2015/16 Assessment of ASX Clearing and Settlement Facilities Appendix A: Detailed Assessment of Clearing and Settlement Facilities against the Financial Stability Standards

Introduction

This Appendix sets out the Reserve Bank's assessment of how well ASX Clear and ASX Clear (Futures) have complied with the CCP Standards, and how well ASX Settlement and Austraclear have complied with the SSF Standards during the year to 30 June 2016.[49] In setting out its assessment, the Bank has applied the rating system used in CPMI and IOSCO's Principles for Financial Market Infrastructures: Disclosure framework and assessment methodology.[50] Under this framework, the Bank has assessed each of the ASX CS facilities' observance of the requirements of each of the applicable CCP or SSF Standards as being:

  • Observed – Any identified gaps and shortcomings are not issues of concern and are minor, manageable and of a nature that the facility could consider taking them up in the normal course of its business.
  • Broadly observed – The assessment has identified one or more issues of concern that the facility should address and follow up on in a defined timeline.
  • Partly observed – The assessment has identified one or more issues of concern that could become serious if not addressed promptly. The facility should accord a high priority to addressing these issues.
  • Not observed – The assessment has identified one or more serious issues of concern that warrant immediate action. Therefore, the facility should accord the highest priority to addressing these issues.
  • Not applicable – The standard does not apply to the type of facility being assessed because of the particular legal, institutional, structural or other characteristics of the facility.

Section 821A(aa) of the Corporations Act 2001 requires that a CS facility licensee, to the extent reasonably practicable to do so, comply with the FSS and do all other things necessary to reduce systemic risk. In assessing how well a CS facility complies with a CCP or SSF standard, the Bank has assessed how well the facility complies with the headline standard and each of the ‘sub-standards’ listed under the headline standard. A single overall rating is applied to each CCP or SSF Standard, reflecting this assessment.

Where a facility has been assessed to observe a CCP or SSF Standard, the Bank nevertheless expects ASX to work towards continual strengthening of its observance of the standard. ASX recognises this and has governance arrangements in place to motivate and encourage continuous improvement. This Appendix includes some recommendations encouraging such improvement in some specific areas. These are not exhaustive, and ASX is encouraged to continue to seek further improvements to its observance of the FSS over the coming Assessment period. This is in accordance with the general obligation on CS facilities to do all things necessary to reduce systemic risk.

Where a facility has been assessed to broadly observe a CCP or SSF Standard, the Bank will have sought evidence that a plan is in place to address the identified issue of concern within a clear, defined and reasonable time frame, and that it would not be reasonably practicable for the facility to take such actions immediately in order to fully observe the standard. This Appendix includes recommendations that identify the steps required by ASX to address the relevant issues of concern and fully observe the applicable CCP or SSF Standard.

The Bank's ratings of each of the CS facilities against relevant FSS are supplemented by detailed information under each sub-standard that is relevant to the Bank's assessment. The Bank gathered this information through its regular liaison with ASX staff, the supply of regular data and reports by ASX, and a series of specific information requests and meetings with ASX during and immediately following the Assessment period to gather information relevant to assessing compliance with the FSS. Arrangements for regular liaison and the supply of data and reports by ASX are described in further detail under the detailed assessments of CCP Standard 21 and SSF Standard 19.

Supplementary interpretation of CCP Standards

In assessing how well ASX Clear and ASX Clear (Futures) have observed certain sub-standards of the CCP Standards, the Bank has applied the supplementary interpretation of these sub-standards issued by way of an exchange of letters with ASX in October 2014.[51] This supplementary interpretation supersedes the Bank's previous supplementary interpretation of the CCP Standards issued in August 2013. The supplementary interpretation of the CCP Standards applies to any domestically licensed derivatives CCP that provides services to participants that are either established in the EU or subject to EU bank capital regulations, and affects CCP Standards 2.6, 4.2, 4.4, 6.3, 7.3, 13.2, 13.3, 15.4 and 21.

ASX Group Structure

Figure 1
Figure 1: ASX Group Structure - explained in the paragraph below.

All four CS facilities are part of the ASX Group. In the ASX corporate structure, the two CCPs – ASX Clear and ASX Clear (Futures) – are subsidiaries of ASXCC, while the two SSFs – ASX Settlement and Austraclear – are subsidiaries of ASX Settlement Corporation Limited (Figure 1). ASXCC and ASX Settlement Corporation Limited are in turn subsidiaries of the ASX Group's parent entity, ASX Limited. ASX Limited is the licensed operator of the ASX market, which provides a trading platform for ASX-quoted securities and equity derivatives. Another subsidiary, Australian Securities Exchange Limited, is the licensed operator of the ASX 24 market, an exchange for futures products.

  • ASX Clear provides clearing services for the ASX market. Under the TAS, it also acts as a CCP for trades in both ASX- and non-ASX-quoted financial products executed on AMO platforms. This service is currently only utilised by Chi-X.
  • ASX Clear (Futures) provides clearing services for the ASX 24 market, as well as AUD-denominated OTC IRD.
  • ASX Settlement provides settlement services for the ASX market and AMOs utilising the TAS. Under the Settlement Facilitation Service, ASX Settlement also provides settlement services for transactions in non-ASX-listed securities undertaken on trading platforms operated by Approved Listing Market Operators (ALMOs); these include SSX, the NSX and SIM.
  • Austraclear provides settlement and depository services for debt securities, and settlement services for derivatives traded on the ASX 24 market and for margin payments in ASX Clear and ASX Clear (Futures).

ASX Limited is a listed company. The ASX Limited Board is responsible for overseeing the processes for identifying significant risks to ASX and ensuring that appropriate policies, as well as adequate control, monitoring and reporting mechanisms, are in place. In addition, ASX Limited's Board assigns certain responsibilities to subsidiaries within the group, including the boards of the four CS facilities (the CS Boards). The CS Boards are responsible for managing the particular clearing and settlement risks faced by each respective CS facility, including through compliance with the FSS. The CS Boards are subject to common governance arrangements with high-level objectives set out in the CS Boards' Charter. A majority of the directors on the CS Boards are common to the boards of all four CS facilities; however, one of the directors on the ASX Clear and ASX Settlement Boards does not sit on the ASX Clear (Futures) and Austraclear Boards, and four of the directors on the ASX Clear (Futures) and Austraclear Boards do not sit on the ASX Clear and ASX Settlement Boards.

ASXCC is a wholly owned subsidiary of ASX Limited. ASXCC is the holding company for, and manages the financial resources of, the two CCPs. It invests these resources according to a treasury investment policy and investment mandate approved by the CS Boards.

In delivering their services, the CS facilities rely on group-wide operational and compliance resources that reside in ASX Operations Pty Limited (ASX Operations), which is a wholly owned subsidiary of ASX Limited.

  • ASX Operations provides most operational resources required by the CS facilities, including resources to enable ASX Compliance Pty Limited (ASX Compliance) to perform its services.

  • ASX Compliance provides compliance services to the licensed entities of the ASX Group, including monitoring and enforcing participants' compliance with the Operating Rules of the CS facilities.

ASX has adopted a group-wide organisational structure to manage the business operations of its various entities, including the CS facilities. Its business units are organised into nine main divisions:

  • Office of the CEO
  • Risk
  • Operations
  • Technology
  • Business Development
  • ASX Compliance
  • Office of General Counsel and Company Secretariat, Regulatory Policy and Regulatory Assurance
  • Chief Financial Officer (CFO) Office
  • Human Resources.

Risk contains a number of departments that play key roles in the management of risks faced by the CS facilities:

  • Clearing Risk Policy and Management (CRPM) – develops, maintains and implements CCP policies and standard, and maintains effective procedures for carrying out those policies and standards.
  • Clearing Risk Quantification (CRQ) – maintains and validates CCP risk and pricing models.
  • Clearing Risk Development – responsible for the development of clearing risk management systems.
  • Enterprise Risk – responsible for enterprise-wide risk management, including general business risk.
  • Portfolio Risk Management – responsible for managing investment and liquidity risks associated with ASXCC's investment portfolio.
  • Internal Audit – conducts risk-based reviews of internal controls and procedures across ASX. Internal Audit reports to the CRO for administrative purposes only.

ASX's Clearing Risk Policy Framework also sets out roles for a number of internal committees that bring together decision makers and experts from departments across the group:

  • Clearing Risk Policy Committee (CRPC) – reviews policies and standards prior to submission to the CS Boards.
  • Capital and Liquidity Committee (CALCO) – advises on changes to clearing risk policies and standards related to capital, liquidity and balance sheet management.
  • CCP Risk, Operations and Compliance Committee (CROCC) – discusses and shares information across relevant operational, compliance and risk management departments.
  • Enterprise Risk Management Committee (ERMC) – reviews and approves enterprise risk management policy and related reporting prior to Board submission.
  • Risk Quantification Group (RQG) – responsible for quantitative risk management matters, including the review and application of quantitative risk policies and the Model Validation Framework, including oversight of model governance and the outcomes and recommendations of regular reviews of margining and stress test outcomes and recommendations.
  • DMC – coordinates ASX's response to a clearing participant default, and conducts the review and testing of the CCPs' default management framework.
  • PIRC – responsible for monitoring and managing participant incidents and, in the case of a clearing participant, escalating potential default events to the DMC.

ASX's Settlement Risk Policy Framework sets out roles for a number of additional internal committees:

  • Settlement Risk Policy Committee (SRPC) – reviews policies and standards prior to submission to the CS Boards.
  • SSF Risk, Operations and Compliance Committee (SROCC) – discusses and shares information across relevant operational, compliance and risk management departments.
  • ERMC – reviews and approves enterprise risk management policy and related reporting prior to Board submission.
  • PIRC – responsible for monitoring and managing material participant incidents, including any non-compliance with participant obligations, settlement default, operational failure or an event which might result in the participant becoming an externally-administered body corporate or an insolvent under administration, and, in the case of a clearing participant, escalating potential default events to the DMC.

Footnotes

The full text of the detailed assessments of each of these CS facilities is available at <http://www.rba.gov.au/payments-and-infrastructure/financial-market-infrastructure/clearing-and-settlement-facilities/assessments/2015-2016/index.html>. [49]

Available at <http://www.bis.org/cpmi/publ/d106.htm>. [50]

This letter is available at <http://www.rba.gov.au/payments-and-infrastructure/financial-market-infrastructure/clearing-and-settlement-facilities/pdf/supplementary-guidance-domestic-derivatives-ccps.pdf>. [51]