Assessment of ASX Clearing and Settlement Facilities Appendix C2. Financial Stability Standards for Securities Settlement Facilities

Standard 2: Governance

A securities settlement facility should have governance arrangements that are clear and transparent, promote the safety of the securities settlement facility, and support the stability of the broader financial system, other relevant public interest considerations and the objectives of relevant stakeholders.

ASX Settlement Austraclear
Observed Observed

2.1 A securities settlement facility should have objectives that place a high priority on the safety of the securities settlement facility and explicitly support the stability of the financial system and other relevant public interest considerations.

The high-level objectives of the ASX SSFs are set out in the CS Boards' Charter, which is available on the ASX public website. The objectives prioritise the boards' responsibilities in the area of risk management and, in particular, the SSFs' responsibility for complying with relevant FSS.

The ASX SSFs' objectives recognise the public interest. These objectives are reflected in the ASX Limited Board Charter, which provides that the board has a responsibility to oversee the conduct of the ASX Group consistent with licence obligations, as well as public policy objectives directed at financial market and payments system integrity. The CS Boards' Charter also specifically acknowledges the boards' public interest responsibilities, as well as the ASX SSFs' obligations under Part 7.3 of the Corporations Act. These include that ASX Settlement and Austraclear, to the extent that it is reasonably practicable to do so, comply with relevant FSS and do all other things necessary to reduce systemic risk arising from their services, and that they provide their services in a fair and effective way.

To support the interests of its customers, ASX maintains a Customer Charter, which is referenced in the CS Boards' Charter. The Customer Charter commits that ASX: work with its customers to deliver products and services that meet their needs and provide them with choice; make its products and services available on a non-discriminatory basis and on reasonable commercial terms; and manage its businesses and operations on a commercial basis to benefit its customers and provide appropriate returns to ASX shareholders. The Customer Charter recognises ASX's role as a provider of critical infrastructure to the Australian financial markets and commits to make the necessary investments to ensure it can fulfil this role and provide confidence to market participants, investors and regulators.

The ASX SSFs' governance arrangements allow for appropriate consideration of stakeholder views. When considering new services or major operational or risk management changes, ASX uses stakeholder forums and other formal and informal consultation processes to communicate proposed changes to relevant stakeholders (see SSF Standard 2.8). Consultations and non-confidential responses to consultations are made available on the ASX public website. In addition, the ASX Group has disclosure obligations under the Corporations Act and Listing Rules, which it manages in accordance with those laws and rules.

2.2 A securities settlement facility should have documented governance arrangements that provide clear and direct lines of responsibility and accountability. These arrangements should be disclosed to owners, the Reserve Bank and other relevant authorities, participants and, at a more general level, the public.

The governance arrangements of the ASX SSFs are documented on the ASX public website. This documentation includes the charters of the ASX Limited Board, the CS Boards (which include the ASX Settlement Board and the Austraclear Board), and other subsidiary boards and committees. The charters provide information about the role and composition of the CS Boards and board committees. The CS Boards are responsible for the oversight and risk management of the ASX CS facilities (see SSF Standard 2.3). The board committees advise the ASX Limited Board on a number of matters:

  • The Audit and Risk Committee is responsible for the oversight of ASX Group enterprise-wide risk. The committee monitors ASX's financial management, internal controls, audit function and legal compliance, and assists the CS Boards in fulfilling their responsibility for the oversight of risk management of the ASX CS facilities.
  • The Remuneration Committee oversees the remuneration and incentive framework for the Managing Director and CEO, non-executive directors, senior executives, and ASX staff more generally (see SSF Standard 2.5).
  • The Nomination Committee is responsible for reviewing matters relating to board composition and performance, succession planning, and training for non-executive board members (see SSF Standard 2.4).

The charters also provide information about key senior managers of the settlement facilities, including the Managing Director and CEO, and the CRO. Profiles of CS facility directors are also publicly available online. Key governance policies and charters are reviewed regularly by the relevant boards and committees. Each of the charters of the ASX Limited and the CS Boards are reviewed and approved by the respective board on an annual basis.

The ASX Limited Annual Report provides information about ASX Group's risk management arrangements, including the roles of boards, key committees, key subsidiary boards (e.g. ASX Compliance) and the roles of senior group executives who report directly to the Managing Director and CEO. Explanatory documentation on the ASX website also describes: the FSS and the CPMI-IOSCO Principles; group and business structure, including biographies of senior Group Executives; and risk management policies (in summary form). ASX's response to the CPMI-IOSCO Disclosure Framework also summarises key governance and risk management arrangements (see SSF Standard 18.4).

Under the Corporations Act, ASX must notify ASIC as soon as practicable after a person becomes or ceases to be a director, secretary or senior manager of the ASX SSFs, including when a person changes from one of those positions to another. Changes to these positions and senior risk management personnel are also notified to the Bank.

2.3 The roles and responsibilities of a securities settlement facility's board of directors (or equivalent) should be clearly specified, and there should be documented procedures for its functioning, including procedures to identify, address and manage member conflicts of interest. The board should regularly review both its overall performance and the performance of its individual board members.

Ultimate responsibility for the oversight of risks faced by the ASX SSFs lies with the ASX Limited Board and each SSF's respective board. The ASX Limited Board is accountable for the overall management of the ASX Group. Its responsibilities include:

  • reviewing the ASX Group's corporate strategy and approving major initiatives
  • overseeing and monitoring the Group's performance consistent with its strategic goals, licence obligations and public policy objectives
  • reviewing and approving financial plans, and monitoring financial performance
  • appointing and assessing the performance of the Managing Director and CEO
  • overseeing the risk management, internal control, and compliance functions, including the implementation of ASX's enterprise risk management policy
  • ensuring that appropriate mechanisms are in place for identifying, controlling, monitoring and reporting significant risks
  • reporting to, and communicating with, shareholders.

The ASX Limited Board Charter delegates certain responsibilities to the SSF Boards, including the review and oversight of the ASX SSFs' settlement-related risks and their compliance with the FSS. The CS Boards' Charter elaborates on the roles and responsibilities of the ASX Settlement Board and the Austraclear Board. The CS Boards' Charter places requirements on the structure of the CS Boards, including that the majority of directors and the Chair be independent. The ASX Settlement Board and Austraclear Board meet regularly and receive detailed reports on the respective SSF's business and operations, risk management and financial performance. During the Assessment period, the ASX Settlement Board had seven formal meetings and four workshops; this includes five meetings and one workshop for independent directors that are not also directors of ASX Limited (see CCP Standard 2.9). The Austraclear Board had seven formal meetings and four workshops during the Assessment period.

Board performance is dealt with periodically by the relevant boards. The process may be facilitated by external independent consultants. A number of tools may be used, including review, skills matrices and surveys, and externally facilitated group discussions. Details of board performance reviews are set out in the ASX Limited Annual Report (the same process applies for the key subsidiary boards).

The CS Boards' Charter sets out how the boards address directors' interests and potential conflicts. Directors of the CS Boards must disclose all material personal interests (such as shareholdings, directorships and consultancy arrangements) which may potentially conflict with their duties. If there is a change in a director's material personal interests, the director must notify that change at the next meeting of the CS Boards. If there is a real possibility of a material conflict of interest and duty on a matter being voted on at a meeting of the CS Boards, the director must not be present for the discussion or vote related to that matter.

2.4 The board should comprise suitable members with the appropriate skills and incentives to fulfil its multiple roles. This typically requires the inclusion of non-executive board member(s).

At the end of the Assessment period:

  • the ASX Limited Board had ten members, comprising the Chairman, the Managing Director and CEO, and eight non-executive directors
  • the ASX Settlement Board comprised one executive director (the ASX Managing Director and CEO) and five independent non-executive directors, two of whom were members of the ASX Limited Board
  • the Austraclear Board comprised one executive director (the ASX Managing Director and CEO) and seven independent non-executive directors, four of whom were members of the ASX Limited Board.

There are five directors that serve on all four CS Boards; one additional director serves on both the ASX Clear and ASX Settlement boards and three additional directors serve on both the ASX Clear (Futures) and Austraclear boards. The differences between the composition of the CS Boards, and between the CS Boards and ASX Limited, are primarily for business reasons, but also support ASX's conflict handling arrangements (see SSF Standard 2.9).

As set out in the CS Boards' Charter, the CS Boards, in consultation with the Nomination Committee and the ASX Limited Board, determine the composition of the CS Boards, with directors selected based on relevant skills and expertise. Two of the non-executive directors of ASX Settlement are also members of the ASX Limited Board, while the remaining three, including the Chair, are external directors appointed for their expertise in clearing and settlement operational and risk management matters. Four of the non-executive directors of Austraclear are also members of the ASX Limited Board, while the remaining three are external directors appointed for their expertise in clearing and settlement operational and risk management matters. This helps to ensure that directors have the capacity to conduct informed independent reviews of relevant issues. The directors of ASX Settlement and Austraclear have experience in senior roles across a range of financial sectors globally, including international banking, asset management, and financial, derivatives and capital markets.

The CS Boards' Charter sets out the ASX policy that the majority of directors on each CS Board must be independent. The Board Policy and Guideline to Relationships Affecting Independent Status is available on the ASX website.[7] The independence of directors is assessed according to this policy, which is aligned to the ASX Corporate Governance Council's Corporate Governance Principles and Recommendations for listed companies. Each board considers whether directors are free of business or other relationships that could materially interfere with, or could reasonably be perceived to interfere with, the independent exercise of the director's judgement. The biographies of the directors, which show their relationship with other ASX Group companies, are set out on the ASX website.[8]

Selection, succession planning and training for board members are matters that are addressed by the Nomination Committee and boards at appropriate intervals. New directors receive a comprehensive induction co-ordinated by Company Secretariat. The boards also receive regular briefings at board meetings, workshops, customer engagement meetings and site visits. This helps to ensure that directors are kept informed of relevant market and industry developments, and assists in developing the skills and technical knowledge of the board.

Directors' fees at ASX Limited, ASX Settlement and Austraclear are considered by the ASX Limited Remuneration Committee. ASX's fee structure has been designed to assist it in attracting and retaining appropriately skilled and qualified non-executive directors and recognises the workload and level of skill and expertise that a director must have to effectively meet their responsibilities. Remuneration of directors is determined by the ASX Limited Board on the recommendation of the Remuneration Committee. In conducting a review, the Board may take advice from an external remuneration consultant. The process involves benchmarking against a group of peer companies. There were no changes to directors' fees following the latest fee review in June 2016.

2.5 The roles and responsibilities of management should be clearly specified. A securities settlement facility's management should have the appropriate experience, mix of skills and integrity necessary to effectively discharge its responsibilities for the operation and risk management of the securities settlement facility. Compensation arrangements should be structured in such a way as to promote the soundness and effectiveness of risk management.

ASX has clear and direct reporting lines between management and the CS Boards. This is set out in the CS Boards' Charter, along with the roles and responsibilities of the Managing Director and CEO and the CRO.

In March 2017, ASX announced an appointment to the role of Chief Operating Officer (COO). The new COO is responsible for the delivery of overall operations of the ASX Group and reports directly to the CEO. In the normal course, the Managing Director and CEO has responsibility for the overall operational and business management and profit performance of ASX, while the COO and CRO are responsible for the overall settlement risk management of the CS facilities and for ensuring that the SSFs meet the regulatory obligations placed on them. The CIO and a new Executive General Manger Operations report to the COO.

ASX has a remuneration policy and performance management framework in place, which aims to ensure that management personnel have an appropriate mix of skills and experience to discharge their responsibilities. The ASX Limited Remuneration Committee has delegated responsibility from the ASX Limited Board to conduct detailed examination of certain matters under ASX's remuneration and incentive framework, including succession plans, recruitment, retention and termination strategies. The committee also reviews the remuneration arrangements of the ASX Group directors and all ASX staff, including the Managing Director and CEO, the Deputy CEO, Group Executives and General Managers. The committee members are appointed by the ASX Limited Board, and must consist of only non-executive directors, with at least three members, a majority of independent directors, and an independent chair who is not Chairman of ASX Limited. The committee has direct access to ASX senior management and the authority to seek independent advice. The CS Boards have delegated responsibility to the committee for compensation arrangements and performance management processes relating to the CRO, COO, and CCO. The CS Boards provide input on the setting of key performance indicators and may review the performance outcomes for these positions.

ASX carries out succession planning and management processes in order to ensure leadership continuity in key positions, and develop intellectual depth and business knowledge. This includes the periodic review of a ‘talent assessment tool’ by Group Executives and Human Resources to identify and manage the development of high potential staff according to individual and business needs. Succession and contingency planning is conducted for Group Executives, General Managers and other key staff.

2.6 The board should establish a clear, documented risk management framework that includes the securities settlement facility's risk tolerance policy, assigns responsibilities and accountability for risk decisions, and addresses decision-making in crises and emergencies. Governance arrangements should ensure that the risk management and internal control functions have sufficient authority, independence, resources and access to the board, including through the maintenance of a separate and independent internal audit function.

ASX has a documented risk management framework, which is described under SSF Standard 3.1. The CS Boards are responsible for approving and reviewing high-level risk management policies relevant to clearing and settlement operations. The boards have oversight of all new clearing and settlement risk policies and standards, as well as material changes to existing clearing and settlement policies and standards. Each board considers these policies in accordance with its respective obligations. Board feedback is incorporated before risk policies and standards are approved.

Responsibilities under the high-level risk management policy relevant to SSF risk are distributed as follows:

  • ASX's Settlement Risk Policy Framework provides a formal structure for the development, governance and review of settlement risk policies and standards, and is reviewed by the CS Boards on an annual basis. Detailed reporting to the CS Boards occurs quarterly on the operation of the SSFs and their compliance with risk management policies and standards, and on broader management and operational matters. Internal Audit conducts a rotational risk-based independent audit program (see SSF Standard 2.7); this includes ensuring that relevant operational functions comply with board-approved policies and standards, where necessary using external specialists to assist with reviews. The CS Boards may also request external reviews.
  • The Audit and Risk Committee has responsibility for the oversight of the Enterprise Risk Management Framework.
  • The Enterprise Risk Management Committee (ERMC), comprising executives from various functions, is responsible for enterprise risk management policy and reviewing controls, processes and procedures to identify and manage risks. This committee is also responsible for formally approving significant operational risk policies.
  • Individual functions are responsible for: identifying business-specific risks; applying controls; maintaining risk management systems; reporting on the effectiveness of risk controls; and implementing enhancements and taking remedial action as appropriate. Each function is required to maintain a record of its risk profile, reviewing this on a six-monthly basis and updating as appropriate. This record includes key risk indicators and action plans to address any identified risk that is not adequately mitigated. Documented policies and standards specify requirements for periodic formal review. More frequent reviews are undertaken where there are potential changes to technology, legal or regulatory requirements, or business drivers.

The Clearing and Settlement Operations and Settlement Services functions have responsibilities relevant to the management of settlement risks that are defined in ASX's Settlement Risk Policy Framework.

Directors are entitled to obtain independent advice. The ASX Limited Annual Report addresses directors' access to information, management and advice. To the extent that directors wish to seek independent advice, they can raise this in board meetings, with the Managing Director and CEO, or with the Chairman. ASX Settlement also obtains participant feedback on risk management matters through the Business Committee (see SSF Standard 2.8).

2.7 A securities settlement facility's operations, risk management processes, internal control mechanisms and accounts should be subject to internal audit and, where appropriate, periodic independent expert reviews. Internal audits should be performed, at a minimum, on an annual basis. The outcome of internal audits and external reviews should be notified to the Reserve Bank and other relevant authorities.

ASX maintains an internal audit plan that provides for a three-to-five-year review cycle of key operational and risk management processes, and internal control mechanisms that are governed by ASX's Enterprise Risk Management Framework, business continuity framework and enterprise compliance framework, using the internal audit methodology. The internal audit plan is approved by the ASX Limited Audit and Risk Committee, and those aspects of the audit plan that are relevant to the CS Boards and ASX Compliance Board are approved by those boards. The key governance frameworks are reviewed by external independent experts, as required. ASX's internal audit arrangements are set out in an Internal Audit Charter, which is reviewed and approved by the ASX Limited Audit and Risk Committee every two years and made available on the ASX public website.

The internal audit function operates independently of other functions within ASX's Risk group. Its principal objective is to ‘provide independent, objective assurance and consulting services designed to add value and improve the operations of ASX’. Its scope covers the policies, processes and procedures of all risk management and internal control systems. Internal Audit also has reporting lines to the Audit and Risk Committee and Managing Director and CEO for audit purposes and to the CRO for administrative purposes. Internal Audit also has reporting lines to the CS Boards and ASX Compliance Board. The General Manager of Internal Audit has direct access to the ASX Limited Audit and Risk Committee, CS Boards and ASX Compliance Board. If a potential conflict arises between Internal Audit and the CRO, Internal Audit would use the reporting lines to the Managing Director and CEO, Audit and Risk Committee, CS Boards or the ASX Compliance Board. Internal Audit staff are required to hold appropriate undergraduate and postgraduate qualifications relevant to their roles.

The role and performance of the internal audit function is regularly reviewed by the ASX Limited Audit and Risk Committee. Internal Audit is also reviewed by external independent auditors on a three-year cycle. The last such audit, conducted in October/November 2014, concluded that Internal Audit was appropriately carrying out its role as the key provider of assurance services within ASX, and was operating in accordance with the International Standards for the Professional Practice of Internal Auditing. The performance of the General Manager, Internal Audit is also assessed each year by the Audit and Risk Committee.

ASX has a clearly defined methodology for internal audit, based on the International Professional Practices Framework set out by the Institute of Internal Auditors.[9] The internal audit methodology allows for ad hoc reviews if, for example, material new risks are identified or other changes to ASX's business occur. This is a matter which the General Manager, Internal Audit and the Audit and Risk Committee consider. The ASX Compliance Board and the CS Boards may also request ad hoc reviews.

2.8 Governance arrangements should ensure that the securities settlement facility's design, rules, overall strategy and major decisions reflect appropriately the legitimate interests of its direct and indirect participants and other relevant stakeholders. Governance arrangements should provide for consultation and stakeholder engagement through appropriate forums on operational arrangements, risk controls and default management rules and procedures. Major decisions should be clearly disclosed to relevant stakeholders and, where there is a broad market impact, the public.

The interests of direct and indirect participants and other relevant stakeholders are recognised in the ASX Limited Board Charter, the CS Boards' Charter and the ASX Customer Charter (see SSF Standard 2.1).

The views of participants and other stakeholders are sought through formal and informal means. ASX routinely conducts public consultations when considering major changes to existing services or new service offerings. These consultations allow for written submissions and discussion in both bilateral and open forums. Participants' views may also be gathered through the induction program for new participants, as well as ongoing participant liaison and compliance checks.

Under ASX's Code of Practice for Clearing and Settlement of Cash Equities in Australia (the Code of Practice), ASX established the Business Committee, a stakeholder advisory body for ASX's cash market clearing and settlement services. The Business Committee comprises representatives of clearing participants, settlement participants, AMOs and the Stockbrokers Association of Australia. The key objective of the Business Committee is to provide user input to the boards of ASX Clear and ASX Settlement on the design, operation and development of the clearing and settlement services and infrastructure for the Australian cash equity market, and provide a formal mechanism for ASX Clear and ASX Settlement to consult users on their strategic plans and investment decisions in relation to these services. The Business Committee's proposals and recommendations are presented to the ASX Clear and ASX Settlement boards for consideration. Although the boards are not obliged to accept the committee's advice, they are required to provide reasons for any decision not to do so. Where it considers it appropriate, the Business Committee can appoint a Technical Committee to assist with the performance of its duties. For example, in December 2016 ASX formed a Technical Committee to consider matters related to CHESS messaging and the adoption of the ISO 20022 messaging standard. In addition to the CHESS replacement project (see Section 2.4.3), the Business Committee discussed a range of initiatives, including ASX's cyber resilience strategy, and changes to minimum participant core capital requirements.

Austraclear also consults with an Advisory Committee to receive user feedback on Austraclear's design, operation and the development of its forward work plan. The Advisory Committee, which met twice in the Assessment period, is currently made up of representatives from 11 of Austraclear's major participants and representatives from the Bank and the Australian Financial Markets Association. The Advisory Committee may convene technical working groups to examine and provide advice on specific matters as required.

2.9 A securities settlement facility that is part of a group of companies should ensure that measures are in place such that decisions taken in accordance with its obligations as a securities settlement facility cannot be compromised by the group structure or by board members also being members of the board of other entities in the same group. In particular, such a securities settlement facility should consider specific procedures for preventing and managing conflicts of interest, including with respect to intragroup outsourcing arrangements.

ASX has conflict handling arrangements to manage potential conflicts of interest that its directors and staff may face. The potential for intragroup conflicts arising from ASX's group structure is addressed by intragroup service agreements, which set out the basis on which other group entities will provide services to the CS facilities and specify that the entities providing the services must have sufficient financial and other resources to meet their obligations. These agreements provide that ASX Group staff are under a duty to act in the best interests of the facility that is receiving the services.

ASX's governance arrangements are designed to ensure that shared directorships within the ASX Group cannot compromise each CS facility's compliance with its licence obligations, including observance of the FSS. ASX considers that there is limited potential for shared directorships to create conflicts between ASX's group-wide commercial interests and the risk management function of the CS facilities. More broadly, it considers that conflicts between directors' roles on the CS Boards and the ASX Limited Board are unlikely given the distinct roles the separate entities perform, and in view of group-wide arrangements to manage matters such as operations and compliance. If a conflict were to arise, a director sitting on multiple CS Boards would be expected to make decisions in the best interests of each facility.

The structure of the CS Boards further limits the potential for conflict. Two directors are able to form a quorum of the ASX Settlement Board, allowing matters that raise potential conflicts of interest in relation to AMOs and ALMOs to be considered and decided as required without the involvement of directors that are also on the ASX Limited Board. The independent directors of ASX Settlement that are not also directors of ASX Limited met on six occasions (including one workshop) during the Assessment period to consider conflict-sensitive information.

Footnotes

Available at <http://www.asx.com.au/documents/regulation/ASXL_guidelines_affecting_independent_status.PDF>. [7]

Available at <http://www.asx.com.au/about/board-and-management.htm>. [8]

The Institute of Internal Auditors is the leading international organisation representing internal auditors. It has developed a set of standards that provides a framework for carrying out and evaluating the performance of internal audits. [9]