Assessment of ASX Clearing and Settlement Facilities – September 2021 2021 Recommendations to Observe or Continue Observing the FSS

The Assessment includes a number of recommendations for the ASX CS facilities to strengthen their observance of relevant FSS. This includes recommendations that have resulted from the Bank's special topic deep dive on governance over the assessment period.

Recommendations

Legal Basis
The ASX CS facilities should enhance their process for five yearly review of operating rules and procedures to include a systematic process for benchmarking against industry standards and market protocols, and identifying rules and procedures that are redundant or inconsistent, or where changes are otherwise desirable.

Governance

  1. The objectives, strategies and goals for each CS facility should be documented and communicated within the ASX group. The objectives should explicitly place a high priority on the safety of the facility and explicitly support the stability of the financial system and other relevant public interest considerations. This should include a statement on how ‘financial stability’ can be practically understood by decision makers within the CS facilities. It should also set out the strategies that have been adopted to safeguard system stability. CS Board processes should include a system for monitoring progress against the strategy and objectives.
  2. ASX should introduce clearer lines of responsibility and accountability for each CS facility as required by CCP Standard 2.2/SSF Standard 2.2. An appropriate way to do this would be to appoint one or more identifiable executives, the ‘CS Lead Executive/s’, accountable to the relevant CS Board for the operation of each of the CS facilities. The CS Lead Executive/s should also be accountable for the achievement of strategies and objectives determined by the relevant CS Board. The relevant CS Board should have input into both the performance assessment and remuneration of the CS Lead Executive/s.
  3. As soon as practicable in the circumstances of the current transition to ASX's new operating model, ASX should document governance arrangements that set out clear and direct lines of responsibility and accountability for each of the CS facilities' businesses as required by CPP Standard 2.2/SSF Standard 2.2. This can be done by way of an accountability map that contains the names of staff with senior executive responsibility for all or part of each CS facility's operations. The accountability map could contain details of the reporting lines and lines of responsibility for those senior executives. Such a map would demonstrate the lines of reporting from those senior executives through to a board or board committee within the ASX Group and specify the relevant board or board committee. Senior executives who could usefully be included on such an accountability map would include those with the following responsibilities:
    1. CEO and Managing director of the ASX Group
    2. the CS Lead Executive for each CS facility
    3. management of the CS Facility's financial resources
    4. overall risk control and overall risk management of the CS Facility
    5. management of the CS Facility's operations (i.e. Chief Operating Officer or equivalent)
    6. information management, including information technology systems for the CS Facility
    7. management of the CS Facility's internal audit function
    8. management of the CS Facility's compliance functions
    9. provision of legal advice to the board of the CS Facility
    10. management of the CS Facility's human resources functions.
  4. In accordance with CCP Standard 2.5/SSF Standard 2.5, ASX should clearly specify the roles and responsibilities of directors and of the senior executives referred to in Governance Recommendation 3. This can be done by creating, for each such person, an accountability statement containing details of:
    1. the part of the CS facility's business for which that person has senior executive responsibility
    2. the responsibilities of that person.

    The accountability statement for the CEO and Managing Director should document his or her responsibility for ensuring that the CS Lead Executive has access to sufficient resources for the operation of the CS facility.

  5. ASX's performance and remuneration policies and frameworks should ensure that any failure by a person identified in Governance Recommendation 3 to appropriately discharge their responsibilities will be reflected in any variable remuneration payable to that person. This will promote the soundness and effectiveness of risk management of the CS facilities as required by CCP standard 2.5/SSF standard 2.5.
  6. The administrative reporting line for the General Manager, Internal Audit should be to the Managing Director and CEO of the ASX Group.
  7. ASX should conduct an annual skills audit of each CS Board in the same manner as the audit currently conducted for the ASX Limited Board.
  8. The CS Boards should formally approve the application of any group-wide policies, procedures or governance documentation to the CS facilities. Such policies should include a statement, approved by the CS Boards, as to the manner in which the relevant policy, procedure or document applies to the CS facilities.
  9. The application of the following arrangements for ASX Clear and ASX Settlement should be extended to ASX Clear (Futures) and Austraclear:
    1. the requirement that the boards shall comprise at least 50 per cent non-executive directors who are not also directors of ASX Limited and that the non-ASX Limited directors can also comprise a quorum
    2. the requirement that the Chair is not also an ASX Limited director
    3. provision for meetings of non-ASX Limited directors. These meetings should consider all potential conflicts of interest between the CS facilities and other ASX Group entities.

    The composition and appointment of the Chairs of the boards of ASX Clear (Futures) and Austraclear should be changed accordingly.

  10. The non-ASX Limited directors should be represented in board-level discussions of the supervision of risks to the CS facilities. This includes involvement at any board or committee meeting which considers risks or the risk appetite of the CS facilities.
  11. ASX should continue to explore ways to provide its boards with access to skills, experience and networks relevant to large technology project implementation.
  12. The ASX Group Boards should strengthen their oversight of technology project implementation. To achieve this, ASX should proceed with its proposal to establish a board committee to monitor technology project implementation. The respective responsibilities of this committee and the ARC will need to be carefully defined.
  13. ASX Group should adopt:
    1. structured and documented processes for director recruitment and board renewal, ultimately including a tenure policy
    2. a more systematic approach to board education with an emphasis on supporting directors in the supervision of ASX's technology program
    3. systems for considering and implementing feedback arising from the annual board feedback survey
    4. more rigorous director performance management
    5. documented guidance as to the matters that should be referred to the various board meetings.
  14. ASX should take steps to improve their identification and management of intragroup conflicts of interest. The non-ASX Limited directors should have unqualified access to independent legal advice and other expert advice on matters where the interests or obligations of a CS facility could potentially conflict with the interests of another entity in the ASX Group. To facilitate this, ASX should consider establishing a small unit of staff dedicated to supporting the CS Boards, including by providing assistance with obtaining external advice.
  15. The ASX Boards should continue their emphasis on stakeholder management, potentially through the creation of a stakeholder committee. This should also include more regular meetings with key stakeholders.
  16. The CS facilities should publish a Stakeholder Management Charter, which identifies groups of stakeholders and articulates the ASX's approach to engaging with each group of stakeholders.
  17. The CS Boards should require the CS Lead Executive(s) to complete an annual self-assessment of compliance with the FSS.

CCP Resilience Guidance
To align financial risk management practices and governance arrangements with the CCP Resilience Guidance, the ASX CCPs should continue to implement plans to:

  • enhance the comprehensiveness of stress testing to ensure risks are appropriately identified, captured and stressed
  • enhance analysis and justification of assumptions used in stress testing models so that risks are adequately captured
  • remove the assumption made by ASX Clear that excess collateral will not be withdrawn or decreased during periods of stress to more accurately reflect the extreme but plausible conditions appropriate for stress testing
  • ensure that roles and processes in relation to the governance of financial risk management are appropriately formalised and documented in order to ensure that the CS Boards have sufficient information to effectively oversee the CCPs
  • ensure that their arrangements for disclosure to, and soliciting feedback from, stakeholders cover all relevant aspects of the CCPs' risk management frameworks, including margin sensitivity analysis, reverse stress testing and management of procyclicality.

Framework for the comprehensive management of risks
ASX should establish a process to periodically conduct systematic assessments of the range of potential risks other entities may pose to its CS facilities and the risks ASX CS facilities could potentially pose to other entities.

Procyclicality
Consistent with the CCP Resilience Guidance, the ASX CCPs should develop a systematic procyclicality framework designed to avoid destabilising increases in margin and other financial risk requirements during periods of heightened market volatility. This framework should include an appropriate methodology for measuring the degree of procyclicality in the CCPs' risk models.

Margin period of risk
The ASX CCPs should review whether their calibration of margin period of risk (MPOR) assumptions and margin add-ons is consistent with the time it would take to liquidate large and diverse portfolios, taking into account the sequencing of liquidation in a default scenario.

Late-in-day price movements
The ASX CCPs should put in place arrangements that allow them to monitor and manage exposures from large late-in-day price movements, including movements that exceed the coverage provided by initial and additional margin. For ASX Clear (Futures), this also applies to price movements during the overnight trading session.

Liquidity add-ons
ASX Clear should complete its review of add-ons to manage liquidity risk for cash market products and implement these add-ons if the review concludes they are needed.

Liquidity risk
ASX Clear (Futures) should take all necessary steps to establish an ability to access liquidity from the Bank in respect of a defaulting participant's non-cash collateral.

Exchange-of-value settlement
ASX Settlement should complete analysis of the legal certainty of powers used to support deferral of the movement of securities if this cannot be achieved on the same day as transfer of cash.[1]

Segregation and portability
ASX Clear should conduct an assessment of whether the protections from arrangements utilising a commingled house/client account structure remain materially equivalent to those provided by omnibus or individual client segregation. ASX should consult with the Bank on the outcome of this assessment within 12 months of the CHESS replacement system going live.

CHESS capacity and system replacement
ASX should implement the new clearing and settlement system for cash market transactions as soon as this can be safely achieved by ASX and users of CHESS. In the short term, ASX should complete work underway to increase the joint capacity of the current CHESS and CORE systems.[2]

Operational incidents
ASX should address findings from the IBM review of the ASX Trade Refresh project, ensuring that any relevant steps are taken to apply lessons learned to its clearing and settlement operations, and in particular to the CHESS replacement program. ASX's assessment of how relevant lessons apply to the CHESS replacement program should be subject to independent external review.

Operational risk management
The ASX CS facilities should continue to embed the use of new systems and processes supporting change management, incident management and knowledge management, and use these systems to identify, monitor and manage operational risks at an enterprise-wide level. ASX internal audit should complete its review of the effectiveness of these systems and processes in practice.

Risk management systems
The ASX CCPs should implement plans to ensure that their core systems have the functionality to fully support their risk management approach, including by migrating processes currently operated on non-core systems to core systems.

Regulatory reporting
ASX should review the quality controls and systems it has in place to systematically identify and bring to the Bank's attention information required to be reported to the Bank, and address any gaps identified as part of this review. ASX should ensure that these controls are also in place for its implementation of the Bank's upgraded FMI data collection.

Endnotes

This recommendation also has relevance for ASX Clear. [1]

This recommendation has relevance for ASX Clear and ASX Settlement. [2]