2011/12 Assessment of Clearing and Settlement Facilities in Australia Appendix A: Detailed Information Relevant to Assessment against the Financial Stability Standards

A1. Financial Stability Standard for Central Counterparties

In assessing whether a facility has met the Financial Stability Standard for Central Counterparties, the Reserve Bank (the Bank) considers a number of broad principles or measures. The full text of these measures and associated guidance is available on the Bank's website.^[21] The following provides summary details of the information the Bank has used to assess ASX Clear Pty Limited (ASX Clear) and ASX Clear (Futures) Pty Limited (ASX Clear (Futures)) against each of these measures. This updates the information presented in the Bank's 2010/11 Assessment for material changes in policies and procedures over 2011/12.

A1.1 ASX Clear

ASX Clear is a wholly owned subsidiary of ASX Clearing Corporation Limited (ASXCC), itself a wholly owned subsidiary of ASX Limited. It acts as the central counterparty (CCP) for cash equities, pooled investment products, warrants, certain fixed-income products and equity- and commodity-related derivatives traded on the ASX market. Under the Trade Acceptance Service, it can also act as CCP for trades on approved market operator (AMO) platforms, such as Chi-X Australia Pty Ltd (Chi-X), which began trading on 31 October 2011.

1. Legal framework

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

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 2001, 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 1998. This provides certainty for the netting process in the event of the insolvency of a participant.

The ASX Clear Operating Rules and Procedures define the nature and scope of the CCP's 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:

(a) 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 CCP's 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 2012, ASX Clear had 44 participants – 11 of these were General Participants that offer third-party clearing services.

(b) 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 CCP. They cover minimum capital and financial obligations; business and managerial requirements; operational resources; business continuity arrangements; and risk- and liquidity-management arrangements.

Participants clearing cash equities or options are required to comply with a risk-based capital regime under which participants must hold liquid capital in excess of a ‘total risk requirement’. This 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 General Participants. Currently, Direct Participants must maintain a minimum of $5 million in ‘core capital’. Subject to a review in late 2012, ASX Clear intends to increase this requirement to $10 million from 1 January 2014. ASX Clear requires that General Participants maintain a higher level of capital, and increased core capital requirements for these participants from $10 million to $20 million, effective 1 January 2012. Participants that only clear futures may elect to be covered by an alternative capital regime, based either on a net tangible asset (NTA) requirement or compliance with the regime of a prudential supervisor. At the end of the Assessment period all but three of ASX Clear's 44 participants were subject to the risk-based regime; two were subject to NTA requirements and one was subject to the regime of a prudential supervisor.

Monitoring of clearing participants is conducted predominantly by the Clearing Risk Management (CRM) unit, which covers both CCPs and reports to the Chief Risk Officer (CRO). CRM monitors day-to-day developments regarding, among other things, financial requirements, risk profiles, open positions and settlement obligations to the CCPs. Within CRM, Counterparty Risk Assessment (previously Capital Monitoring) is responsible for monitoring, assessing and investigating matters relating to financial requirements, including monitoring participants' monthly financial statements for any matters of concern. These returns may be a trigger for follow-up enquiries, for example, if the ratio of liquid capital to the total risk requirement falls below 1.7; there are sustained losses on outstanding positions; or there is a significant fall in liquid capital held.^[22] More stringent reporting requirements apply where a participant's capital falls below certain stated thresholds. CRM also carries out a range of participant monitoring spot checks and other initiatives designed to validate the accuracy of the financial and operational information that participants submit to ASX Clear. Current initiatives are discussed in more detail in Section 5.

CRM is also responsible for determining and reviewing participants' internal credit ratings (ICRs), drawing in part on information provided by participants in their regular financial returns to ASX. A participant's ICR is based on its external credit rating, if available, or that of its parent if either that parent provides a formal guarantee to the CCP or the participant carries the parental corporate name. Otherwise, the rating is based on the participant's capital position (or that of its parent where that parent is unrated but provides a formal guarantee to the CCP).

CRM also coordinates a ‘watch list’ of participants deemed to warrant more intensive monitoring. During the current Assessment period, the watch list regime was consolidated within CRM, whereas previously different teams within ASX (including CRM) had maintained separate watch lists with different triggers. The result is a more comprehensive and accessible picture of the factors affecting the risks participants bring to the CCPs. This facilitates appropriate and coordinated responses to those risks.

Inclusion on the watch list is based on a range of factors, such as: concerns emerging from a specific event or media report; significant changes in a participant's own share price, bond yield or credit default swap price; ICR downgrades; calls for additional initial margin; operational issues; compliance issues; or issues arising from ASX's routine review of financial returns. Participants on the watch list may be subject to a more stringent intraday margin call regime, and CRM will typically also carry out a detailed credit review. During the current Assessment period, the CCP Risk, Operations and Compliance Committee, which involves senior members drawn from the CRO office (including the CRM unit), ASX Compliance Pty Limited (ASX Compliance) and the Operations Division, was established in order to provide a comprehensive assessment of watch list factors monitored by all three areas. Based on such an assessment, ASX Clear may decide to place restrictions on a participant's trading, clearing and settlement activities.

(c) 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 Board (one of the Clearing and Settlement (CS) Boards) must be satisfied that a 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 that it is in a position to make an immediate transfer of funds to meet its obligations.

(d) 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 CCP. ASX Clear may suspend or 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 that may have an adverse impact on the CCP. 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 implies 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 the Australian Securities and Investments Commission (ASIC) and, in most cases, are investigated by the Executive Office of ASX Compliance. Disciplinary action relating to rule breaches is brought before the ASX Compliance Officer. During the 2011/12 Assessment period, ASX Clear suspended two participants, which were subsidiaries of MF Global Holdings Limited (MF Global), following an event of default. These suspensions remain in place, having been renewed each month since the event of default.

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 are publicly available on the ASX website. The Operating Rules and Procedures explain the role and responsibilities of each category of participant and ASX Clear. 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 for Financial Services and Superannuation (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:

(a) 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 on behalf of a client.

(b) 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 or Chi-X markets is novated to ASX Clear upon the acceptance and registration of the details of that market transaction within the clearing system. For cash equity market transactions, novation occurs with effect from the matching of the trade on the market. In the case of derivatives transactions, novation takes place at the time of registration (which is when the contract has been properly designated to the accounts of both participants). For both cash equities and derivatives, novation can occur no later than the evening of the day of the trade.

5. Settlement

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

(a) where settlement involves the exchange of one asset for another, it must be done on an appropriate delivery-versus-payment basis; and

(b) 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 CCP 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 Pty Limited (ASX Settlement).
Payments to or from the CCP, including margin payments relating to derivatives positions. In this instance, the ASX Clear Operating Rules and Procedures specify that the facility provided by Austraclear Limited (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 delivery-versus-payment (DvP) model 3 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 the Clearing House Electronic Sub-register System (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 the Reserve Bank Information and Transfer System (RITS) across Payment Providers' Exchange Settlement Account (ESAs). Once cash settlement has been confirmed, ASX Settlement effects the net transfer of securities within CHESS. The delivery of wool is via commodity warehouses, with ASX Clear retaining title documentation until payment has been made.

Participants settle routine margin payments in respect of ASX derivatives positions via cash transfers in Austraclear, which settle in real time via RITS. Payments transactions reflecting margin-related funds movements and treasury investments for both CCPs are settled using ASXCC's ESA.

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 and Procedures is also final and irrevocable by virtue of 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 ESAs held with the 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

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:

(a) require its participants to inform it immediately if they:

become subject to external administration, or have reasonable grounds for suspecting that they will become subject to external administration; or
have breached, or are likely to breach, a risk-control requirement of the central counterparty; and

The ASX Clear Operating Rules and Procedures require that participants inform ASX Clear 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; default of the clearing participant at another CCP or exchange; and being in breach of the CCP's risk-control requirements, such as failing to fulfil margin or other payment obligations to the CCP.

(b) have the ability to close out, or otherwise deal with a participant's open contracts in order to appropriately control risk if a participant:

becomes subject to external administration; or
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 using a variety of methods to manage their exposure. 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 any open contracts, to exercise or terminate open contracts, or to seek to transfer client positions. The specific close-out method will depend on market conditions and the products in question.

These formal rules are supplemented by an internal ‘default management framework’ (DMF), applicable to both ASX Clear and ASX Clear (Futures), to assist in the management of a clearing participant default. The DMF is based on high-level principles regarding the management of a default that have been approved by the CS Boards. In particular, these principles specify that the key aim in handling a default is to minimise the impact of the event on the ASX CCPs, clearing participants and the market.

The DMF covers each stage of a default, from the identification of a default event, to the management of the defaulter's position, real-time monitoring of financial insolvency, and financial offset and reconciliation. It is intended to be flexible, rather than prescriptive, and can be developed and adapted as needed. The DMF is reviewed on an annual basis, or more frequently as needed, and is regularly tested by in-house default management ‘fire drills’. In the current Assessment period, the DMF was updated to incorporate refinements from the most recent fire drills as well as lessons from the default of MF Global (see Box B in Section 5).

The DMF and the Operating Rules and Procedures allow ASX Clear to employ a variety of methods to close out or otherwise manage the positions of a defaulting participant. These include transfer, on- or off-market liquidation, expiry, exercise, compulsory settlement (generally considered to be a ‘last-resort’ method of closing out) and hedging. As there are advantages and disadvantages to each close-out method, the specific method used in practice will depend on market conditions and the products in question. For example, the account structure used by the CCP is a factor in determining the ease with which client positions can be transferred following a default event. This may, subject to other legal and practical impediments, be a possibility for client derivatives positions at ASX Clear, as ASX Clear offers individually segregated client accounts for options and individually segregated client accounts with an optional omnibus client account for futures.

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:

(a) ensure that its risk-control measures, typically a combination of its own capital, margins, guarantee funds and predetermined loss-sharing arrangements, provide sufficient coverage and liquidity; and

(b) 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 CCP 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 CCP to meet its obligations could be extremely disruptive to the financial system. The focus of the Bank in this area is ensuring that the combination of risk controls implies a very low probability of failure of the CCP.

ASX Clear's financial resources are at the core of its risk controls. 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 margins on derivatives products, and is in the process of implementing cash equity margining (see Section 5.1). Initial (risk) margin provides cover in the event that a participant defaults and an adverse price change occurs before the CCP can close out the participant's positions. Initial margin is calibrated so as to cover three standard deviations of the 60-day historical distribution of price movements, assuming a close-out period of either one or two days. ASX Clear also levies so called ‘premium’ margin on short exchange-traded option positions, updating this daily to reflect mark-to-market changes in the close-out price, and levies variation (mark-to-market) margin on both long and short low exercise price options, and all futures positions. All margin rates are reviewed on a three-monthly cycle, supplemented with ad hoc reviews during especially volatile market conditions.

ASX Clear calculates total initial margin requirements across each participant's portfolio using a margining engine based on the Theoretical Intermarket Margin System methodology, developed by the Options Clearing Corporation. The calculation of margin (using this methodology) is performed by ASX Clear's in-house Derivatives Clearing System (DCS). In the next Assessment period this methodology will be replaced with CME SPAN. This upgrade is expected to facilitate better calibration of exposures to ASX Clear's risk tolerance (see Box A in Section 5 for more detail).

Margin requirements are calculated overnight, with variation margins based on closing contract prices each day, and are notified to participants the next morning. All margin obligations are settled via Austraclear and regular calls must be met by 10.30 am. In the event of sharp intraday price movements, ASX Clear may also call margin intraday. This must be met by participants within two hours of notification. Intraday margin calls reflect changes in participants' positions and price movements.

Both variation and intraday margin obligations must be settled in cash, while participants may use cash or non-cash collateral to meet initial and premium margin obligations. Securities are eligible to be used as collateral only if strict criteria set by ASX Clear are met, and are subject to a haircut. In general, acceptable collateral includes S&P/ASX 200 index constituent stocks; exchange-traded funds that ASX deems are mature and liquid and where issuer risk is considered low (currently only the SPDR S&P/ASX 200 Fund); and stocks lodged as specific cover for a call option on that stock. The list of acceptable collateral is reviewed at least quarterly, in order to reflect changes to the S&P/ASX 200 constituent list. ASX Clear restricts the use of participant or related entity issued stocks to manage the potential risk of correlated default of a participant and the collateral issuer. ASX Clear also accepts guarantees from banks with a short-term S&P credit rating of at least A-1+ as collateral, as long as the bank is not a related entity of the participant.

Under ASX Clear's Contributions and Additional Cover (CAC) methodology, a participant is also required to post additional collateral should stress-test outcomes reveal that the potential loss arising from its positions, as at the close of the previous day, exceeds a predetermined stress-test exposure limit (STEL). Comparison of potential stress-test losses with the STEL offers some guidance as to the resilience of the CCP to a participant default in extreme market conditions. STELs are linked to participants' ICRs. In normal market conditions, highly-rated (i.e. A- and B-rated) participants are eligible for discounts on the additional collateral called. However, these discounts have not applied since April 2010 because ASX has not considered market conditions to be normal.

In addition, ASX Clear may call capital-based position limit (CBPL) CAC from participants with large portfolios (proxied by initial margin requirements) relative to their capital. CAC 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). ASX Clear may also call CAC from participants where it has counterparty credit risk concerns.

The CAC regime provides additional cover against non-systematic spikes in participants' exposures; it is not a substitute for holding sufficient pooled risk resources. There are potential shortcomings to relying too heavily on variable calls related to stress-test exposures, particularly given lags in the calculation and settlement of such calls. In deciding whether a CCP has sufficient pooled risk resources, ASX considers the size, frequency, duration and distribution of the additional collateral calls across participants. This process is documented in guidance on the circumstances in which ASX would consider increasing ASX Clear's pooled risk resources.

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 pre-funded financial resources of $250 million, which consist of own equity ($3.5 million); funds held in a restricted capital reserve ($71.5 million); and fully-drawn subordinated loans from ASXCC (totalling $175 million), which are 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 risk exposures to individual participants and the adequacy of the CCP's financial resources. These are the same stress tests used in the CAC regime, described above. Stress tests are based on 99 scenarios, each calibrated to a one-in-30-year event, and are reviewed annually. The scenarios cover extreme price moves and volatility shifts at the market-wide, sector and individual-stock levels. During 2011/12, several changes to stress-test parameters were made. The annual review of stress-test parameters occurred in November 2011 and resulted in some amendments to both sectoral and individual-stock scenarios. The implied volatility change for no price change scenarios was also increased from 200 per cent to 250 per cent for all individual stock scenarios. In August 2011, CRM raised the across-the-board ‘market up’ stress-test scenario to 12 per cent, compared with 10 per cent previously. This followed a similar rise from 7 to 10 per cent in May 2010. Both changes resulted from observed persistent price declines over a number of days, which were considered to increase the probability of a subsequent rebound. On 5 December 2011 the scenario was returned to 10 per cent.

ASXCC is the controlling entity for ASX Clear's treasury investments, which are conducted through ASXCC's ESA. In respect of both cash margin collected and pooled risk resources, ASXCC invests funds in accordance with a defined Treasury Investment policy, endorsed by the CS Boards of both CCPs. This policy is designed to ensure that risk resources can be reliably accessed on a timely basis. The performance of the investment portfolio in relation to this policy is closely monitored by ASXCC, with trigger points being set to automatically escalate potential issues to the CRO before actual limits are reached.

The policy restricts treasury investments to high-quality liquid assets, such as Commonwealth Government Securities (CGS), bank bills and certificates of deposit. Limits are set for maximum instrument maturity, weighted average maturity, maximum share of liquid assets that can be held in safe custody bank bills, and maximum maturity for foreign exchange instruments. The Treasury Investment policy also sets a 5-day ‘Earnings-at-Risk’ limit based on a defined share of the portfolio at a 99 per cent confidence interval.

The Treasury Investment policy defines investment counterparty eligibility criteria and sets investment limits in order to control counterparty investment risk. Investment counterparties must be Australian Prudential Regulation Authority (APRA) approved ADIs that are licensed banks in Australia under the Banking Act 1959 that are not clearing participants. They must also have a Standard and Poor's short-term credit rating of A1 or above. As well as restricting the proportion of the portfolio that can be invested with a single counterparty to 33 per cent, the policy sets an absolute limit on ASXCC's exposure to an individual counterparty. For all counterparties, with the exception of the four largest domestic banks, this limit is set with regard to the resources ASXCC has available to cover an investment counterparty default. Notwithstanding the application of such limits, the policy leaves open the potential for large and concentrated credit exposures to the four largest domestic banks. A further issue arising from investment in bank-issued assets is that, where an entity related to the issuer counterparty is also a clearing participant, the performance of investments in the portfolio may be correlated with the very default event against which the CCP's risk resources seek to provide cover.

The policy also sets upper limits for the average maturity of investments and an overarching liquidity requirement based on assumed ‘ordinary’ liquidity needs (e.g. for the return of margin to participants, based on the maximum required over the previous year); liquidity needs in the event of a default (i.e. the Default Liquidity Requirement (DLR)); and the value of cash margin posted by the largest clearing participant. These liquidity resources must be available within two hours; and must comprise cash, or securities eligible for repurchase transactions with the Bank.

ASX Clear uses a liquidity stress-testing model to assess the adequacy of its liquidity arrangements. The model, which is based on ASX Clear's capital stress tests (described above) and is similar to that used by ASX Clear (Futures), calculates the maximum liquid funds that ASX Clear would need to access in order to be able to meet obligations arising in the event of a clearing participant default, acknowledging that ASX Settlement currently has the flexibility to reschedule ASX Clear settlements. The liquidity stress tests assume that a default occurs just prior to receipt of the previous day's variation margin payments, if owed by the defaulter, or just after any variation margin payments have been paid, if owed to the defaulter. The stress tests thereby maximise the potential liquidity required under each stress-test scenario. The results of the liquidity stress tests (the DLRs) are compared to the CCP's Available Financial Resources (AFR). For ASX Clear, the AFR is currently set at $300 million and is met by liquid assets held in respect of ASX Clear's pre-funded risk resources of $250 million, and a further $50 million available under a committed standby liquidity facility. A stress-test result above the AFR for three consecutive trading days is considered a breach of the AFR and triggers a review of the adequacy of the AFR. Such a review takes into account the outcome of the capital stress tests, as any CAC calls will provide extra liquidity.

iii. Loss sharing

This section of the Measure applies to arrangements where participants commit to meet any settlement shortfall. It does not require that a facility has loss-sharing arrangements in place, but where they exist they should be documented, legally enforceable and acknowledged by all participants in the CCP. 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 of this Measure). 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.

Ultimate responsibility for the control of the financial risks faced by ASX Clear lies with the ASX Limited Board and the ASX Clear Board. The ASX Limited Board, which is accountable to ASX Group (ASX) shareholders, is responsible for overseeing the processes for identifying significant risks to ASX and ensuring that appropriate and adequate control, monitoring and reporting mechanisms are in place. In addition, the ASX Limited Board assigns certain responsibilities to the ASX Clear Board (as specified in the ASX Limited Board Charter), including the management of ASX Clear's clearing and settlement risk, and oversight of its compliance with the Financial Stability Standards (FSSs).

The ASX Limited Board Charter also places requirements on the Board structure, including that the majority of members and the Chair of the ASX Limited Board be independent (defined as being free of business or other relationships that could interfere with independent exercise of judgement). There are currently eight members of the ASX Limited Board, comprising the ASX Chief Executive Officer (CEO) and seven independent, non-executive directors. The ASX Limited Board appoints the members of the ASX Clear Board, with independent directors selected based on relevant skills and expertise. Currently, the ASX Clear Board comprises one executive director (the ASX CEO) and six non-executive directors. Four of the non-executive directors are also members of the ASX Limited Board, while the remaining two, including the Chairman, are external directors appointed for their expertise in clearing and settlement matters. The other CS boards – ASX Clear (Futures), ASX Settlement and Austraclear – have the same directors and Chairman as the ASX Clear Board. The ASX Limited Board Charter and the profiles of all board members are publicly available online.

The ASX Clear Board meets between six and eight times each year, and receives detailed reports on ASX Clear's business and operations, risk management and financial performance. It is responsible for approving capital, liquidity and stress-testing arrangements.

Within ASX's management structure, reporting lines for those units primarily responsible for financial risk management are segregated from other business units, reporting to the CRO, who in turn reports directly to the CEO. There are five functional areas within ASX with at least some responsibility for CCP financial risk management: the Clearing Risk Policy unit; the CRM unit; the Enterprise Risk unit; the Internal Audit unit; and the Portfolio Risk Manager. The CRO is not responsible for any other functions, and none of the units within the CRO's portfolio have a revenue or profit objective. In addition, ASX maintains a number of executive committees that have some responsibility for financial risk management.

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 operating systems are DCS and CHESS. Operational risk in the CHESS system is dealt with in the discussion of ASX Settlement (see Appendix A2.1, below).

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 regularly performs external-penetration and vulnerability testing on DCS. 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 audits
critical information technology (IT) infrastructure is designed to ensure resilience against component failure, including full redundancy at the primary site
availability targets are documented and defined formally for critical services.

Notwithstanding these arrangements, should an infrastructure failure occur at the primary site, ASX Clear policy requires that failover to the backup site should occur within one hour for all systems, or two hours in the event that there is also an application and/or data problem. ASX Clear views these failover targets as conservative. Actual failover times will vary according to the system component affected and the nature of the problem.

Over the 2010/11 Assessment period, DCS was available 100 per cent of the time. 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 ensures 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 19 per cent, while peak utilisation was 41 per cent. ASX continues to monitor the capacity of DCS to ensure peak utilisation does not exceed its minimum capacity headroom target of 50 per cent of total capacity.

ASX Clear has arrangements in place to ensure that changes to DCS and supporting infrastructure do not disrupt its normal operations. ASX Clear operates a separate test environment for DCS and has a formal, documented change-management process. It also follows defined procedures for communicating with participants and vendors around technology-upgrade releases, which include regular notices to participants of upcoming changes. These procedures were reviewed and updated in the 2011/12 Assessment period.

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 Clear 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 updated periodically. The risk that an operational incident at the main site disrupts DCS is mitigated through maintenance of a backup site. In early 2012, ASX completed the migration of all core systems to its new operations centre, which is now its primary site for IT infrastructure (ASX's Bridge St office in Sydney remains its primary site for staff).

ASX Clear employs a variety of technologies to ensure a high degree of redundancy in its systems – both across sites and within a single site. All core systems employ multiple servers with spare capacity. Front-end servers handling communications with participants are configured to provide automatic failover within each site. Failover of the more critical data servers will generally take place within an hour under the control of management; however, the disruption to participants in such a case is reduced due to the high degree of redundancy in the front-end system components, which in most circumstances will maintain communications with external systems and queue transactions until the data servers are reactivated. The integrity of transactions is ensured by queuing messages until they can be processed; storing all transactions in the database with unique identifiers, thereby preventing the loss or duplication of transactions; and synchronised replication of database records across both sites. Furthermore, in the event that a significant part of a system or an operational site fails, ASX Clear has contingency arrangements to activate an additional tier of redundancy arrangements (either by converting test systems into production systems or rebuilding systems from readily available hardware) within 24 hours to meet the contingency of any further service interruption.

To facilitate rapid recovery in the event of an operational disruption, ASX Clear is gradually increasing the number of operational staff based at the operations centre (which is the backup site for staff), and plans to have around 30 per cent of operational staff located there by early 2013. In case of a disruption to staffing arrangements at the Bridge St office, the operations centre has capacity to house 65 per cent of all operational staff.

ASX Clear regularly tests its business continuity 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.

ASX Clear's Operating Rules and Procedures require participants to maintain adequate business continuity arrangements to allow the recovery of usual operations within one to two hours following a contingency event. If a participant fails to do so, ASX Clear may impose sanctions. Spot checks of participants’ business continuity management are triggered if a participant has been experiencing operational problems. These include examination of governance and processes.

In the current Assessment period, ASX developed a ‘multi-market communication protocol’ for communicating information to participants and stakeholders should any disruption to market, clearing or settlement services eventuate. Development of this protocol follows engagement with ASIC, the Bank and Chi-X. In particular, ASX and ASIC have been working on defining high-level communication points and areas of responsibility, with ASX assuming responsibility for communicating with participants and ASIC assuming responsibility for communicating with the clients of participants.

iii. Outsourcing

All ASX Clear operational functions are performed within ASX. 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.

iv. External administration of a related body

Within the ASX structure, most operational resources are provided by ASX Operations Pty Limited (ASX Operations), a subsidiary of ASX Limited. In the event that ASX Operations 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 (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 Bank under the FSS for CCPs. These obligations include the reporting of breaches of the FSS; the failure of a participant to fulfil the CCP's risk-control requirements; and the CCP'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.

A1.2 ASX Clear (Futures)

ASX Clear (Futures) is a wholly owned subsidiary of ASXCC, itself a wholly owned subsidiary of ASX Limited. ASX Clear (Futures) acts as the CCP for all futures and options products that are traded on the ASX 24 market.

1. Legal framework

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

The legal basis for ASX Clear (Futures)' operations is set out in the ASX Clear (Futures) 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.

ASX Clear (Futures)' 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:

(a) 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 its 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 2012, ASX Clear (Futures) had 17 participants, predominantly large foreign banks and their subsidiaries.

(b) 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 CCP. 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. ASX management has discretion to impose a higher requirement. Over time, ASX Clear (Futures) plans to implement a further increase in this NTA requirement to $10 million, with a higher requirement for those participants clearing for third parties. The Operating Rules and Procedures also allow ASX Clear (Futures) to impose requirements for net liquid assets, which must at a minimum be greater than zero.

Monitoring of clearing participants is conducted predominantly by the CRM unit, which covers both CCPs and reports to the CRO. CRM monitors day-to-day developments regarding, among other things, financial requirements, risk profiles, open positions and settlement obligations to the CCPs. Within CRM, Counterparty Risk Assessment (previously Capital Monitoring) is responsible for monitoring, assessing and investigating matters relating to financial requirements, including monitoring participants' monthly financial statements for any matters of concern. CRM also carries out a range of participant monitoring spot checks and other initiatives designed to validate the accuracy of the financial and operational information that participants submit to ASX Clear (Futures). Current projects are discussed in more detail in Section 5.

CRM is also responsible for determining and reviewing participants' ICRs, drawing in part on information provided by participants in their regular financial returns to ASX. A participant's ICR is based on its external credit rating, if available or that of its parent if either that parent provides a formal guarantee to the CCP or the participant carries the parental corporate name. Otherwise, the rating is based on the participant's capital position (or that of its parent where that parent is unrated but provides a formal guarantee to the CCP).

CRM also coordinates a watch list of participants deemed to warrant more intensive monitoring. During the current Assessment period, the watch list regime was consolidated within CRM, whereas previously different teams within ASX (including CRM) had maintained separate watch lists with different triggers. The result is a more comprehensive and accessible picture of the factors affecting the risks participants bring to the CCPs. This facilitates appropriate and coordinated responses to those risks.

Inclusion on the watch list is based on a range of factors, such as concerns emerging from a specific event or media report; significant changes in a participant's own share price, bond yield or credit default swap price; ICR downgrades; calls for additional initial margin; operational issues; compliance issues; or issues arising from ASX's routine review of financial returns. Participants on the watch list may be subject to a more stringent intraday margin call regime, and CRM will typically also carry out a detailed credit review. During the current Assessment period, the CCP Risk, Operations and Compliance Committee, which involves senior members drawn from the CRO office (including the CRM unit), ASX Compliance and the Operations Division, was established in order to provide a comprehensive assessment of watch list factors monitored by all three areas. Based on this assessment, ASX Clear (Futures) may decide to place restrictions on the participant's trading, clearing and settlement activities.

(c) 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) 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 that it is in a position to make an immediate transfer of funds to meet its obligations.

ASX Clear (Futures) has wide-ranging powers to sanction its participants in order to preserve the integrity of the CCP. ASX Clear (Futures) may suspend or terminate a participant's authority to clear all market transactions in the event of a default, or in the event of a breach of the Operating Rules and Procedures that may have an adverse impact on the CCP. 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 implies negligence, incompetence or dishonesty. Where a breach has been identified and the participant has taken appropriate steps to rectify it, ASX Clear (Futures) will typically continue to monitor the participant closely for a period of time. Breaches are also referred to ASIC and, in most cases, are investigated by the Executive Office of ASX Compliance. Disciplinary action relating to rule breaches is brought before the ASX Compliance Officer. During the 2011/12 Assessment period, ASX Clear (Futures) suspended two participants, which were subsidiaries of MF Global, following an event of default. These suspensions remain in place, having been renewed each month since the event of default.

3. Understanding risks

The ASX Clear (Futures) Operating Rules and Procedures are comprehensive and publicly available on the ASX website. The Operating 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, 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:

(a) the nature and scope of novation; and

The nature and scope of novation is set out in the 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 on behalf of a client.

(b) 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, which occurs in ASX 24's SYCOM system. 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:

(a) where settlement involves the exchange of one asset for another, it must be done on an appropriate delivery-versus-payment basis; and

(b) 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 CCP. These include margin payments and the settlement of cash-settled derivatives 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 with a net obligation to the CCP are required to make payments to ASX Clear (Futures) by 11.00 am, for both AUD- and NZD-denominated contracts. Once these payments have been received, ASX Clear (Futures) makes payments to those participants with a net obligation from the CCP.

AUD settlements occur via Austraclear, with interbank obligations settled on a real-time gross settlement (RTGS) basis across ESAs at the Reserve Bank of Australia, via RITS. ASX Clear (Futures) uses ASXCC's ESA to settle its obligations in RITS. NZD settlements occur via NZClear (an SSF owned by the Reserve Bank of New Zealand, of which ASXCC is a participant), with the interbank obligations settled on an RTGS basis across accounts at the Reserve Bank of New Zealand, via the Exchange Settlement Account System (ESAS). To access ESAS, ASXCC is represented by a private bank with an ESAS account, and transfers are effected between this account and participants' (or their representative banks') ESAS accounts.

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. For 90-day bank bill futures, ASX Clear (Futures) utilises the standard settlement process in Austraclear. The delivery of grain and wool is via commodity warehouses, with ASX Clear (Futures) retaining title documentation until payment has been made.

ASX Clear (Futures) also accepts some collateral denominated in AUD, NZD and a small number of other currencies as initial margin. ASX Clear (Futures) has accounts at Austraclear and NZClear for settling AUD- and NZD-denominated securities, respectively. Collateral denominated in other currencies is settled indirectly via relationships with private banks.

The settlement of obligations is final and irrevocable according to the terms of ASX Clear (Futures)' and ASX 24's Operating Rules and Procedures, 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 Procedures 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 ESAs held with the 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

(a) require its participants to inform it immediately if they:

become subject to external administration, or have reasonable grounds for suspecting that they will become subject to external administration; or
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; default of the clearing participant at another CCP or exchange; and being in breach of the CCP's risk-control requirements, such as failing to fulfil margin or other payment obligations to the CCP.

(b) have the ability to close out, or otherwise deal with a participant's open contracts in order to appropriately control risk if a participant:

becomes subject to external administration; or
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 using a variety of methods to manage their exposure. 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. The specific close-out method will depend on market conditions and the products in question.

These formal rules are supplemented by an internal DMF, applicable to both ASX Clear and ASX Clear (Futures), to assist in the management of a clearing participant default. The DMF is based on high-level principles regarding the management of a default that have been approved by the CS Boards. In particular, these principles specify that the key aim in handling a default is to minimise the impact of the event on the ASX CCPs, clearing participants and the market.

The DMF covers each stage of a default, from the identification of a default event, to the management of the defaulter's position, real-time monitoring of financial insolvency, and financial offset and reconciliation. It is intended to be flexible, rather than prescriptive, and can be developed and adapted as needed. The DMF is reviewed on an annual basis, or more frequently as needed, and is regularly tested by in-house default management fire drills. In the current Assessment period, the DMF was updated to incorporate lessons learnt from the default of MF Global (see Box B in Section 5).

The DMF and the Operating Rules and Procedures allow ASX Clear (Futures) to employ a variety of methods to close out or otherwise manage the positions of a defaulting participant. These include transfer, on- or off-market liquidation, expiry, exercise, compulsory settlement (generally considered to be a last-resort method of closing out) and hedging. As there are advantages and disadvantages to each close-out method, the specific method used in practice will depend on market conditions and the products in question. For example, subject to other legal and practical impediments, the account structure used by the CCP is a factor in determining the ease with which client positions can be transferred following a default event. As ASX Clear (Futures) offers omnibus client account with net margining, transfer of individual client positions in a default event can be difficult due to possible undercollateralisation.

7. Risk controls

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

(b) 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.

ASX Clear (Futures)' financial resources are at the core of its risk controls. These comprise margin and other collateral lodged in accordance with 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 initial and variation margin on the derivatives products it clears. Initial margin provides cover in the event that a participant defaults and an adverse price change occurs before the CCP can close out the participant's positions. Initial margin is calibrated so as to cover three standard deviations of the 60-day historical distribution of price movements, considering both one- and two-day price movements. 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 CME SPAN version of the internationally accepted Standard Portfolio Analysis of Risk (SPAN) methodology. CME SPAN, which is widely used, replaced the OMX RIVA version of SPAN at ASX Clear (Futures) in the first quarter of 2012. This upgrade is expected to facilitate better calibration of exposures to ASX Clear (Futures)' risk tolerance (See Box A in Section 5 for more detail).

Participants generally meet their initial margin obligations using cash, although they may also use high-quality liquid non-cash collateral, such as eligible debt securities and foreign-currency deposits. Acceptable collateral is reviewed annually, and haircuts are applied in respect of all non-cash collateral posted and all cash collateral that is not in the same currency as the product being covered.

ASX Clear (Futures) also levies variation margin on derivatives positions to cover gains or losses arising from price movements over the preceding day. Variation margin must be settled in cash. ASX Clear (Futures) transfers variation margin to participants that have made gains only after receiving all payments from participants that have made losses.

Initial and variation margin requirements are calculated overnight based on each day's closing contract prices, and are notified to participants by 6.00 am the next day. Obligations must be met via Austraclear, or, for NZ-denominated payments, NZClear, by 11.00 am Australian Eastern Standard Time. Breaches of any margin payment deadline are escalated to ASX Compliance and may attract a financial penalty.

Should ASX Clear (Futures)' exposures change significantly within the day, initial and variation margin can be called intraday. ASX Clear (Futures) recalculates its exposures to participants twice each day (in addition to the overnight calculations), and also after large price movements. In the event that its exposure to any participant has risen beyond a certain threshold, relative to the initial margin posted by that participant, intraday margin is called. Intraday margin calls reflect changes in participants' positions and price movements.

Under ASX Clear (Futures)' STEL Additional Initial Margin (AIM) methodology, a participant is also required to post additional collateral should stress-test outcomes reveal that the potential loss arising from its positions, as at the close of the previous day, exceeds a predetermined STEL. STELs are linked to the value of ASX Clear (Futures)' pre-funded risk resources and vary according to the credit quality of participants. ASX Clear (Futures) does not include the $30 million promissory risk resources in its STELs, recognising the potential for a significant delay in receipt of these resources. Accordingly, the maximum STEL is $370 million for participants with the highest credit rating, equivalent to the value of pre-funded financial resources available to ASX Clear (Futures). In normal market conditions, highly-rated (i.e. A- and B-rated) participants are eligible for discounts on their STEL AIM calls. However, these discounts have not applied since April 2010 because ASX has not considered market conditions to be normal.

The STEL AIM regime provides additional comfort against non-systematic spikes in participant exposure; it is not a substitute for holding sufficient pooled risk resources. There are potential shortcomings to relying too heavily on variable calls related to stress-test exposures, particularly given lags in the calculation and settlement of such calls. In deciding whether a CCP has sufficient pooled risk resources, ASX considers the size, frequency, duration and distribution of STEL AIM calls across participants. This process is documented in guidance on the circumstances in which ASX would consider increasing the ASX Clear (Futures)' pooled risk resources.

Like other margins, STEL AIMs are calculated overnight, notified to participants by 6.00 am the next day, and must be met by 11.00 am. Participants may meet these obligations using cash or non-cash collateral, including Australian Government securities and bank bills or letters of credit from ADIs. ASX Clear (Futures) does not accept collateral issued by a clearing participant or associated entity, in order to reduce the possibility that it might face the default of both a clearing participant and a collateral issuer.

In addition, ASX Clear (Futures) may call CBPL AIMs from participants with large portfolios (proxied by initial margin requirements) relative to their NTAs. ASX Clear (Futures) may also call AIM from participants where it has counterparty credit risk concerns. As with STEL AIMs, these other AIMs are calculated overnight and called the next day, but they are separately processed and called by the CRM unit. Participants are required to settle CBPL AIMs within two hours of the call.

ii. Guarantee fund

ASX Clear (Futures) maintains additional pooled financial resources to protect against losses in excess of margin and other collateral assets posted by a defaulting participant. ASX Clear (Futures)' holds pre-funded financial resources of $370 million, which consist of own equity ($30 million); participant commitments ($120 million) and fully-drawn subordinated loans from ASXCC (totalling $220 million), which is ultimately funded by a commercial bank loan facility ($150 million) and a subordinated loan from ASX Limited ($70 million). These pre-funded resources are relevant in assessing coverage of stress-test exposures. In addition, ASX Clear (Futures) may call on participants for up to $30 million in promissory commitments. These are not immediately callable; indeed, the rules explicitly allow for payment a significant time after a participant default. ASX Clear (Futures)' Operating Rules and Procedures state that the ASX Clear (Futures) Board shall be entitled to apply the pooled financial resources upon default by a clearing participant. The rules stipulate the order in which the resources will be applied (which is as listed above), and make it clear that the contributions of all participants, not just those in default, may be called upon in the event of a default.

ASX Clear (Futures) uses daily stress tests of its four major contracts and the options on these contracts to monitor the risks undertaken by individual participants and the adequacy of the CCP's risk resources. These are the same stress tests used in the STEL AIM system, described above. They comprise a suite of portfolio and single-contract stress-test scenarios based on statistical analysis of historical market movements. The stress scenarios provide consistent tests across contract types and are tailored to ASX Clear (Futures)' risk tolerance, as defined by its Board. They aim to capture one-in-30-year events for single asset scenarios and one-in-100-year events for multi-asset scenarios, and are reviewed annually. During 2011/12, several changes to stress-test parameters were made. The annual review of parameters in November 2011 resulted in a number of minor parameter changes, including a decrease in the magnitude of volatility shock for SPI 200 options under all scenarios and changes to the futures price shocks (both increases and decreases) in around half of the scenarios. The increase in the futures ‘up’ stress-test scenario, implemented in May 2010, remained in place during the 2011/12 Assessment period. Following an episode of declining prices over a period of 10 days, CRM considered it prudent to increase this stress-test scenario – from an across-the-board 9.5 per cent price increase, to a 14.5 per cent price increase – to allow for the possibility of a more substantial rise in prices given the potential for the market to rapidly bounce back from such a decline.

ASXCC is the controlling entity for ASX Clear (Futures)' treasury investments, which are settled across ASXCC's ESA. In respect of both cash margin collected and pooled risk resources, ASXCC invests funds in accordance with a defined Treasury Investment policy, endorsed by the CS Boards of both CCPs. This policy is designed to ensure that risk resources can be reliably accessed on a timely basis. The performance of the investment portfolio in relation to this policy is closely monitored by ASXCC, with trigger points being set to automatically escalate potential issues to the CRO before actual limits are reached.

The policy restricts treasury investments to high-quality liquid assets, such as CGS, bank bills and certificates of deposit. Limits are set for maximum instrument maturity, weighted-average maturity, maximum share of liquid assets that can be held in safe custody bank bills, and maximum maturity for foreign exchange instruments. The Treasury Investment policy also sets a 5-day ‘Earnings-at-Risk’ limit based on a defined share of the portfolio at a 99 per cent confidence interval.

The Treasury Investment policy defines investment counterparty eligibility criteria and sets investment limits in order to control counterparty investment risk. Counterparties must be APRA-approved ADIs that are licensed banks in Australia under the Banking Act that are not clearing participants. They must also have a Standard and Poor's short-term credit rating of A1 or above. As well as restricting the proportion of the portfolio that can be invested with a single counterparty to 33 per cent, the policy sets a limit on ASXCC's exposure to an individual counterparty. For all counterparties with the exception of the four largest domestic banks, this limit is set with regard to the resources ASXCC has available to cover an investment counterparty default. Notwithstanding the application of such limits, the policy leaves open the potential for large and concentrated credit exposures to the four largest domestic banks. A further issue arising from investment in bank-issued assets is that, where an entity related to the issuer counterparty is also a clearing participant, the performance of investments in the portfolio may be correlated with the very default event against which the CCP's risk resources seek to provide cover.

The policy also sets upper limits for the average maturity of investments and an overarching liquidity requirement based on assumed ordinary liquidity needs (e.g. for the return of margin to participants, based on the maximum required over the previous year); liquidity needs in the event of a default (i.e. the DLR); and the value of cash margin posted by the largest clearing participant. These liquidity resources must be available within two hours; and must comprise cash, or securities eligible for repurchase transactions with the Bank.

ASX Clear (Futures) uses a liquidity stress-testing model to assess the adequacy of its liquidity arrangements. The model, which is based on ASX Clear (Futures)' capital stress tests (described above) and 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 liquidity stress tests assume that a default occurs just prior to receipt of the previous day's variation margin payments, if owed by the defaulter, or just after any variation margin payments have been paid, if owed to the defaulter. The stress tests thereby maximise the potential liquidity required under each stress-test scenario. The results of the liquidity stress tests (the DLRs) are compared to the CCP's AFR. For ASX Clear (Futures), the AFR is currently set at $370 million and is met by liquid assets held in respect of ASX Clear (Futures)' pre-funded risk resources. A stress-test result above the AFR for three consecutive trading days is considered a breach of the AFR and triggers a review of the adequacy of the AFR. Such a review takes into account the outcome of the capital stress tests, as any AIM calls will provide extra liquidity.

iii. Loss sharing

This section of the Measure applies to arrangements where participants commit to meet any settlement shortfall. It does not require that a facility has loss-sharing arrangements in place, but where they exist they should be documented, legally enforceable and acknowledged by all participants in the CCP. 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 of this Measure). This is not an open-ended commitment and therefore 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.

Ultimate responsibility for the control of the financial risks faced by ASX Clear (Futures) lies with the ASX Limited Board and the ASX Clear (Futures) Board. The ASX Limited Board, which is accountable to ASX shareholders, is responsible for overseeing the processes for identifying significant risks to ASX and ensuring that appropriate and adequate control, monitoring and reporting mechanisms are in place. In addition, the ASX Limited Board assigns certain responsibilities to the ASX Clear (Futures) Board (as specified in the ASX Limited Board Charter), including the management of ASX Clear (Futures)' clearing and settlement risk, and its compliance with the FSS.

The ASX Limited Board Charter also places requirements on the Board structure, including that the majority of members and the Chair of the ASX Limited Board be independent (defined as being free of business or other relationships that could interfere with independent exercise of judgement). There are currently eight members of the ASX Limited Board, comprising the ASX CEO and seven independent, non-executive directors. The ASX Limited Board appoints the members of the ASX Clear (Futures) Board, with independent directors selected based on relevant skill and expertise. Currently, the ASX Clear (Futures) Board comprises one executive director (the ASX CEO) and six non-executive directors. Four of the non-executive directors are also members of the ASX Limited Board, while the remaining two, including the Chairman, are external directors appointed for their expertise in clearing and settlement matters. The other CS boards – ASX Clear, ASX Settlement and Austraclear – have the same directors and Chairman as the ASX Clear (Futures) Board. The ASX Limited Board Charter and the profiles of all board members are publicly available online.

The ASX Clear (Futures) Board meets between six and eight times each year, and receives detailed reports on ASX Clear (Futures)' business and operations, risk management and financial performance. It is responsible for approving capital, liquidity and stress-testing arrangements.

9. Operational risk

ASX Clear (Futures)' key operating 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) regularly performs external-penetration and vulnerability testing on SECUR. 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 audits
critical IT infrastructure is designed to ensure resilience against component failure, including full redundancy at the primary site
availability targets are documented and defined formally for critical services.

Notwithstanding these arrangements, should an infrastructure failure occur at the primary site, ASX Clear (Futures) policy requires that failover to the backup site should occur within one hour for all systems, or two hours in the event that there is also an application and/or data problem. ASX Clear (Futures) views these failover targets as conservative. Actual failover times will vary according to the system component affected and the nature of the problem; for example, the front-end servers that communicate with participants' systems run in active-active mode and are designed to fail over automatically.

Over the 2011/12 Assessment period, SECUR was available 100 per cent of the time. The availability target for SECUR is 99.8 per cent of the time.

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 resources 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 18 per cent, while peak utilisation was 27 per cent. ASX continues to monitor the capacity of SECUR to ensure peak utilisation does not exceed its minimum capacity headroom target of 50 per cent of total capacity. In the 2011/12 Assessment period, ASX increased the capacity of the SECUR system.

ASX Clear (Futures) has arrangements in place to ensure that changes to SECUR and supporting infrastructure do not disrupt its normal operations. ASX Clear (Futures) operates a separate test environment for SECUR and has a formal, documented change-management process. It also follows defined procedures for communicating with participants and vendors around technology-upgrade releases, which includes regular notices to participants of upcoming changes. These procedures were reviewed and updated in the 2011/12 Assessment period.

ASX Clear (Futures) also has arrangements in place to ensure that 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 Clear (Futures) 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 updated periodically. The risk that an operational incident at the main site disrupts SECUR is mitigated through maintenance of a backup site. In early 2012, ASX completed the migration of all core systems to its new operations centre, which is now its primary site for IT infrastructure (ASX's Bridge St office remains its primary site for staff).

ASX Clear (Futures) employs a variety of technologies to ensure a high degree of redundancy in its systems – both across sites and within a single site. All core systems employ multiple servers with spare capacity. Front-end servers handling communications with participants are configured to provide automatic failover across sites. Failover of the more critical data servers will generally take place within an hour under the control of management; however, the disruption to participants in such a case is reduced due to the high degree of redundancy in the front-end system components, which in most circumstances will maintain communications with external systems and queue transactions until the data servers are reactivated. The integrity of transactions is ensured by queuing messages until they can be processed; storing all transactions in the database with unique identifiers, thereby preventing the loss or duplication of transactions; and synchronised replication of database records across both sites. Furthermore, in the event that a significant part of a system or an operational site fails, ASX Clear (Futures) has contingency arrangements to activate an additional tier of redundancy arrangements (either by converting test systems into production systems or rebuilding systems from readily available hardware) within 24 hours to meet the contingency of any further service interruption.

To facilitate rapid recovery in the event of an operational disruption, ASX Clear (Futures) is gradually increasing the number of operational staff based at the operations centre (which is the backup site for staff), and plans to have around 30 per cent of operational staff located there by early 2013. In case of a disruption to staffing arrangements at the Bridge St office, the operations centre has capacity to house 65 per cent of all operational staff.

ASX Clear (Futures) regularly tests business continuity 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. 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.

ASX Clear (Futures)' Operating Rules and Procedures require participants to maintain adequate business continuity arrangements to allow the recovery of usual operations within one to two hours following a contingency event. If a participant fails to do so, ASX Clear (Futures) may impose sanctions. Spot checks of participants' business continuity management are triggered if a participant has been experiencing operational problems. These include examination of governance and processes.

iii. Outsourcing

All ASX Clear (Futures) operational functions are performed within ASX. 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. Since mid 2008, ASX Clear (Futures) has been responsible for first- and second-level operational support of SECUR. This includes business continuity arrangements and computer-system support not involving changes to system components or underlying source code. Previously, these high-levels of support were provided by NASDAQ OMX, which continues to provide third-level and software support under an agreement that extends beyond 2013.

iv. External administration of a related body

Within the ASX structure, most operational resources are provided by ASX Operations, a subsidiary of ASX Limited. In the event that ASX Operations 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 (to the extent permissible by law).

10. Regulatory reporting

ASX Clear (Futures), as a CS facility licensee, is required to meet certain reporting obligations to the Bank under the FSS for CCPs. These obligations include the reporting of breaches of the FSS; the failure of a participant to fulfil the CCP's risk-control requirements; and the CCP'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.

A2. Financial Stability Standard for Securities Settlement Facilities

In assessing whether a facility has met the Financial Stability Standard for Securities Settlement Facilities the Bank considers a number of measures. The full text of these measures and associated guidance is available on the Bank's website. The following provides a summary of the information the Bank has used to assess ASX Settlement and Austraclear against each of these measures. This updates the information presented in the Bank's 2010/11 Assessment for material changes in policies and procedures over 2011/12.

A2.1 ASX Settlement

ASX Settlement is a wholly owned subsidiary of ASX Settlement Corporations Limited, itself a wholly owned subsidiary of ASX Limited. It is a securities settlement facility (SSF) that provides settlement services for the ASX market and for AMOs, such as Chi-X, which began trading on 31 October 2011. Over the Assessment period, ASX Settlement implemented a DvP service for a small number of transactions undertaken on other markets that provide a platform for trading securities that are not listed on the ASX market. This service is an alternative to the transfer service previously offered to these AMOs. The National Stock Exchange of Australia now settles its transactions through this DvP service.

1. Legal framework

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

The legal basis for ASX Settlement's operations is set out in the ASX Settlement 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, as well as between each of the participants. 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 undertaken by ASX Settlement with respect to its participants' obligations has 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 Payment 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:

(a) be based on objective and publicly disclosed criteria;

ASX Settlement has objective and transparent participation requirements, which are publicly available and form part of its 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 136 participants as at end June 2012.

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

ASX Settlement's participation requirements address financial and business integrity issues, as well as operational and technical matters. ASX monitors participants' operational processing performance. The monitoring, assessment and investigation of matters relating to financial requirements is dealt with by ASX Compliance, a separate subsidiary within ASX, which has its own Board.

A settlement participant must post a settlement bond of $500,000, unless: it is subject to prudential supervision as an ADI; is an approved clearing facility or an AMO under ASX Settlement Operating Rules and Procedures; is a CS facility that complies with the FSSs; or only acts as a Participant Bidder in a takeover. In addition, a sponsoring participant (i.e. a participant that also acts in ASX Settlement on behalf of non-participants) that is not covered by the National Guarantee Fund 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 of the rules or other offence committed by the participant.

(c) 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 Procedures, or where a Payment Provider fails to authorise a participant's payment for interbank settlement. During the 2011/12 Assessment period, ASX Settlement suspended one participant following an event of default.

ASX Settlement also levies fees on a participant that fails to meet its settlement obligations on a timely basis. The fee is 0.1 per cent of the value of the settlement obligation, but with a minimum and maximum fee of $100 and $5,000, respectively. Participants are also required to close out any positions remaining unsettled on the fifth day after the trade date (i.e. two days after the scheduled settlement date). ASX Settlement also routinely benchmarks participants' settlement performance. Under this regime, a participant's compliance unit receives a ranking of its settlement performance (based on the value of its trades that 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 on the ASX website. The Operating 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.

A variation to this measure of the Standard in February 2009 requires a licensed CS facility as operator of a SSF to make publicly available any relevant information on settlement activity. Since November 2009, settlement participants ‘tag’ securities-lending-related settlement instructions submitted to CHESS and, from December 2009, participants disclose outstanding positions, both borrowed and lent. ASX publishes 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:

(a) 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;

Securities are dematerialised (electronic) 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.

(b) 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 electronic book entry. Settlement occurs via a DvP model 3 process in a daily scheduled batch settlement cycle (see Measure 5). The ASX Settlement Operating Rules and Procedures also provide for the transfer of securities free-of-payment, where required.

(c) 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; these assets are 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.

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

(b) 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.

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

Settlement of securities transactions in ASX Settlement occurs on a DvP model 3 basis. 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 either the ASX or Chi-X markets, a trade-related instruction is sent to CHESS. At 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 2011/12, an average of around 80 per cent of the 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).

On the evening before settlement, 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 ESAs at the Bank and act on behalf of settlement participants. There were 14 Payment Providers operating in ASX Settlement as at 30 June 2012. Payment obligations are settled between Payment Providers in RITS as 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 ensured 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 (i.e. has a shortfall of funds). 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. Transactions unrelated to novated settlement obligations are typically backed out first.

In August 2012, ASX agreed an earlier deadline of 2.30 pm for Payment Providers to authorise or reject payment obligations on behalf of settlement participants. This change is effective from 10 September 2012. The earlier deadline maintains a maximum payment authorisation window of 90 minutes, with ASX Settlement having its cut-off for issuing payment notifications to Payment Providers brought forward to 1.00 pm (from 1.44 pm). In addition, a Payment Provider must inform ASX Settlement if it requires longer than 60 minutes to authorise a payment, providing details of the participant credit concerns that are delaying their decision. This improvement to the batch settlement process forms part of ASX's response to the Bank's Review of Settlement Practices for Australian Equities, which followed the significant delays to the completion of settlement in January 2008. Had such arrangements been in place in January 2008, decisions that ultimately resulted in the back out of the troubled participant's settlement obligations and the recalculation of the batch could have been accelerated, reducing the overall length of the settlement delay, and mitigating the uncertainty that affected the market at large.

As discussed in Section 5.3, during the Assessment period, ASX Settlement also developed two new services, which will settle in the CHESS batch: a DvP settlement service for non-ASX listed securities; and the ASX Managed Funds Service.

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:

(a) allow for the cancellation or suspension of a participant or a provider of cash settlement assets from the security settlement facility:

if the participant or provider of cash settlement assets is in external administration; or
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 ASX Settlement 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.

(b) 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 a participant to nominate a new Payment Provider if its current provider is subject to, or is reasonably likely to become subject to, external administration.

The ASX Settlement Operating Rules and Procedures provide for the removal of 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 operating system is CHESS.

i. Security and operational reliability

The security of the CHESS system is supported by access controls, restricting both physical and virtual access. The process to request access to systems is documented, monitored and formally audited. ASX Settlement performs external-penetration and vulnerability testing on CHESS. 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 that 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
availability targets are documented and defined formally for critical services.

Notwithstanding these arrangements, should an infrastructure failure occur at the primary site, ASX Settlement policy requires that failover to the backup site should occur within one hour for all systems, or two hours in the event that there is also an application and/or data problem. ASX Settlement views these failover targets as conservative. Actual failover times will vary according to the system component affected and the nature of the problem; for example, the front-end servers that communicate with participants' systems run in active-active mode and are designed to fail over automatically.

Over the 2011/12 Assessment period, CHESS exceeded its operational reliability target of 99.8 per cent. CHESS was available 99.98 per cent of the time, with two operational incidents occurring in the December 2011 quarter, although only one resulted in an outage for CHESS (see Section 5.3 for details).

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 resources to operate the settlement system during peak periods, including in the event of operational incidents or system failure. Average capacity utilisation of CHESS over the Assessment period was 13 per cent, while peak utilisation was 21 per cent. ASX continues to monitor the capacity of CHESS to ensure peak utilisation does not exceed its minimum capacity headroom target of 50 per cent of total capacity.

ASX Settlement has arrangements in place to ensure that changes to CHESS and supporting infrastructure do not disrupt its normal operations. ASX Settlement operates a separate test environment for CHESS and has a formal, documented change-management process. It also follows defined procedures for communicating with participants and vendors around technology-upgrade releases, which includes regular notices to participants of upcoming changes. These procedures were reviewed and updated in the 2011/12 Assessment period.

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 Settlement 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 procedures to respond to failures. These plans are updated periodically. The risk that an operational incident at the main site disrupts CHESS is mitigated through maintenance of a backup site. In early 2012, ASX completed the migration of all core systems to its new operations centre, which is now its primary site for IT infrastructure (ASX's Bridge St office remains its primary site for staff).

ASX Settlement employs a variety of technologies to ensure a high degree of redundancy in its systems – both across sites and within a single site. All core systems employ multiple servers with spare capacity. Front-end servers handling communications with participants are configured to provide automatic failover across sites. Failover of the more critical data servers will generally take place within an hour under the control of management; however, the disruption to participants in such a case is reduced due to the high degree of redundancy in the front-end system components, which in most circumstances will maintain communications with external systems and queue transactions until the data servers are reactivated. The integrity of transactions is ensured by queuing messages until they can be processed; storing all transactions in the database with unique identifiers, thereby preventing the loss or duplication of transactions; and synchronised replication of database records across both sites. Furthermore, in the event that a significant part of a system or an operational site fails, ASX Settlement has contingency arrangements to activate an additional tier of redundancy arrangements (either by converting test systems into production systems or rebuilding systems from readily available hardware) within 24 hours to meet the contingency of any further service interruption.

To facilitate rapid recovery in the event of an operational disruption, ASX Settlement is gradually increasing the number of operational staff based at the operations centre (which is the backup site for staff), and plans to have around 30 per cent of operational staff located there by early 2013. In case of a disruption to staffing arrangements at the Bridge St office, the operations centre has capacity to house 65 per cent of all operational staff.

ASX Settlement regularly tests business continuity 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.

ASX Settlement's Operating Rules and Procedures 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. Spot checks of participants' business continuity management are triggered if a participant has been experiencing operational problems. These include examination of governance and processes.

iii. Outsourcing

All operational functions are performed within ASX. 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 the Society for Worldwide Interbank Financial Telecommunication (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 structure, most operational resources are provided by ASX Operations, a subsidiary of ASX Limited. In the event that ASX Operations 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 (to the extent permissible by law).

8. Regulatory reporting

CS facility licensees are required to meet certain reporting obligations to the Bank under the FSS for SSFs. These obligations include: the reporting of breaches of the FSS; breaches of risk-control requirements; and quarterly financial results. ASX Settlement satisfied all reporting obligations during the Assessment period.

A2.2 Austraclear

Austraclear is a wholly owned subsidiary of ASX Settlement Corporations Limited, itself a wholly owned subsidiary of ASX Limited. It provides settlement services for debt securities and for derivatives traded on the ASX 24 and ASX markets.

1. Legal framework

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

The legal basis for Austraclear's operations is set out in the Austraclear Regulations and Procedures. Under section 822B of the Corporations Act, these rules have effect as a contract under seal between Austraclear and each of its participants, as well as between each of the participants. The Regulations and Procedures 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 ensured 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

(a) be based on objective and publicly disclosed criteria;

Austraclear has objective and transparent participation requirements, which are publicly available and form part of its 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. Austraclear had 747 participants as at end June 2012.

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

Austraclear's participation requirements address issues such as financial standing, business integrity and business continuity arrangements. ASX monitors participants' operational processing performance. The monitoring, assessment and investigation of matters relating to financial requirements is dealt with by ASX Compliance, a separate subsidiary within ASX, which has its own board.

Austraclear's Regulations and Procedures allow it to suspend or terminate a participant from its facility in the event of a breach of its Regulations. Austraclear suspended seven members during the Assessment period; at the end of June 2012, four participants remained on suspension, including the three MF Global subsidiaries.

3. Understanding risks

Austraclear's Regulations and Procedures are comprehensive and publicly available on the ASX website. 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

(a) 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 and Procedures identify title for three different classes of securities: paper securities; non-paper securities and euroentitlements; 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 and euroentitlements are electronic securities that are not registered within the Austraclear system. Non-paper securities include Commonwealth Government Securities, registrable state and semi-government securities, and corporate debt. Euroentitlements are claims to investment-grade AUD-denominated European securities that are deemed acceptable by Austraclear and are deposited in Austraclear's account at Clearstream Banking S.A. In the case of non-paper securities and euroentitlements, Austraclear holds title for the participant as nominee, while the participant retains beneficial title.

Dematerialised securities are electronic securities that 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’. This legal structure imposes rights and obligations that replicate the rights and obligations of a negotiable instrument.

(b) 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 electronic book entry. Paper securities are transferred through updates to participants' security records. Austraclear also uses ‘allonges’ which maintain the negotiability of paper securities. 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. Settlement occurs via a DvP process in real time (see Measure 5). The Austraclear Regulations and Procedures also provide for the transfer of securities free-of-payment, where required.

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

(a) 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 DvP model 1 basis. This involves the simultaneous transfer of cash and securities obligations between the buyer and seller on an item-by-item basis through the settlement cycle. Austraclear additionally provides for one-way cash transfers between participants, which are also settled on an item-by-item basis. Austraclear's Regulations and Procedures establish the basis for settlement of transactions entered into the system. By volume, DvP settlements accounted for around 54 per cent of total settlements during the Assessment period, and one-way cash transfers account for around 46 per cent. There was also a small number of free-of-payment securities transfers – less than 1 per cent of total volumes. By value, however, DvP payments predominate, accounting for 76 per cent of total transfers in the year to end June 2012.

(b) 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.

Austraclear settlement participants must either be a Participating Bank or appoint a Participating Bank to meet payment obligations in central bank money. 60 Participating Banks were operating in Austraclear and held ESAs at the Bank as at 30 June 2012. Settlement of payment obligations occurs between Participating Banks across ESAs on an RTGS basis without credit risk. Simultaneously, DvP settlement between settlement participants of cash and securities obligations occurs within Austraclear.

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

The finality of Austraclear's settlement process is ensured 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

(a) allow for the cancellation or suspension of a participant or a provider of cash settlement assets from the security settlement facility:

if the participant or provider of cash settlement assets is in external administration; or
if there is a reasonable suspicion of external administration; and

Austraclear's Regulations and Procedures 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 and Procedures on a participant changing its Participating Bank, including the case where that participant bank is insolvent.

7. Operational risk

Austraclear's key operating system is EXIGO. As a feeder system to Australia's RTGS system, RITS, and as a systemically important system, Austraclear's system architecture is required to be equivalently operationally robust to that of RITS.

i. Security and operational reliability

The security of the EXIGO system is supported by access controls, restricting both physical and virtual access. The process to request access to systems is documented, monitored and formally audited. Austraclear performs external-penetration and vulnerability testing on EXIGO. 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.

Austraclear has a number of arrangements in place to ensure that EXIGO 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
availability targets are documented and defined formally for critical services.

Notwithstanding these arrangements, should an infrastructure failure occur at the primary site, Austraclear policy requires that failover to the backup site should occur within one hour for all systems, or two hours in the event that there is also an application and/or data problem. Austraclear views these failover targets as conservative. Actual failover times will vary according to the system component affected and the nature of the problem; for example, the front-end servers that communicate with participants' systems run in active-active mode and are designed to fail over automatically.

During the Assessment period, EXIGO was available for 99.9 per cent of the required time. This met the availability target stipulated in Austraclear's ‘Step-in and Service Agreement’ with the Bank. As outlined in Section 5.4 of this Assessment, there were several operational incidents during the Assessment period, including a 4-hour outage on 10 October 2011 following the upgrade to Release III of Austraclear; and a disruption affecting access to the system for some participants on 13 and 14 February 2012, which followed the system move to the new primary site. In the latter incident, participants were for a short time unable to access Austraclear through the Austraclear National Network Infrastructure, but participants connecting through the internet were unaffected; a temporary fix was established and there was no need to extend the settlement session. In relation to these incidents, the Bank is satisfied with both Austraclear's immediate responses and the follow-up action taken to prevent recurrence. In particular, Austraclear's project to take over software development of EXIGO will allow it to make improvements, in the longer term, to the stability of the EXIGO system.

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 but is no longer developing new versions of the software. In 2011/12, Austraclear launched a project to take over all software support for EXIGO, including future software development. The project will be undertaken with the assistance of NASDAQ OMX. This project will reduce Austraclear's operational reliance on external suppliers and also allow Austraclear to undertake development to simplify the system architecture – enhancing the robustness of the EXIGO software. Accordingly, the Bank sees this work as an important improvement in security and operational reliability. In 2011/12, Austraclear also installed Release III of EXIGO, which introduced additional user functionality, including support for additional SWIFT message types and new reports.

Average capacity utilisation for EXIGO was 23 per cent during the Assessment period, and peak capacity utilisation was 33 per cent. ASX continues to monitor the capacity of EXIGO to ensure peak utilisation does not exceed its minimum capacity headroom target of 50 per cent of total capacity. In the 2011/12 Assessment period, ASX successfully tested EXIGO capacity headroom as part of the Release III upgrade.

Austraclear has arrangements in place to ensure that changes to EXIGO and supporting infrastructure do not disrupt its normal operations. Austraclear operates a separate test environment for EXIGO and has a formal, documented change-management process. It also follows defined procedures for communicating with participants and vendors around technology-upgrade releases, which includes regular notices to participants of upcoming changes. These procedures were reviewed and updated in the 2011/12 Assessment period.

ii. Business continuity procedures

Austraclear 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 procedures to respond to failures. These plans are updated periodically. The risk that an operational incident at the main site disrupts Austraclear is mitigated through maintenance of a backup site. In early 2012, ASX completed the migration of all core systems to its new operations centre, which is now its primary site for IT infrastructure (ASX's Bridge St office remains its primary site for staff).

Austraclear employs a variety of technologies to ensure a high degree of redundancy in its systems – both across sites and within a single site. All core systems employ multiple servers with spare capacity. Front-end servers handling communications with participants are configured to provide automatic failover across sites. Failover of the more critical data servers will generally take place within an hour under the control of management; however, the disruption to participants in such a case is reduced due to the high degree of redundancy in the front-end system components, which in most circumstances will maintain communications with external systems and queue transactions until the data servers are reactivated. The integrity of transactions is ensured by queuing messages until they can be processed; storing all transactions in the database with unique identifiers, thereby preventing the loss or duplication of transactions; and synchronised replication of database records across both sites. Furthermore, in the event that a significant part of a system or an operational site fails, Austraclear has contingency arrangements to activate an additional tier of redundancy arrangements (either by converting test systems into production systems or rebuilding systems from readily available hardware) within 24 hours to meet the contingency of any further service interruption.

To facilitate rapid recovery in the event of an operational disruption, Austraclear is gradually increasing the number of operational staff based at the operations centre (which is the backup site for staff), and plans to have around 30 per cent of operational staff located there by early 2013. In case of a disruption to staffing arrangements at the Bridge St office, the operations centre has capacity to house 65 per cent of all operational staff.

Austraclear regularly tests business continuity arrangements. Connectivity and procedural testing of the backup site are performed monthly by representatives from Austraclear. 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 February and March 2012. Test results are formally documented and reported to ASX senior management and are also made available to internal and external auditors. The adequacy of Austraclear's business continuity procedures is reviewed regularly, as part of broader reviews of Austraclear's operational-risk policy.

Austraclear's Operating Rules and Procedures 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, Austraclear may impose sanctions. Spot checks of participants' business continuity management are triggered if a participant has been experiencing operational problems. These include examination of governance and processes.

iii. Outsourcing

All operational functions are performed by ASX. 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 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

Austraclear, as a CS facility licensee, is required to meet certain reporting obligations to the Bank under the FSS for SSFs. These obligations include: the reporting of breaches of the FSS; breaches of risk-control requirements; and quarterly financial results. Austraclear satisfied all reporting obligations during the Assessment period.

Footnotes

Available at <http://www.rba.gov.au/payments-system/clearing-settlement/standards/>. [21]

Liquid capital is defined as the sum of core capital, cumulative preference shares, approved subordinated debt and revaluation reserves other than financial asset revaluation reserves, less excluded assets and excluded liabilities. [22]