2015/16 Assessment of ASX Clearing and Settlement Facilities A1.1 ASX Clear Standard 13: Segregation and portability

A central counterparty should have rules and procedures that enable the segregation of positions of a participant's customers and the collateral provided to the central counterparty with respect to those positions.

ASX Clear offers three types of account structure: individual client segregation for options and futures; omnibus segregation with net margining for futures; and single commingled accounts for all house and client cash market transactions (CCP Standard 13.2). Individual client segregation for options and futures provides protection to customers (or ‘clients’) against the default of both their clearing participant and a fellow client, and supports transfer to another clearing participant in such a scenario. ASX's client protection arrangements for cash market transactions ensure that commingled accounts provide materially equivalent protection to that provided by omnibus account segregation (CCP Standards 13.1, 13.2 and 13.3). ASX Clear has implemented arrangements to support the posting of excess client cash collateral in respect of derivatives, consistent with the Bank's supplementary interpretation of CCP Standards 13.2 and 13.3. ASX Clear publicly discloses its segregation and portability arrangements, including the current obstacles to portability (CCP Standard 13.4).

13.1 A central counterparty should, at a minimum, have segregation and portability arrangements that effectively protect a participant's customers' positions and related collateral from the default or insolvency of that participant. If the central counterparty additionally offers protection of such customer positions and collateral against the concurrent default of the participant and a fellow customer, the central counterparty should take steps to ensure that such protection is effective.

ASX Clear maintains a segregated account structure for its options and futures products which separates client positions from the participant's proprietary (house) positions. For these products, clients are able to access individually segregated accounts that offer protection against the concurrent default of the participant and a fellow client (see CCP Standard 13.2).

Although ASX Clear utilises a single (commingled) account for each participant's house and client cash market transactions, its arrangements provide clients with protections that are materially equivalent to those afforded by segregated house/client omnibus accounts (see CCP Standard 13.2). These arrangements were introduced in the previous Assessment period, in response to concerns raised in a July 2013 stakeholder consultation that omnibus segregation for the cash market would be costly and deliver minimal benefits in terms of protection for clients of participants.

In addition to these arrangements, ASX Clear has the capacity to transfer (port) participants' clients' positions and collateral under its Operating Rules (see CCP Standard 13.3). Part 5 of the PSNA allows a CCP to transfer client collateral of a defaulted participant as provided for by its Operating Rules without the need to seek approval from the participant's external administrator. ASX maintains an internal policy governing the segregation and portability arrangements at ASX Clear and ASX Clear (Futures), which formally aligns these with the requirements of this standard.

13.2 A central counterparty should employ an account structure that enables it readily to identify positions of a participant's customers and to segregate related collateral. A central counterparty should maintain customer positions and collateral in individual customer accounts or in omnibus customer accounts, or equivalent.

ASX Clear offers individual client segregation for options and a choice of individual client segregation or omnibus segregation for futures transactions. For these products, client collateral cannot be used to offset losses arising from a participant's proprietary (house) account. Non-cash collateral (including excess collateral) lodged with ASX Clear in respect of options transactions remains under the beneficial ownership of clients. In November 2015, ASX Clear implemented arrangements that also allow excess client cash collateral against options positions to be held directly with ASX Clear and attributed to an individual client account, should participants choose to offer this option to their clients. Under these arrangements, ASX Clear would transfer or return to the participant's client trust account any excess collateral that had been attributed to an individual client account (net of any close-out costs).

While ASX Clear employs a commingled house/client account structure for cash market transactions, it has implemented arrangements that provide clients with materially equivalent protections to those offered under house/client omnibus segregation. These arrangements aim to ensure that participants employ best practice in processing client trades during the pre-settlement period, namely: that client securities due for delivery that are held in the participant's accumulation account remain the beneficial property of the client until they are placed into the participant's settlement account (see Appendix A2.1, SSF Standard 10.2); and that client monies to fund a purchase must remain in trust accounts until the purchased stock is registered in the client's name.^[17] The ASX Clear Operating Rules also require daily reconciliation by participants of unsettled stock held beneficially for the client.

The settlement processing is also designed to minimise client principal exposure to the participants acting on their behalf. Under these arrangements, participants are required to fund any movements of beneficially held client stock to the settlement account on the day that the movement occurs, by placing the required amount into trust for the client concurrent with the CHESS batch settlement process. Participants are able to pre-schedule movements of beneficially held client stock to their settlement account. These ‘pre-positioning’ transactions settle in the first stage of batch processing, with Payment Providers being notified of a net amount to be transferred between participants' general accounts and client trust accounts. These arrangements aim to ensure that client assets and funds remain in the beneficial ownership of clients for all but a brief window during the settlement period.

These arrangements protect clients from principal losses in the event of a participant default but will not protect clients against the cost of replacing trades in such an event. Even if omnibus segregation was adopted, however, clients could not be effectively protected against replacement cost losses in the event of a participant default. This reflects that Australian law currently prevents a clearing participant from passing through to a CCP margin posted by a client in respect of cash equities.

13.3 To the extent reasonably practicable under prevailing law, a central counterparty should structure its portability arrangements in a way that makes it highly likely that the positions and collateral of a defaulting participant's customers will be transferred to one or more other participants.

ASX Clear has the power under its Operating Rules to transfer client positions and collateral following a participant default. The availability of individually segregated client accounts for both options and futures supports the transfer of client positions and collateral to another participant in the event of a clearing participant default. Under individual client segregation, margin requirements are calculated on a gross basis (i.e. individually for the positions held by each client). Accordingly, there should be sufficient collateral available to support the transfer of each client's positions to another clearing participant. Portability is further supported by Part 5 of the PSNA (see CCP Standard 13.1). However, portability cannot be guaranteed since it relies on clients having established arrangements with alternate clearing participants and the willingness and capacity of those participants to take on the affected clients within a short period of time. The time window available for porting will also depend on market conditions, since ASX Clear would remain exposed to market risk until such time as a defaulted participant's client positions were ported or closed out (see CCP Standard 12).

The commingled account structure used for cash market transactions creates practical difficulties for portability. The commingled account structure makes it difficult to identify client positions and, even if positions could be identified, since house and client positions are margined on a net basis across the commingled account, there is unlikely to be sufficient collateral at the CCP to achieve the fully collateralised transfer of individual client positions to alternative clearing participants. Accordingly, ASX would expect to manage a defaulted participant's commingled account as a single client account – that is, no individual client would be transferred separately from the others. Since porting requires the consent of the receiving participant and each individual client, the simultaneous transfer of a large number of clients would be challenging. However, even under a segregated account structure the scope for transfer of cash market positions would be limited due to the short (two-day) equity settlement cycle.

13.4 A central counterparty should disclose its rules, policies and procedures relating to the segregation of a participant's customers' positions and related collateral. In particular, the central counterparty should disclose whether customer collateral is segregated on an individual or omnibus basis. In addition, a central counterparty should disclose any constraints, such as legal or operational constraints, that may impair its ability to segregate or port a participant's customers' positions and related collateral.

Current arrangements for segregation and portability are defined in the ASX Clear Operating Rules and Procedures. ASX has also published a public overview of clearing participant default arrangements, which outlines the current operational constraints to portability and the implications of different account structures.^[18]

Since 2012/13, ASX has publicly consulted stakeholders on segregation and portability arrangements for derivatives transactions cleared in ASX Clear. During 2013/14, ASX also consulted stakeholders on segregation and portability arrangements for cash market participants. These consultations have identified operational constraints to portability and the implications of different account structures used by ASX Clear. Following the default of BBY Limited in May 2015, ASX provided regular updates to affected clients and other market participants on key aspects of the default management process, including arrangements for the transfer of client positions.

Footnotes

Participants maintain ‘accumulation’ and ‘settlement’ accounts to manage the processing of securities for settlement. Client securities due for delivery are typically initially placed in accumulation accounts prior to transfer to the participant's settlement account, at which point the participant takes effective control over the use of securities. Securities are delivered to and from settlement accounts as part of ASX Settlement's batch settlement process. [17]

Available at: <http://www.asx.com.au/documents/clearing/131001_Default_Management_-_Public_Information_Document_v2.pdf>. [18]