2009/10 Assessment of Clearing and Settlement Facilities in Australia 3. Developments in the Clearing and Settlement Industry in 2009/10
Activity in the financial markets served by Australian CS facilities increased significantly over 2009/10, as financial markets recovered from the severe dislocation experienced in late 2008 and early 2009. The risks faced by both central counterparties – as measured by the value of margin collected from participants – generally declined over the year due to reduced market volatility. However, these risks increased again towards mid 2010, with increased market volatility stemming from concerns about sovereign credit risk in Europe.
There have been several developments over the past year with implications for the future form of Australia's clearing and settlement industry. The prospect of AMOs entering the Australian market has prompted ASX to develop a TAS, which will allow trades executed on AMOs' platforms to be submitted directly to ASX Clear for clearing and ASX Settlement for settlement. Internationally, regulatory efforts to increase the resilience of the financial system – prompted by the recent financial crisis – are yielding prospective changes in financial markets and their regulation around the world. In Australia, the industry has been encouraged by the financial regulators (Australian Prudential Regulation Authority (APRA), ASIC and the Reserve Bank) to consider central counterparty clearing services for OTC derivatives, and a review of international standards underway may prompt the Reserve Bank to in turn review its own FSS.
Activity in the Licensed CS Facilities
Reflecting the recovery in financial markets over the year, there was a strong increase in the value and volume of equities and derivatives transactions processed by the licensed CS facilities in 2009/10. Both the value and volume of trades in the cash equity market grew strongly in 2009/10. The average daily value of turnover increased by 21 per cent, in part reflecting the general rise in share prices over the year. Growth in the average daily number of trades was slightly stronger at 24 per cent, associated with a small fall in the average trade size (Graph 1). The average trade size fell by only 3 per cent in 2009/10, compared with substantial falls in earlier years, reflecting the long-term trend towards breaking up large orders for gradual release into the market, as well as the share price falls over 2008.
The strong growth in trading activity in 2009/10 reflected an increase in risk appetite as the recovery in financial markets progressed. Average volatility, as measured by the absolute per cent change in the S&P ASX All Ordinaries index, almost halved from 1.5 per cent in 2008/09 to 0.8 per cent in 2009/10 (Graph 2). Volatility picked up towards the middle of 2010, as concerns arose regarding public debt levels in some European countries, although it remained below the levels of the previous financial year.
Activity in the ASX and ASX 24 derivatives markets also increased in 2009/10 in response to the recovery in global financial markets. Volumes traded on the ASX 24 market grew by 19 per cent, while volumes traded on the smaller ASX derivatives market grew by 14 per cent.
The value of securities transactions settled by ASX Settlement increased by 6 per cent in 2009/10 to an average daily value of $8.5 billion. (The growth in settlement values differs from the growth in traded values because it includes settlement of non-market transactions and multilateral netting of clearing participants' obligations.) In contrast, the average daily value of debt securities settled through Austraclear edged downwards by 1 per cent to $41.8 billion. (This value includes outright purchases and sales of securities, and securities transferred to effect a repurchase agreement.)
Risk Management in the Licensed Central Counterparties
Notwithstanding the increase in trading activity on equities and derivatives markets, the risks faced by the central counterparties decreased during 2009/10 as market volatility declined.
In the case of ASX Clear's exposure to the cash equities market, average daily exposure to participants' settlement obligations arising from cash equities trades on the ASX market (almost three-quarters of which are novated to ASX Clear) decreased by 10 per cent to $889 million.[1] This decline, which occurred despite the increase in activity, reflected the effect of netting. The risks faced by ASX Clear in relation to these exposures are likely to have declined by even more due to the reduction in volatility.[2]
The reduction in market volatility also saw the risk associated with derivatives positions in the ASX and ASX 24 markets fall, despite higher traded volumes of derivatives across both markets. Both ASX Clear and ASX Clear (Futures) generally reduced initial margin rates for derivatives over 2009/10. As a result the daily average initial and mark-to-market margin collected by ASX Clear fell by 31 per cent to $1.1 billion (Graph 3). The daily average initial margin collected in respect of trades on the ASX 24 market fell by 51 per cent to $1.8 billion.
Prospective Changes in the Clearing and Settlement Landscape
In late March 2010 the Minister gave in-principle approval for a market licence application by Chi-X, which plans to offer a platform to conduct secondary trading in ASX-listed shares. Final approval of Chi-X's licence is dependent on Chi-X meeting all of the necessary legislative requirements and the finalisation of the regulatory framework for competition between markets for trading equities. In response to the prospect of AMOs entering the Australian market, ASX has announced the creation of a TAS, which will allow trades executed on AMOs' platforms to be submitted directly to ASX Clear for clearing and ASX Settlement for settlement. The Reserve Bank is satisfied that the TAS, as currently proposed, will not affect the compliance of ASX Clear and ASX Settlement with the relevant FSS.
The Reserve Bank, together with APRA and ASIC, continues to work with the industry to encourage improvements to transparency and risk management in OTC derivatives markets. This is occurring in the context of similar efforts by the international regulatory community and industry, which have gained increased attention following the financial market turbulence of recent years. The Reserve Bank's particular focus is on encouraging, where appropriate, use of central counterparties by Australian participants in OTC derivatives markets. To date, industry feedback has suggested there are some concerns regarding the viability of a stand-alone domestic central counterparty, and alternative solutions may be preferable.[3] As part of this, the Australian financial authorities have been engaging with the (typically international) market infrastructures regarding Australian market participants' access to their services on terms appropriate to the scale and scope of their business. (The Reserve Bank finalised its regime for oversight of overseas central counterparties, which facilitates cross-border provision of clearing services by minimising regulatory duplication, in 2008/09.) This is an important issue for Australia, as the existing market infrastructures have not typically catered to the needs of participants in smaller markets, such as Australia. Through their participation in the OTC Derivatives Regulators' Forum – established in late 2009 to provide regulators around the world with a means to cooperate, exchange views and share information related to OTC derivatives central counterparties and trade repositories – the Australian financial authorities have sought to bring the importance of this issue to the attention of the international regulatory community.
In February 2010, the Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO) announced a comprehensive review of the international standards for clearing and settlement systems in light of the financial crisis and developments in the industry (including OTC derivatives markets) since the standards were initially introduced. One aspect of this review is ensuring that the CPSS-IOSCO Recommendations for Central Counterparties (RCCP) appropriately cover central counterparties clearing OTC derivatives; CPSS and IOSCO have undertaken a public consultation on proposed changes to the RCCP to ensure this. It is intended that the outcomes of this review will be subject to public consultation by early 2011. To the extent that the standards are amended, the Reserve Bank will consider whether any related changes to the FSS are appropriate.
Footnotes
The daily exposure faced by ASX Clear arises from unsettled trades through the three-day settlement cycle. ASX Clear's average total settlement exposure from a single day's trades was $421 million in 2009/10, down by 10 per cent from the previous year. [1]
ASX Clear calculates notional margin in respect of participants' cash equity positions – although margin is not currently routinely collected – but the calculations cannot be compared for 2008/09 and 2009/10 because from July 2009 ASX Clear expanded the range of securities used to calculate exposures, from just the largest and most liquid 200 listed securities to include other less-liquid securities. This expansion has led to a material increase in total notional margin. [2]
See the 2009 report on the ‘Survey of the OTC Derivatives Market in Australia’ conducted by APRA, ASIC and the Reserve Bank, available at: <https://www.rba.gov.au/payments-and-infrastructure/financial-market-infrastructure/otc-deriviatives/survey-otc-deriv-mkts/>. [3]