2012/13 Assessment of ASX Clearing and Settlement Facilities B2.2: Austraclear
Standard 2: Governance
A securities settlement facility should have governance arrangements that are clear and transparent, promote the safety of the securities settlement facility, and support the stability of the broader financial system, other relevant public interest considerations and the objectives of relevant stakeholders.
Rating: Observed
Austraclear pursues objectives that place a high priority on risk management, through compliance with relevant Financial Stability Standards (FSS) and the broader Corporations Act requirement to do all other things necessary to reduce systemic risk. Austraclear also acknowledges public policy objectives directed at financial market and payments system integrity, as well as the interests of customers and other stakeholders (SSF Standard 2.1). Austraclear's governance arrangements are documented and publicly disclosed. These arrangements give ultimate responsibility for the oversight of operations and risk management of Austraclear to the ASX Limited Board and the Austraclear Board (see ‘ASX Group Structure’ in Appendix B). Board and committee charters document Board roles and lines of responsibility and accountability (SSF Standards 2.2, 2.3). The performance of each relevant Board is reviewed at least annually for both individual directors and the Board as a whole. The relevant Boards each include a majority of independent non-executive directors and the Austraclear Board includes directors appointed for their expertise in clearing and settlement matters (SSF Standard 2.4). Board remuneration is designed to attract and retain appropriately skilled and qualified directors.
The reporting lines of management are set out in the CS Boards' Charter, along with roles and responsibilities of key management personnel. Remuneration of senior management in risk management roles is structured to provide appropriate incentives for sound and effective risk management (SSF Standard 2.5). ASX maintains a clear and documented risk management framework subject to regular internal and external review (SSF Standard 2.6). Key processes and internal controls are subject to review by ASX's Internal Audit unit, which is itself subject to periodic external review (SSF Standard 2.7). ASX utilises formal and informal consultation processes to ensure that the design and decisions of Austraclear reflect the interests of participants and other stakeholders (SSF Standard 2.8). ASX has conflict handling procedures in place to address potential conflicts of interest that may arise by virtue of its group structure, requiring staff and directors to act in the best interests of each facility as appropriate (SSF Standard 2.9). The Bank will continue to work with Austraclear to better understand these arrangements.
Based on this information, the Bank's assessment is that Austraclear has observed the requirements of SSF Standard 2 during the 2012/13 Assessment period. Details of Austraclear's governance arrangements are described under the following sub-standards.
2.1 A securities settlement facility should have objectives that place a high priority on the safety of the securities settlement facility and explicitly support the stability of the financial system and other relevant public interest considerations.
The high-level objectives of Austraclear are set out in the CS Boards' Charter, which is available on ASX's public website. The objectives place priority on the Boards' responsibilities in the area of risk management and, in particular, Austraclear's responsibility for complying with relevant FSS.
Austraclear's objectives recognise the public interest. These objectives are laid out generally in the ASX Limited Board Charter, which provides that the Board has a responsibility to oversee the conduct of the affairs of the ASX Group consistent with licence obligations, as well as public policy objectives directed at financial market and payments system integrity. The CS Boards' Charter also specifically acknowledges the Board's public interest responsibilities, as well as its obligations under Part 7.3 of the Corporations Act (dealing with licensing of CS facilities). These include that Austraclear, to the extent that it is reasonably practicable to do so, comply with relevant FSS and do all (other) things necessary to reduce systemic risk arising from its services, and that its services are provided in a fair and effective way.
To support the interests of its customers, ASX has developed a Customer Charter, which is referenced in the CS Boards' Charter. The Customer Charter commits that ASX: work with its customers to deliver products and services that meet their needs and provide them with choice; make its products and services available on a non-discriminatory basis and on reasonable commercial terms; and manage its businesses and operations on a commercial basis to benefit its customers and provide appropriate returns to ASX shareholders. The Customer Charter recognises ASX's role as a provider of critical financial infrastructure to the Australian financial markets and commits to make the necessary investments to ensure it can fulfil this role and provide confidence to market participants, investors and regulators.
Austraclear's governance arrangements allow for appropriate consideration of stakeholder views. When considering major operational or risk management changes, or new services, ASX uses stakeholder forums, and formal and informal consultation processes to communicate proposed changes to relevant stakeholders (see SSF Standard 2.8). Consultations and responses to consultations are made available on ASX's website. In addition, the ASX Group has disclosure obligations under the Corporations Act and Listing Rules which it manages in accordance with those laws and rules.
2.2 A securities settlement facility should have documented governance arrangements that provide clear and direct lines of responsibility and accountability. These arrangements should be disclosed to owners, the Reserve Bank and other relevant authorities, participants and, at a more general level, the public.
The governance arrangements of Austraclear are documented on its public website. This documentation includes the Charters of the ASX Limited Board, the CS Boards (including that of Austraclear), and other subsidiary boards and committees. The charter documents provide information about the role and composition of the CS Boards and Board committees, as well as the key senior managers of the settlement facilities; namely the Managing Director and CEO, and the Executive responsible for settlement risk. Profiles of CS facility directors are also publicly available online. Key governance policies and charters are reviewed regularly by the relevant boards and committees.
The ASX Limited Annual Report provides information about ASX Group's risk management arrangements, including the role of boards, key committees, key subsidiary boards (e.g. ASX Compliance) and the roles of senior group executives who report directly to the Managing Director and CEO. Explanatory documentation on the website also describes: the FSS and Principles for Financial Market Infrastructures (Principles) developed by the Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO); group and business structure, including an organisational chart showing senior group executives; risk management policies (in summary form); and details of business units, including those within Risk.[1]
Under the Corporations Act, ASX must notify ASIC as soon as practicable after a person becomes or ceases to become a director, secretary or senior manager of Austraclear, including when a person changes from one of those positions to another. Changes to senior risk management personnel are also notified to the Bank.
2.3 The roles and responsibilities of a securities settlement facility's board of directors (or equivalent) should be clearly specified, and there should be documented procedures for its functioning, including procedures to identify, address and manage member conflicts of interest. The board should regularly review both its overall performance and the performance of its individual board members.
Ultimate responsibility for the oversight of risks faced by Austraclear lies with the ASX Limited Board and the Austraclear Board. The ASX Limited Board is responsible for the overall business strategy of the ASX Group, and oversight of enterprise risk management policy. The ASX Limited Board Charter delegates certain responsibilities to the Austraclear Board, including the review and oversight of Austraclear's settlement-related risk, and its compliance with the FSS. The CS Boards' Charter elaborates on other roles and responsibilities of the Austraclear Board. The CS Boards' Charter places requirements on the structure of the CS Boards, including that the majority of directors and the Chair be independent.
Board performance is dealt with periodically in private session by the relevant boards. The process may be facilitated by external independent consultants. A number of tools are used, which may include private session review, skills matrices and surveys, and individual and externally facilitated group discussions. Details of Board performance reviews are set out in the ASX Limited Annual Report (the same process applies for the key subsidiary boards).
The CS Boards' Charter sets out how the Boards address directors' interests and potential conflicts. Directors of the CS Boards must disclose all material personal interests (such as shareholdings, directorships and consultancy arrangements) which may potentially conflict with their duties. If there is a change in a director's material personal interests, the director must notify that change at the next meeting of the CS Boards. If there is a real and sensible possibility of a conflict of interest and duty on a matter being voted on at a meeting of the CS Boards, the director must not be present for the discussion or vote related to that matter.
2.4 The board should comprise suitable members with the appropriate skills and incentives to fulfil its multiple roles. This typically requires the inclusion of non-executive board member(s).
The ASX Limited Board currently has nine members, comprising the ASX CEO and eight independent, non-executive directors. As set out in the CS Boards' Charter, the CS Boards, in consultation with the Nomination Committee and the ASX Limited Board, determine the composition of the CS Boards, with directors selected based on relevant skills and expertise. Currently, the Austraclear Board comprises one executive director (the ASX CEO) and seven non-executive directors. Four of the non-executive directors are also members of the ASX Limited Board, while the remaining three, including the Chairman, are external directors appointed for their expertise in clearing and settlement operational and risk management matters. This ensures that directors have the capacity to conduct informed independent review of relevant issues. The other CS Boards – ASX Clear, ASX Clear (Futures) and ASX Settlement – have the same directors as the Austraclear Board. The Austraclear Board meets regularly (six times in the Assessment period) and receives detailed reports on Austraclear's business and operations, risk management and financial performance.
ASX has adopted a policy that the majority of directors on each of its CS Boards must be independent. The Board Policy and Guideline to Relationships Affecting Independent Status is available on ASX's website. The independence of directors is assessed according to this policy, which is aligned to the ASX Corporate Governance Council's Corporate Governance Principles and Recommendations for listed companies. The policy requires, for example, that independent directors be free of business or other relationships that could interfere with the independent exercise of the director's judgement. Specifically considered is whether the director is a substantial shareholder of ASX, as well as whether in the last three years the director was previously employed by ASX or was an adviser to ASX. The biographies of the directors, which show their relationship with other ASX Group companies, are set out on ASX's website.
Selection, succession planning and training for ASX Limited and CS Board members are dealt with in private session by the Nomination Committee and Boards at appropriate intervals. New directors receive a comprehensive induction from Board and Nomination Committee members, as well as senior managers and other key staff. Directors' fees at both ASX Limited and Austraclear are considered by the ASX Limited Remuneration Committee, recognising the level of skill and expertise that a director must have to effectively meet its responsibilities. Remuneration of directors is determined in private session by the ASX Limited Board and the CS Boards at appropriate intervals. The ASX Limited Board reviews its fees regularly to ensure that ASX non-executive directors are remunerated fairly for their services, recognising the level of skill and experience required. It also reviews its fees to ensure that it has in place a fee scale that enables ASX to attract and retain appropriately skilled and qualified non-executive directors. Non-executive directors' fees are broadly aligned to the top quartile of the marketplace. In conducting a review, the Board takes advice from an external remuneration consultant. The process involves benchmarking against a group of peer companies. The last fee review was effective 1 July 2008.
2.5 The roles and responsibilities of management should be clearly specified. A securities settlement facility's management should have the appropriate experience, mix of skills and integrity necessary to effectively discharge its responsibilities for the operation and risk management of the securities settlement facility. Compensation arrangements should be structured in such a way as to promote the soundness and effectiveness of risk management.
ASX has clear and direct reporting lines between management and the CS Boards. This is set out in the CS Boards' Charter, along with the roles and responsibilities of the Managing Director and CEO, the Chief Risk Officer (CRO), and the Executive General Manager, Operations (EGM, Operations). The Managing Director and CEO has responsibility for the overall operational and business management and profit performance of ASX, while the EGM, Operations is responsible for the overall settlement risk management of the CS facilities and for ensuring that the SSFs meet regulatory obligations placed on them. The EGM, Operations has a direct reporting line to the CS Boards.
ASX has a comprehensive remuneration policy and performance management framework in place, which aims to ensure that management personnel have an appropriate mix of skills and experience to discharge their responsibilities. The ASX Limited Remuneration Committee has delegated responsibility from the ASX Limited Board to conduct detailed examination of matters including oversight of the remuneration and incentive framework, succession plans, recruitment, retention and termination strategies, and the remuneration of the Managing Director and CEO and ASX Group non-executive directors. The Committee members are appointed by the ASX Limited Board, and must consist of only non-executive directors, with at least three members, a majority of independent directors, and an independent chair who is not Chairman of ASX Limited. The Committee has direct access to ASX senior management and the authority to seek independent advice. The CS Boards have delegated responsibility to the Committee for compensation arrangements and performance management processes relating to the CRO and the EGM, Operations. The CS Boards provide input on the setting of Key Performance Indicators and performance outcomes for senior management responsible for clearing and settlement risks.
ASX carries out succession planning and management processes in order to ensure leadership continuity in key positions, and develop intellectual depth and business knowledge. This includes the biannual review of a ‘talent assessment tool’ by Group Executives and People and Development to identify and manage the development of high potential staff according to individual and business needs. Succession and contingency planning is conducted for Group Executives, General Managers and other key staff.
2.6 The board should establish a clear, documented risk management framework that includes the securities settlement facility's risk tolerance policy, assigns responsibilities and accountability for risk decisions, and addresses decision-making in crises and emergencies. Governance arrangements should ensure that the risk management and internal control functions have sufficient authority, independence, resources and access to the board, including through the maintenance of a separate and independent internal audit function.
ASX has a documented risk management framework, which is described under SSF Standard 3.1. The CS Boards are responsible for approving and reviewing high-level risk management policy relevant to clearing and settlement operations. The Boards approve all new clearing and settlement risk policies and standards, as well as material changes to existing clearing and settlement policies and standards. Board feedback is incorporated before risk policies and standards are approved.
Responsibilities under the high-level risk management policy are distributed as follows:
- Detailed reporting to the CS Boards occurs on a quarterly basis on the implementation of risk management policies and standards, and on broader management and operational matters. Internal Audit conducts a rotational risk-based audit program, which includes ensuring that relevant operational units comply with Board approved policies and standards, where necessary using external specialists to assist with reviews. The CS Boards may also request external reviews. ASX is currently formalising its Settlement Risk Policy Framework in order to establish a consistent structure for the development, governance and review of settlement risk policies and standards. The formalised Framework is expected to be presented to the CS Boards for approval by the end of 2013, with existing policies and standards to be formally documented within that Framework following Board approval.
- The Audit and Risk Committee has responsibility for the oversight of the enterprise risk framework.
- The Enterprise Risk Management Committee, comprising executives from across the business units, is responsible for enterprise risk management policy and reviewing controls, processes and procedures to identify and manage risks. This committee is also responsible for formally approving significant operational risk policies prepared by individual business units.
- Individual business units are responsible for: identifying business-specific risks; applying controls; maintaining risk-management systems; reporting on the effectiveness of risk controls; and implementing enhancements and taking remedial action as appropriate. Each business unit is required to maintain a record of its risk profile, reviewing this on a six-monthly basis and updating as appropriate. This record includes ‘Key Risk Indicators’ and action plans to address any identified risk that is not adequately mitigated. Policies are formally reviewed every 18 months to three years. More frequent reviews are undertaken where there are potential changes to technology, legal or regulatory requirements, or business drivers.
There are three functional units with at least some responsibility for settlement risk management: Clearing & Settlement Operations, Listings Operations and Participants Compliance. In addition there a number of units which have input into managing settlement risk: Clearing Risk Management, Clearing Risk Policy, Internal Audit, Enterprise Risk, and Legal.
Directors are entitled to obtain independent advice. The Annual Report addresses directors' access to information, management and advice. To the extent that directors wish to seek independent advice, they can raise this in board meetings, with the Managing Director and CEO, or with the Chairman.
2.7 A securities settlement facility's operations, risk management processes, internal control mechanisms and accounts should be subject to internal audit and, where appropriate, periodic independent expert reviews. Internal audits should be performed, at a minimum, on an annual basis. The outcome of internal audits and external reviews should be notified to the Reserve Bank and other relevant authorities.
ASX maintains an internal audit plan that provides for a three-to-five year review cycle key operational and risk management processes, and internal control mechanisms governed by ASX's enterprise risk framework, business continuity framework, enterprise compliance framework and internal audit methodology. The internal audit plan is approved by the ASX Limited Audit and Risk Committee and the audit work that is relevant to the CS Boards and ASX Compliance Board is endorsed by those Boards. The key governance frameworks are reviewed by external independent experts, as required. ASX's internal audit arrangements are set out in an Internal Audit Charter which is reviewed and approved by the ASX Limited Audit and Risk Committee on an annual basis and made available on ASX's public website.
The Internal Audit unit is a separate unit within ASX that reports to the CRO for administrative purposes, and the Audit and Risk Committee and Managing Director and CEO for audit purposes. Its principal objective is to ‘provide independent, objective assurance and consulting services designed to add value and improve the operations of ASX’. Its scope covers the policies, processes and procedures of all risk management and internal control systems. The Internal Audit unit has a well-defined reporting structure, which includes reports to the CRO, the Audit and Risk Committee, and Managing Director and CEO. The General Manager of Internal Audit has direct access to the ASX Limited Audit and Risk Committee, CS Boards and ASX Compliance Board. Members of the Internal Audit unit are required to hold appropriate undergraduate and postgraduate qualifications relevant to their roles.
The role and performance of the Internal Audit function is regularly reviewed by the ASX Limited Audit and Risk Committee. Internal Audit is also reviewed by external independent auditors on a three-year cycle. The last audit was carried out in 2011, with the next assessment scheduled for 2014.
ASX has a clearly defined methodology for internal audit, based on the International Professional Practices Framework set out by the Institute of Internal Auditors.[2] The audit process includes phases for planning, fieldwork, reporting, final sign-off, and issues logging and follow-up. The planning phase includes the preparation of terms of reference that define the purpose, timing, approach and scope of the audit.
The internal audit methodology allows for ad hoc reviews if, for example, material new risks are identified or other changes to ASX's business occur. This is a matter which the General Manager, Internal Audit and the Audit and Risk Committee consider. The ASX Compliance Board and the CS Boards may also request ad hoc reviews.
2.8 Governance arrangements should ensure that the securities settlement facility's design, rules, overall strategy and major decisions reflect appropriately the legitimate interests of its direct and indirect participants and other relevant stakeholders. Governance arrangements should provide for consultation and stakeholder engagement through appropriate forums on operational arrangements, risk controls and default management rules and procedures. Major decisions should be clearly disclosed to relevant stakeholders and, where there is a broad market impact, the public.
The interests of direct and indirect participants and other relevant stakeholders are recognised in the ASX Limited Board Charter, the CS Boards' Charter and the ASX Customer Charter (see SSF Standard 2.1).
The views of participants and other stakeholders are sought through formal and informal means. Participants' views may be gathered through the induction program for new participants, as well as ongoing participant liaison and compliance checks. Austraclear routinely conducts stakeholder consultations when considering major changes to existing services or new service offerings, such as the introduction of ASX Collateral.
2.9 A securities settlement facility that is part of a group of companies should ensure that measures are in place such that decisions taken in accordance with its obligations as a securities settlement facility cannot be compromised by the group structure or by board members also being members of the board of other entities in the same group. In particular, such a securities settlement facility should consider specific procedures for preventing and managing conflicts of interest, including with respect to intragroup outsourcing arrangements.
ASX has conflict handling arrangements to help manage potential conflicts of interest that its directors and staff may face. The potential for intragroup conflicts arising from ASX's group structure is addressed by ‘intragroup’ service agreements, which set out the basis on which other group entities will provide services to the CS facilities and specify that the entities providing the services must have sufficient financial and other resources to meet their obligations. These agreements provide that ASX Group staff are under a duty to act in the best interests of the facility that is receiving the services.
ASX's governance arrangements are designed to ensure that shared directorships within the ASX Group cannot compromise each CS facility's compliance with its licence obligations, including observance of the FSS. ASX considers the potential for shared directorships to create conflicts between ASX's group-wide commercial interests and the risk management function of the CS facilities to be low. More broadly, it considers that conflicts between directors' roles on the CS Boards and the ASX Limited Board are unlikely given the distinct roles the separate entities perform, and in view of group-wide arrangements to manage matters such as operations and compliance. If a conflict were to arise, a director sitting on multiple CS Boards would be expected to make decisions in the best interests of each facility. The Bank intends to work with ASX to understand better the arrangements in place for conflict handling.
Footnotes
Risk is ASX's risk management area – see ‘ASX Group Structure’ in Appendix B. [1]
The Institute of Internal Auditors is the leading international organisation representing internal auditors. It has developed a set of standards that provide a framework for carrying out and evaluating the performance of internal audits. [2]