2009/10 Assessment of Clearing and Settlement Facilities in Australia Appendix B: Detailed Information Relevant to Assessment against the Financial Stability Standards

B1. Financial Stability Standard for Central Counterparties

There are 10 measures that the Reserve Bank considers relevant in determining whether a facility has met the Financial Stability Standard for Central Counterparties. The full text of the measures and associated guidance is available on the Reserve Bank's website. The following provides summary details of the information the Reserve Bank has used to assess ASX Clear and ASX Clear (Futures) against each of the relevant measures. This updates the information presented in the Reserve Bank's 2008/09 Assessment for material changes in policies and procedures over 2009/10.

B1.1 ASX Clear (formerly Australian Clearing House)

1. Legal framework

The central counterparty must have a well-founded legal basis.

ASX Clear Pty Limited is a wholly owned subsidiary of ASX Clearing Corporation Limited, itself a wholly owned subsidiary of ASX Limited. It acts as the central counterparty for cash equities, pooled investment products, warrants, certain interest-rate products and equity- and commodity-related derivatives traded on the ASX market.

The legal basis for ASX Clear's operations is set out in the ASX Clear Operating Rules and Procedures. Under section 822B of the Corporations Act, these rules have effect as a contract under seal between ASX Clear and each of its participants, and between each participant and each other participant. Furthermore, the netting arrangements contained in the ASX Clear Operating Rules and Procedures are protected as a ‘netting market’ under Part 5 of the Payment Systems and Netting Act. This provides certainty for the netting process in the event of the insolvency of a participant. In July 2009, ASX implemented some rule-book clarifications around the protections afforded by the Act.

The ASX Clear Operating Rules and Procedures define the nature and scope of its obligation to provide clearing services to participants, and describe the conditions under which final and irrevocable settlement of obligations is deemed to have occurred. The Operating Rules and Procedures also set out the rights and obligations of participants, including in the event of default or suspension.

2. Participation requirements

The requirements for participation in the central counterparty must promote the safety and integrity of the central counterparty and ensure fair and open access. Participation requirements must:

be based on objective and publicly disclosed criteria;

ASX Clear has objective and transparent participation requirements, which are publicly available and form part of the Operating Rules and Procedures. The Operating Rules and Procedures also provide for an appeals process should an application for participation be rejected or a participant's access be terminated.

At the end of June 2010, ASX Clear had 54 participants – 51 of these were also ASX market participants, while three provided specialist third-party clearing services.

ensure that participants in the central counterparty are of a sufficient financial standing such that the central counterparty is not exposed to unacceptable credit risks;

ASX Clear's participation requirements are designed to promote the safety and integrity of the central counterparty. Participants clearing cash equities or options are required to comply with a risk-based capital regime under which, subject to maintaining a minimum of $2 million in ‘core capital’ – as of 1 July 2010 this amount was increased to $5 million for Direct Participants and $10 million for General Participants – they must hold capital in excess of a ‘total risk requirement’, which reflects counterparty risk, large-exposure risk, position risk and operational risk. Brokers that do not have a need to undertake their own clearing, or choose not to hold the required amount of capital, may use the services of specialist third-party clearers. Subject to sufficient depth and competition in the third-party clearing market, ASX Clear intends to subsequently further increase ‘core capital’ requirements to $10 million for Direct Participants, and are reviewing requirements for General Participants. Participants that clear futures only may elect to be covered by an alternative capital regime, based either on a NTA requirement or compliance with the regime of another prudential supervisor. At the end of the assessment period all but three of ASX Clear's 54 participants were subject to the risk-based regime; two were subject to NTA requirements and one was subject to the subject to NTA requirements and one was subject to the regime of another prudential supervisor.

Participants are subject to ongoing monitoring by ASX Clear, with this conducted by two units within ASX, ASX Compliance and Clearing Risk Management:

The monitoring, assessment and investigation of matters relating to financial requirements are dealt with by the Capital Monitoring unit of ASX Compliance, a separate subsidiary within the ASX group with its own board. Participants are required to submit capital liquidity returns on a monthly basis, which ASX Compliance then monitors for exceptions. ASX Compliance applies a number of triggers for follow-up enquires, including: a fall to below 1.7 in the ratio of liquid capital to the total risk requirement; sustained losses on outstanding positions; and a significant fall in liquid capital held. More stringent reporting requirements apply where a participant's capital falls below certain stated thresholds. ASX Compliance also undertakes a range of ‘spot checks’ to verify the accuracy of participant returns. Individual spot checks are typically triggered by two or more historical inaccuracies in the submitter's returns, while industry-wide spot checks are conducted to look at multiple participants' compliance with a specific aspect of the capital rules.
Clearing Risk Management, a unit that covers both central counterparties, focuses on day-to-day participant activity and monitors risk profiles, open positions and settlement of obligations to the central counterparties. It also determines and reviews participants' ICRs, drawing on information provided by participants in their returns to ASX Compliance. The ICR is based on the participant's external credit rating (if available) or that of its parent, if either that parent provides a formal guarantee to the central counterparty or the participant carries the parental corporate name. Otherwise, the rating is based on the participant's capital position. Clearing Risk Management also maintains a ‘watch list’ of participants deemed to warrant more intensive monitoring. Inclusion on the watch list might, for instance, reflect issues arising from routine review of financial returns by ASX Compliance, or concerns emerging from a specific event or media report. Participants on the watch list are subject to greater scrutiny in respect of the exposures they bring to the central counterparty and, should a participant's perceived financial standing deteriorate further, restrictions may be placed on its trading, clearing and settlement activities.

ASX has developed policies that allow for relevant information to flow between ASX Compliance and other business units within ASX. These are embodied in a ‘Supervisory Code of Conduct’ and ‘Commercial and Supervisory Conflict of Interest Policy’, which together aim to ensure that conflicts and potential conflicts between ASX's supervisory responsibilities and its commercial interests are appropriately managed. ASX has revised (and, where appropriate, replaced) these policies in conjunction with the transfer of market supervisory responsibilities to ASIC, to better reflect the changed licence obligations, operating environment and organisational structure of ASX Group and its licensed subsidiaries. To facilitate exchange of clearing risk-relevant information on clearing participants, a formal liaison meeting is held between ASX Compliance, Clearing Risk Policy, Clearing Risk Management and Clearing and Settlement Operations.

require that participants have the operational capacity to settle their obligations with the central counterparty in a timely manner; and

Under the Operating Rules and Procedures, ASX Clear participants are subject to requirements regarding technical and operational capacity, including business continuity. The Rules also include provisions to ensure that a participant's management structure is designed to achieve compliance with the ASX Clear Operating Rules and Procedures, including meeting settlement obligations.

allow the CS facility licensee as operator of the central counterparty to suspend or cancel the participation of an institution which breaches the applicable participation or other risk-control requirements.

ASX Clear has wide-ranging powers to sanction its participants in order to preserve the integrity of the central counterparty. ASX Clear may terminate a participant's authority to clear all, or any category of, market transactions in the event of a default, or in the event of a breach of the Operating Rules and Procedures which may have an adverse impact on the central counterparty. The action taken in the event of a breach will depend on a number of factors, including the participant's history of compliance and whether the breach is suggestive of negligence, incompetence or dishonesty. 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. Breaches are also referred to ASIC and, in most cases, are investigated by ASX Compliance.

3. Understanding risks

The central counterparty's rules and procedures must enable each participant to understand the central counterparty's impact on each of the financial risks the participant incurs through participation in the central counterparty.

The ASX Clear Operating Rules and Procedures are comprehensive and publicly available on the ASX website. The Operating Rules and Procedures explain the role and responsibilities of each category of participant and ASX Clear. Some background information on ASX Clear's operations and risk management is also available on the ASX website.

ASX Clear must lodge any changes to its Operating Rules with ASIC. Under section 822E of the Corporations Act, the Minister has 28 days to consider, and potentially disallow, any rule changes made by a licensed CS facility. ASX Clear consults with its participants on important rule changes, and notifies participants of all changes to the Operating Rules and Procedures.

4. Novation

The rules and procedures governing the central counterparty must clearly identify:

the nature and scope of novation; and

The nature and scope of novation is set out in the ASX Clear Operating Rules and Procedures. Through the process of novation, ASX Clear takes on the financial obligations of the seller to the buyer, and the buyer to the seller. The obligations of ASX Clear are to each clearing participant as principal, irrespective of whether that participant is acting as an agent on behalf of a client.

the point in the clearing process at which trades are novated.

The point at which trades are novated is set out in the Operating Rules and Procedures. These specify that a broker-to-broker transaction on the ASX market is novated to ASX Clear upon the acceptance and registration of the details of that market transaction within the clearing system. For equities market transactions, novation occurs with effect from the matching of the trade on the market. In the case of derivatives transactions, novation takes place no later than the evening of participants' accounts.

5. Settlement

Settlement arrangements must ensure that the central counterparty's exposures are clearly and irrevocably extinguished on settlement.

where settlement involves the exchange of one asset for another, it must be done on an appropriate delivery-versus-payment basis; and
where payments, including net payments, are made to extinguish other obligations, payment must be made by real-time gross settlement.

Settlement of obligations between a central counterparty and its participants can involve two processes:

The exchange of one asset for another, such as cash equities. In this case, ASX Clear utilises the settlement facility provided by ASX Settlement.
Payments to or from the central counterparty, including margin payments relating to derivatives positions. In this instance, the facility provided by Austraclear must be used.

In each case, ASX Clear calculates bilateral net positions between itself and each of its clearing participants. These positions reflect both cash payment and securities obligations. The relevant netting arrangements are outlined in the ASX Clear Operating Rules and Procedures and are protected as a ‘netting market’ under Part 5 of the Payment Systems and Netting Act.

ASX Settlement's settlement process involves the use of a Model 3 DVP mechanism, whereby cash payments and securities transfers are settled simultaneously in a single daily multilateral net batch. 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 in respect of each line of stock. Once participants' net obligations have been calculated, ASX Settlement confirms that sufficient securities are available in each participant's securities 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' ES accounts. Once cash settlement has been confirmed, ASX Settlement effects the net transfer of securities within CHESS.

Participants settle routine margin payments in respect of ASX derivatives positions via cash transfers in Austraclear, which settle in real time via RITS. Prior to February 2010 these payments could also be made alongside securities-related settlement obligations in the daily batch-settlement process in CHESS. The change ensures that ASX Clear's risk-management arrangements are not dependent on the completion of settlement in the cash equity market. The settlement of routine margin is now consistent with the requirement that all intraday margin payments and obligations under the CAC regime be settled via Austraclear.

In a related development, foreshadowed in the 2008/09 Assessment, ASX Clear started operation of its ES account with the Reserve Bank during this assessment period. ASX Clear now uses the account for margin-related funds movements and treasury investment-related settlements in RITS. These payments were previously settled under an agency agreement with a commercial bank.

Settlement in both ASX Settlement and Austraclear is final and irrevocable. In the case of ASX Settlement, finality is supported both by its Operating Rules and Procedures and ASX Settlement's approval under Part 3 of the Payment Systems and Netting Act. Settlement according to Austraclear's Regulations is also final and irrevocable by virtue of its approval under Part 2 of the Payment Systems and Netting Act.^[1]

ASX Clear also clears grain and wool futures. These instruments may be physically settled through commodity warehouses, with ASX Clear transferring title to the buyer only once payment is received from the seller.

6. Default arrangements

The CS facility licensee as operator of the central counterparty must ensure that it has clear rules and procedures to deal with the possibility of a participant being unable to fulfil its obligations to the central counterparty. The arrangements for dealing with a default must ensure that in this scenario timely action is taken by the central counterparty and the participants in the central counterparty, and that risks to the central counterparty and its participants are minimised. In meeting this requirement, the CS facility licensee as operator of the central counterparty must:

require its participants to inform it immediately if they:
1. become subject to 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

The ASX Clear Operating Rules and Procedures set out notification requirements that participants must meet in relation to a default. A participant is required to inform ASX Clear should it default under the Operating Rules and Procedures. A range of default events are set out in the Operating Rules and Procedures, including: the appointment of an external administrator (or a reasonable expectation that one will be appointed); a breach of ASX Clear's capital requirements; or a failure to meet payment or settlement obligations to ASX Clear.

have the ability to close out, or otherwise deal with a participant's open contracts in order to appropriately control risk if a participant:
1. becomes subject to external administration; or
2. breaches a risk-control requirement of the central counterparty.

The Operating Rules and Procedures provide ASX Clear with the authority and flexibility to deal with a participant default and to ensure that settlement of novated positions occurs. For equities, ASX Clear is able to reschedule any settlements involving the failed participant, or those affected by its failure. ASX Clear may also enter into market transactions to sell or purchase securities to facilitate the settlement of novated transactions. For derivatives, ASX Clear has the ability to close out a defaulted participant's positions, or to seek to transfer the client positions of the defaulted participant to a surviving participant.

These formal rules are supplemented by an internal default management plan. ASX is working to enhance
default-management processes for both central counterparties, with the aim of managing legal, operational and liquidity risk, and minimising potential losses and spillovers that could arise in a default scenario (see Section 5.1 for more detail).

ASX Clear also has a range of financial resources available to ensure that it can meet its obligations in the event of a participant default (Measure 7).

7. Risk controls

The CS facility licensee as operator of a central counterparty must have comprehensive risk-control arrangements in place. These arrangements must provide the operator of the central counterparty with a high degree of confidence that, in the event of extreme volatility in relevant markets, the central counterparty will be able to settle all of its obligations in a timely manner. As a minimum, the risk-control arrangements must provide the CS facility licensee as operator of the central counterparty with a high degree of confidence that the central counterparty will be able to settle its obligations in the event that the participant with the largest settlement obligations cannot meet them. In all but the most extreme circumstances, a central counterparty must be able to settle its obligations using liquid assets as defined in this standard.

The CS facility licensee as operator of a central counterparty must:

ensure that its risk-control measures, typically a combination of its own capital, margins, guarantee funds and pre-determined loss-sharing arrangements, provide sufficient coverage and liquidity; and
undertake regular and rigorous stress testing to ensure the adequacy of its risk controls.

The adequacy of risk-control measures must be approved by the board of the central counterparty, or an appropriate body as delegated by the board.

The risk controls of a central counterparty are crucial in providing a high degree of confidence that it would be able to meet its obligations in the event of a participant failure. The inability of a central counterparty to meet its obligations could be extremely disruptive to the financial system. The focus of the Reserve Bank in this area is on ensuring that the combination of risk controls applied achieves a very low probability of failure of the central counterparty.

At the core of ASX Clear's risk controls is its financial resources. These comprise: margin and other collateral calls based on participants' positions; and pooled financial resources of $550 million (of which $250 million is fully paid up and invested in high-quality liquid assets). Stress testing is carried out daily to gauge the adequacy of financial resources and to monitor the risks associated with individual participants' positions. Where large or concentrated exposures are identified by stress testing, additional collateral calls are made on participants. These risk controls are supplemented by ASX Clear's participation requirements and participant-monitoring arrangements (Measure 2).

i. Margins

ASX Clear levies margin on derivatives products. Initial (risk) margin provides cover in the event that a participant defaults and an adverse price change occurs before the central counterparty can close out the participant's positions. Initial margin is calibrated so as to cover three standard deviations of the distribution of price movements until a position can be closed out, assuming a close-out period of either one or two days. ASX Clear also levies so-called premium margin on sold exchange-traded option positions, updating this daily to reflect mark-to-market changes in the close-out price, and levies mark-to-market margin on both bought and sold LEPOs, and all futures positions. All margin rates are reviewed on a three-monthly cycle, supplemented with ad hoc reviews in volatile market conditions.

ASX Clear calculates total initial margin requirements across each participant's portfolio using a margining engine based on the internationally accepted TIMS methodology, supported by the Options Clearing Corporation. ASX Clear has a project underway to migrate the calculation of margin to ASX Clear's in-house DCS. The TIMS methodology will continue to be used in the near term, although a longer-term project is planned to replace it with CME SPAN (see Section 5.1).

Margin requirements are calculated overnight based on closing contract prices each day, and are notified to participants the next morning. As discussed in Measure 5, from February 2010, all margin obligations are settled via Austraclear and must be met by 10.30 am. Participants generally meet their margin obligations using cash, although they may also use non-cash collateral. Securities are eligible to be used as collateral only if strict criteria set by ASX Clear are met, and they are subject to a haircut. The list of acceptable collateral is reviewed annually, with one new security (SPDR S&P/ASX 200 Fund) added during the assessment period. ASX Clear also manages the potential risk of correlated default of a participant and collateral issuer (e.g., where parental collateral is posted).

In the event of sharp intraday price movements, ASX Clear may also call mark-to-market margin intraday. This must be met by participants within two hours of notification. System enhancements will enable intraday margin calls to be made on the basis of changes in participants' positions; previously intraday margin calls could only be made on the basis of price movements.

Under ASX Clear's CAC methodology, a participant is also required to post additional collateral should stress-test outcomes (see below) reveal that the projected stress loss arising from its positions as at the close of the previous day exceed a STEL. Comparison of projected stress-test losses with the STEL offers some guidance as to the resilience of the central counterparty to a participant default in extreme market conditions. Commencing 1 October 2009, ASX Clear introduced a regime where STELs are linked to participants' ICRs.^[2] Previously, ASX Clear set the STEL at $150 million for all participants (taking into account any margin already posted). Participants are required to lodge CAC with ASX Clear if stress-test losses exceed their STEL. In normal market conditions, highly-rated (i.e., A− and B−rated) participants are eligible for discounts on the additional collateral called.^[3]

Calls are typically made on participants by 9.30 am and must be settled within two hours, either via the transfer of cash in Austraclear, or through the provision of a bank guarantee from an approved authorised deposit-taking institution (ADI).

ii. Guarantee fund

ASX Clear maintains additional pooled financial resources to protect against losses in excess of margin and other collateral assets posted by a defaulting participant. ASX Clear holds paid-up financial resources of $250 million, which consist of: own equity ($3.5 million); funds held in a restricted capital reserve ($71.5 million); and a fully-drawn subordinated loan from ASXCC ($175 million), which is ultimately funded by a commercial bank loan facility ($100 million) and a subordinated loan from ASX Limited ($75 million). ASX Clear also has the right under its Operating Rules and Procedures to levy its participants up to $300 million collectively in ‘Emergency Assessments’ should a loss caused by a participant's default exceed its other resources.

ASX Clear uses daily capital stress tests to monitor the risks undertaken by individual participants and the adequacy of the central counterparty's financial resources. Stress tests are based on 99 scenarios, each calibrated to a one-in-30-year probability of occurring. The scenarios cover extreme price moves and volatility shifts at the market-wide, sector and individual stock levels. ASX Clear regularly reviews stress test scenarios and occasionally amends them to reflect current market conditions. During 2009/10, several changes to stress test parameters were made. In early August 2009 ASX Clear reduced the maximum market up scenario from 10 per cent to 7 per cent. This was reversed in late May 2010, however, when growing volatility warranted a return to 10 per cent. The annual review of parameters occurred in October 2009 and resulted in marginal increases in the strength of several scenarios and marginal decreases in the strength of one scenario.

In respect of both cash margin collected and pooled risk resources, ASX Clear invests funds in accordance with a defined treasury investment policy, endorsed by the ASX Clear Clearing Board (one of the CS Boards). The policy is designed to ensure that risk resources can be reliably accessed on a timely basis. The policy restricts treasury investments to liquid assets – such as bank bills and certificates of deposit – and applies issuer investment limits scaled according to the credit standing of the issuing counterparty. Eligible investment counterparties are APRA-supervised ADIs, with a minimum short-term credit rating of A1. With the exception of instruments issued by the four largest domestic banks, individual counterparty limits are set within the value of ASX Clear's capital resources. Concentration limits also apply; the maximum exposure to any investment counterparty is 33 per cent.

The policy also sets upper limits for the average maturity of investments and the market risk of the portfolio (i.e., price value of a basis point), and an overarching liquidity requirement based on assumed ‘ordinary’ liquidity needs (e.g., for the return of margin to participants) and liquidity needs in the event of a default (referred to as the default liquidity requirement or DLR). To ensure the adequacy of the DLR, ASX Clear carries out regular liquidity stress tests. The DLR is currently set at $300 million and is met by liquid assets held in respect of ASX Clear's paid-up risk resources of $250 million, and a further $50 million available under a committed standby liquidity facility. This $50 million committed liquidity facility was previously provided to ASX Clear by a commercial bank, but upon expiry of this facility in June 2010 it was replaced with a similar facility provided by ASX Limited.

iii. Loss sharing

This measure of the Standard applies to arrangements where participants commit to meet any settlement shortfall. The arrangement does not require that a facility have loss-sharing arrangements in place, but where they exist they should be documented, legally enforceable and acknowledged by all participants in the central counterparty. One element of ASX Clear default resources is a promissory component up to a fixed amount (the Emergency Assessments referred to in the previous section). This is not an open-ended commitment and does not constitute a loss-sharing arrangement as contemplated by Measure 7(iii).

8. Governance

The central counterparty must have effective, accountable and transparent governance arrangements.

Details of governance arrangements across both central counterparties in the ASX Group are provided
in Section 6.

9. Operational risk

The CS facility licensee as operator of a central counterparty must identify sources of operational risk and minimise these through the development of appropriate systems, controls and procedures.

ASX Clear's key system is DCS.

i. Security and operational reliability

The security of DCS is supported by access controls, restricting access both physically and virtually. The process to request access to systems is documented, monitored and formally audited. ASX Clear performs external penetration and vulnerability testing on DCS regularly. Technology-security policy is considered by external auditors twice a year. ASX's Internal Audit unit routinely monitors compliance with policy, reporting to the Audit and Risk Committee on a quarterly basis.

ASX Clear has a number of arrangements in place to ensure DCS is operationally reliable:

operational processes are documented and supported by internal procedures;
the design and effectiveness of control procedures supporting the core operational
and systems processes are subject to regular independent external and internal audit;
critical IT infrastructure is designed to ensure resilience against component failure, including full redundancy at the primary site;^[4] and
availability targets are documented and defined formally for critical services.

Nevertheless, should an infrastructure failure occur at the primary site, failover to ASX's backup site is targeted to occur within one hour. A comprehensive test is completed over a two-year cycle to demonstrate that normal functions can be carried out using systems located at the backup site. ASX Clear also regularly tests its ability to operate its primary systems from the backup site.

Over the 2009/10 assessment period, DCS achieved high operational reliability. DCS was available 99.99 per cent of the time, with just one short outage reported in the September quarter 2009. The availability target for DCS is 99.8 per cent.

DCS capacity is monitored on an ongoing basis, with monthly reviews of current and projected capacity requirements. ASX Clear requires that it has sufficient technical and human resource capacity to operate DCS during peak periods, including in the event of operational incidents or system failure. Average capacity utilisation of DCS over the assessment period was 23 per cent, while peak utilisation was 60 per cent. In accordance with its capacity headroom policy, ASX will look to increase the capacity of DCS within the next 12 months such that peak utilisation does not exceed 50 per cent.

ASX Clear has arrangements in place to ensure that changes to DCS and supporting infrastructure do not disrupt its usual operations. ASX Clear operates a separate test environment for DCS and has a formal, documented change-management process.

ASX Clear also has arrangements in place to ensure it has well-trained and competent personnel operating DCS. 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. ASX Clear has a formal succession-planning and management process in place.

ii. Business continuity procedures

ASX maintains extensive contingency plans detailing the appropriate operational response to a CS facility disruption, including coverage of the various lines of authority, means of communication, and failover procedures. These plans are periodically updated. The risk that an operational incident at the main site disrupts DCS is mitigated through maintenance of a backup site. ASX also has procedures in place to manage the availability of specific staff skill sets in the event of a contingency, with migration to the backup site targeted to occur within one to two hours. In addition, as noted in the previous assessment, ASX is in the process of implementing arrangements to have some operational staff at its backup site during business hours in order to support rapid recovery in the event of a disruption.

ASX Clear rules require participants to maintain adequate business continuity arrangements to allow the recovery of usual operations within approximately one to two hours following a contingency event. If a participant fails to do so, ASX Clear may impose sanctions.

ASX Clear regularly tests business-recovery arrangements. Connectivity and procedural testing of the backup site are performed monthly by representatives from ASX Clear. Live tests (i.e., where market and clearing and settlement services are provided in real time from the backup site) are conducted on a two-year cycle. Test results are formally documented and reported to ASX senior management and are also made available to internal and external auditors.

The adequacy of ASX Clear's business continuity procedures is reviewed regularly, as part of broader reviews of ASX Clear's operational risk policy.

iii. Outsourcing

No operational functions are outsourced by ASX Clear. However, external suppliers are used for various services, such as utilities, hardware maintenance, operating system and product maintenance, and certain security-related specialist independent services. ASX Clear also currently relies on an external vendor for the software underpinning margining for DCS (that is, TIMS software, discussed in Section 5.1). However, this reliance will be removed with the integration of the TIMS margin calculations within DCS.

iv. External administration of a related body

Within the ASX group structure, most operational resources are provided by ASX Operations Limited, a subsidiary of ASX Limited. In the event that ASX Operations Limited became subject to external administration and this particular event did not impact upon the capacity of ASX Clear to continue operating, ASX Clear would be able to retain use of resources under provisions within the written support agreement between it and ASX Operations Limited (to the extent permissible by law).

10. Regulatory reporting

ASX Clear, as a CS facility licensee, is required to meet certain reporting obligations to the Reserve Bank under the Financial Stability Standard for Central Counterparties. These obligations include the reporting of: breaches of the Standard; the failure of a participant to fulfil the central counterparty's risk-control requirements; and the central counterparty's failure to enforce its own risk-control requirements. There are also obligations to report financial and stress-testing results on a quarterly basis. ASX Clear satisfied all reporting obligations during the assessment period.

B1.2 ASX Clear (Futures) (formerly SFE Clearing Corporation)

1. Legal framework

The central counterparty must have a well-founded legal basis.

ASX Clear (Futures) Pty Limited is a wholly owned subsidiary of ASX Clearing Corporation Limited, itself a wholly owned subsidiary of ASX Limited. It acts as the central counterparty for all futures and options products which are traded on the ASX 24 market.

The legal basis for ASX Clear (Futures) Pty Limited' operations is set out in its Operating Rules and Procedures. Under section 822B of the Corporations Act, these rules have effect as a contract under seal between ASX Clear (Futures) and each of its participants, and between each participant and each other participant. Furthermore, the netting arrangements contained in ASX Clear (Futures)' Operating Rules and Procedures are protected as a ‘netting market’ under Part 5 of the Payment Systems and Netting Act. This provides certainty for the netting process in the event of the insolvency of a participant. In July 2009, ASX implemented some rule-book clarifications around the protections afforded by the Act.

ASX Clear (Futures)' Operating Rules and Procedures define the nature and scope of its obligation to provide clearing support to participants, and describe the conditions under which final and irrevocable settlement of obligations is deemed to have occurred. The Operating Rules and Procedures also set out the rights and obligations of participants, including in the event of default or suspension.

2. Participation requirements

The requirements for participation in the central counterparty must promote the safety and integrity of the central counterparty and ensure fair and open access. Participation requirements must:

be based on objective and publicly disclosed criteria;

ASX Clear (Futures) has objective and transparent participation requirements, which are publicly available and form part of the Operating Rules and Procedures. The Operating Rules and Procedures also provide for an appeals process should an application for participation's access be terminated.

At the end of June 2010, ASX Clear (Futures) had 15 participants, predominantly large foreign banks and their subsidiaries.

ensure that participants in the central counterparty are of a sufficient financial standing such that the central counterparty is not exposed to unacceptable credit risks;

ASX Clear (Futures)' participation requirements are designed to promote the safety and integrity of the central counterparty. They cover: minimum capital and financial obligations; business and managerial requirements; operational resources; business continuity arrangements; and risk- and liquidity-management arrangements.

Participants are subject to a minimum NTA requirement of $5 million, with management 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 clearing for third parties. Participants are obliged to lodge a detailed financial report with the Capital Monitoring unit (prior to 1 August 2010, the Futures Supervision unit) of ASX Compliance on a monthly basis.

Participants are subject to ongoing monitoring by ASX Clear (Futures), with this conducted by two units within ASX, ASX Compliance and Clearing Risk Management:

The monitoring, assessment and investigation of matters relating to financial requirements are dealt with by the Capital Monitoring unit of ASX Compliance, a separate subsidiary within the ASX group with its own board. Participants are required to submit NTA returns on a monthly basis, which ASX Compliance then monitors for exceptions.
Clearing Risk Management, a unit that covers both central counterparties, focuses on day-to-day participant activity and monitors risk profiles, open positions and settlement of obligations to the central counterparties. It also determines and reviews participants' ICRs, drawing on information provided by participants in their returns to ASX Compliance. The ICR is based on the participant's external credit rating (if available) or that of its parent, if either that parent provides a formal guarantee to the central counterparty or the participant carries the parental corporate name. Otherwise, the rating is based on the participant's capital position. Clearing Risk Management also maintains a ‘watch list’ of participants deemed to warrant more intensive monitoring. Inclusion on the watch list might, for instance, reflect issues arising from routine review of financial returns by ASX Compliance, or concerns emerging from a specific event or media report. Participants on the watch list are subject to greater scrutiny in respect of the exposures they bring to the central counterparty and, should a participant's perceived financial standing deteriorate further, restrictions may be placed on its trading, clearing and settlement activities.

ASX Clear (Futures) has developed policies that allow for relevant information to flow between ASX Compliance and other business units within ASX. These are embodied in a ‘Supervisory Code of Conduct’ and ‘Commercial and Supervisory Conflict of Interest Policy’ , which together aim to ensure that potential conflicts between ASX's supervisory responsibilities and its commercial interests are avoided. Monthly liaison meetings are also held between ASX Compliance, Clearing Risk Management, and Clearing and Settlement Operations to facilitate the exchange of clearing risk-relevant information on clearing participants.

require that participants have the operational capacity to settle their obligations with the central counterparty in a timely manner; and

Under the Operating Rules and Procedures, the ASX Clear (Futures) Clearing Board (one of the CS Boards) must be satisfied that a potential participant has (or will have) managerial, operational, financial and appropriate complementary business continuity arrangements in place to enable it to meet its ongoing obligations, and is in a position to make an immediate transfer of funds to meet its obligations.

allow the CS facility licensee as operator of the central counterparty to suspend or cancel the participation of an institution which breaches the applicable participation or other risk-control requirements.

Under the Operating Rules and Procedures, a clearing participant may be automatically suspended under a number of circumstances, including the participant's default, the appointment of external management, or the breach of financial requirements. The ASX Clear (Futures) Clearing Board can also suspend a clearing participant for misconduct, breaches of the Operating Rules and Procedures, or if it ceases to satisfy the admission requirements.

3. Understanding risks

ASX Clear (Futures)' Operating Rules and Procedures are comprehensive and publicly available. The Rules and Procedures explain the role and responsibilities of participants and ASX Clear (Futures). Background information on ASX Clear (Futures)' operations and risk management is also available on the ASX website.

ASX Clear (Futures) must lodge any changes to its Operating Rules with ASIC. Under section 822E of the Corporations Act, the Minister has 28 days to consider, and potentially disallow, any rule changes made by a licensed CS facility. ASX Clear (Futures) consults with its participants on important rule changes. Announcements affecting participants are issued as ‘ASX 24 Notices’ ‘SFE Notices’ prior to August 2010).

4. Novation

The rules and procedures governing the central counterparty must clearly identify:

the nature and scope of novation; and

The nature and scope of novation is set out in ASX Clear (Futures)' Operating Rules and Procedures. Through the process of novation, ASX Clear (Futures) takes on the financial obligations of the seller to the buyer, and the buyer to the seller. The obligations of ASX Clear (Futures) are to each participant as principal, irrespective of whether that participant is acting as an agent on behalf of a client.

the point in the clearing process at which trades are novated.

The point at which trades are novated is set out in the Operating Rules and Procedures. These specify that a transaction on the ASX 24 market is novated to ASX Clear (Futures) upon the registration of a matched trade by the market. Non-market trades are novated once their details have been approved and registered by ASX Clear (Futures).

5. Settlement

Settlement arrangements must ensure that the central counterparty's exposures are clearly and irrevocably extinguished on settlement. This requires that:

where settlement involves the exchange of one asset for another, it must be done on an appropriate delivery-versus-payment basis; and
where payments, including net payments, are made to extinguish other obligations, payment must be made by real-time gross settlement.

The vast majority of ASX Clear (Futures) settlements involve cash payments to or from the central counterparty. These include margin payments and the settlement of cash-settled derivative contracts. Settlement of payments generally occurs on a net basis. Each day, ASX Clear (Futures) calculates the net obligations of each of its participants. ASX Clear (Futures) participants calculated to have a net obligation to the central counterparty are required to make payments to ASX Clear (Futures) in Austraclear by 11.00 am. Once these payments have been received, ASX Clear (Futures) makes payments to those participants with a net obligation from the central counterparty. Interbank settlement of these payments occurs between participants' appointed bankers and ASX Clear (Futures) in real time across ES accounts at the Reserve Bank.

In some cases, the settlement of derivatives contracts cleared by ASX Clear (Futures) involves the transfer of a security or physical asset, with a corresponding transfer of cash. For each type of security or asset, ASX Clear (Futures)' arrangements ensure that delivery occurs if, and only if, payment occurs and vice versa. For 90-day bank accepted bill futures, ASX Clear (Futures) utilises the standard settlement process in Austraclear. The delivery of greasy wool is via a warehouse, with ASX Clear (Futures) retaining title documentation until payment has been made.

The settlement of obligations is final and irrevocable according to the terms of ASX Clear (Futures)' Operating Rules and Procedures and ASX 24's Operating Rules, which set out contract specifications, including the means of settlement. For payments and securities obligations settled through Austraclear, finality is reinforced by Austraclear's Regulations and its approval under Part 2 of the Payment Systems and Netting Act. Any interbank transactions arising from these settlements are settled in real time across ES accounts held with the Reserve Bank. Payments within this system are also final and irrevocable; this is again supported by the approval of RITS under Part 2 of the Payment Systems and Netting Act.

6. Default arrangements

require its participants to inform it immediately if they:
1. become subject to 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

The ASX Clear (Futures) Operating Rules and Procedures require that participants inform ASX Clear (Futures) immediately in the event of a default, or if there is a reasonable expectation of such an event. 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; and being in breach of the central counterparty's risk-control requirements, such as failing to fulfil margin or other payment obligations to the central counterparty.

have the ability to close out, or otherwise deal with a participant's open contracts in order to appropriately control risk if a participant:
1. becomes subject to external administration; or
2. breaches a risk-control requirement of the central counterparty.

The Operating Rules and Procedures provide ASX Clear (Futures) with the authority and flexibility to deal with a participant default. ASX Clear (Futures) has the ability to close out any open contracts, to exercise or terminate open contracts, or to seek to transfer client positions along with related margin payments.

These formal rules are supplemented by an internal default management plan. ASX is working to enhance default-management processes for both central counterparties, with the aim of managing legal, operational and liquidity risk, and minimising potential losses and spillovers that could arise in a default scenario (see Section 5.1 for more detail).

ASX Clear (Futures) also has a range of financial resources available to enable it to act on the default powers set out above and to meet its obligations as central counterparty (see Measure 7).

7. Risk controls

The CS facility licensee as operator of a central counterparty must:

ensure that its risk-control measures, typically a combination of its own capital, margins, guarantee funds and pre-determined loss-sharing arrangements, provide sufficient coverage and liquidity; and
undertake regular and rigorous stress testing to ensure the adequacy of its risk controls.

The adequacy of risk-control measures must be approved by the board of the central counterparty, or an appropriate body as delegated by the board.

At the core of ASX Clear (Futures)' risk controls are its financial resources. These comprise: margin and other collateral calls based on participants' positions; and pooled financial resources of $400 million (of which $30 million is promissory). Stress testing is carried out daily to gauge the adequacy of financial resources and to monitor the risks associated with individual participants' positions. Where large or concentrated exposures are identified by stress testing, additional collateral calls are made on participants. These risk controls are supplemented by ASX Clear (Futures)' participation requirements and participant-monitoring arrangements (Measure 2).

i. Margins

ASX Clear (Futures) levies margin on the derivatives products it clears.

Initial margin is calibrated so as to cover three standard deviations of the distribution of price movements until a position can be closed out, assuming a close-out period of either one or two days. All margin rates are reviewed on a three-monthly cycle, with the possibility of more frequent ad hoc reviews in times of greater market volatility.

ASX Clear (Futures) calculates total initial margin requirements across each participant's portfolio using the OMX RIVA version of the internationally accepted SPAN methodology.^[5] Margin requirements are calculated overnight based on closing contract prices each day, and are notified to participants by 7.00 am the next day. Margin obligations must be met via Austraclear by 11.00 am – breaches of any margin payment deadline are escalated to ASX Compliance and may attract a financial penalty. Participants generally meet these obligations using cash, although they may also use high-quality liquid non-cash collateral, such as eligible debt securities, certain equities and foreign-currency deposits. Acceptable collateral is reviewed annually, and haircuts are applied in respect of all non-cash collateral posted. ASX Clear (Futures) introduced an improved system for the management of all collateral held in March 2010. ASX Clear (Futures) does not accept parental/self guarantees in order to reduce the possibility that it might face the correlated default of a clearing participant and a collateral issuer.

ASX Clear (Futures) also levies variation (mark-to-market) margin on derivatives positions to cover gains or losses arising from price movements over the preceding day. Should conditions warrant, ASX Clear (Futures) is also able to call variation margin intraday, based on movements in either positions or prices. Intraday margin calls can be made at various times throughout the day. Participants are required to meet an intraday margin call within two hours of notification. Both variation and intraday margin obligations must be settled in cash.

ASX Clear (Futures) also uses a system of AIMs, based on participants' exposures in ASX 24's four largest contracts. AIMs are intended to cover potential losses from large or concentrated positions with the central counterparty in extreme market conditions. ASX Clear (Futures) calculates potential exposures using a system of stress tests (see below) and makes AIMs calls to cover projected stress losses in excess of a stated threshold – the participant's STEL – which is linked to the value of ASX Clear (Futures)' risk resources and varies according to the credit quality of the participant. In normal market conditions highly rated participants with NTAs above a minimum threshold are eligible for discounts on their AIMs calls.^[6]

This system is designed to provide a high degree of confidence that the central counterparty will be able to meet its obligations, even in the event that losses arising from a participant default exceed ASX Clear (Futures)' pooled risk resources (see below). Like other margins, AIMs are calculated overnight, notified to participants at 7.00 am the next day, and must be met by 11.00 am. Participants may meet these obligations using cash or non-cash collateral, including Commonwealth Government securities and bank bills or letters of credit from ADIs.

In accordance with the Operating Rules and Procedures, in the event of a default by a participant, ASX Clear (Futures) would first apply margin, securities or other property from the defaulter to satisfy its obligations to other participants.

ii. Guarantee fund

ASX Clear (Futures) maintains a buffer of financial resources to protect against losses arising in the event of a default that exceed the value of margin and other collateral assets contributed by the defaulting participant. The value of ASX Clear (Futures)' CGF is $400 million, comprising $30 million in ASX Clear (Futures)' own capital, a $70 million subordinated loan provided by ASXCC (ultimately funded by ASX Limited), participant commitments of $150 million (of which $30 million is promissory), and a subordinated loan from ASXCC of $150 million (ultimately funded by a subordinated commercial bank loan and which replaced ASX Clear (Futures)' default insurance agreement in December 2009). The ASX Clear (Futures) Operating Rules and Procedures state that the ASX Clear (Futures) Board shall be entitled to apply these resources upon default by a Clearing Participant. The rules stipulate the order in which the resources will be applied, and make it clear that the contributions of all participants, not just those in default, may be called upon in a default event.

ASX Clear (Futures) uses daily stress tests of its four major contracts to monitor the risks undertaken by individual participants and the adequacy of the CGF. ASX Clear (Futures) uses a suite of portfolio and single-contract stress-test scenarios based on statistical analysis of historical market movements. These provide consistent tests across contract types and are tailored to ASX Clear (Futures)' risk tolerance, as defined by its board. The stress scenarios aim to capture one-in-30 year events for single asset scenarios and one-in-100 year events for multi-asset scenarios.

In respect of both cash margin collected and pooled risk resources, ASX Clear (Futures) invests funds in accordance with a defined treasury investment policy, endorsed by the ASX Clear (Futures) Clearing Board, which is designed to ensure that risk resources can be reliably accessed on a timely basis. The policy restricts treasury investments to liquid assets – such as bank bills and certificates of deposit – and applies issuer investment limits scaled according to the credit standing of the issuing counterparty. Eligible investment counterparties are APRA-supervised ADIs, with a minimum short-term credit-rating of A1. With the exception of instruments issued by the four largest domestic banks, individual counterparty limits are set within the value of ASX Clear (Futures)' capital resources. Concentration limits also apply (the maximum exposure to any investment counterparty is 33 per cent).

The policy also sets upper limits for the average maturity of investments and the market risk of the portfolio (i.e., price value of a basis point), and an overarching liquidity requirement based on assumed ‘ordinary’ liquidity needs (e.g., for the return of margin to participants) and liquidity needs in the event of a default: a so-called default liquidity requirement or DLR. ASX Clear (Futures) uses a liquidity stress-testing model to assess the adequacy of its liquidity arrangements. The model, which is similar to that used by ASX Clear, calculates the maximum liquid funds that ASX Clear (Futures) would need to access in order to meet obligations arising in the event of a clearing participant default. The model is based on ASX Clear (Futures)' capital stress tests.

The results of the liquidity stress tests are compared with the DLR. The DLR is currently set at $370 million – equal to the non-promissory component of ASX Clear (Futures)' CGF. Breaches of the DLR trigger a review of the adequacy of the DLR. This review will take into account the outcome of the capital stress tests, as any AIMs calls will provide extra liquidity.

iii. Loss sharing

This measure of the Standard applies to arrangements where participants commit to meet any settlement shortfall. The arrangement does not require that a facility have loss-sharing arrangements in place, but where they exist they should be documented, legally enforceable and acknowledged by all participants in the central counterparty. One element of ASX Clear (Futures)' default resources is a promissory component up to a fixed amount (the promissory participant commitments referred to in the previous section). This is not an open-ended commitment and does not constitute a loss-sharing arrangement as contemplated by Measure 7 (iii).

8. Governance

The central counterparty must have effective, accountable and transparent governance arrangements.

Details of governance arrangements across both central counterparties in the ASX Group are provided in Section 6.

9. Operational risk

The CS facility licensee as operator of a central counterparty must identify sources of operational risk and minimise these through the development of appropriate systems, controls and procedures.

ASX Clear (Futures)' key system is SECUR.

i. Security and operational reliability

The security of SECUR is supported by access controls, restricting access both physically and virtually. The process to request access to systems is documented, monitored and formally audited. ASX Clear (Futures) performs external penetration and vulnerability testing on SECUR regularly. Technology-security policy is considered by external auditors twice a year. ASX's Internal Audit unit routinely monitors compliance with policy, reporting to the Audit and Risk Committee on a quarterly basis.

ASX Clear (Futures) has a number of arrangements in place to ensure SECUR is operationally reliable:

operational processes are documented and supported by internal procedures;
the design and effectiveness of control procedures supporting the core operational and systems processes are subject to regular independent external and internal audit;
critical IT infrastructure is designed to ensure resilience against component failure, including full redundancy at the primary site;^[7] and
availability targets are documented and defined formally for critical services.

Nevertheless, should an infrastructure failure occur at the primary site, failover to ASX's backup site is targeted to occur within one hour. A comprehensive test is completed over a two-year cycle to demonstrate that normal functions can be carried out using systems located at the backup site. ASX Clear (Futures) also regularly tests its ability to operate its primary systems from its backup site.

Over the 2009/10 assessment period, SECUR was available 100 per cent of the time. The availability target for SECUR is 99.8 per cent.

SECUR capacity is monitored on an ongoing basis, with monthly reviews of current and projected capacity requirements. ASX Clear (Futures) requires that it has sufficient technical and human resource capacity to operate SECUR during peak periods, including in the event of operational incidents or system failure. Average capacity utilisation of SECUR over the assessment period was 26 per cent, while peak utilisation was 66 per cent. In accordance with its capacity headroom policy, ASX will look to increase the capacity of SECUR within the next 12 months such that peak utilisation does not exceed 50 per cent.

ASX Clear (Futures) has arrangements in place to ensure that changes to SECUR and supporting infrastructure do not disrupt its usual operations. ASX Clear (Futures) operates a separate test environment for SECUR and has a formal, documented change-management process.

ASX Clear (Futures) also has arrangements in place to ensure it has well-trained and competent personnel operating SECUR. 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. ASX Clear (Futures) has a formal succession-planning and management process in place.

ii. Business continuity procedures

ASX maintains extensive contingency plans detailing the appropriate operational response to a CS facility disruption, including coverage of the various lines of authority, means of communication, and failover procedures. These plans are periodically updated. The risk that an operational incident at the main site disrupts SECUR is mitigated through maintenance of a backup site. ASX also has procedures in place to manage the availability of specific staff skill sets in the event of a contingency, with migration to the backup site targeted to occur within one to two hours. In addition, as noted in the previous assessment, ASX is in the process of implementing arrangements to have some operational staff at its backup site during business hours in order to support rapid recovery in the event of a disruption.

ASX Clear (Futures) rules require participants to maintain adequate business continuity arrangements to allow the recovery of usual operations within approximately one to two hours following a contingency event. If a participant fails to do so, ASX Clear (Futures) may impose sanctions.

ASX Clear (Futures) regularly tests business-recovery arrangements. Connectivity and procedural testing of the backup site are performed monthly by representatives from ASX Clear (Futures). Live tests (i.e., where market and clearing and settlement services are provided in real time from the backup site) are conducted on a two-year cycle.^[8] Test results are formally documented and reported to ASX senior management and are also made available to internal and external auditors.

The adequacy of ASX Clear (Futures)' business continuity procedures is reviewed regularly, as part of broader reviews of ASX Clear (Futures)' operational risk policy.

iii. Outsourcing

No operational functions are outsourced by ASX Clear (Futures). However, external suppliers are used for various services, such as utilities, hardware maintenance, operating system and product maintenance, and certain
security-related specialist independent services. As noted above, NASDAQ OMX provides third-level and software support to SECUR.

iv. External administration of a related body

Within the ASX group structure, most operational resources are provided by ASX Operations Limited, a subsidiary of ASX Limited. In the event that ASX Operations Limited became subject to external administration and this particular event did not impact upon the capacity of ASX Clear (Futures) to continue operating, ASX Clear (Futures) would be able to retain use of resources under provisions within the written support agreement between it and ASX Operations Limited (to the extent permissible by law).

10. Regulatory reporting

CS facility licensees, as operators of central counterparties, are required to meet certain reporting obligations to the Reserve Bank under the Financial Stability Standard for Central Counterparties. These obligations include the reporting of: breaches of the Standard; the failure of a participant to fulfil the central counterparty's risk-control requirements; and the central counterparty's failure to enforce its own risk-control requirements. There are also obligations to report financial and stress-testing results on a quarterly basis. ASX Clear (Futures) satisfied all reporting obligations during the assessment period.

B2. Financial Stability Standard for Securities Settlement Facilities

There are eight measures that the Reserve Bank considers relevant in determining whether a facility has met the Financial Stability Standard for Securities Settlement Facilities. The full text of the measures and associated guidance is available on the Reserve Bank's website. The following provides summary details of the information the Reserve Bank has used to assess ASX Settlement and Austraclear against each of the relevant measures. This updates the information presented in the Reserve Bank's 2008/09 Assessment for material changes in policies and procedures over 2009/10.

B2.1 ASX Settlement (formerly ASX Settlement and Transfer Corporation)

1. Legal framework

The securities settlement facility must have a well-founded legal basis.

ASX Settlement Pty Limited is a wholly owned subsidiary of ASX Limited.^[9] It provides settlement services for ASX markets, as well as a transfer service for a small number of transactions undertaken on the National Stock Exchange.

The legal basis for ASX Settlement's operations is set out in its Operating Rules and Procedures. Under section 822B of the Corporations Act, these rules have effect as a contract under seal between ASX Settlement and each of its participants, and between each participant and each other participant. The Operating Rules and Procedures set out the rights and obligations of participants and ASX Settlement, including in the event of default or suspension.

The netting arrangements undertaken by ASX Settlement with respect to its participants' obligations have approval as a netting arrangement under Part 3 of the Payment Systems and Netting Act.

This provides certainty for the netting process in the event of the insolvency of an ASX Settlement participant or a payments provider.

2. Participation requirements

The requirements for participation in the securities settlement facility must promote the safety and integrity of the securities settlement facility and ensure fair and open access. Participation requirements must:

be based on objective and publicly disclosed criteria;

ASX Settlement has objective and transparent participation requirements, which are publicly available and form part of the Operating Rules and Procedures. The Operating Rules and Procedures also provide for an appeals process should an application for participation be rejected or a participant's access be terminated. ASX Settlement had 106 participants as at end June 2010.

require that participants have the operational capacity and financial standing to settle their obligations through the securities settlement facility in a timely manner; and

Participation requirements address financial and business integrity ] issues, as well as operational and technical matters.

A participant that is neither subject to prudential supervision as an ADI, nor monitored as either a clearing or market participant under ASX Clear Operating Rules and Procedures or ASX Operating Rules, must post a performance bond of $500,000. In addition, a sponsoring participant (i.e., a participant that also acts in ASX Settlement on behalf of non-participants) that is not subject to prudential or market supervision and is not covered by the NGF compensation arrangements (under the Corporations Act) must post a sponsorship bond of $500,000.

Performance and sponsorship bonds must be issued by an Australian bank or appropriately regulated insurance company. Funds held under a performance bond would be drawn upon by ASX Settlement in the event that the participant breached ASX Settlement rules. In a similar vein, funds held under a sponsorship bond would be drawn upon to meet any losses suffered by ASX Settlement, an issuer, or a holder sponsored by an ASX Settlement participant arising from a breach, by the participant, of the rules or other offence. The monitoring, assessment and investigation of matters relating to financial requirements is dealt with by ASX Compliance, a separate subsidiary within the ASX group, with its own board.

allow the CS facility licensee as operator of the securities settlement facility to suspend or cancel the participation of an institution which breaches the applicable participation or other risk-control requirements.

The ASX Settlement Operating Rules and Procedures allow it to suspend or terminate a participant from its facility in the event of a failure to comply with the Operating Rules and P rocedures, or where a payment provider fails to authorise a participant's payment for interbank settlement.

ASX Settlement also levies fail fees on a participant that does not meet its settlement obligations on a timely basis. The minimum and maximum fees applied in respect of fails are set at $100 and $5,000, respectively (with an ad valorem fee of 0.1 per cent). Participants are also required to close out any positions remaining unsettled on the fifth day after trade date (i.e., two days after the scheduled settlement date). ASX Settlement also operates a benchmarking regime for settlement-fails performance. This regime makes use of peer-group benchmarking and provides a participant's compliance unit with a ranking of its settlement-fails performance (based on the value of its trades which have failed to settle) against its market group peers.

3. Understanding risks

The securities settlement facility must make sufficient information publicly available, via its rules and procedures and the provision of relevant information on settlement activity, such that each participant is able to understand the securities settlement facility's impact on each of the financial risks the participant incurs through participation in the facility.

The ASX Settlement Operating Rules and Procedures are comprehensive and publicly available. The Rules and Procedures explain the role and responsibilities of each category of participant and ASX Settlement. Background information on ASX Settlement's operations and risk management is also available on the ASX website.

ASX Settlement must lodge any changes to its Operating Rules with ASIC. Under section 822E of the Corporations Act, the Minister has 28 days to consider, and potentially disallow, any rule changes made by a licensed CS facility. ASX Settlement consults with its participants on important rule changes, and notifies participants of all changes to the Operating Rules and Procedures.

Further to a variation to this measure of the Standard in February 2009, a licensed CS facility as operator of a securities settlement facility is required to make publicly available any relevant information on settlement activity. To this end, during the 2009/10 assessment period ASX implemented a regime, developed in consultation with the Reserve Bank and industry participants, for the disclosure of data on equities securities lending. With effect from November 2009, settlement participants ‘tag’ securities-lending-related settlement instructions submitted to CHESS and, from December 2009, participants disclose outstanding on-loan and borrowed positions. ASX publishes the aggregate data on its website daily.

4. Certainty of title

The CS facility licensee as operator of the securities settlement facility must ensure that under the facility's rules and procedures, participants, or where relevant, their clients, have a clear and unambiguous title to, or interest in, securities held, deposited or registered on their behalf, including in circumstances where the solvency of the operator of a securities settlement facility is in doubt. This requires that its rules and procedures:

clearly identify the type of title or interest held by participants for particular securities, to the extent such title or interest is recognised by the facility's rules or procedures;

All securities held by ASX Settlement are dematerialised and held in CHESS. Title is held in the name of clients of ASX Settlement participants. The system does not record any details of encumbrances, other than collateral lodged in favour of ASX Clear.

A CHESS sub-register forms part of the issuer's securities register. Maintenance and reconciliation of the complete register is the responsibility of the issuer or its appointed agent. Most ASX Settlement participants settle across a centralised settlement account and subsequently allocate securities to end-clients in the CHESS sub-register. As part of its end-of-day processes, CHESS reports net movements on each sub-register to the holder of the issuer's complete register. Settlement participants utilise the centralised account under ‘trust’ provisions and are obliged to give irrevocable legal title to an end-client as long as that client has met all relevant conditions in respect of the settlement.

clearly identify the way in which the transfer of (or any other forms of dealing with) securities and related payments can be effected through the facility; and

The transfer of title to securities in CHESS is given effect by book entry, with ownership details updated electronically. Settlement occurs via a DVP process in a daily scheduled batch-settlement cycle (see Measure 5). The ASX Settlement Operating Rules and Procedures also provide for transferring securities without payment, where required.

ensure that, to the extent permissible by law, the creditors of the operator of the securities settlement facility have no claim over securities or other assets held, deposited or registered by participants in the facility.

In the event of ASX Settlement's insolvency, the rules and arrangements for title within ASX Settlement provide a high degree of assurance that participants' securities will be immune from claims by ASX Settlement's creditors. ASX Settlement is not the legal owner of any participant or client assets, with these assets recorded in CHESS in the name of the participant or sponsored client.

5. Settlement

The CS facility licensee as operator of a securities settlement facility must ensure that its operations do not expose its participants, or the financial system more broadly, to unacceptable levels of risk. The operator of a securities settlement facility must pay particular attention to ensuring settlement finality and the use of high-quality settlement assets in payment for securities.

The operation of a securities settlement facility must eliminate principal risk between its participants and ensure that settlements, once completed, are final and irrevocable.
The assets used to settle the payment obligations in respect of a transaction in the securities settlement facility must carry little or no credit or liquidity risk.
Exposures between providers of cash settlement assets must be settled finally and irrevocably.

Settlement of securities transactions in ASX Settlement occurs on a Model 3 DVP basis.^[10] This involves the simultaneous transfer of net payment and net securities obligations between buyers and sellers at the end of the settlement cycle. The ASX Settlement Operating Rules and Procedures establish that settlement according to the terms of those rules is final and irrevocable. This is reinforced through legislation (see Measure 1).

Once a trade has been executed on the ASX market, a trade-related instruction is sent to CHESS. On T+1, CHESS generates a single net batch instruction reflecting the net position of each participant's novated trades in each line of stock. Between T+1 and T+3, participants can also instruct CHESS to include additional non-novated (off-market) transactions in the batch at T+3. During 2009/10, an average of around 81 per cent (by value) of net securities settled in the final batch was in respect of non-novated transactions. The majority of these transactions were related to the ‘priming’ of clearing participants' accounts to facilitate settlement of novated trades (i.e., the transfer of securities to a clearing participant's securities account to ensure that they can be delivered in accordance with scheduled obligations).

By 6.00 am on the settlement day, ASX Settlement notifies each participant of its projected net cash and securities settlement obligations. Participants have until 10.30 am to negotiate any additional non-novated transfers necessary to ‘prime’ their accounts for settlement. After the cut-off for new instructions, transfer of securities positions is stopped in CHESS and participants' payment providers are requested to fund the net cash obligations of settlement participants. Payment providers hold ES accounts at the Reserve Bank and act on behalf of settlement participants. There were 12 payment providers operating in ASX Settlement as at 30 June 2010. Payment obligations are settled between payment providers in the Reserve Bank's RITS system in a single daily multilateral net batch. Immediately upon confirmation from RITS that the funds transfers have been settled, ASX Settlement completes the net securities transfers in CHESS, thus ensuring DVP settlement. This typically occurs at around noon.

The finality of ASX Settlement's settlement process is reinforced by its approval under Part 3 of the Payment Systems and Netting Act.

In addition, the payments between payment providers as part of the multilateral net batch are protected by virtue of the approval of RITS as an RTGS system under Part 2 of the Payment Systems and Netting Act. This approval protects payments from being voided in the case of a payments provider entering external administration.

If, due to a shortfall of either securities or funds, a participant is unable to settle its scheduled obligations in the batch, ASX Settlement's rules allow for all or some of the transactions of the affected participant to be ‘backed out’. These transactions are then rescheduled for settlement on the next settlement day. The precise parameters of the back-out process depend upon whether or not the failing participant is in default. If the participant is in default, ASX Clear may assume an obligation for novated settlements in accordance with its default-management arrangements. ASX Settlement's back-out algorithm seeks to remove as few transactions from the batch as possible, maximising settlement values and volumes, while minimising the spillover to other participants. Non-novated settlement obligations are typically backed out first.

As detailed in Section 5.3, during 2009/10 ASX Settlement implemented a number of changes to reduce the risks surrounding the settlement process, with further improvements planned in the period ahead.

6. External administration

The rules and procedures for the securities settlement facility must contain mechanisms to deal with the external administration of a participant, or a provider of cash settlement assets, in such a way as to limit the operational and financial impact on both the securities settlement facility and its participants. This requires that the CS facility licensee as operator of the securities settlement facility must:

allow for the cancellation or suspension of a participant or a provider of cash settlement assets from the security settlement facility:
1. if the participant or provider of cash settlement assets is in external administration; or
2. if there is a reasonable suspicion of external administration; and

The ASX Settlement Operating Rules and Procedures allow for the cancellation or suspension of a participant or a payment provider in the event that it becomes subject to external administration, or if it reasonably suspects that this may occur. Participants and payment providers are required to notify ASX Settlement if they, or any other participant or payment provider, become subject to external administration or if they reasonably suspect that this may occur.

allow participant users of a cash settlement provider which becomes subject to external administration, or which is reasonably likely to become subject to external administration, to quickly nominate a new provider.

The ASX Settlement Operating Rules and Procedures allow participants to nominate a new payment provider if their current provider is subject to, or is reasonably likely to become subject to, external administration.

The ASX Settlement Operating Rules and Procedures allow it to remove transactions from batch settlement under certain circumstances, including where a participant is subject to external administration. ASX Settlement has procedures and mechanisms in place to allow it to recast a batch ensuring that settlement can be carried out in a timely manner (see Measure 5).

7. Operational risk

The CS facility licensee as operator of a securities settlement facility must identify sources of operational risk and minimise these through the development of appropriate systems, controls and procedures.

ASX Settlement's key system is CHESS.

i. Security and operational reliability

The security of the CHESS system is supported by access controls, restricting access both physically and virtually. The process to request access to systems is documented, monitored and formally audited. ASX Settlement performs external penetration and vulnerability testing on CHESS regularly. Technology-security policy is considered by external auditors twice a year. ASX's Internal Audit unit routinely monitors compliance with policy, reporting to the Audit and Risk Committee on a quarterly basis.

ASX Settlement has a number of arrangements in place to ensure CHESS is operationally reliable:

operational processes are documented and supported by internal procedures;
the design and effectiveness of control procedures supporting the core operational and systems processes are subject to regular independent external and internal audit;
critical IT infrastructure is designed to ensure resilience against component failure, including full redundancy at the primary site;^[11] and
availability targets are documented and defined formally for critical services.

Nevertheless, should an infrastructure failure occur at the primary site, failover to the backup site is targeted to occur within one hour. A comprehensive test is completed over a two-year cycle to demonstrate that normal functions can be carried out using systems located at the backup site. ASX Settlement also regularly tests its ability to operate its primary systems from its backup site.

Over the 2009/10 assessment period, CHESS achieved high operational reliability. CHESS was available close to 100 per cent of the time, with just one short outage reported in the March quarter 2010. The availability target for CHESS is 99.8 per cent.

CHESS capacity is monitored on an ongoing basis, with monthly reviews of current and projected capacity requirements. ASX Settlement requires that it has sufficient technical and human resource capacity to operate the clearing and settlement systems during peak periods, including in the event of operational incidents or system failure. Average capacity utilisation of CHESS over the assessment period was 24 per cent, while peak utilisation was 50 per cent. The capacity headroom target for CHESS is 50 per cent over peak utilisation.

ASX Settlement has arrangements in place to ensure that changes to CHESS and supporting infrastructure do not disrupt its usual operations. ASX Settlement operates a separate test environment for CHESS and has a formal, documented change-management process.

ASX Settlement also has arrangements in place to ensure it has well-trained and competent personnel operating 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. ASX Settlement has a formal succession-planning and management process in place.

ii. Business continuity procedures

ASX maintains extensive contingency plans detailing the appropriate operational response to a CS facility disruption, including coverage of the various lines of authority, means of communication, and failover procedures. These plans are periodically updated. The risk that an operational incident at the main site disrupts CHESS is mitigated through maintenance of a backup site. ASX also has procedures in place to manage the availability of specific staff skill sets in the event of a contingency, with migration to the backup site targeted to occur within one to two hours. In addition, as noted in the previous assessment, ASX is in the process of implementing arrangements to have some operational staff at its backup site during business hours in order to support rapid recovery in the event of a disruption.

ASX Settlement rules require participants to maintain adequate business continuity arrangements to allow the recovery of usual operations within approximately one to two hours following a contingency event. If a participant fails to do so, ASX Settlement may impose sanctions.

ASX Settlement regularly tests business-recovery arrangements. Connectivity and procedural testing of the backup site are performed monthly by representatives from ASX Settlement. Live tests (i.e., where market and clearing and settlement services are provided in real time from the backup site) are conducted on a two-year cycle. Test results are formally documented and reported to ASX senior management and are also made available to internal and external auditors.

The adequacy of ASX Settlement's business continuity procedures is reviewed regularly, as part of broader reviews of ASX Settlement's operational risk policy.

iii. Outsourcing

No operational functions are outsourced by ASX Settlement. However, external suppliers are used for various services, such as utilities, hardware maintenance, operating system and product maintenance, and certain security-related specialist independent services. ASX Settlement is also reliant on interactions with SWIFT, and would revert to manual processing of SWIFT payments in the event of a SWIFT failure.

iv. External administration of a related body

Within the ASX group structure, most operational resources are provided by ASX Operations Limited, a subsidiary of ASX Limited. In the event that ASX Operations Limited became subject to external administration and this particular event did not impact upon the capacity of ASX Settlement to continue operating, ASX Settlement would be able to retain use of resources under provisions within the written support agreement between it and ASX Operations Limited (to the extent permissible by law).

8. Regulatory reporting

CS facility licensees are required to meet certain reporting obligations to the Reserve Bank under the Financial Stability Standards. These obligations include the reporting of: breaches of the Standard; breaches of risk-control requirements; and quarterly financial results. ASX Settlement satisfied all reporting obligations during the assessment period.

B2.2 Austraclear

1. Legal framework

The securities settlement facility must have a well-founded legal basis.

Austraclear Limited is a wholly owned subsidiary of ASX Limited.^[12] It provides settlement services for the OTC debt market and for derivatives traded on the ASX 24 and ASX markets.

The legal basis for Austraclear's operations is set out in its Regulations. Under section 822B of the Corporations Act, these regulations have effect as a contract under seal between Austraclear and each of its participants, and between each participant and each other participant. The Regulations set out the rights and obligations of participants and Austraclear, including in the event of default or suspension.

The finality of settlements undertaken by Austraclear is reinforced by its approval as an RTGS system under Part 2 of the Payment Systems and Netting Act. This approval protects the finality of payments made through Austraclear in the event of a participant entering external administration.

2. Participation requirements

be based on objective and publicly disclosed criteria;
require that participants have the operational capacity and financial standing to settle their obligations through the securities settlement facility in a timely manner; and
allow the CS facility licensee as operator of the securities settlement facility to suspend or cancel the participation of an institution which breaches the applicable participation or other risk-control requirements.

Austraclear had 729 participants as at end June 2010. Austraclear has objective and transparent participation requirements, which are publicly available and form part of the Regulations and Procedures. The Regulations also provide for an appeals process should an application for participation be rejected or a participant's access be terminated. Its participation requirements address financial and operational issues, such as capital adequacy, business integrity and business continuity arrangements.

Austraclear's Regulations allow it to suspend or terminate a participant from its facility in the event of a breach of its Regulations. Clearing and Settlement Operations monitors participants' operational processing performance.

3. Understanding risks

Austraclear's Regulations and Procedures are comprehensive and publicly available. The Regulations and Procedures explain the role and responsibilities of each category of participant and Austraclear. Background information on Austraclear's operations, technical arrangements and risk management is also available on ASX's website.

Austraclear must lodge any changes to its Regulations with ASIC. Under section 822E of the Corporations Act, the Minister has 28 days to consider, and potentially disallow, any rule changes made by a licensed CS facility. Austraclear consults with its participants on important rule changes. Announcements affecting participants are issued as ‘ASX 24 Notices’ which are targeted to participants and market users.

4. Certainty of title

clearly identify the type of title or interest held by participants for particular securities, to the extent such title or interest is recognised by the facility's rules or procedures;

Austraclear's Regulations identify title for three different classes of securities: paper securities, non-paper securities and dematerialised securities.

Paper securities are negotiable instruments and include some certificates of deposit, promissory notes and bills of exchange. Austraclear holds these securities for the participant as bailee. The participant retains legal and beneficial title. Non-paper securities are electronic securities that are not registered within the Austraclear system. They include Commonwealth Government securities, registrable state and semi-government securities and corporate debt. In each of the registries, Austraclear holds legal title for the participant as nominee. The participant retains beneficial title. Dematerialised securities are electronic securities which are registered in the Austraclear system rather than externally. They include electronic certificates of deposit, electronic promissory notes and electronic bank-accepted bills of exchange. A dematerialised security is held by a participant as a ‘chose in action’.^[13] This legal structure imposes rights and obligations which replicate the rights and obligations of a negotiable instrument.

clearly identify the way in which the transfer of (or any other forms of dealing with) securities and related payments can be effected through the facility; and

The transfer of title to securities in the Austraclear system is effected by book entry. Paper securities are transferred through updates to participants' security records. Austraclear also uses ‘allonges’ which maintain the negotiability of paper securities.^[14] Non-paper securities are transferred through the passing of beneficial title from the seller to the buyer. Austraclear retains legal title in the relevant registry. Transfers of dematerialised securities are transfers of contractual rights within the Austraclear system.

ensure that, to the extent permissible by law, the creditors of the operator of the securities settlement facility have no claim over securities or other assets held, deposited or registered by participants in the facility.

In the event of Austraclear's insolvency, the rules and arrangements for title within Austraclear provide a high degree of assurance that participants' securities will be immune from claims by Austraclear's creditors. Austraclear is not counterparty to any transactions settled in its system.

5. Settlement

The operation of a securities settlement facility must eliminate principal risk between its participants and ensure that settlements, once completed, are final and irrevocable.

Settlement of securities transactions in Austraclear occurs on a Model 1 DVP basis. This involves the simultaneous transfer of payment and securities obligations between the buyer and seller on an item-by-item basis through the settlement cycle. Austraclear also provides for one-way cash transfers between participants, which are also settled on an item-by-item basis. Austraclear's Regulations establish the basis for settlement of transactions entered into the system. By volume, DVP settlements accounted for around 47 per cent of total settlements during the assessment period, and one-way cash transfers around 53 per cent. There was also a small volume of
free-of-payment securities transfers (less than 1 per cent). By value, however, DVP payments predominate, accounting for 79 per cent of total transfers in the year to end June 2010.

The assets used to settle the payment obligations in respect of a transaction in the securities settlement facility must carry little or no credit or liquidity risk.

‘Participating banks’ hold ES accounts at the Reserve Bank and act on behalf of other Aus-traclear participants. 59 participating banks were operating in Austraclear as at 30 June 2010. Settlement of payment obligations occurs between participating banks across ES accounts on a RTGS basis. As such, settlement occurs in central bank money. Austraclear is notified immediately upon settlement of the payment leg of a securities trade, allowing for the immediate transfer of securities title so as to ensure DVP settlement.

Exposures between providers of cash settlement assets must be settled finally and irrevocably.

The finality of Austraclear's settlement process is reinforced by its approval under Part 2 of the Payment Systems and Netting Act. In addition, the payments between participating banks are also protected by virtue of the approval of RITS as an RTGS system under Part 2 of the Payment Systems and Netting Act.

6. External administration

allow for the cancellation or suspension of a participant or a provider of cash settlement assets from the security settlement facility:
1. if the participant or provider of cash settlement assets is in external administration; or
2. if there is a reasonable suspicion of external administration; and

allow participant users of a cash settlement provider which becomes subject to external administration, or which is reasonably likely to become subject to external administration, to quickly nominate a new provider.

Austraclear's Regulations allow it to cancel or suspend a participant or a participating bank that becomes subject to external administration, or if it reasonably suspects that this may occur. A participant or a participating bank is also required to notify Austraclear if it becomes subject to external administration or where it reasonably suspects that this may occur.

There is no restriction within the Austraclear Regulations on a participant changing its participating bank, including where that entity is insolvent.

As a facility supporting bilateral agreements negotiated on an OTC basis, without the presence of a central counterparty, Austraclear does not have centralised arrangements for dealing with the unsettled transactions of its participants. Consequently, replacement risk for any trade left unsettled due to the insolvency of a participant is borne directly by trade counterparties. By virtue of the application of a Model 1 DVP arrangement, unsettled obligations do not give rise to principal risk.

7. Operational risk

The CS facility licensee as operator of a central counterparty must identify sources of operational risk and minimise these through the development of appropriate systems, controls and procedures.

Austraclear's key system is EXIGO.

i. Security and operational reliability

Since mid 2008 Austraclear has been responsible for first- and second-level operational support of EXIGO. This includes business continuity arrangements, and computer system support not involving changes to system components or underlying source code. Previously this support was provided by NASDAQ OMX, which continues to provide third-level and software support. During the year a new agreement was finalised to extend this support beyond 2013.

During the assessment period EXIGO was available for 99.9 per cent of the required time. This equalled the availability target stipulated in Austraclear's ‘Step-in and Service Agreement’ with the Reserve Bank. As outlined in Section 5.4, there were three major operational incidents during the assessment period. There were also several smaller incidents. The first occurred in July 2009, when EXIGO users were unable to access the system for a short period due to problems with their digital certificates following non-routine maintenance by the vendor. Procedures have now been put in place to ensure all maintenance is checked immediately. A second incident occurred in April 2010 when a number of automated overnight processes in EXIGO did not run as expected, causing the first three Austraclear transactions of the following day to fail. ASX has taken action to prevent this reoccurring, and is working toward an automated daily check that confirms overnight processes have been successfully completed. A further incident occurred in May 2010 when the process which submits matched trades in SECUR to EXIGO terminated unexpectedly. There was no disruption to user access to EXIGO, but there was a small delay to some settlements before the process could be restarted. ASX has since improved its process monitoring to ensure that it is immediately informed of such terminations, and NASDAQ OMX will correct some aspects of the process in its next software release for EXIGO. The Reserve Bank is satisfied with both ASX's immediate responses, and the follow-up action taken to prevent reoccurrence, in relation to the operational incidents that occurred during the year.

Average capacity utilisation for EXIGO was 30 per cent during the assessment period, and peak capacity utilisation was 66 per cent. In accordance with its capacity headroom policy, ASX will look to increase the capacity of EXIGO within the next 12 months such that peak utilisation does not exceed 50 per cent.

The security of the EXIGO system is supported by access controls which are subject to external audit. Austraclear also has a fraud control policy in place which seeks to minimise the risk of fraud occurring within Austraclear, as well as providing procedures for its timely identification and appropriate responses should it occur.

ii. Business continuity procedures

ASX maintains extensive contingency plans detailing the operational response to a CS facility disruption, including coverage of the various lines of authority, means of communication, and failover procedures. These plans are periodically updated. The risk that an operational incident at the main site disrupts EXIGO is mitigated through maintenance of a backup site. ASX also has procedures in place to manage the availability of specific staff skill sets in the event of a contingency, with migration to the backup site targeted to occur within one to two hours. In addition, as noted in the previous assessment, ASX is in the process of implementing arrangements to have some operational staff at its backup site during business hours in order to support rapid recovery in the event of a disruption.

Austraclear tests backup arrangements quarterly and carries out connectivity and procedural testing on a monthly basis. Live tests (i.e., where market and clearing and settlement services are provided in real time from the backup site) are conducted on a two-year cycle; the most recent live test of EXIGO occurred in November 2009 and revealed some issues which have now been resolved (see Section 5.4 for detail). The next test is scheduled for August 2011. Through its Regulations, Austraclear also requires that its participants have appropriate disaster recovery arrangements. The adequacy of Austraclear's business continuity procedures is reviewed regularly, as part of broader reviews of Austraclear's operational risk policy.

iii. Outsourcing

No operational functions are outsourced by Austraclear. However, external suppliers are used for various services, such as utilities, hardware maintenance, operating system and product maintenance, and certain security-related specialist independent services. As noted above, NASDAQ OMX provides third-level and software support to EXIGO.

Austraclear is reliant on interactions with SWIFT, and would revert to manual processing of SWIFT payments in the event of a SWIFT failure. The failure of RITS would potentially prevent settlement in EXIGO, although ASX has prepared business plans to consider the potential for EXIGO to continue operating independently.

iv. External administration of a related body

ASX Operations, a subsidiary of ASX Limited, is responsible for supplying Austraclear and other ASX group companies with personnel and technological resources. Austraclear has a written support agreement with ASX Operations which helps to ensure its access to these resources in the event of the external administration of ASX Operations, to the extent permissible by law.

8. Regulatory reporting

CS facility licensees are required to meet certain reporting obligations to the Reserve Bank under the Financial Stability Standards. These obligations include the reporting of: breaches of the Standard; breaches of risk-control requirements; and quarterly financial results. Austraclear satisfied all reporting obligations during the assessment period.

Footnotes

As noted, interbank transactions arising from settlements in ASX Settlement and Austraclear are settled in RITS across ES accounts held with the Reserve Bank. RITS is also approved under Part 2 of the Payment Systems and Netting Act. [1]

Such a regime had already been in place at ASX Clear (Futures) for some time. [2]

These discounts are removed if the EWMA of SPI S&P/ASX 200 volatility is 20 per cent higher than historical volatility. [3]

ASX also intends to introduce full redundancy at its backup site for DCS. [4]

As outlined in Sections 5.1 and 5.2, ASX plans to migrate the margining methodologies at both central counterparties to the latest version of CME SPAN. [5]

ASX Clear (Futures) applies discounts only under normal market conditions. It will suspend discounting – thereby reverting to full collateralisation of AIMs – if EWMA volatility is 20 per cent higher than historical volatility. ASX Clear (Futures) uses seven years of daily SPI movements for both volatility measures. [6]

ASX also intends to introduce full redundancy at its backup site for SECUR. [7]

The next live test of SECUR is scheduled for late 2010. [8]

As of 1 July 2010, ASX Settlement is a wholly owned subsidiary of ASX Settlement Corporation Limited, which is itself a wholly owned subsidiary of ASX Limited. [9]

There is provision for DVP to occur on a trade-by-trade basis using CHESS RTGS, but this option has yet to be used. [10]

ASX also intends to introduce full redundancy at its backup site for CHESS. [11]

As of 1 July 2010, Austraclear is a wholly owned subsidiary of ASX Settlement Corporation Limited, which is itself a wholly owned subsidiary of ASX Limited. [12]

This is a legal right to intangible property. It allows the holder (in this case, the relevant Austraclear participant) to direct Austraclear to deliver to it securities of a specified description and number. [13]

Allonges are separate sheets of paper attached to a bill of exchange for the purpose of documenting endorsements. As a bill of exchange is transferable through endorsement, the allonge attached to the bill acts as a legal extension of the document. [14]