2015/16 Assessment of ASX Clearing and Settlement Facilities A2.2 Austraclear Standard 16: Tiered participation arrangements

A securities settlement facility should identify, monitor and manage the material risks to the securities settlement facility arising from tiered participation arrangements.

In managing the risks associated with tiered arrangements, Austraclear is able to gather basic information on indirect participation (SSF Standards 16.1, 16.2). Austraclear does not maintain formal thresholds at which substantial indirect participants are encouraged to seek direct participation, but does actively manage risks posed by indirect participant activity through its relationship with the direct participant (SSF Standard 16.3). Austraclear is not directly exposed to financial risks arising from tiered participation (SSF Standard 16.4).

Austraclear's approach to tiered participation arrangements is described in further detail under the following sub-standards.

16.1 A securities settlement facility should ensure that its rules, procedures and agreements allow it to gather basic information about indirect participation in order to identify, monitor and manage any material risks to the securities settlement facility arising from such tiered participation arrangements.

Given the nature of the wholesale OTC market in debt securities that Austraclear settles, participation in Austraclear is generally direct. Furthermore, since Austraclear does not assume credit or liquidity risk as principal, the primary risks that could arise from indirect participation are operational. In particular, indirect participation arrangements that concentrated settlement activity within a few direct participants could concentrate operational risk to the facility. Any significant activity associated with indirect participation would be likely to be recorded in sub-accounts of direct Austraclear participants, which Austraclear is able to monitor.

Austraclear currently considers the risks from concentration of indirect participants to be low.

16.2 A securities settlement facility should identify material dependencies between direct and indirect participants that might affect the securities settlement facility.

Austraclear monitors dependencies arising from tiered participation indirectly using a variety of means. These include regular discussions with participants on developments in their business and risk management activities, participants' own risk assessments, and discussions with new participants as part of the induction process. Based on this information, Austraclear has not identified any material dependencies between direct and indirect participants that might affect its operations.

16.3 A securities settlement facility should identify indirect participants responsible for a significant proportion of transactions processed by the securities settlement facility and indirect participants whose transaction volumes or values are large relative to the capacity of the direct participants through which they access the securities settlement facility in order to manage the risks arising from these transactions.

In general, participation in Austraclear is direct, reflecting the profile of the wholesale OTC debt market that it serves. At end June 2016 there were 855 direct Austraclear participants.

ASX encourages participants to develop appropriate risk control measures in managing their relationships with clients, including any substantial indirect participants. ASX does not set thresholds, either formal or informal, at which it would encourage direct participation by an indirect participant. ASX's general approach to managing risks associated with participants' business activities is based on a framework that can flexibly detect and respond to new risks as they arise, rather than setting firm ex ante activity limits.

16.4 A securities settlement facility should regularly review risks arising from tiered participation arrangements and should take mitigating action when appropriate.

Austraclear is not directly exposed to financial risks from indirect participation, and its exposure to operational risks from indirect participants is limited by the bilateral nature of settlement between its participants and its relatively broad participation base. Austraclear would only be expected to face material risks from indirect participation if the nature of its participation base or activities were to change significantly.