2006/07 Assessment of Clearing and Settlement Facilities in Australia 5. Assessment of CS Facilities against the Financial Stability Standards

The Reserve Bank determined Financial Stability Standards for central counterparties and securities settlement facilities in May 2003. The standard for central counterparties is as follows:

A CS facility licensee must conduct its affairs in a prudent manner, in accordance with the standards of a reasonable CS facility licensee in contributing to the overall stability of the Australian financial system, to the extent that it is reasonably practicable to do so.

The standard for securities settlement facilities was varied in June 2005. It is as follows:

A CS facility licensee must conduct its affairs in a prudent manner, in accordance with the standards of a reasonable CS facility licensee in contributing to the overall stability of the Australian financial system, to the extent that it is reasonably practicable to do so.

This standard only applies to CS facility licensees that provide a facility where the value of financial obligations settled in a financial year exceeds a threshold value of $100 million. When this threshold is exceeded for the first time, the provider of the facility must meet the standard by the beginning of the next financial year.

The threshold value for the application of the Financial Stability Standard for Securities Settlement Facilities was established to ensure that small securities settlement facilities, which are unlikely to affect the overall stability of the Australian financial system, are not subject to unnecessary regulation.

The standards are supplemented by the minimum measures that the Reserve Bank considers relevant for meeting each standard. These apply across a range of subject areas (See Table 1). The full text of the associated measures is available on the Reserve Bank's website.

Approach to assessment

The assessments against the standards have been compiled on the basis of information collected from a variety of sources. All four ASX licensees report financial information to the Reserve Bank quarterly, while the two central counterparties also report risk management information. The Bank also holds regular discussions with the licensees on issues relevant to compliance at both an operational and a policy level. The information gathered from these sources is supplemented with a detailed written questionnaire at the end of the assessment period, which requests both qualitative and quantitative information on issues relevant to the assessment. Follow-up discussions are held as required.

From this information, the Bank has assessed each CS facility against each of the minimum measures associated with the relevant standard, as set out in Table 1 above. The primary focus has been on assessing areas of operation that have changed materially since the previous assessment, to determine whether they continue to meet the relevant measure. Where there has been no material change in operations, the Bank must nonetheless also verify that the facility remains compliant. The Bank has also taken into account data which are relevant to ongoing compliance with some measures. For example, stress testing data have been used to provide information on the strength of the central counterparties' risk management arrangements and to supplement information on the specific risk management tools in place. Data on operational reliability, capacity and business continuity testing have also been used to determine how well a CS facility has managed operational risk.

The summary assessments that follow draw on all available information in order to make an overall assessment of each facility's compliance with the relevant standard. Detailed evaluations of how the facilities address each measure are outlined in the attachment.