2012/13 Assessment of ASX Clearing and Settlement Facilities B1.1 ASX Clear

Standard 17: Access and Participation Requirements

A central counterparty should have objective, risk-based and publicly disclosed criteria for participation, which permit fair and open access.

Rating: Observed

ASX Clear has objective and transparent participation requirements set out in its Operating Rules and Procedures (CCP Standard 17.1). These requirements include minimum capital and other financial requirements, as well as operational and risk management arrangements that are tailored to the specific activities of ASX Clear (CCP Standard 17.2). ASX Clear monitors participants' compliance with requirements on an ongoing basis, and has the authority to suspend or terminate participation, or take other disciplinary or remedial action in the event of a breach of these requirements (CCP Standard 17.3).

In order to strengthen its observance of CCP Standard 17, ASX Clear is encouraged to carry out the planned review of risk-based capital requirements for participants (CCP Standard 17.2).

Based on this information, the Bank's assessment is that ASX Clear has observed the requirements of CCP Standard 17 during the 2012/13 Assessment period. ASX Clear's access and participation requirements are described in further detail under the following sub-standards.

17.1 A central counterparty should allow for fair and open access to its services, including by direct and, where relevant, indirect participants and other FMIs, based on reasonable risk-related participation requirements.

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

At the end of June 2013, ASX Clear had 40 participants (excluding inactive participants) – 11 of these were participants that offer clearing services to related entities or third parties.

17.2 A central counterparty's participation requirements should be justified in terms of the safety of the central counterparty and the markets it serves, be tailored to and commensurate with the central counterparty's specific risks, and be publicly disclosed. Subject to maintaining acceptable risk control standards, a central counterparty should endeavour to set requirements that have the least restrictive impact on access that circumstances permit.

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 and capabilities, business continuity arrangements, and risk and liquidity management arrangements.

Participants are required to comply with a risk-based capital regime under which participants must hold ‘liquid capital’ in excess of a ‘total risk requirement’.^[1] 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 (see CCP Standard 18). Currently, Direct Participants that do not clear for other brokers must maintain a minimum of $5 million in ‘core capital’.^[2] ASX Clear requires that General Participants maintain a higher level of capital, currently $20 million. ASX management has discretion to impose a higher requirement. Participants that only clear futures may elect to be covered by an alternative capital regime, either on a net tangible asset (NTA) requirement or compliance with the regime of a prudential supervisor. Since August 2013, the alternative of compliance with the regime of a prudential supervisor has been extended to participants undertaking clearing activities for all products in ASX Clear. At the end of the Assessment period all but two of ASX Clear's 40 participants were subject to the risk-based regime, with one participant making use of each of the alternative regimes.

Several aspects of ASX Clear's capital requirements have recently been or are currently subject to review:

• As noted above, ASX Clear's Operating Rules were amended in August 2013 to allow participants undertaking the full range of clearing activities in ASX Clear to be comply with capital requirements via their compliance with the regime of a prudential supervisor. These rule changes were designed to enable ADIs to fully participate in clearing activities at ASX Clear.
• In the second half of 2013, ASX plans to consult with participants and other stakeholders on proposed changes to participation requirements across the two CCPs to achieve greater consistency. This will include consultation on whether to implement a further increase in ‘core capital’ requirements for Direct Participants in ASX Clear to $10 million.
• Also in the second half of 2013, ASX will be reviewing the risk-based capital regime that applies to most participants in ASX Clear. This review will address the continued need to calculate a risk-based formula for capital requirements, in light of the increase in NTA requirements in recent years, and to consider the appropriateness of such a formula in quantifying the risks generated by the activities of larger participants. Irrespective of the review's conclusions, consideration will need to be given to how information gathered by ASX in order to monitor compliance with the risk-based capital regime, and which may be useful for broader risk-monitoring purposes, can be retained.

Under the Operating Rules and Procedures, a potential participant must satisfy ASX Clear that it has (or will have) the relevant managerial, operational and financial capacity and appropriate complementary business continuity arrangements in place to enable it to meet its ongoing obligations. A participant must also demonstrate that it has the capacity to make an immediate transfer of funds, on demand, should this be required to meet its obligations.

17.3 A central counterparty should monitor compliance with its participation requirements on an ongoing basis and have clearly defined and publicly disclosed procedures for facilitating the suspension and orderly exit of a participant that breaches, or no longer meets, the participation requirements.

The CRM unit, which covers both CCPs and reports to the CRO, is responsible for risk management in respect of clearing participants. CRM monitors day-to-day developments regarding, among other things, financial requirements, risk profiles, open positions and settlement obligations to the CCPs. Within CRM, the Counterparty Risk Assessment team 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. 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, and coordinating a ‘watch list’ of participants deemed to warrant more intensive monitoring (see CCP Standard 4.1). In addition Operations and Compliance perform regular and ad hoc compliance monitoring activities.

ASX Clear has wideranging powers to sanction its participants in order to preserve the integrity of the CCP. ASX Clear may restrict, suspend or terminate a participant's authority to clear some or 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 effect on the CCP. The action taken will depend on a number of factors, including the materiality of the incident, the participant's financial and operational capacity as well as the participant's history of compliance. 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. Significant breaches are also referred to ASIC and, depending on the nature of the breach, may be investigated by the Executive Office of ASX Compliance for formal disciplinary action. An example of steps taken by ASX Clear to sanction a participant that was unable to meet a CAC call is described under CCP Standard 4.3.

Footnotes

‘Liquid capital’ is defined by ASX to comprise total tangible shareholders' funds held in liquid assets, net of any guarantees and indemnities. [1]

‘Core capital’ is defined by ASX to be the sum of: all paid-up ordinary share capital; all non-cumulative preference shares; all reserves, excluding revaluation reserves; and opening retained profits/losses, adjusted for current year movements. [2]