2012/13 Assessment of ASX Clearing and Settlement Facilities B1.2 ASX Clear (Futures)

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 (Futures) has objective and transparent participation requirements set out in its Operating Rules and Procedures (CCP Standard 17.1). These requirements include minimum capital and other financial requirements, as well as operational and risk management arrangements that are tailored to the specific activities of ASX Clear (Futures), including additional requirements for OTC derivatives clearing participants (CCP Standard 17.2). ASX Clear (Futures) 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).

Based on this information, the Bank's assessment is that ASX Clear (Futures) has broadly observed the requirements of CCP Standard 17 during the 2012/13 Assessment period. ASX Clear (Futures)' 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 (Futures) has objective and transparent participation requirements, which are publicly available and form part of its Operating Rules and Procedures. The Operating Rules and Procedures provide for an appeals process should an application for participation be rejected or a participant's access be terminated.

At the end of June 2013, ASX Clear (Futures) had 14 participants, predominantly large foreign banks and their subsidiaries.

ASX requires OTC derivatives clearing participants to be an Australian bank (i.e. ADIs licensed to operate as a bank) or a subsidiary of an Australian bank. These participants will be required to have either minimum Tier 1 capital (if an Australian bank) of $50 million, or net tangible assets of $50 million. Potential participants must be able to demonstrate to the satisfaction of ASX Clear (Futures) their ability to participate in the default management process, including a default auction.

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 (Futures)' participation requirements are designed to promote the safety and integrity of the CCP. They cover minimum capital and financial obligations, business and managerial requirements, operational resources and capabilities, business continuity arrangements, and risk and liquidity management arrangements.

Participants that clear futures only are subject to a minimum net tangible asset (NTA) requirement of $5 million. ASX management has discretion to impose a higher requirement. Over time, ASX Clear (Futures) plans to implement a further increase in this NTA requirement to $10 million, with a higher requirement for those participants that clear for third parties. In the second half of 2013, ASX plans to consult on proposed changes to participation requirements across the two CCPs to achieve greater consistency. The Operating Rules and Procedures also allow ASX Clear (Futures) to impose requirements for net liquid assets.

Participation requirements for participants that clear OTC derivatives are set out in the publicly available OTC Rules and OTC Handbook. The capital requirement of $50 million for these participants is significantly higher than that for futures to reflect the increased complexity of OTC derivatives markets, and the potential for a default event to require the closing out of less liquid products that are more difficult to liquidate than those in the futures market and that are therefore likely to require participant involvement in the close-out process. The requirement that an OTC derivatives participant be an ADI bank (or subsidiary of an ADI bank) similarly provides an additional level of protection for the CCP, since the participant would then be regulated directly by the Australian Prudential Regulation Authority.

Under the Operating Rules and Procedures, the ASX Clear (Futures) Board must be satisfied that a potential participant has (or will have) the relevant managerial, operational and financial capacity and appropriate complementary business continuity arrangements in place to enable it to meet its ongoing obligations. 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.

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 unit, which covers both CCPs and reports to the CRO, is responsible for the risk management of 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 (Futures). 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 Compliance perform regular and ad hoc compliance monitoring activities.

ASX Clear (Futures) has wideranging powers to sanction its participants in order to preserve the integrity of the CCP. ASX Clear (Futures) may restrict, suspend or terminate a participant's authority to clear 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. Where a breach has been identified and the participant has taken appropriate steps to rectify it, ASX Clear (Futures) 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 the Executive Office of ASX Compliance for formal disciplinary action.