2015/16 Assessment of ASX Clearing and Settlement Facilities A1.1 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.

ASX Clear has objective and transparent participation requirements set out in its Operating Rules and Procedures (CCP Standard 17.1). These include minimum capital and other financial requirements, as well as operational and risk management arrangements 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).

During the Assessment period, ASX consulted on enhancements to participant liquidity risk management and participant capital requirements (CCP Standard 17.2).

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. ASX has also issued formal guidance to assist applicants' and participants' understanding of the participation requirements. This includes guidance on: the admission process and criteria; notification obligations; offshoring and outsourcing arrangements; and business continuity requirements.

ASX has an internal policy and supporting standards that summarise the financial and operational requirements placed on participants under the Operating Rules and Procedures (see CCP Standard 17.2), and document the responsibilities of the CS Boards, CRPC, CRO and relevant departments for ensuring these requirements are met and periodically reviewed. The Operating Rules and Procedures provide for an appeals process should an application for participation be rejected or a participant's access be terminated.

Under the Code of Practice, ASX has committed to providing transparent and non-discriminatory terms of access to ASX Clear's cash equity clearing services, including to participants and AMOs.

At the end of June 2016, ASX Clear had 33 participants (excluding inactive participants) – 12 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; requirements related to legal structure, governance and regulatory status; 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’.^[24] Calculation of the total risk requirement considers counterparty risk, large-exposure risk, position risk and operational risk. Brokers that have insufficient capital, or that do not wish to undertake their own clearing, may use the services of a General Participant (see CCP Standard 18). A General Participant is a participant that may offer clearing services to third-party trading participants.

Direct Participants, who do not clear for other brokers, must maintain a minimum of $5 million in ‘core capital’.^[25] ASX management has discretion to impose a higher requirement. General Participants are subject to tiered core capital requirements, under which a General Participant must hold $5 million in core capital for each trading participant for which it clears, up to a maximum of $20 million. That is:

• a General Participant that clears only for itself or for one other trading participant is required to hold $5 million in core capital
• a General Participant that clears for itself and one other participant, or on behalf of two third-party trading participants, is required to hold $10 million in core capital
• a General Participant is required to hold an additional $5 million in core capital for each additional trading participant that it clears for, to a maximum of $20 million.

In June 2016, ASX Clear launched a consultation on further enhancements to its participant minimum core capital requirements, which aim to better account for the complexity of each participant's business model.

General and Direct Participants may elect to be covered by an alternative capital regime that recognises compliance with the requirements of a prudential supervisor. This is intended to encourage ADIs to become active participants for the full range of products cleared by ASX Clear. At the end of the Assessment period, two participants were subject to this capital regime. Participants that clear only futures may also elect to be covered by a capital regime that is based on an NTA requirement, although there were no active participants in this category at the end of the Assessment period.

Under the Operating Rules and Procedures, a potential participant must satisfy ASX Clear that it has the resources and processes in place to comply with its obligations as a participant. For these purposes, ‘resources’ include financial, technological and human resources, and ‘processes’ include management supervision, training, compliance, risk management, business continuity and disaster recovery processes. 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.

ASX Clear consulted on new requirements in respect of participants' liquidity risk management frameworks during the Assessment period. Under the new standards, participants would be required to establish a formal liquidity risk management framework and prepare an annual liquidity plan, which should consider both normal and stressed market conditions. The requirements are expected to be implemented in the Q3 2016.

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 CRPM department, which covers both CCPs and reports to the CRO, is responsible for the risk management of exposures to clearing participants. CRPM monitors day-to-day developments regarding, among other things, financial requirements, risk profiles, open positions and settlement obligations to the CCPs.

The CRA team is responsible for monitoring, assessing and investigating matters relating to financial requirements, including monitoring participants' monthly financial statements for any matters of concern. The CRA team reports to the General Manager, Participants Compliance with a secondary reporting line to the Senior Manager, CRPM.

CRA 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. Participants are required to inform ASX if at any stage their capital falls below the minimum requirement. CRA, working with CRPM, 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 ASX Compliance perform regular and ad hoc compliance monitoring activities, including monthly reviews of participants' financial returns. During the Assessment period, ASX also initiated additional risk-based validation reviews.

ASX Clear's arrangements for monitoring and enforcing compliance with its Operating Rules are published on the ASX public website. Under these, ASX Clear has wide-ranging 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 ASX Compliance for formal disciplinary action.

Footnotes

‘Liquid capital’ is defined by ASX to comprise total tangible shareholders' funds held in liquid assets, net of any guarantees and indemnities. [24]

‘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. [25]