Assessment of ASX Clearing and Settlement Facilities Appendix C1. Financial Stability Standards for Central Counterparties

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.

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 and ASX Clear (Futures) have objective and transparent participation requirements, which are publicly available and form part of their Operating Rules and Procedures. The CCPs have 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; business continuity requirements; and, in the case of ASX Clear, liquidity management arrangements and capital requirements.

The CCPs have 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, CRO and relevant functions 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 2017, ASX Clear had 34 participants (excluding inactive participants) – 11 of these were participants that offer or can offer clearing services to related entities or third parties. ASX Clear (Futures) had 20 participants, predominantly large domestic and foreign banks and their subsidiaries. Eight of ASX Clear (Futures)' participants were OTC derivatives clearing participants, of which four cleared OTC derivatives only. One futures participant was clearing remotely from the United Kingdom under a pilot scheme (see CCP Standard 17.2).

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.

The ASX CCPs' participation requirements are designed to promote the safety and integrity of the CCPs. 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.

Under the Operating Rules and Procedures, a potential participant must satisfy the ASX CCPs that it has (or will have) 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.

CCP-specific participation requirements are described below.

ASX Clear

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’.^[45] Calculation of the total risk requirement considers counterparty risk, large-exposure risk, position risk, non-standard risk and operational risk. ASX management has discretion to increase the risk requirement imposed on a participant associated with operational risk in the form of a ‘secondary requirement’. Brokers that have insufficient capital, or that do not wish to undertake their own clearing, may use the services of a General Participant. A General Participant is a participant that may offer clearing services to trading participants.

In addition to meeting the capital requirement, participants are required to hold minimum levels of ‘core capital’.^[46] Direct Participants, who do not clear for other brokers, must maintain a minimum of $5 million in core capital. 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 up to one other trading participant is required to hold $5 million in core capital
• 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
• 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.

Following a consultation process over 2016/17, in July 2017, ASX announced that it will implement enhancements to minimum core capital requirements, which aim to better account for the complexity of each participant's business model. The enhancements will consist of add-ons to a participant's existing base capital requirement that reflect its activities in own-account business, non-ASX client activity, and client written ETO activity. Subject to a minimum level of materiality, ASX will apply an additional capital requirement of $2.5 million or $5 million for each of these activities, depending on the level of materiality. Under the new requirements, the minimum amount of core capital requirement will range from $5 million to $35 million, up from the current range of $5 million to $20 million.

Participants will be granted an initial transitional period of up to 12 months to meet any increased capital requirements. Subsequently, ASX will expect to review the capital requirements on a quarterly basis, and allow a transitional period of at least six months for participants to meet any subsequent increases.

Bank participants may elect to be covered under another capital regime which 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.

During the Assessment period, ASX Clear implemented new requirements in respect of participants' liquidity risk management frameworks. Under the new standards, participants are required to establish a formal liquidity risk management framework and prepare an annual liquidity plan, which should consider both normal and stressed market conditions. Participants that are ADIs regulated by APRA or non-bank subsidiaries of ADIs (if certain conditions are met) are exempted from the enhanced requirements.

ASX Clear (Futures)

Participants that clear futures only are subject to a minimum NTA requirement of $5 million. ASX management has discretion to impose a higher requirement.

Participation requirements for participants that clear OTC derivatives are set out in the publicly available OTC Rules and OTC Handbook. The capital requirement of $50 million for these participants is significantly higher than that for futures-only participants to reflect the increased complexity of OTC derivatives markets, and the potential for a default event to require the liquidation of less liquid products than those in the futures market. In particular, it is likely that OTC derivatives participants would be called upon to contribute to the close-out process, including by bidding in an auction of a defaulted participant's positions.

Since April 2015, ASX Clear (Futures) has been conducting a pilot scheme for the admission of participants that are incorporated and base their operations offshore. Such participants must demonstrate the capacity to meet all of the financial and operational requirements described above and that no conflicts of law would arise as a result of their participation. ASX will assess the outcomes from the pilot scheme (initially involving a single UK-based participant) prior to allowing such arrangements more broadly.

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.

CRPM, 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. 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 the ASX CCPs. 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.

The ASX CCPs' arrangements for monitoring and enforcing compliance with their Operating Rules are published on the ASX public website. Under these, ASX Clear and ASX Clear (Futures) have wide-ranging powers to sanction their participants in order to preserve the integrity of the CCPs. ASX Clear and ASX Clear (Futures) 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 CCPs. 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, the CCPs 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 the maximum liability of certain guarantees and indemnities given by the participant. [45]

‘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, other than financial asset revaluation reserves; and opening retained profits/losses, adjusted for current year movements. [46]