2012/13 Assessment of ASX Clearing and Settlement Facilities B1.2 ASX Clear (Futures)
Standard 7: Liquidity Risk
A central counterparty should effectively measure, monitor and manage its liquidity risk. A central counterparty should maintain sufficient liquid resources in all relevant currencies to effect same-day and, where appropriate, intraday and multiday settlement of payment obligations with a high degree of confidence under a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would generate the largest aggregate liquidity obligation for the central counterparty in extreme but plausible market conditions.
Rating: Observed
ASX Clear (Futures) maintains a robust framework for managing its liquidity risk (CCP Standard 7.1). Under this framework, ASX Clear (Futures) provides participants with information to assist them in managing their liquidity needs and risks, and employs an experienced Portfolio Risk Manager to monitor and manage ASX Clear (Futures)' own settlement and funding flows (CCP Standard 7.2). ASX Clear (Futures) holds sufficient liquid resources to meet its payment obligations on time in the event that the participant with the largest payment obligation to the CCP was to default in the extreme but plausible scenarios envisaged in its stress tests (CCP Standards 7.3, 7.8). These liquid resources comprise a portfolio of high quality liquid assets managed by ASXCC on ASX Clear (Futures)' behalf, supported by procedures to ensure timely and reliable access to liquidity from the portfolio as required (CCP Standards 7.4, 7.6). To enhance its management of liquidity risk, ASX Clear (Futures) has access, via ASXCC's ESA, to Australian dollar liquidity from the Reserve Bank against eligible collateral (CCP Standard 7.7). In August 2013, ASX Clear (Futures) increased its financial resources to cover liquidity exposures to the largest two participants and their affiliates. This reflects the Bank's supplementary interpretation of CCP Standard 7.3, including the Bank's view that ASX Clear (Futures) is systemically important in multiple jurisdictions (see also Section 3.7).
The Bank also notes the following steps that ASX Clear (Futures) should take to strengthen its observance of CCP Standard 7:
- In order to meet the requirements of CCP Standard 7.9, which comes into effect on 31 March 2014, implement mechanisms consistent with forthcoming CPSS-IOSCO guidance on recovery planning that fully address any uncovered liquidity shortfalls in order to settle any payment obligations on a same-day basis.
Based on this information, and noting that CCP Standards 7.3 and 7.9 are not yet in force, the Bank's assessment is that ASX Clear (Futures) has observed the requirements of CCP Standard 7 during the 2012/13 Assessment period. ASX Clear (Futures)' arrangements to measure, monitor and manage its liquidity risk are described under the following sub-standards.
7.1 A central counterparty should have a robust framework to manage its liquidity risks from its participants, commercial bank money settlement agents, nostro agents, custodians, liquidity providers and other entities.
Sources of liquidity risk
The primary source of liquidity risk in ASX Clear (Futures) is the potential default of a participant with Australian dollar payment obligations to the CCP, on which the CCP may rely to make payments to other participants. These payment obligations to and from participants typically take the form of initial and variation margin, although they may also relate to the cash settlement of contracts. ASX Clear (Futures) does not rely on commercial bank money settlement agents, nostro agents, custodians or liquidity providers in meeting its Australian dollar payment obligations.
Managing liquidity risk
ASX Clear (Futures) minimises the size of its liquidity obligations to participants through daily (and in the case of significant market movements, intraday) settlement of variation margin. This prevents the build up of large (credit and) liquidity exposures. ASX Clear (Futures)' framework for managing its remaining liquidity risks involves the monitoring of liquidity exposures through daily stress testing (see CCP Standard 7.8) and the maintenance of sufficient liquid resources to be able to meet payment obligations in the event of a participant default (see CCP Standard 7.3).
ASX Clear (Futures) also provides participants with information to help them manage their liquidity needs and risks, which in turn protects the CCP. Participants are provided with sufficient information to understand their intraday margin call obligations, and replicate stress test outcomes. ASX publishes a daily CME SPAN margin parameter file that allows participants to estimate payment obligations associated with margin requirements for actual or hypothetical portfolios. ASX provides advance warnings and communications in respect of calls for additional margin, and margin rate changes. For example, participants are notified if their stress-testing results approach their STELs. Additionally, ASX works closely with participants where new obligations are likely to affect their liquidity needs; for example, conducting educational workshops for the introduction of CME SPAN.
7.2 A central counterparty should have effective operational and analytical tools to identify, measure and monitor its settlement and funding flows on an ongoing and timely basis, including its use of intraday liquidity.
Daily cash flows and investment of funds across the ASX CCPs are monitored and managed by an experienced Portfolio Risk Manager. In addition, the CRM unit reviews a daily report of key risk indicators that encompasses liquidity measures, with any issues being escalated to the CRO. Funding arrangements, such as settlement flows and foreign currency lodgements, are also monitored in real time by the CRM and Treasury functions. Portfolio Risk Management uses reports provided by CRM to monitor CME SPAN-calculated margin flows originating from ASX Clear (Futures)' Collateral Management System, which feed into ASX's Treasury Management System. Portfolio Risk Management inputs required deals to manage cash-flow movements in the Treasury Management System, which are accessed by Clearing and Settlement Operations via daily settlement reports. These reports are used to generate settlement instructions in Austraclear. Cash flow movements are monitored in RITS. Margin payments from participants must be matched in Austraclear by 10.30 am and settled by 11.00 am, while payments to participants are manually managed in the RITS queue, and are only released once all margin obligations have been settled (generally by 12.00 pm).
ASX Clear (Futures) mitigates potential liquidity risks in several ways. The bulk of ASX Clear (Futures)' pooled financial resources are prefunded (see CCP Standard 12). ASX Clear (Futures) does not include promissory commitments in its liquidity calculations, including in its stress tests, in recognition of the potential delay in receipt of these resources.
ASX Clear (Futures)' liquid assets are invested and managed on its behalf by ASXCC (see ‘ASX Group Structure’ in Appendix B). ASXCC's Investment Mandate establishes a clear definition of liquid assets: liquid assets must be available for use within two hours and held in the form of either a restricted set of highly liquid securities or securities eligible for repurchase with the Reserve Bank (see CCP Standard 7.4).
7.3 A central counterparty should maintain sufficient liquid resources in all relevant currencies to settle securities-related payments, make required variation margin payments and meet other payment obligations on time with a high degree of confidence under a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would generate the largest aggregate payment obligation to the central counterparty in extreme but plausible market conditions. In addition, a central counterparty that is involved in activities with a more complex risk profile or that is systemically important in multiple jurisdictions should consider maintaining additional liquidity resources sufficient to cover a wider range of potential stress scenarios that should include, but not be limited to, the default of the two participants and their affiliates that would generate the largest aggregate payment obligation to the central counterparty in extreme but plausible market conditions.
CCP Standard 7.3 comes into effect on 31 March 2014.
ASX Clear (Futures)' liquid resources include margin and other collateral posted by participants, as well as its own holdings of liquid assets. ASX Clear (Futures)' holdings of liquid assets and cash collateral posted by participants are invested on its behalf by ASXCC in accordance with its Investment Mandate. The ASXCC Investment Mandate requires that ASX hold liquid assets sufficient to cover:
- The total available financial resources (AFR) across the ASX CCPs. The AFR for ASX Clear (Futures) is currently set at $550 million and is calibrated to cover the largest combined stressed liquidity exposures across any two participants (and their affiliates, although there are currently no affiliated participants in ASX Clear (Futures)). Prior to August 2013, ASX Clear (Futures)' AFR was $370 million, calibrated to cover the default of its single largest participant. ASX Clear (Futures)' AFR is expected to rise to $650 million once additional contributions to pooled financial resources have been received from OTC participants. The AFR for ASX Clear is $300 million (see Appendix B1.1, CCP Standard 7.3).
- An ‘ordinary liquidity requirement’, which is intended to cover day-to-day liquidity requirements, such as the return of margin to participants, and is specified as a percentage of the ASXCC portfolio. This is calibrated to the maximum margin outflow in normal market conditions over the last 12 months and is reviewed quarterly.
- An amount sufficient to cover the cash margin requirement of the largest participant of ASX Clear and the two largest participants of ASX Clear (Futures), based on the largest margin amounts held by participants over the previous quarter.
The requirement to cover the AFR across both CCPs takes a conservative approach in that it provides for the simultaneous default, under extreme but plausible market conditions, of the largest participant and its affiliates in ASX Clear and the two largest participants (and their affiliates) in ASX Clear (Futures). The latter requirement anticipates the Bank's supplementary interpretation of this sub-standard, which will require ASX Clear (Futures) to cover liquidity exposures to the two largest participants and their affiliates from 31 March 2014 (see Section 3.7).
7.4 For the purpose of meeting its minimum liquid resource requirement, a central counterparty's qualifying liquid resources in each currency include cash at the central bank of issue and at creditworthy commercial banks, committed lines of credit, committed foreign exchange swaps and committed repos, as well as highly marketable collateral held in custody and investments that are readily available and convertible into cash with prearranged and highly reliable funding arrangements, even in extreme but plausible market conditions. If a central counterparty has access to routine credit at the central bank of issue, the central counterparty may count such access as part of the minimum requirement to the extent it has collateral that is eligible for pledging to (or for conducting other appropriate forms of transactions with) the relevant central bank. All such resources should be available when needed.
ASXCC holds an ESA at the Bank to facilitate money settlements on behalf of ASX Clear (Futures) (and ASX Clear) (see CCP Standard 7.7). As an ESA holder, ASXCC is eligible for access to Australian dollar liquidity under the Bank's overnight and intraday liquidity facilities (against eligible collateral within its investment portfolio), including in times of market stress.
The ASXCC Investment Mandate requires the Portfolio Risk Manager to maintain high-quality liquid assets to meet ASX Clear (Futures)' minimum liquidity requirements, consistent with the definition of qualifying liquid assets under this standard. Liquid assets must be available for use within two hours and held in securities eligible for repurchase transactions with the Bank. Investments held in the form of bank bills, negotiable certificates of deposit and floating rate notes issued by approved counterparties or obligors are required to be tradable on a robust secondary market. Over the Assessment period, term deposits averaged just over 40 per cent of the ASXCC investment portfolio, at-call deposits around 30 per cent, with holdings of other approved securities making up the balance. Eligible investment counterparties are discussed under CCP Standard 15.
7.5 A central counterparty may supplement its qualifying liquid resources with other forms of liquid resources. If the central counterparty does so, these liquid resources should be in the form of assets that are likely to be saleable or acceptable as collateral for lines of credit, swaps or repos on an ad hoc basis following a default, even if this cannot be reliably prearranged or guaranteed in extreme market conditions. Even if a central counterparty does not have access to routine central bank credit, it should still take account of what collateral is typically accepted by the relevant central bank, as such assets may be more likely to be liquid in stressed circumstances. A central counterparty should not assume the availability of emergency central bank credit as part of its liquidity plan.
ASX Clear (Futures) does not supplement its qualifying liquid resources with other forms of liquid resources.
7.6 A central counterparty should obtain a high degree of confidence, through rigorous due diligence, that each provider of its minimum required qualifying liquid resources, whether a participant of the central counterparty or an external party, has sufficient information to understand and to manage its associated liquidity risks, and that it has the capacity to perform as required under its commitment. Where relevant to assessing a liquidity provider's performance reliability with respect to a particular currency, a liquidity provider's potential access to credit from the central bank of issue may be taken into account. A central counterparty should regularly test its procedures for accessing its liquid resources at a liquidity provider.
The Portfolio Risk Manager, in consultation with the CRO, is responsible for the provision of timely liquidity to fund margin and settlement obligations to non-defaulting participants. The Default Management Framework (see CCP Standard 12.1) covers liquidation of participant non-cash collateral, as well as the liquidation of treasury investments representing participant cash collateral and other prefunded financial resources. While the order of use of particular collateral types will depend on the particular circumstances, a typical order of use may be cash first, followed by other non-cash collateral. The order of liquidation of non-cash collateral to meet funding requirements will depend on factors such as prevailing market conditions, liquidity needs and the amount of funds required relative to the size of each collateral lodgement. Procedures for dealing with liquid assets in the treasury investment portfolio are documented, and are available for Portfolio Risk Management staff at both primary and backup sites.
7.7 A central counterparty with access to central bank accounts, payment services or securities services should use these services, where practical, to enhance its management of liquidity risk. A central counterparty that the Reserve Bank determines to be systemically important in Australia and has obligations in Australian dollars should operate its own Exchange Settlement Account, in its own name or that of a related body corporate acceptable to the Reserve Bank, to enhance its management of Australian dollar liquidity risk.
ASXCC holds an ESA, making it eligible for access to Australian dollar liquidity under the Bank's overnight and intraday liquidity facilities (against eligible collateral). Updates to its Investment Mandate in 2012/13 clarified ASXCC's ability to make use of these services, by specifying the list of securities (from the Bank's approved list) available for repurchase, including the securities of the Commonwealth, certain states and major banks (CCP Standard 15).
ASX Clear (Futures) uses ASXCC's ESA to settle its AUD margin and cash settlement obligations in RITS (see also CCP Standard 9).
7.8 A central counterparty should determine the amount and regularly test the sufficiency of its liquid resources through rigorous stress testing. A central counterparty should have clear procedures to report the results of its stress tests to appropriate decision-makers at the central counterparty and to use these results to evaluate the adequacy of, and adjust, its liquidity risk management framework. In conducting stress testing, a central counterparty should consider a wide range of relevant scenarios. Scenarios should include relevant peak historic price volatilities, shifts in other market factors such as price determinants and yield curves, multiple defaults over various time horizons, simultaneous pressures in funding and asset markets, and a spectrum of forward-looking stress scenarios in a variety of extreme but plausible market conditions. Scenarios should also take into account the design and operation of the central counterparty, include all entities that might pose material liquidity risks to the central counterparty (such as commercial bank money settlement agents, nostro agents, custodians, liquidity providers and linked FMIs) and, where appropriate, cover a multiday period. In all cases, a central counterparty should document its supporting rationale for, and should have appropriate governance arrangements relating to, the amount and form of total liquid resources it maintains.
ASX Clear (Futures) uses a daily liquidity stress-testing model to assess the adequacy of its liquidity arrangements. Until August 2013, the model, which is based on ASX Clear (Futures)' capital stress tests (described under CCP Standard 4), calculated the maximum liquid funds that ASX Clear (Futures) would need to access in order to meet obligations arising in the event of the joint default of a clearing participant and its affiliates. Since there were no affiliated participants in ASX Clear (Futures) during the Assessment period, liquidity stress tests addressed scenarios involving an individual default. However, further to the introduction of the OTC derivatives clearing service, ASX Clear (Futures) adjusted its liquidity stress tests in August 2013 to take into account potential affiliations between participants involved in OTC and futures clearing. At the same time, the liquidity stress tests formally adopted the more stringent requirement of testing the sufficiency of liquid resources against the joint default of the two participants (plus affiliates) that would create the largest liquidity exposure for ASX Clear (Futures). 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 calculate the worst-case liquidity requirement under each stress-test scenario.
All stress-test scenarios are based on historical moves and have been set so that they replicate extreme market moves which have a probability of occurrence of once in 30 years for single-asset scenarios and once in 100 years for multi-asset scenarios (see CCP Standard 4.6). There are 30 scenarios involving movements of price and volatility across the four major contracts (SPI 200 futures, 90-day bank accepted bill futures, 3-year bond futures, and 10-year bond futures). Twenty multi-asset scenarios model balanced movements of each of the four major contracts, as well as a range of tilts, twists and bends of the yield curve. Eight ‘single contract’ scenarios model extreme movements in the four contracts individually. Two ‘internal’ scenarios that model large movements in the interest rate contracts with little impact on equities are used for internal risk analysis only.
The results of the liquidity stress tests give a ‘default liquidity requirement’ (DLR), which is compared with ASX Clear (Futures)' AFR (set to $370 million during the Assessment period). A stress-test result above the AFR for three consecutive trading days is considered a breach of the AFR and triggers a detailed investigation into the breach. When assessing the materiality of a liquidity stress-test breach, the CCPs will consider contributing and mitigating factors, such as changes in the ICR of the participant, atypical trading activity, and any AIM that is being held. In order to test the sufficiency of ASX's overall liquid resources, the results of liquidity stress testing are also aggregated across both CCPs to calculate the worst-case aggregated DLR.
The results of liquidity stress testing are regularly reported to ASX senior management, the CS Boards and the Bank. All liquidity stress-test breaches are reported to the CRO, the General Manager of Clearing Risk Policy, and the Portfolio Risk Manager. A sustained or widely distributed breach may lead to a review of the adequacy of the AFR.
7.9 A central counterparty should establish explicit rules and procedures that enable the central counterparty to effect same-day and, where appropriate, intraday and multiday settlement of payment obligations on time following any individual or combined default among its participants. These rules and procedures should address unforeseen and potentially uncovered liquidity shortfalls and should aim to avoid unwinding, revoking or delaying the same-day settlement of payment obligations. These rules and procedures should also indicate the central counterparty's process to replenish any liquidity resources it may employ during a stress event, so that it can continue to operate in a safe and sound manner.
CCP Standard 7.9 comes into effect on 31 March 2014. Following the release of finalised CPSS-IOSCO guidance on recovery planning, expected in late 2013, ASX Clear (Futures) will be considering arrangements to ensure settlement of payment obligations can be achieved on time in circumstances where its liquid resources under CCP Standard 7.3 have been exhausted.