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

Standard 6: Liquidity risk

A securities settlement facility should effectively measure, monitor and manage its liquidity risk. A securities settlement facility should maintain sufficient liquid resources in all relevant currencies to effect same-day and, where appropriate, intraday and multiday settlement of payment obligations with a high degree of confidence under a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would generate the largest aggregate liquidity obligation for the securities settlement facility in extreme but plausible market conditions.

6.1 A securities settlement facility should have a robust framework to manage its liquidity risks from its participants, commercial bank money settlement agents, nostro agents, custodians, liquidity providers and other entities.

Neither ASX Settlement nor Austraclear face liquidity risks as principal from their participants, commercial bank money settlement agents, nostro agents, custodians or liquidity providers. In the event of the default it would be the participants in the relevant SSF (including the relevant central counterparty (CCP)) that would have to manage the liquidity risk.

6.2 A securities settlement facility should have effective operational and analytical tools to identify, measure and monitor its settlement and funding flows on an ongoing and timely basis, including its use of intraday liquidity.

Since ASX Settlement and Austraclear do not face liquidity risks as principal they do not need operational and analytical tools to identify, measure and monitor their settlement and funding flows. However, they do provide such tools to participants in order to allow participants to do so on an ongoing and timely basis.

ASX Settlement provides participants with information regarding their money and securities settlement obligations between trade date and settlement date. This information includes individual trade notifications, netted obligations, projected funds obligations and rescheduled settlements following delivery failures. Participants use this information to monitor and manage their funding and delivery obligations and risks.

In the event of a participant default, ASX Settlement may use its back-out algorithm to reconstitute the batch and select novated transactions to be settled via an OTA. ASX Settlement's back-out arrangements are described in Section 10 of the ASX Settlement Operating Rules, as well as in related procedures available to participants. ASX Settlement has published a guidance note on default management to explain the operation of the back-out algorithm. Furthermore, during consultation with participants on the introduction of OTAs, ASX released a consultation paper and subsequent explanatory note outlining the operation and potential liquidity impact of OTAs on novated transactions (see SSF Standard 6.1). ASX Clear has subsequently developed additional disclosures to assist participants in understanding the potential liquidity impact of reconstitution of the ASX Settlement batch arising from the use of OTAs (see Appendix C.1, CCP Standard 7.1).

Austraclear also provides information to participants to assist them in their liquidity management. This includes the provision of real-time information on transactions and securities account balances. Austraclear also has tools to help participants manage their transactions. For example, participants have control over the priority of transactions that are on the settlement queue, which in turn determines the order in which those transactions would settle.

6.3 A securities settlement facility should maintain sufficient liquid resources in all relevant currencies to effect same-day settlement and, where appropriate, intraday or multiday settlement of payment obligations with a high degree of confidence under a wide range of potential stress scenarios that should include, but not be limited to, the default of the participant and its affiliates that would generate the largest aggregate payment obligation in extreme but plausible market conditions.

Since ASX Settlement and Austraclear do not assume liquidity risk as principal the requirement to maintain liquid resources to cover payment obligations in stressed scenarios does not apply.

6.4 For the purpose of meeting its minimum liquid resource requirement, a securities settlement facility's qualifying liquid resources in each currency include cash at the central bank of issue and at creditworthy commercial banks, committed lines of credit, committed foreign exchange swaps and committed repos, as well as highly marketable collateral held in custody and investments that are readily available and convertible into cash with prearranged and highly reliable funding arrangements, even in extreme but plausible market conditions. If a securities settlement facility has access to routine credit at the central bank of issue, the securities settlement facility may count such access as part of the minimum requirement to the extent it has collateral that is eligible for pledging to (or for conducting other appropriate forms of transactions with) the relevant central bank. All such resources should be available when needed.

Since ASX Settlement and Austraclear do not assume liquidity risk as principal, the minimum liquid resource requirement does not apply.

6.5 A securities settlement facility may supplement its qualifying liquid resources with other forms of liquid resources. If the securities settlement facility does so, these liquid resources should be in the form of assets that are likely to be saleable or acceptable as collateral for lines of credit, swaps or repos on an ad hoc basis following a default, even if this cannot be reliably prearranged or guaranteed in extreme market conditions. Even if a securities settlement facility does not have access to routine central bank credit, it should still take account of what collateral is typically accepted by the relevant central bank, as such assets may be more likely to be liquid in stressed circumstances. A securities settlement facility should not assume the availability of emergency central bank credit as part of its liquidity plan.

Since ASX Settlement and Austraclear do not assume liquidity risk as principal, the need to supplement their qualifying liquid resources does not apply.

6.6 A securities settlement facility should obtain a high degree of confidence, through rigorous due diligence, that each provider of its minimum required qualifying liquid resources, whether a participant of the securities settlement facility or an external party, has sufficient information to understand and to manage its associated liquidity risks, and that it has the capacity to perform as required under its commitment. Where relevant to assessing a liquidity provider's performance reliability with respect to a particular currency, a liquidity provider's potential access to credit from the central bank of issue may be taken into account. A securities settlement facility should regularly test its procedures for accessing its liquid resources at a liquidity provider.

Since ASX Settlement and Austraclear do not assume liquidity risk as principal, the requirement to maintain liquid resources to cover payment obligations in stressed scenarios does not apply.

6.7 A securities settlement facility with access to central bank accounts, payment services or securities services should use these services, where practical, to enhance its management of liquidity risk.

Since ASX Settlement and Austraclear do not assume liquidity risk as principal, the requirement to use central bank accounts, payment services or securities services does not apply. Nevertheless, both SSFs make use of central bank money (SSF Standard 8).

6.8 A securities settlement facility should determine the amount and regularly test the sufficiency of its liquid resources through rigorous stress testing. A securities settlement facility should have clear procedures to report the results of its stress tests to appropriate decision-makers at the securities settlement facility and to use these results to evaluate the adequacy of, and adjust, its liquidity risk management framework. In conducting stress testing, a securities settlement facility should consider a wide range of relevant scenarios. Scenarios should include relevant peak historic price volatilities, shifts in other market factors such as price determinants and yield curves, multiple defaults over various time horizons, simultaneous pressures in funding and asset markets, and a spectrum of forward-looking stress scenarios in a variety of extreme but plausible market conditions. Scenarios should also take into account the design and operation of the securities settlement facility, include all entities that might pose material liquidity risks to the securities settlement facility (such as commercial bank money settlement agents, nostro agents, custodians, liquidity providers and linked FMIs) and, where appropriate, cover a multiday period. In all cases, a securities settlement facility should document its supporting rationale for, and should have appropriate governance arrangements relating to, the amount and form of total liquid resources it maintains.

Since ASX Settlement and Austraclear do not assume liquidity risk as principal, the requirement to test the sufficiency of their liquid resources does not apply.

6.9 A securities settlement facility should establish explicit rules and procedures that enable the securities settlement facility to effect same-day and, where appropriate, intraday and multiday settlement of payment obligations on time following any individual or combined default among its participants. These rules and procedures should address unforeseen and potentially uncovered liquidity shortfalls and should aim to avoid unwinding, revoking or delaying the same-day settlement of payment obligations. These rules and procedures should also indicate the securities settlement facility's process to replenish any liquidity resources it may employ during a stress event, so that it can continue to operate in a safe and sound manner.

The ASX SSFs have rules and procedures that govern the management of a participant default (SSF Standard 11). However, since ASX Settlement and Austraclear do not assume liquidity risk as principal the requirement to establish rules and procedures to address unforeseen and potentially uncovered liquidity shortfalls and replenish any liquid resources do not apply.