2015/16 Assessment of ASX Clearing and Settlement Facilities A1.2 ASX Clear (Futures) Standard 19: FMI links

A central counterparty that establishes a link with one or more FMIs should identify, monitor and manage link-related risks.

ASX Clear (Futures) maintains links to three other FMIs: Austraclear, NZClear and DTCC Data Repository LLC (DTCC). ASX Clear (Futures) assumes no direct financial risks from these links, but is exposed to operational risks. These are managed in the context of the operational risk management practices of both FMIs (CCP Standard 19.1). The legal basis of each link is supported by finality legislation and contractual arrangements, including the Regulations, Operating Rules and Procedures of the linked facilities (CCP Standard 19.2). All link arrangements have been discussed with the Bank (CCP Standard 19.3). ASX Clear (Futures) does not maintain links with any other CCPs (CCP Standards 19.4, 19.5).

19.1 Before entering into a link arrangement, and on an ongoing basis once the link is established, a central counterparty should identify, monitor and manage all potential sources of risk arising from the link arrangement. Link arrangements should be designed such that the central counterparty is able to comply with these CCP Standards.

Identifying link-related risks

ASX Clear (Futures) maintains links with three other FMIs. A link for the purposes of this standard is any connection that is made to another FMI according to a set of contractual and operational arrangements, irrespective of the complexity of the link and whether it is made directly with the FMI or through an intermediary.[27]

  • Austraclear. This link supports AUD funds transfers, lodgement of AUD-denominated non-cash collateral, and settlement of 90-day bank bill futures. Cash transfers are entered into Austraclear by ASX Clear (Futures), and then matched in Austraclear against the respective clearing participants' cash settlement instructions. Regular margin collections and intraday margin calls, which make up the majority of cash transfers, are submitted automatically to Austraclear by ASX Clear (Futures)' margin and collateral systems. AUD-denominated non-cash collateral is lodged via a collateral lodgement form, and cannot be applied to margin requirements until the day following lodgement of this form. Once ASX Clear (Futures) has received the form, the relevant securities are transferred to ASX Clear (Futures) via a ‘free of payment’ trade in Austraclear. Settlement of 90-day bank bill futures takes place in Austraclear according to procedures set out in ASX 24's Operating Rules and Procedures. Sellers and buyers who are not full participants of Austraclear must appoint a full participant to act as their settlement agent.
  • NZClear. This link supports the settlement of NZD payments. ASX Clear (Futures) maintains an account in NZClear to initiate and receive NZD margin payments, with settlement in central bank money via arrangements with a commercial settlement bank (see CCP Standard 9.1).
  • DTCC. This link was established for the reporting of OTC IRS trades, and supports ASX Clear (Futures)' OTC trade reporting obligations to ASIC. The link also facilitates the reporting of OTC IRS trades involving US persons, which is a condition of ASX Clear (Futures)' August 2015 exemption from the requirement to register as a DCO in the US.

Managing operational risk

The link to Austraclear is subject to the same operational risk management framework that applies to all of the ASX CS facilities (see CCP Standard 16). This addresses operational risks associated with software, infrastructure or network failures and manual processing errors. An incident report is required for any significant technical or operational incident, including an assessment of mitigating actions to reduce the risk of reoccurrence. In addition, six-monthly risk profile assessments are prepared and presented to the Audit and Risk Committee, and an independent system-controls audit is conducted annually. Austraclear operations are also covered by the Austraclear System Business Operations Plan, which includes a ‘Step-in and Service’ agreement with the Bank (see Appendix A2.2, SSF Standard 14).

The potential impact of risks associated with ASX Clear (Futures)' link to NZClear is limited by the small value of NZD margin in comparison with total margin held by ASX Clear (Futures). NZClear is owned, operated and overseen by the RBNZ. Any operational issues that arise in NZClear are notified to all members, including ASX Clear (Futures), via email notification. NZClear has the ability to perform transactions on behalf of a member in the event of an operational disruption to ASX Clear (Futures)' link arrangements; in this case, ASX would advise NZClear to perform payment instructions via written instructions signed by ASX's authorised signatories. ASX Clear (Futures) has contingency arrangements that allow for late payment of margin on New Zealand futures products via Austraclear in AUD, with ASX Clear (Futures) applying a haircut to the NZD margin equivalent.

Managing financial risk

ASX Clear (Futures) does not assume any direct financial risks from its links to other FMIs.

19.2 A link should have a well-founded legal basis, in all relevant jurisdictions, that supports its design and provides adequate protection to the central counterparty and other FMIs involved in the link.

ASX Clear (Futures)' link to Austraclear has its legal basis in its Operating Rules and Procedures and the Austraclear Regulations and Procedures. The finality of settlements in Austraclear is supported by its approval under Part 2 of the PSNA (see CCP Standard 1.5).

The finality of settlement in NZClear is enshrined in the system rules of NZClear and supported by NZClear's designation under Part 5C of the Reserve Bank of New Zealand Act 1989 (NZ) (see CCP Standard 8.1).

The Bank has formed the view that a CCP link to a trade repository for trade reporting purposes does not give rise to material legal risks. Nevertheless, the legal basis of ASX Clear (Futures)' link to DTCC is supported by contractual arrangements between the two FMIs.

19.3 Where relevant to its operations in Australia, a central counterparty should consult with the Reserve Bank prior to entering into a link arrangement with another FMI.

ASX Clear (Futures) has discussed its current link arrangements with the Bank.

19.4 Before entering into a link with another central counterparty, a central counterparty should identify and manage the potential spillover effects from the default of the linked central counterparty. If a link has three or more central counterparties, a central counterparty should identify, assess and manage the risks of the collective link arrangement.

ASX Clear (Futures) has no links with other CCPs.

19.5 A central counterparty in a central counterparty link arrangement should be able to cover, at least on a daily basis, its current and potential future exposures to the linked central counterparty and its participants, if any, fully with a high degree of confidence without reducing the central counterparty's ability to fulfil its obligations to its own participants at any time.

ASX Clear (Futures) has no links with other CCPs.

Footnote

Links to payment systems are addressed in CCP Standard 9. [27]