Assessment of ASX Clearing and Settlement Facilities – September 2021 Executive Summary
This report presents the annual Assessment by the Reserve Bank of Australia (the Bank) of the ASX clearing and settlement (CS) facilities, as at 30 June 2021. On balance, the Bank has concluded that the facilities have conducted their affairs in a way that promotes overall stability in the Australian financial system. However, ASX will need to place a high priority on addressing recommendations related to margin at ASX Clear (Futures) and operational risk at all of the ASX CS facilities.
Scope of assessment
The Assessment covers the four ASX CS facilities: two central counterparties (CCPs) – ASX Clear and ASX Clear (Futures) – and two securities settlement facilities (SSFs) – ASX Settlement and Austraclear. The Bank has assessed the CS facilities' compliance with relevant financial stability standards (FSS) determined by the Bank, as well as the CS facilities' general obligation to do all other things necessary to reduce systemic risk.
Key findings
The Bank's ratings of the ASX CS facilities' compliance against relevant FSS are summarised below.
| Standard(s) | ASX Clear | ASX Clear (Futures) | ASX Settlement | Austraclear |
|---|---|---|---|---|
| Operational Risk | Partly observed | Partly observed (↓) | Partly observed | Partly observed (↓) |
| Margin | Broadly observed | Partly observed | --- | --- |
| Governance Regulatory Reporting |
Broadly observed (↓) | Broadly observed (↓) | Broadly observed (↓) | Broadly observed (↓) |
| Credit Risk Liquidity Risk |
Broadly observed | Broadly observed | N/A | N/A |
| General Business Risk | Observed (↑) | Observed (↑) | Observed (↑) | Observed (↑) |
| Other applicable standards | Observed | Observed | Observed | Observed |
| Note: Green = Observed; Yellow = Broadly Observed; Orange = Partly Observed; Grey = N/A. Blue text is used for upgraded ratings and red text for downgraded ratings. | ||||
In arriving at these ratings, the Bank took into account the following key developments at the CS facilities:
Operational risk: ASX experienced a major outage to its equities trading platform following an upgrade to a key trading platform, as well as other incidents affecting its trading, clearing and settlement systems in November 2020. An independent expert review of the ASX project to upgrade the trading platform identified several shortcomings that are also relevant to the CS facilities' management of project-related risks.
Over the past year, ASX has taken short-term steps to relieve pressure on the capacity of CHESS – ASX's system for clearing, settlement and other post-trade services for the Australian cash equities market – while it progresses work on a replacement system.
- Governance: The Bank conducted a detailed review of ASX's governance arrangements,
finding:
- that ASX benefits from a skilled and experienced board. The new Chair of ASX has introduced a number of positive initiatives for governance at ASX
- that the CS facilities' business and their regulatory and stakeholder obligations do not always receive appropriate attention and focus within the broader ASX Group
- unclear lines of responsibility and accountability for the operation of the CS facilities
- gaps in the ASX Boards' access to the skills, experience and understanding needed to supervise ASX's program of technology upgrades, including the replacement of CHESS
- that ASX should broaden its ‘customer’ focus to include all stakeholders.
- Regulatory reporting: The Bank identified gaps in ASX's processes for notifying the Bank of information in a timely and transparent manner.
- General business risk: ASX addressed recommendations made in the Bank's 2020 Assessment to introduce an investment risk capital buffer for the CCPs, and to formalise its arrangements for holding business and operational risk capital at the SSFs.
2021/22 regulatory priorities
The Assessment includes a number of recommendations for the ASX CS facilities to strengthen their observance of relevant FSS, including in relation to:
- addressing the findings of an independent review of the ASX trading platform upgrade project, including to carry across relevant findings to the CHESS replacement project
- strengthening ASX's governance arrangements in line with findings of the Bank's governance review
- managing the risks to the CCPs associated with large, late-in-day price movements
- developing a systematic framework to address the risk of destabilising increases in margin and other financial risk requirements during volatile periods
- aligning financial risk management practices and governance arrangements with international guidance on CCP resilience
- reviewing the legal certainty of the delivery-versus-payment settlement process in CHESS
- addressing remaining constraints to the joint processing capacity of CHESS and the related CORE system, and implementing the CHESS replacement system
- establishing a systematic approach to assessing risks that other entities may pose to the CS facilities, and vice versa
- reviewing the quality controls and systems ASX has in place for notifying the Bank of material developments in a timely and transparent manner.
Over the coming year the Bank will conduct deep-dive assessments of the ASX CS facilities' management of margin and the CHESS replacement system. Other areas of focus will include ASX initiatives to enhance cyber resilience, validation of stress testing scenarios and review of its enterprise risk management framework (ERMF).