arrangements in both cash and derivatives markets through its regular risk discussions with participants, including third-party clearers. Business Development, ASX Compliance, Clearing and Settlement Operations and CRM are each involved in the discussion of changes to participants' exchange-facing business models, including those that relate to tiered participation arrangements. For instance, ASX's discussions with third-party clearers over recent years have identified situations in which clients of a trading participant clearing via a third-party clearer have taken large options positions, and in which a third-party clearer took on significant new third-party business over a short period. In both situations ASX increased monitoring of the participants' positions and investigated whether the participants in question had adequate resources and risk management arrangements in place to properly manage the additional risks posed by these situations.

If required, ASX Clear may request more detailed information on any indirect client from that client's clearing participant. This information may include further details about the indirect participant's profile or activities including, but not limited to, its intentions as to open positions. In addition, ASX Clear also has an ongoing program of ‘thematic’ participant reviews, covering risk topics of interest or concern. These could potentially examine tiering risks if ASX Clear were to perceive an increased risk from indirect relationships. ASX Clear currently considers the risks from concentration of indirect participants to be low.

18.2 A central counterparty should identify material dependencies between direct and indirect participants that might affect the central counterparty.

As noted under CCP Standard 18.1, ASX Clear monitors dependencies arising from tiered participation indirectly through a variety of means. These include regular discussions with participants on developments in their business and risk management activities, participants' own risk assessments, discussions with new participants as part of the induction process, monitoring of delivery risk (e.g. options expiries), and ASX Clear's broader array of risk management data collection and monitoring activities, including the daily monitoring of client-level data on derivatives-related exposures. Based on this information, ASX Clear has not identified any material dependencies between direct and indirect participants. As discussed under CCP Standard 18.4, ASX Clear monitors the proportion of a participant's derivatives business attributable to a particular client and sets triggers for further action based on the proportion of initial margin attributable to that client.

Efforts to identify suitable transferee participants for client ETO positions following the default of BBY Limited in May 2015 highlighted the lack of depth in indirect clearing arrangements for the retail ETO market. ASX Clear is considering the implications of this market structure for default management as part of its broader review of experience gained from the BBY Limited default (see CCP Standard 12.2 and Section 4).

18.3 A central counterparty should identify indirect participants responsible for a significant proportion of transactions processed by the central counterparty and indirect participants whose transaction volumes or values are large relative to the capacity of the direct participants through which they access the central counterparty in order to manage the risks arising from these transactions.

An important potential source of tiered participation risks in ASX Clear arises in the context of the third-party clearing market. There are a small number of participants offering third-party clearing services in the derivatives and cash markets. Although there is a greater dispersion of third-party clearing activity for derivatives, the largest third-party clearer in the cash market represented a relatively small proportion of total positions held at ASX Clear during the Assessment period. ASX monitors the third-party clearing market more broadly, in the context of its participant monitoring activities described under CCP Standard 18.1.

ASX encourages participants to develop appropriate risk control measures in managing their relationships with indirect participants. ASX does not set thresholds, either formal or informal, at which it would encourage direct participation by an indirect participant. ASX's general approach to managing risks associated with participants' business activities is based on a framework that can flexibly detect and respond to new risks as they arise, rather than setting firm ex ante activity limits. During the Assessment period, ASX Clear's participant enforcement was important in managing down the clearing business of BBY Limited following a missed deadline for a CBPL-related AIM call. This allowed ASX to decrease its exposures in an orderly manner prior to the participant being placed into voluntary administration, which activated ASX Clear's default management process (see CCP Standard 12.2 and Section 4).

18.4 A central counterparty should regularly review risks arising from tiered participation arrangements and should take mitigating action when appropriate.

ASX maintains a formal Concentration Risk Standard, setting out a risk-based approach to monitoring tiered participation risks.

On the basis of the relatively low exposures generated by cash market transactions, ASX concluded that the risks to ASX Clear from tiered participation arrangements in the cash market were low. ASX Clear therefore monitors tiering risks for the cash market as part of its ongoing monitoring of participant credit exposures, investigating whether identified issues are due to client positions (see CCP Standard 4.2).

ASX has, however, identified two main sources of tiering risk in the clearing of derivatives products in ASX Clear.

• For low exercise price options, the potential for large mark-to-market margin requirements when in delivery may be a particular issue where there is a concentration of positions in individual client accounts.
• For ETOs more generally, clients of participants may execute strategies, such as selling deep-out-of-the-money put options for premium income, that have the potential to trigger significant margin obligations in the event of large price movements.

ASX Clear therefore monitors indirect participation in the derivatives market on a daily basis, using concentration indicators based on initial margin. If a client's ETO initial margin accounts for over 25 per cent of the clearing participant's total ETO initial margin, further investigation is triggered. The Concentration Risk Standard notes that a number of factors will be considered when determining the appropriate response to any breaches of triggers, including the materiality of the breach and the credit standing and activity profile of the participant involved.

Standard 19: FMI links

A central counterparty that establishes a link with one or more FMIs should identify, monitor and manage link-related risks.

Rating: Observed

ASX Clear maintains links to two other FMIs: ASX Settlement and Austraclear. ASX Clear assumes no direct financial risks from these links, but is exposed to operational risks. These are managed in the context of ASX's group-wide framework for operational risk management (CCP Standard 19.1). The legal basis of each link is supported by finality legislation, and link arrangements have been discussed with the Bank (CCP Standards 19.2, 19.3). ASX Clear does not maintain links with any other CCPs (CCP Standards 19.4, 19.5).

The Bank's assessment is that ASX Clear has observed the requirements of CCP Standard 19 during the 2014/15 Assessment period. ASX Clear's management of link-related risks is described in further detail under the following sub-standards.

19.1 Before entering into a link arrangement, and on an ongoing basis once the link is established, a central counterparty should identify, monitor and manage all potential sources of risk arising from the link arrangement. Link arrangements should be designed such that the central counterparty is able to comply with these CCP Standards.

Identifying link-related risks

ASX Clear maintains two links with other FMIs, both of which are in the ASX Group. A link for the purposes of this standard is any connection that is made to another FMI according to a set of contractual and operational arrangements, irrespective of the complexity or otherwise of the link and whether it is directly with the FMI or through an intermediary.^[27]

The first link is with Austraclear. This link supports AUD funds transfers other than the settlement of securities-related payments, such as margin payments. Cash transfers are entered into Austraclear by ASX Clear, and then matched in Austraclear against the respective clearing participants' cash settlement instructions. Regular margin collections and intraday margin calls, which make up the majority of cash transfers, are submitted automatically to Austraclear by ASX Clear's margin and collateral systems.

The second link is with ASX Settlement for the settlement of securities transactions, including DvP settlement of novated securities trades and the lodgement of non-cash collateral. Instructions for these transactions are entered into CHESS, which operates across both ASX Clear and ASX Settlement.

Managing operational risk

The links to ASX Settlement and Austraclear are subject to the same operational risk management framework that applies for all the ASX CS facilities (see CCP Standard 16). This addresses operational risks associated with software, infrastructure or network failures and manual processing errors. An incident report is required for any significant technical or operational incident, including an assessment of mitigating actions to reduce the risk of reoccurrence. In addition, six-monthly risk profile assessments are prepared and presented to the Audit and Risk Committee, and an independent system-controls audit is conducted annually. Austraclear operations are also covered by the Austraclear System Business Operations Plan, which includes a ‘Step-in and Service’ agreement with the Bank (see Appendix A2.2, SSF Standard 14).

Managing financial risk

ASX Clear does not assume any direct financial risks from its links to other FMIs.

19.2 A link should have a well-founded legal basis, in all relevant jurisdictions, that supports its design and provides adequate protection to the central counterparty and other FMIs involved in the link.

ASX Clear's links to ASX Settlement and Austraclear have their legal basis in the Regulations, Operating Rules and Procedures of the three facilities. The finality of settlements via these links is supported, respectively, by approvals of Austraclear under Part 2 of the PSNA, and ASX Settlement under Part 3 of the PSNA (see CCP Standard 1.5).

19.3 Where relevant to its operations in Australia, a central counterparty should consult with the Reserve Bank prior to entering into a link arrangement with another FMI.

ASX Clear has discussed its current link arrangements with the Bank. ASX Clear did not enter into any new link arrangements during the Assessment period.

19.4 Before entering into a link with another central counterparty, a central counterparty should identify and manage the potential spillover effects from the default of the linked central counterparty. If a link has three or more central counterparties, a central counterparty should identify, assess and manage the risks of the collective link arrangement.

ASX Clear has no links with other CCPs.

19.5 A central counterparty in a central counterparty link arrangement should be able to cover, at least on a daily basis, its current and potential future exposures to the linked central counterparty and its participants, if any, fully with a high degree of confidence without reducing the central counterparty's ability to fulfil its obligations to its own participants at any time.

ASX Clear has no links with other CCPs.

Standard 20: Disclosure of rules, key policies and procedures, and market data

A central counterparty should have clear and comprehensive rules, policies and procedures and should provide sufficient information and data to enable participants to have an accurate understanding of the risks they incur by participating in the central counterparty. All relevant rules and key policies and procedures should be publicly disclosed.

Rating: Observed

ASX Clear fully discloses its Operating Rules and Procedures to participants, and publicly discloses its rules, guidance on its rules and a range of additional relevant information on its risk management procedures. ASX provides links to information that is subject to disclosure requirements from a central location on its public website (CCP Standard 20.1). This includes information regarding the process of novation, and general descriptions of system design and the roles and obligations of ASX Clear and its participants (CCP Standards 20.2, 20.3). ASX Clear provides new participants with comprehensive documentation, and verifies their understanding of their responsibilities as participants; existing participants are also provided with education on their obligations where required (CCP Standard 20.4). ASX has updated its published response to the CPMI-IOSCO Disclosure Framework and plans to periodically review and enhance this document where appropriate (CCP Standard 20.5).

The Bank's assessment is that ASX Clear has observed the requirements of CCP Standard 20 during the 2014/15 Assessment period. In order to continue to observe CCP Standard 20, ASX Clear should:

• carry out plans to regularly publish risk and activity data in accordance with the CPMI-IOSCO quantitative disclosure standards for CCPs.

ASX Clear's disclosure of rules, key policies and procedures, and market data is described in further detail under the following sub-standards.

20.1 A central counterparty should adopt clear and comprehensive rules, policies and procedures that are fully disclosed to participants. Relevant rules and key policies and procedures should also be publicly disclosed (including specific requirements relating to CCP Standards 1.4, 2.2, 12.3, 13.4, 15.4, 17.2 and 17.3).

ASX Clear's Operating Rules and Procedures form the basis of all material aspects of the CCP's service to participants. The Operating Rules and Procedures and ASX Guidance Notes are disclosed on the ASX public website.^[28] The Operating Rules and Procedures are also made available on ASX's participant website. ASX is in the process of enhancing the design and functionality of its participant website to better support the dissemination of non-public information to participants.

To assist participants in their understanding of the risks of participating in ASX Clear, and for the information of other interested stakeholders, ASX publishes a range of additional material on its public website. Information specific to ASX Clear includes information about risk management, default management, margins and CBPLs, and business continuity arrangements. More general information includes: the ASX Group's regulatory framework; requirements of the FSS; requirements of the Corporations Act for provision of services in a ‘fair and effective’ way; the ASX Group's other obligations under the Corporations Act; and ASX Group's compliance with the Principles. ASX also operates a dedicated website that discloses information relevant to the clearing and settlement of cash equities, to support its disclosure commitments under the Code of Practice. ASX maintains a centralised list of links on its website to information required to be disclosed under the FSS.

Specific disclosure requirements are dealt with under CCP Standards 1.4, 2.2, 12.3, 13.4, 15.4, 17.2 and 17.3.

20.2 A central counterparty's rules, policies and procedures should clearly identify the nature and scope of the risk exposure assumed by the central counterparty, such as by novation, open offer or other similar legal devices. A central counterparty's rules, policies and procedures should clearly identify the point in the clearing process at which the central counterparty assumes the risk exposure.

ASX maintains on its public website an overview of how the CCPs would manage a clearing participant default, which includes information about the purpose of novation, the point at which novation occurs, and the scope of contractual arrangements.^[29] Section 12 of ASX Clear's Operating Rules sets out the arrangements for registration of market contracts, including the point at which a contract is considered to be registered and at which ASX Clear assumes the risk exposure of a trade for transactions of ASX-quoted securities on the ASX or Chi-X markets, or OTC equity options (see CCP Standard 1.5).

20.3 A central counterparty should disclose clear descriptions of the system's design and operations, as well as the central counterparty's and participants' rights and obligations, so that participants can assess the risks they would incur by participating in the central counterparty (see CCP Standards 2.8 and 9.5).

General descriptions of ASX Clear's system design and operations are available on the ASX public website, including as part of ASX's response to the CPMI-IOSCO Disclosure Framework (see CCP Standard 20.5).^[30] The Disclosure Framework document describes the ASX group structure, provides a general description of the CS facilities and their roles, system design and operations, outlines the legal and regulatory framework for clearing and settlement, and provides a description of steps taken by ASX to ensure compliance with the Principles and the corresponding FSS. The ASX public website provides additional information on system design and operations, including descriptions of the cash market clearing and settlement process, and margining approaches for both securities and derivatives products.

20.4 A central counterparty should provide all necessary and appropriate documentation and training to facilitate participants' understanding of the central counterparty's rules, policies and procedures and the risks they face from participating in the central counterparty.

All applicants for participation in ASX Clear are provided with a comprehensive application pack, which includes information regarding key requirements of the facilities. Applicants are provided with access to the Operating Rules, Procedures and Guidance Notes via the ASX website, as well as publicly available information about the facilities, services and participation requirements. When ASX Clear has completed an initial assessment of an application, the applicant is also invited to attend formal ‘on boarding’ meetings with the Compliance, CRM and Operations departments to discuss key areas of importance for participants.

As part of the formal admission process, the applicant must provide supporting evidence of its capacity to comply with the rules. This is reviewed and discussed with the applicant prior to approving admission. An applicant is required to certify that it has resources and processes in place to comply with its obligations under the applicable Operating Rules and Procedures (see CCP Standard 17.2). When reviewing the submissions, or otherwise at any time following admission, the applicant must be able to demonstrate, to the satisfaction of ASX, the basis on which the certification is, or was, provided.

Where ASX becomes aware or suspects that a participant lacks a satisfactory understanding of the Operating Rules and Procedures, or the risks of participation, ASX will generally work collaboratively with the participant to educate them on their obligations. ASX may become aware of issues through its routine risk monitoring activities or through its regular discussions with participants. Examples of matters that might raise concerns are if a participant was slow in making required payments, or had a high frequency of intraday margin calls arising from delays in the intraday allocation of client positions. Steps available to ASX to address serious matters may include: ASX Clear calling for AIM or additional cover from the participant; requiring the participant to hold additional capital; requiring the participant to remediate the weakness; imposing conditions on participation; or requiring that the participant appoint an independent expert to assist with the remediation task (see also CCP Standard 16.5).

20.5 A central counterparty should complete regularly and disclose publicly responses to the CPSS-IOSCO Disclosure Framework for Financial Market Infrastructures.^[31] A central counterparty also should, at a minimum, disclose basic risk and activity data, as directed by the Reserve Bank from time to time.

ASX has published its response to the CPMI-IOSCO Disclosure Framework, including information describing how its CS facilities observe the applicable Principles. This document was revised during the Assessment period, expanding on previous versions to provide greater detail as to how the CS facilities meet the Principles and corresponding FSS, and to present this information in a way that is more useful for participants. ASX plans to update this document periodically (at least annually) and further enhance its disclosure as necessary from time to time.

ASX currently reports basic risk and activity data for the CS facilities via a monthly activity report, as well as through additional data published on both its main website and dedicated website on clearing and settlement of cash equities. In February 2015, CPMI and IOSCO published a finalised set of quantitative disclosure standards for CCPs that are intended to complement descriptive disclosures under the Disclosure Framework. ASX Clear plans to publish an expanded set of quantitative risk and activity data in accordance with the CPMI-IOSCO quantitative disclosure standards. The initial set of data is planned for publication in December 2015. The Bank will continue to monitor steps by ASX Clear to refine and enhance its disclosure.

Standard 21: Regulatory reporting

A central counterparty should inform the Reserve Bank in a timely manner of any events or changes to its operations or circumstances that may materially impact its management of risks or ability to continue operations. A central counterparty should also regularly provide information to the Reserve Bank regarding its financial position and risk controls on a timely basis.

Rating: Observed

The Bank meets regularly with ASX Clear to discuss matters relevant to its compliance with the FSS, and related aspects of its risk management and operational arrangements. The Bank has been kept informed of relevant developments during the Assessment period (CCP Standard 21.1). ASX Clear provides the Bank with financial, activity, risk and operational data and reports on a regular and timely basis (CCP Standard 21.2).

The Bank's assessment is that ASX Clear has observed the requirements of CCP Standard 21 during the 2014/15 Assessment period. ASX Clear's regulatory reporting arrangements with the Bank are described in further detail under the following sub-standards.

21.1 A central counterparty should inform the Reserve Bank as soon as reasonably practicable if:

1. it breaches, or has reason to believe that it will breach:
   1. a CCP Standard; or
   2. its broader legislative obligation to do, to the extent that it is reasonably practicable to do so, all things necessary to reduce systemic risk;
2. it becomes subject to external administration, or has reasonable grounds for suspecting that it will become subject to external administration;
3. a related body to the central counterparty becomes subject to external administration, or if the central counterparty has reasonable grounds for suspecting that a related body will become subject to external administration;
4. a participant becomes subject to external administration, or if the central counterparty has reasonable grounds for suspecting that a participant will become subject to external administration;
5. a participant fails to meet its obligations under the central counterparty's risk control requirements or has its participation suspended or cancelled because of a failure to meet the central counterparty's risk control requirements;
6. it fails to enforce any of its own risk control requirements;
7. it plans to make significant changes to its risk control requirements or its rules, policies and procedures;
8. it or a service it relies on from a third party or outsourced provider experiences a significant operational disruption, including providing the conclusions of its post-incident review;
9. any internal audits or independent external expert reviews are undertaken of its operations, risk management processes or internal control mechanisms, including providing the conclusions of such audits or reviews;
10. its operations or risk controls are affected, or are likely to be affected, by distress in financial markets;
11. it has critical dependencies on utilities or service providers, including providing a description of the dependency and an update if the nature of this relationship changes;
12. it proposes to grant a security interest over its assets (other than a lien, right of retention or statutory charge that arises in the ordinary course of business);
13. it proposes to incur or permit to subsist any loans from participants or members unless such loans are subordinated to the claims of all other creditors of the central counterparty; or
14. any other matter arises which has or is likely to have a significant impact on its risk control arrangements (see also CCP Standards 1.6, 16.10 and 19.3).

Three routine meetings are held between the Bank and ASX each quarter:

• executive-level meetings to discuss developments relevant to compliance with the FSS, involving the CRO and other relevant members of ASX's management team; representatives from ASIC attend these meetings to discuss matters of common interest
• risk management meetings, involving general managers and other staff responsible for clearing risk policy and the implementation of risk management arrangements
• operations meetings, involving the GE, Operations, and other members of the management team responsible for implementation of operational strategy, management of operational risk and business continuity planning.

These meetings provide a forum for the discussion of material developments, such as issues regarding participant compliance, changes to risk management controls, and the results of internal audits. Matters discussed in the formal scheduled meetings are followed up, as appropriate, in more focused targeted sessions.

The Bank expects to be notified immediately of any significant developments in ASX Clear's risk exposure; for example, if ASX Clear has reason to believe that a participant default may be imminent or there is evidence of distress in markets cleared by ASX Clear. Notification to the Bank of significant developments is specified in many of ASX's key internal risk management policies. During the 2014/15 Assessment period, this included the notification of the default of a participant. The Bank was provided regular updates throughout this incident, including daily updates during the key stages of the pre-default and default management processes (see Section 4). The Bank and ASX also hold ad hoc meetings to discuss relevant matters as required.

During the 2014/15 Assessment period, ASX kept the Bank up to date with minor operational incidents and the status of important project milestones, such as the implementation of enhanced client protection arrangements for cash equities and enhancements to the credit stress-testing framework. The Bank is satisfied with its level of communication with ASX over this period.

21.2 A central counterparty should also provide to the Reserve Bank, on a timely basis:

1. audited annual accounts;
2. management accounts on a regular basis, and at least quarterly;
3. risk management reports, including detailed information on margining and stress testing, on a regular basis, and at least quarterly;
4. periodic activity, risk and operational data, as agreed with the Reserve Bank; and
5. any other information as specified by the Reserve Bank from time to time.

Audited annual reports are published on the ASX public website, while ASX provides the Bank with quarterly statements of balance sheet, income, and collateral held for each CS facility. Under the Code of Practice, ASX also publishes audited biannual management accounts for its cash equity clearing and settlement services.

ASX provides a quarterly risk management report, as well as detailed activity, risk and operational data. The risk management report includes information on stress-test results, adequacy of financial resources, and developments in risk management policy. Data provided quarterly to the Bank include changes to participants' ICRs, daily margin collections (including intraday margin calls), stress-test results, collateral holdings, and any late payments. The quarterly risk management review meetings between the Bank and ASX provide a forum for discussion of developments observed in the data.

From time to time, the Bank will request additional information from ASX Clear on topics of interest, particularly in regard to any operational incidents or the status of projects with significant risk implications.

During the previous Assessment period, Bank conducted a review of the data that it collects from ASX in order to better support its assessment of the CS facilities against the requirements of the FSS. As a result of this review, ASX has implemented enhancements to the data it reports to the Bank during the Assessment period.

Footnotes

The guidance is available at <http://www.rba.gov.au/payments-system/clearing-settlement/standards/central-counterparties/2012/>. [1]

For an explanation of the Bank's Assessment approach and the ratings scale used, see the introduction to Appendix A. [2]

Available at <http://www.asx.com.au/documents/asx-compliance/pfmi-disclosure-framework.pdf>. Prior to 1 September 2014, CPMI was known as the Committee on Payment and Settlement Systems (CPSS). [3]

The Code of Practice is available at <http://www.asx.com.au/cs/index.htm>. [4]

Available at <http://www.asx.com.au/documents/regulation/ASXL_guidelines_affecting_independent_status.PDF>. [5]

Available at <http://www.asx.com.au/about/board-and-management.htm>. [6]

The Institute of Internal Auditors is the leading international organisation representing internal auditors. It has developed a set of standards that provides a framework for carrying out and evaluating the performance of internal audits. [7]

Available at <http://www.treasury.gov.au/~/media/Treasury/Publications%20and%20Media/Publications/2013/Council%20of%20Financial%20Regulators%20advice%20on%20competition/Downloads/Competition%20in%20clearing%20and%20settlement%20of%20the%20Australian%20cash%20equity%20market.ashx>. [8]

ISO is an international standard-setting body and ISO 31000 is considered to be relevant guidance for enterprise risk management. The ISO 31000 standard has been reproduced by Standards Australia and Standards New Zealand as AS/NZS 31000. [9]

Premium margin is used to cover the amount that would be required to close out short positions in ETOs (see CCP Standard 6.1). [10]

Previously, exercised LEPOs continued to be margined through to the settlement date of the underlying cash equity trades using SPAN (so-called prolonged margining). The cash trade reported to CHESS (that is, the nominal $0.01 strike price) was excluded from margining. [11]

Flat rates effectively assume independence of price movements between securities subject to flat rates. Unless a portfolio is highly concentrated in a small number of flat rate securities, it is likely that this assumption would lead to coverage at the portfolio level that exceeds the targeted confidence interval for individual securities. [12]

ASX assumes a normal distribution of prices in specifying its desired confidence level in standard deviations. [13]

A LEPO is a European-style call option (exercisable only on the expiry date) with a strike price of one cent. Only a small proportion of the option premium is paid upfront, and both buyer and seller pay margins throughout the life of the LEPO. Upon exercise at expiry, the buyer pays the final margin payments, the balance of the premium and strike price to the seller in exchange for the securities. [14]

The Review of Settlement Practices for Australian Equities is available at <http://www.rba.gov.au/payments-system/clearing-settlement/review-practices/>. [15]

Participants maintain ‘accumulation’ and ‘settlement’ accounts to manage the processing of securities for settlement. Client securities due for delivery are typically initially placed in accumulation accounts prior to transfer to the participant's settlement account, at which point the participant takes effective control over the use of securities. Securities are delivered to and from settlement accounts as part of ASX Settlement's batch settlement process. [16]

Available at: <http://www.asx.com.au/documents/clearing/131001_Default_Management_-_Public_Information_Document_v2.pdf>. [17]

The NIST Cybersecurity Framework is used widely by critical infrastructure providers and other organisations in a number of jurisdictions internationally. [18]

The Australian Liquidity Centre provides market participants with the option to ‘co-locate’ their servers with ASX's data centre. [19]

ASX currently maintains three main sites for its operations and data processing: a primary operations site that also operates as the primary data centre (where the majority of staff are located); a secondary operations site; and a backup data centre. [20]

When a component of software is updated, ‘regression testing’ aims to perform checks on the full software to verify that the operation of other software components has not been inadvertently affected by the update. [21]

The Uptime Institute is an IT consulting organisation that has developed a widely adopted classification system for the level of redundancy arrangements in data centres. ‘Tier 3’ is the second highest standard of redundancy, indicating that a data centre has redundant components, multiple independent power and cooling systems, and a high degree of availability. [22]

See CPMI-IOSCO (2014), Principles for financial market infrastructures: Assessment methodology for the oversight expectations applicable to critical service providers, December, available at <http://www.bis.org/cpmi/publ/d123.htm>. [23]

‘Liquid capital’ is defined by ASX to comprise total tangible shareholders' funds held in liquid assets, net of any guarantees and indemnities. [24]

‘Core capital’ is defined by ASX to be the sum of: all paid-up ordinary share capital; all non-cumulative preference shares; all reserves, excluding revaluation reserves; and opening retained profits/losses, adjusted for current year movements. [25]

The number of participants includes three inactive participants excluded for the purpose of CCP Standard 17.1, since these remain subject to capital requirements. [26]

Links to payment systems are addressed in CCP Standard 9. [27]

Available at <http://www.asx.com.au/regulation/rules/asx-clear-operating-rules.htm>. [28]

Available at <http://www.asx.com.au/documents/clearing/131001_Default_Management_-_Public_Information_Document_v1.pdf>. [29]

Available at <http://www.asx.com.au/documents/regulation/ASX_PFMI_Disclosure_Framework_28_February_2015.PDF>. [30]

The CPSS was renamed the CPMI in October 2014. [31]