Assessment of ASX Clearing and Settlement Facilities Executive Summary

Purpose In accordance with its responsibilities under the Corporations Act 2001, the Reserve Bank of Australia (the Bank) presents its annual Assessment of the ASX clearing and settlement (CS) facilities. ASX operates four CS facilities: two central counterparties (CCPs) – ASX Clear Pty Limited and ASX Clear (Futures) Pty Limited – and two securities settlement facilities (SSFs) – ASX Settlement Pty Limited and Austraclear Pty Limited. The report details the CCPs' and SSFs' compliance with the Bank's Financial Stability Standards for Central Counterparties (CCP Standards) and Financial Stability Standards for Securities Settlement Facilities (SSF Standards) (together, the Financial Stability Standards or FSS), respectively, as well as the facilities' more general obligation to do all other things necessary to reduce systemic risk. The assessment is as at the end of June; however, where relevant, developments after this time are discussed.
Conclusion It is the Bank's assessment that the CS facilities ‘observed’ or ‘broadly observed’ all relevant requirements under the FSS as at 30 June, with the exception of the Operational Risk Standard (CCP Standard 16, SSF Standard 14), which was rated as ‘partly observed’ in each facility. On balance, the Bank has concluded that the facilities have conducted their affairs in a way that causes or promotes overall stability in the Australian financial system. However, the CS facilities will need to place a high priority on addressing the recommendations related to operational risk to ensure these issues of concern do not become serious.
Progress towards previous priorities ASX has made material progress against the Bank's regulatory priorities identified in its September 2017 Assessment report:
  • Risk model validation. ASX has amended its Model Validation Standard to ensure that the frequency of independent validations of the ASX CCPs' credit risk models aligns with the CCP Standards.
  • Analysis of credit stress testing. The ASX CCPs have implemented a revised monthly reverse stress testing approach.
  • Margining arrangements. The ASX CCPs have made several changes to their margining practices:

    Intraday exposures. ASX Clear (Futures) has introduced a 2.00 am initial margin call from certain Futures and over-the-counter (OTC) participants, supplemented by a requirement for participants to maintain a margin buffer to cover potential variation margin exposures created in the overnight session. ASX has also made several other changes to bring forward the collateralisation of overnight or late-in-day exposures. ASX Clear (Futures) expects to develop the capability to monitor and manage intraday exposures on a near real-time basis by December 2018.

    Margin period of risk (MPOR). During the assessment period, ASX carried out analysis of the MPOR for all products, concluding that the current assumptions are appropriate, with the exception of electricity derivatives in ASX Clear (Futures) and some cash market products in ASX Clear. In response, ASX has increased the MPOR on energy contracts from two to three days, and from one to two days for relevant cash market products.

    Liquidity add-ons. ASX has conducted a holistic review of its approach to calibrating initial margin for exchange-traded derivatives products at ASX Clear (Futures), resulting in plans to scale up margin requirements for larger portfolios based on estimated liquidation costs.

  • Default broker. ASX Clear implemented rule changes which allow it to select at least three participants from a pool of eligible default brokers to serve as active default brokers for a two-year period. ASX Clear now has four active default brokers and expects to appoint additional default brokers during the next assessment period.
Other material developments Other material developments relevant to the supervision of the ASX CS facilities that occurred during the assessment period include:
  • Operational risk review. ASX has established a program to strengthen its operational risk management and technology governance, to address the findings of an external review carried out at the instigation of the Bank and the Australian Securities and Investments Commission (ASIC). The program also incorporates existing ASX initiatives underway in these areas.
  • Clearing House Electronic Sub-register System (CHESS) replacement. ASX continued its development work on a project to replace CHESS, the clearing and settlement system that supports the cash equities market. ASX made the decision to proceed with a solution that utilises distributed ledger technology (DLT) and has consulted on the business requirements for the new system.
  • Stress test exposure limits (STEL) and capital requirements. Both CCPs reduced STELs to provide an additional buffer of default resources, while ASX Clear introduced additional core capital requirements related to the risk profile and complexity of a participant's business.
Priorities for the next assessment period

The Assessment includes recommendations for the ASX CS facilities to either observe or continue to observe the requirements under particular FSS. These recommendations relate to:

  • strengthening governance arrangements
  • the management of exposures during the ASX Clear (Futures) Night Session
  • aligning financial risk management practices with international guidance on CCP resilience
  • the management of liquidity and concentration risk in the CCPs' margin models for exchange-traded derivatives
  • implementing plans to strengthen operational risk management arrangements.

The Assessment also identifies areas that will be an important part of the Bank's supervisory engagement with ASX over the next assessment period. These relate to work ASX has underway to strengthen the facilities' risk management arrangements, and include:

  • the implementation of longer-term plans to improve risk systems
  • the review of liquid resources at both CCPs
  • the project to replace CHESS
  • continued enhancement of the CS facilities' cyber resilience arrangements
  • the Bank's planned assessment of the CS facilities' legal basis.