Assessment of ASX Clearing and Settlement Facilities 1. Summary of Regulatory Priorities
This section summarises actions taken by the ASX CS facilities during the 12 months to June 2018 (the assessment period) in relation to recommendations identified in the Bank's September 2017 Assessment of ASX Clearing and Settlement Facilities (the September 2017 Assessment), and summarises the recommendations identified by the Bank in its September 2018 Assessment of the facilities against the FSS. Further detail is provided in section 2, which describes the material developments in the ASX CS facilities relevant to the FSS; section 3, which discusses findings from an external review of ASX's technology governance and operational risk and control framework; and section 4, which provides the results of a detailed assessment conducted by the Bank of the consistency of the ASX CCPs' risk management arrangements with the CCP Resilience Guidance.
1.1 Progress against 2017 Recommendations
In the Bank's September 2017 Assessment, the ASX CS facilities were rated ‘observed’ for all FSS, except for ASX Clear (Futures), which was rated ‘broadly observed’ for Margin (CCP Standard 6). The September 2017 Assessment made a recommendation for steps to be taken by ASX Clear (Futures) in order for it to observe CCP Standard 6, as well as other recommendations in order for the ASX CS facilities to continue to observe various standards. Table 1 summarises actions taken by the ASX CS facilities in relation to these recommendations during the assessment period.
The Bank's September 2017 Assessment also identified a number of areas of supervisory focus for the current assessment period. Material developments in each of these areas are described in sections 2, 3 and 4 (see Appendix A for a mapping of these sections to each area of supervisory focus).
1.2 2018 Assessment and Regulatory Priorities
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 Operational Risk (CCP Standard 16 and SSF Standard 14), which was rated as ‘partly observed’ in each facility (Table 2).[1] 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.[2] 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. Compared to the September 2017 Assessment, the Bank has lowered each of the CS facilities' ratings for Governance (CCP and SSF Standard 2) to ‘broadly observed’ and for Operational Risk (CCP Standard 16 and SSF Standard 14) to ‘partly observed’, reflecting issues identified as part of the Bank's consideration of an external review of ASX's technology governance and operational risk and controls (see section 3). The Bank has also lowered each CCP's ratings for Credit Risk (CCP Standard 4) and Liquidity Risk (CCP Standard 7) reflecting issues identified as part of the Bank's assessment of the ASX CCPs against new international guidance on CCP resilience, which raises the bar in relation to financial risk management at CCPs (see section 4).
The Bank has made recommendations that the CS facilities should address to observe or continue to observe relevant requirements in the FSS. This includes recommendations to address issues identified in ASX's governance arrangements, operational risk management and consistency with financial risk management practices described in a report of the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO), Resilience of central counterparties: Further guidance on the PFMI (the CCP Resilience Guidance). These recommendations are set out in Table 3 and will be a key part of the Bank's regulatory priorities in the next assessment period.
In addition to recommendations to observe or continue to observe the FSS, the Bank has identified several areas that will be an important part of its supervisory engagement with ASX in the next assessment period. These relate to the Bank's planned special topic for the next assessment period, and work ASX has underway to strengthen the facilities' risk management arrangements, and are summarised in Table 4.
In addition to the recommendations and supervisory focus, the Bank expects ASX to work towards continual strengthening of its risk management arrangements. This is in accordance with the general obligation on CS facilities to do all things necessary to reduce systemic risk. ASX recognises this and has governance arrangements in place to motivate and encourage continuous improvement. As part of its ongoing supervisory engagement, the Bank will continue to discuss with ASX areas where there may be opportunities for improvement.
Footnotes
In undertaking its Assessment, the Bank has applied the rating system used in the Principles for Financial Market Infrastructures: Disclosure Framework and Assessment Methodology produced by the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions in December 2012. See Appendix C for more detail on this system. [1]
Section 821A(aa) of the Corporations Act requires that a CS facility licensee, to the extent reasonably practicable to do so, comply with the FSS and do all other things necessary to reduce systemic risk. [2]