| 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.
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| 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.
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| 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.
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| 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.
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| 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.
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