Assessment of ASX Clearing and Settlement Facilities – September 2024 Developments

3.1 Governance

During the assessment period, ASX took steps to address previous concerns about the effectiveness of its Internal Audit function, and to further strengthen its executive accountability framework. Changes to board reporting were introduced towards the end of the period. Further time will be needed to determine whether these changes result in sustained improvement in reports to the ASX boards. This is important to ensure the boards are able to appropriately debate and provide direction on key issues. ASX also needs to maintain focus on facilitating constructive stakeholder engagement during the next phase of CHESS Replacement and other projects to upgrade clearing systems. In the meantime, the RBA has maintained the rating of partly observed for the Governance FSS.

3.1.1 Board oversight

In response to a recommendation in the 2023 Assessment, ASX commissioned an external review of its board oversight arrangements. The review considered board papers and minutes, interviews with directors and executives, and observation of the February meetings of the boards and board committees. The review found that directors readily provide challenge to management and other board members. The review also noted a culture of transparency and cooperation promoted by ASX’s Chief Executive Officer (CEO). However, the review found that papers provided to the boards (particularly those relating to technology and risk-related reporting) were overly long and technical and did not sufficiently highlight key issues for the boards’ attention. This is a longstanding issue of concern. The findings in the recent review are consistent with: those made in the RBA’s 2021 Assessment; director feedback previously seen by the RBA; and previous reports from ASX external contractors providing assurance on the governance of key ASX projects. Following the review, ASX implemented a new board reporting template.

During the assessment period, the RBA saw examples, through the board minutes, of challenge and direction by the boards, which led to changes by management. However, the RBA considers that there were a few areas where further challenge could have occurred (e.g. with regard to ASX’s strategy for managing its overall risk position – see section 3.2.2). The quality and effectiveness of ASX’s updated reporting will remain an area of focus for the RBA over the next assessment period.

3.1.2 Internal audit

A remediation of the relationship between Internal Audit and the executive was facilitated by a ‘culture reset’ following the commencement of the new General Manager of Internal Audit. The Internal Audit function was restructured and expanded to bring on additional resources and capabilities. A stronger stakeholder engagement program was put in place to strengthen Internal Audit’s understanding of the business and to provide transparency over the internal audit process, plans and activities impacting the business. Executives’ accountabilities were also updated to include specific accountabilities for constructive responses to Internal Audit. A follow-up external review confirmed the effectiveness of these actions. Audits performed during the assessment period demonstrated effective independent challenge from Internal Audit, and constructive responses to the findings by the executives.

3.1.3 Stakeholder management

ASX has engaged with stakeholders through a number of channels during the assessment period, including bilateral meetings and industry forums. Engagement forums for CHESS and CHESS Replacement include the independently chaired industry Business Committee, the CHESS Replacement Technical Committee and related working groups. In September 2023, at the initiative of ASIC, ASX established the ASX Cash Equities Clearing and Settlement Advisory Group (Advisory Group). ASX has facilitated the operation of the Advisory Group, which had an initial focus on CHESS Replacement, but has discussed other strategic matters. ASX is undertaking industry consultations on the proposed implementation strategy, timelines and planning for the CHESS Replacement project (see section 3.3.1). ASX has also developed a high-level plan for engaging with stakeholders regarding a planned upgrade to its derivatives clearing platforms (ClearStar program, see section 3.3.2).

The RBA is monitoring the effectiveness of these stakeholder management initiatives. Over the coming assessment period, the RBA will be looking for ASX to demonstrate effective management of stakeholder feedback and industry concerns regarding CHESS Replacement and ClearStar.

3.2 Framework for the Comprehensive Management of Risks

ASX’s overall risk culture lags that of major financial institutions. The RBA is concerned about the responsiveness of ASX’s risk management priorities to the evolution of key risks. ASX also does not have an orderly wind-down plan (see section 3.5.2). Accordingly, the RBA has maintained the rating of partly observed for the Framework for the Comprehensive Management of Risks FSS.

3.2.1 Risk culture

ASX measures risk culture using a range of methods, chief among which is an annual staff survey. Since 2023, this survey has been based on the risk culture survey questions administered by the Australian Prudential Regulation Authority (APRA) to some financial institutions. In both 2023 and 2024, ASX’s risk culture scores were found to be less mature than those of major financial institutions. This was particularly the case in the areas of risk capabilities and governance.

Following the 2023 survey, ASX developed an action plan to improve its risk culture. The action plan was reviewed by an external consultant, who recommended additional actions. These included defining a target state for risk culture and ensuring consistent communication and leadership on the approach to risk. The RBA expects ASX to continue implementing the action plan and the recommendations from the external review. The RBA agrees with ASX’s plans to further assess the maturity of its risk culture against an externally developed model.

The RBA also considers that the risk appetite statement for the ASX CS facilities should expressly emphasise the safety of the CS facilities. It should also explicitly support the stability of the financial system and other relevant public interest considerations. While this is not expressly required by the FSS, the RBA considers this is in keeping with the intention of FSS 2.1. The RBA considers that this would set an appropriate tone for the risk culture of the CS facilities.

The RBA, along with ASIC, will continue to monitor ASX’s risk culture and the effectiveness of its three lines of accountability in the next assessment period.

3.2.2 Risk strategy

In 2022, ASX developed an internal strategy to address its heightened overall level of risk. This risk strategy focused on improving key risk indicators (KRIs) that had been historically high. During the assessment period, the RBA raised concerns with ASX about this strategy. Of key concern was the failure to update the risk strategy to focus on significant technology risks that had become apparent in the previous year and the importance of ASX’s efforts to remediate them. Following continued RBA feedback, the risk strategy was revised in May 2024. ASX has also been reviewing selected KRIs to check whether they need revising to better measure risks. The RBA expects ASX to take a more proactive approach to updating its risk strategy to ensure that it remains focused on current sources of risk.

During the assessment period, ASX commenced more detailed reporting on its strategy to improve its risk position to the Audit and Risk Committee. It also adjusted the way its overall risk position is reported to the Committee. The RBA encourages ASX to assess over time whether the current reporting provides the boards with a clear view of the overall level of risk.

ASX’s Internal Audit plan for 2025 includes an independent review of ASX’s strategy to address the heightened level of risk, including a holistic consideration of its KRIs. Following this review, ASX should consider whether changes to its board reporting would be appropriate.

3.3 Technology developments

ASX has several major multi-year technology transformation initiatives underway. The safe and timely delivery of these initiatives is crucial to ensuring that ASX continues to provide critical CS services in a manner that supports financial stability. With such a large portfolio of critical projects, ASX must provide its boards with a clear view of interdependencies and resource contentions between initiatives. It is also important for ASX to have plans in place to manage any associated risks. During the assessment period, the RBA undertook a detailed assessment of ASX’s management of operational risks, including in relation to current projects. The assessment and recommendations are presented in Chapter 5. Specific developments within each project are highlighted below.

3.3.1 Current CHESS and CHESS Replacement

3.3.1.1 Current CHESS

ASX progressed work on its CHESS Roadmap to ensure that the current CHESS remains operationally reliable until its replacement is implemented. ASX successfully implemented a version upgrade of the CHESS database, ensuring ongoing vendor support. In line with a 2023 RBA recommendation, ASX developed an annual process to review its CHESS Roadmap and published an updated version in July 2024.

In response to another of the RBA’s recommendations, ASX tested the capacity of CHESS to identify bottlenecks and breakpoints at high trading volumes. The system was able to operate with only minor delays at a peak of 12.5 million trades per day. However, a peak of 15 million trades (more than 100 per cent headroom over the historical peak of 7 million) led to significant performance degradation and a break in the system. These issues would have delayed the market opening on the next trading day if such a volume had occurred in live trading. ASX remediated the identified breakpoint and is monitoring the need for further action to reduce the remaining bottlenecks prior to the system’s replacement. ASX also implemented and tested guiding principles for managing the market impact in the event of delays relating to high-volume days.^[2]

The RBA expects ASX to continue its focus on the operational resilience, reliability, integrity and security of the current CHESS until it is replaced. This will require ongoing investment and maintenance. ASX should also ensure that the quantity and capability of its resources are sufficient to complete the items on the CHESS Roadmap on schedule.

3.3.1.2 CHESS Replacement

ASX announced the solution design and selected vendors for the new CHESS Replacement in November 2023. ASX selected a product-based solution, to be delivered by TATA Consultancy Services (TCS). Globally, the product is being used or implemented in several other markets. ASX also appointed Accenture to support project delivery by providing additional capacity, capability and industry experience. An external assurance report concluded that ASX’s solution and vendor selection processes were appropriate for the delivery of critical market infrastructure.

ASX, through the industry CHESS Replacement Technical Committee, evaluated different transition options and proposed a phased implementation approach to CHESS replacement. Phased implementation was considered to provide lower overall delivery risk compared with a single cut-over approach. The first release, expected to go live in the first half of 2026, will provide a new messaging interface for Approved Market Operators. It will also replace clearing functionality, removing the current capacity constraints. The second release (the settlement and sub-register replacement) is estimated for 2029.

ASX has ‘onboarded’ the CHESS Replacement vendors, and implemented an operating model that embeds TCS and Accenture staff in its project teams and governance forums. This is intended to support a consistent understanding of objectives and risks between ASX and the vendors. This addresses a finding from the external review of the previous CHESS Replacement project. ASX has been undertaking a ‘proof-of-technology’ process using an ‘out-of-the-box’ version of TCS’s product run on a public cloud platform. The process focuses on testing capacity and scalability to high trading volumes. ASX has also designed an assurance program to assist with risk management and decision-making at key milestones. The assurance program is intended to support the project’s objective of implementing a solution that meets security, reliability, availability and performance requirements.

Industry consultation on the first release was completed in June 2024. A consultation paper on the second release was published in August. In April, ASX also issued a white paper seeking industry views on the costs, benefits and potential timing of shortening the equities settlement cycle to T+1. This was prompted by developments in American and European markets. An implementation of T+1 prior to the second release of CHESS Replacement could result in a delay to the completion of the CHESS Replacement project. The RBA expects the sequencing of any move to T+1 to be carefully considered in consultation with regulatory agencies. ASX’s CHESS Replacement project continues to be a key supervisory priority for the RBA and ASIC.

3.3.2 ClearStar

ASX is conducting a program of work to upgrade ASX’s derivative clearing platforms over a six-year period, through its ClearStar program. ASX’s Over-the-Counter derivative clearing platform and its Exchange Traded Derivative futures clearing platform will both be upgraded as part of the program. These upgrades are expected to remediate the risks caused by the age of the systems and the unavailability of long-term support. These risks remain a key concern for the RBA. As a result, the RBA considers the ClearStar program to be vitally important to ASX’s ongoing ability to provide CS services in a manner that supports Australia’s financial stability.

During the assessment period, there were deficiencies in the reporting of the status of the program to the ASX boards and regulators, delays in acquiring appropriate staff, turnover in program leadership and resource contention between business-as-usual activities and system upgrades. ASX has provided details of key changes that have been made to the program following these issues. The RBA has communicated its significant concerns about the issues encountered by ClearStar and is continuing to evaluate the effectiveness of these changes. Specific issues in relation to reporting to the RBA are dealt with below (see section 3.5.3).

Throughout the ClearStar program, ASX will need to ensure that the program’s resource needs are managed appropriately. It is also important that ASX applies the lessons of past experience and ensures that it effectively engages stakeholders throughout this program. ASX will need to ensure that accurate and timely information regarding the ClearStar program is provided to its boards and regulators. The RBA agrees with ASX’s plans to complete an internal audit of the ClearStar governance arrangements, and to establish an assurance program similar to that for CHESS Replacement. The RBA, working closely with ASIC, will be closely monitoring ASX’s management of the ClearStar program.

3.3.3 Cloud

ASX has begun the process of developing the capabilities needed to transition CS services to a public cloud environment. ASX’s transition to cloud is part of a broader technology modernisation strategy and move to a platform-based design. While the adoption of cloud services can yield benefits to resilience, security and scalability, it also introduces technology and vendor-related risks that must be carefully managed. During the assessment period, the RBA and ASIC communicated to ASX their expectations in relation to the transition of any critical systems to the cloud. The RBA, working closely with ASIC, will continue to monitor ASX’s progress, including through supervision of the CHESS Replacement project, as it moves closer to migrating key CS systems to the cloud.

3.4 Credit Risk and Margin

Daily credit stress testing is an important tool used by the ASX CCPs for assessing the adequacy of their financial resources to cover current and potential future credit exposures. These tests compare each CCP’s available prefunded resources against the largest potential loss in the event of the default of two participants under a range of extreme but plausible scenarios (the Cover 2 requirement).^[3]

During the assessment period, ASX Clear and ASX Clear (Futures) each experienced one instance where the Cover 2 requirement exceeded their prefunded financial resources. In both cases, the root cause was the accumulation of significant exposures by a participant late in the day. This led to a potential under-collateralisation if a stress scenario had eventuated. These potential shortfalls were covered by additional margin collected on the morning of the next business day. The breach by ASX Clear occurred on the day of an index rebalancing. As a result, ASX has adopted a more conservative approach to ‘pre-collecting’ margin on index rebalancing days. ASX is considering its response to the instance at ASX Clear (Futures).

ASX Clear also had an additional instance of exceeding its Cover 2 requirement after the 2024 assessment period. The RBA expects ASX to undertake a holistic consideration of the options available to reduce the likelihood of further instances.

Separately, in response to recommendations in the 2023 Assessment, ASX developed a plan to improve its ability to monitor the accumulation of exposures to participants for cash market products at ASX Clear and to make intraday margin calls. It is also in the process of developing a long-term strategy for overnight margin processes at ASX Clear (Futures). These improvements should help mitigate against an unexpected build-up of risk at the ASX CCPs. The RBA expects ASX to progress these initiatives in the coming assessment periods. This work should be undertaken with due consideration to its potential impact on other strategically important projects, such as ClearStar and CHESS Replacement.

3.5 Other developments

3.5.1 Tiered Participation Arrangements

Tiered participation arrangements occur when indirect participants rely on direct participants to use the services of a CCP or SSF. The RBA conducted a review of ASX’s adherence to the Tiered Participation Arrangements FSS. The RBA rated both CCPs as broadly observed and has rated both SSFs as observed.^[4]

Client clearing represents upwards of 60 per cent of initial margin at the ASX CCPs. ASX collects data from participants to monitor the build-up of large client positions and has arrangements in place that allow it to mitigate risks that arise because of such tiering. For example, the ASX CCPs impose additional margin requirements where client positions are highly concentrated at a clearing participant. However, the RBA did not find sufficient evidence that ASX is doing all it can to monitor and mitigate the risks that could arise from tiered participation arrangements. For example, ASX has operated without a formal policy for tiered participation arrangements since 2020. Although ASX has acknowledged the need to address some gaps in its approach to tiering risk, the lack of action to develop a formal policy suggests ASX is failing to place sufficient importance on the management of these risks.

3.5.2 General Business Risk

During the assessment period, ASX completed a review of its recovery plan against international regulatory guidance.^[5] This review acknowledged that the ASX CS facilities ‘do not maintain an orderly wind-down plan as a possible response to a recovery situation’.

In previous assessments of ASX’s recovery and wind-down arrangements, the RBA has focused on recovery. This reflects the importance of effective arrangements to maintain critical services in extreme circumstances without external support. However, as recovery arrangements have reached a higher level of maturity, ASX should ensure that it addresses all aspects of the FSS. This includes the requirement to develop and maintain comprehensive plans for instances where recovery is ineffective.

A wind-down plan is an important complement to recovery and resolution for a CS facility in distress. Where a recovery plan proves ineffective and no resolution authority is present, the lack of a wind-down plan could result in a disorderly cessation of services that are important to the financial system. A wind-down plan also sets an important alternative path to the resolution of a CS facility in crisis. The absence of a wind-down plan can therefore inappropriately lower the bar for intervention by a resolution authority in circumstances where that would not otherwise occur.

Accordingly, the RBA has rated the ASX CS facilities as broadly observed for the General Business Risk FSS. Following discussions with the RBA, ASX has made progress in developing a wind-down plan and, following the end of the assessment period, has provided an advanced draft to the regulators. ASX is expected to complete this work in the coming assessment period.

3.5.3 Regulatory Reporting

All ASX CS facilities have been rated broadly observed against the Regulatory Reporting FSS. ASX failed to expressly notify the RBA of delays in its major program to upgrade its derivatives platforms, ClearStar, and the deterioration of the program risk status. Significant delays in this program could materially impact ASX’s ability to continue to provide CS services as the existing technology continues to age. Additional risks will arise if vendor support ceases due to the age of the technology. A change of program status is therefore a significant development in the risk position of the ASX CS facilities and should be reported to the RBA.

A similar lapse in project status reporting for the original CHESS Replacement project occurred during the 2022 assessment period. This appears to be a pattern in the context of major projects that are essential to the ongoing provision of CS services.

Since the assessment period ended, there has been another regulatory reporting failure that, on this occasion, was not related to a technology project. These failures raise a broader concern that ASX’s approach to reporting is insufficient to ensure regulators are always kept informed in a timely and accurate way. The RBA’s expectation is that regulatory reporting processes, and particularly those for inflight projects, will be reviewed for all facilities over the next assessment period.

ASX has completed the Financial Market Infrastructure (FMI) Data Reporting project for ASX Settlement and ASX Clear, which finishes the project for all four facilities. The RBA acknowledges the work that has been undertaken to improve the quality, scope and timeliness of the data ASX provides to the RBA on its activities and risks.

3.5.4 Central Security Depositories

Following an operational incident revealing deficiencies in ASX’s procedures and controls in the previous assessment period, Austraclear’s rating against the Central Securities Depositories FSS was downgraded to broadly observed. During this assessment period, ASX implemented several improvements to its controls to address the identified gaps. Given these improvements, Austraclear has been rated observed against the Central Securities Depositories FSS.

Footnotes

Actual volumes over the past year were significantly lower than the tested capacity, at an average of 2.01 million and peak of 2.85 million trades per day. ASX’s updated forecasting models predict two-year stress volumes of up to 8 million trades per day prior to the capacity constraint being addressed by the implementation of the first phase of CHESS Replacement. [2]

RBA (2014), ‘Supplementary Interpretation of the Financial Stability Standards for Central Counterparties’, 27 October. [3]

The RBA does not consider the risks of the tiered participation arrangements at ASX Settlement and Austraclear to warrant a downgrade for the ASX SSFs. These facilities are not exposed to the same level of risk as the CCPs. [4]

CPMI-IOSCO (2017), ‘Recovery of Financial Markets Infrastructures’, July. This guidance, first issued in 2014 and updated in 2017, is applied by the RBA in interpreting some FSS. [5]