Assessment of ASX Clearing and Settlement Facilities 1. Summary of Regulatory Priorities

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.

For more information, see section 2.5.

Governance. ASX should address the recommendations of the Bank's special topic on governance to strengthen its approach to:

• embedding financial stability considerations in the CS facilities' strategy and objectives
• roles, responsibilities and accountabilities of executives and directors
• roles and composition of the CS Boards, including arrangements for non-ASX Limited directors
• supervision of technology projects
• board policies and processes
• managing intragroup conflicts of interest
• stakeholder management
• board oversight of CS facility compliance with the FSS.

For more information, see section 4.1.

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• remove the assumption made by ASX Clear that excess collateral will not be withdrawn or decreased during periods of stress to more accurately reflect the extreme but plausible conditions appropriate for stress testing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.

For more information, see Box A and section 2.2.1.

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.

For more information, see section 4.2.4.

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.

For more information, see section 2.2.2.

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.

For more information, see section 2.3.3.

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.

For more information, see section 2.2.2.

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.

For more information, see section 2.2.2.

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.

For more information, see section 2.3.2.

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.

For more information, see sections 3.3 and 3.4.

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.

For more information, see section 2.1.3.

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.

For more information, see section 2.1.1 and 2.1.2.

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.

For more information, see sections 3.2 and 3.4

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.

For more information, see section 2.1.4.

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.

For more information, see section 2.6.2.

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.

For more information, see section 2.6.1

Risk management framework. The Bank will monitor how recent developments, including revisions to the CS Boards Charter, ASX's new organisational model and the recommendations of this Assessment, are reflected in the upcoming review of ASX's Enterprise Risk Management Framework and in updates to the underlying frameworks for settlement and clearing risk. The Bank will discuss with ASX how this review process takes into account:

• how any gaps in the ERMF contributed to issues experienced in the ASX Trade Refresh project and CHESS replacement program
• whether the ERMF worked as intended during those events
• any changes that are required to address or support recommendations from the IBM review of the ASX Trade outage and the EY reviews of the CHESS Replacement program.

CCP Resilience Guidance. Implementation of ASX's plans to address gaps against the CCP Resilience Guidance.

For more information, see Box A.

Default management and recovery. Implementation of ASX's work plan to enhance its default management and recovery frameworks, taking into account potential gaps identified in the 2019/20 special topic assessment. These include:

• a review of the legal certainty of arrangements for ASX Limited to replenish ASX contributions to the CCPs' default funds
• the implementation of planned enhancements to fire drills, lessons learned from the Nasdaq Clearing AB default and benchmarking to the Committee on Payments and Market Infrastructures-International Organization of Securities Commissions (CPMI-IOSCO) paper on Central Counterparty default management auctions – Issues for consideration
• the continued enhancement of its recovery plan via benchmarking it to the CPMI-IOSCO Recovery of financial market infrastructures – Revised report and updating it for the gaps identified
• the implementation of enhancements to the default management framework including periodic audits and improved documentation.

For more information see section 2.3.3.

Cyber resilience. Continued enhancement of ASX's cyber resilience via:

• the implementation of actions identified in ASX's Cyber Strategy
• ASX's evaluation of current and emerging technology that could lead to further enhancements to the abilities of ASX to recover from cyber attacks in a timely manner.

For more information, see section 2.1.5.

Stress test severity. The Bank will discuss with ASX how it plans to validate whether its stress scenarios could cover an event of similar severity as the 1987 stock market crash, taking into account differences in the current market environment.

For more information, see section 2.2.1.

ASX Group support agreement. The Bank will conduct a broader review of the ASX Group Support Agreement, covering aspects outside the scope of the 2018/19 special topic assessment of the CS facilities' legal basis.

For more information, see section 2.5.