Assessment of ASX Clearing and Settlement (CS) Facilities against the Principles for Financial Market Infrastructures (Principles) List of tables
Chapters
Table 1: Systemically Important CCPs and SSFs Operating in Australia
Table 2: ASX Clear Summary Assessment
Table 3: ASX Clear (Futures) Summary Assessment
Table 4: ASX Settlement Summary Assessment
Table 5: Austraclear Summary Assessment
Table 6: ASX Clear Recommendations
Table 7: ASX Clear (Futures) Recommendations
Table 8: ASX Settlement Recommendations
Table 9: Austraclear Recommendations
Box
Table A1: Allocation of Responsibilities for Principles
| Description of Activity | Values Cleared/Settled, Daily)(b) | Number of participants(c) |
|
|---|---|---|---|
| Central Counterparties | |||
| ASX Clear | Clearing of cash equities and equity-related derivatives | Cash equities: $4 billion traded value Equity options: $115 million traded value/$2.8 billion underlying | 36 active direct participants (including Australian/foreign banks, brokers) |
| ASX Clear (Futures) | Clearing of ASX 24 exchange-traded derivatives and AUD OTC interest rate derivatives | $167 billion for five major listed financial contracts $4.1 billion notional value for OTC derivatives | 19 direct participants (including Australian/foreign banks). Large number of indirect participants for listed derivatives |
| LCH.Clearnet Ltd's SwapClear Service | Clearing of OTC interest rate derivatives | $1.3 trillion notional value for all currencies $11.7 billion notional value for AUD-denominated trades(d) | 90 direct participants internationally (including two Australian banks) |
| Securities Settlement Facilities | |||
| ASX Settlement | Settlement of cash equities | $8.3 billion(e) | 78 direct participants (including Australian/foreign banks, brokers) |
| Austraclear | Settlement of OTC trades in debt securities, AUD payments | $41 billion for securities trades $11 billion for payment-only transactions | 847 participants (including financial institutions and corporates); some access indirectly |
|
(a) A third small licensed SSF is operated by IMB Limited for trades in
its own securities. Since the value of financial obligations settled by
IMB Limited in any financial year falls well below $200 million, IMB Limited
is not subject to the Bank's FSS for SSFs (SSF Standards). Sources: ASX; Bloomberg; LCH.Clearnet Limited; RBA |
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| Summary Assessment by Principle |
|---|
| Principle 1. Legal basis Rating: Observed ASX Clear is a separate legal entity within the ASX Group that solely provides clearing services. ASX Clear's legal basis is founded on clear and understandable rules that operate within the framework of relevant laws and regulations (Key Considerations 1, 2). The certainty of this legal basis in relevant jurisdictions is reinforced by supporting legislation, including ASX Clear's protection as a netting market under the PSNA, and protection for settlements conducted via ASX Settlement and Austraclear under the same legislation, and is subject to periodic review by ASX Legal (Key Considerations 1, 4). ASX Clear has publicly outlined the key features of its legal basis on its website and, from time to time, for information, may provide legal opinions to participants or other stakeholders in respect of the legal basis of significant new services (Key Consideration 3). ASX has not identified any material risks arising from potential conflicts of law relating to the operations of ASX Clear (Key Consideration 5). |
| Principle 2. Governance Rating: Observed ASX Clear pursues objectives that place a high priority on risk management, through compliance with relevant FSS and the broader Corporations Act requirement to do all other things necessary to reduce systemic risk. ASX Clear must also comply with all its other obligations under Part 7.3 of the Corporations Act, including to operate in a fair and effective manner. ASX Clear also acknowledges public policy objectives directed at financial market and payments system integrity, as well as the interests of customers and other stakeholders (Key Consideration 1). ASX Clear's governance arrangements are documented and publicly disclosed. These arrangements give ultimate responsibility for the oversight of operations and risk management of ASX Clear to the ASX Limited Board and the ASX Clear Board. Board and committee charters document Board roles and lines of responsibility and accountability (Key Considerations 2, 3). ASX has conflict handling procedures in place to address potential conflicts of interest that may arise by virtue of its group structure, requiring staff and directors to act in the best interests of each facility as appropriate. Changes to the composition of the CS facility Boards (CS Boards) during 2013/14 further support these conflict handling procedures (Key Consideration 3). The performance of each relevant Board is reviewed at least annually for both individual directors and the Board as a whole. The relevant Boards each include a majority of independent non-executive directors, and the ASX Clear Board includes members appointed for their expertise in clearing and settlement matters (Key Consideration 4). Board remuneration is designed to attract and retain appropriately skilled and qualified directors. The reporting lines of management are set out in the CS Boards' Charter, along with roles and responsibilities of key management personnel (Key Consideration 5). Remuneration of senior management in risk management roles is structured to provide appropriate incentives for sound and effective risk management. ASX maintains a clear and documented risk management framework, subject to regular internal and external review. Key processes and internal controls are subject to review by ASX's Internal Audit department, which is itself subject to periodic external review (Key Consideration 6). ASX utilises formal and informal consultation processes to ensure that the design and decisions of ASX Clear reflect the interests of participants and other stakeholders. This includes the establishment of a new advisory forum, introduced in accordance with commitments under the ASX Code of Practice for Clearing and Settlement of Cash Equities in Australia (the Code of Practice), which provides user feedback in relation to the ongoing development of cash market clearing and settlement infrastructure and services (Key Consideration 7). |
| Principle 3. Framework for the comprehensive management of risks Rating: Broadly observed ASX maintains an Enterprise Risk Management Policy that sets out its framework for managing the full range of strategic, legal, financial and operational risks faced by ASX Clear. This high-level framework is supported by more granular policies and a governance structure to oversee ASX Clear's risk management activities (Key Consideration 1). ASX Clear's risk management framework imposes proportional, risk-based obligations such as initial margin, and places incentives on participants, including additional collateral requirements where required, to control the risks that they bring to the CCP (Key Consideration 2). As part of its risk management framework, ASX Clear reviews risks associated with interdependencies with other entities on an ongoing basis, and in relation to new initiatives, applying appropriate tools to manage these risks (Key Consideration 3). ASX Clear has prepared a basic recovery plan on the basis of its existing powers and plans to consult on enhancements to its Operating Rules that would support a more comprehensive recovery plan (Key Consideration 4). |
| Principle 4. Credit risk Rating: Broadly observed ASX Clear maintains a comprehensive framework for managing its credit exposures to participants (Key Consideration 1). Under this framework, ASX Clear regularly monitors information on participants' credit standing through financial reporting requirements, public information, and further investigation where required. Monitoring of participants' credit standing is risk based, and ASX maintains a list of participants deemed to warrant more intensive monitoring. In responding to any issues identified through monitoring, ASX Clear is able to impose activity restrictions or additional controls, including calls for additional collateral (Key Consideration 2). ASX Clear also monitors and manages the magnitude of exposures to participants through both daily and intraday initial and variation margin calculations (Key Consideration 2), and through daily stress tests that measure the effects of extreme but plausible scenarios on exposures (Key Consideration 5). ASX Clear holds sufficient financial resources to cover its largest potential credit exposure to any single participant and its affiliates in the extreme but plausible scenarios covered in its stress tests (Key Considerations 4, 6). ASX Clear has the capacity to call additional margin from participants in the event that their stress-test exposures exceed pre-determined stress-test exposure limits (STELs). During 2013/14, ASX Clear enhanced the review of its capital stress-test model by introducing monthly reverse stress testing and review of market conditions to supplement the existing daily and formal annual review of scenarios. ASX Clear has also engaged an external expert to conduct an annual validation of the capital stress-test model. This work is ongoing. Responsibility for increasing financial resources in response to persistent and widespread STEL breaches that exceed available financial resources lies with the CS Boards and the ASX Limited Board (Key Consideration 5). ASX Clear can allocate any uncovered credit losses to participants via Emergency Assessments, which are subject to a cap. ASX plans to consult on proposals to enhance its loss allocation and replenishment powers (Key Consideration 7). |
| Principle 5. Collateral Rating: Observed ASX Clear limits the assets it routinely accepts as collateral to cash, or highly liquid stocks or funds with low credit and market risks (Key Consideration 1). ASX Clear applies haircuts to collateral that are calibrated to stressed market conditions, to avoid the need for procyclical adjustments (Key Consideration 2, 3). Collateral holdings are not sufficiently concentrated as to impair ASX Clear's ability to liquidate such assets quickly without significant adverse price effects (Key Consideration 4). ASX Clear does not accept cross-border or foreign currency collateral (Key Consideration 5). ASX Clear employs well-designed and operationally flexible systems to manage collateral movements for securities and derivatives trades (Key Consideration 6). |
| Principle 6. Margin Rating: Broadly observed ASX Clear applies initial and variation margin to both derivatives exposures and cash securities transactions, using margin systems that are tailored to the particular attributes of these product types (Key Consideration 1). Timely price data are available for most products subject to ASX Clear's margining systems, and ASX Clear applies appropriate models to estimate prices when timely and reliable data are not available (Key Consideration 2). ASX Clear's margin models for both cash securities and derivatives ensure that initial margin meets a single-tailed confidence level of 99.7 per cent of the estimated distribution of future exposure, applying appropriate and conservative assumptions regarding close-out periods, product risks, portfolio effects, product offsets and floors to limit the need for procyclical changes (Key Considerations 3, 5). In addition, ASX Clear applies variation margin to both securities and derivatives positions daily, and may call intraday margin on derivatives positions in the event of significant market movements (Key Consideration 4). ASX Clear performs daily and periodic backtesting of its margin models to assess the adequacy of initial margin against the targeted level of cover, and performs an annual review of margin policy. ASX Clear uses quarterly sensitivity analysis to validate the assumptions underpinning margin models, including to test the reliability of implicit or explicit product offsets (Key Consideration 6). ASX Clear regularly reviews and validates its margin models. An external expert was recently engaged for a three-year period to conduct a comprehensive review of all key risk models, including those that support margining (Key Consideration 7). This work is ongoing. |
| Principle 7. Liquidity risk Rating: Broadly observed ASX Clear maintains a robust framework for managing its liquidity risk (Key Consideration 1). Under this framework, ASX Clear provides participants with information to assist them in managing their liquidity needs and risks, and employs an experienced Portfolio Risk Manager to monitor and manage ASX Clear's own settlement and funding flows (Key Consideration 2). ASX Clear holds sufficient liquid resources to meet its payment obligations on time in the event that the participant with the largest payment obligation to the CCP was to default in the extreme but plausible scenarios envisaged in its stress tests (Key Considerations 4, 9). These liquid resources comprise a portfolio of high-quality liquid assets managed by ASXCC on ASX Clear's behalf, supported by procedures to ensure timely and reliable access to liquidity from the portfolio as required (Key Considerations 5, 7). In addition, ASX Clear is able to source liquidity from participants via offsetting transaction arrangements to address liquidity shortfalls related to cash equity transactions (Key Consideration 4). To enhance its management of liquidity risk, ASX Clear has access, via ASXCC's Exchange Settlement Account (ESA), to Australian dollar liquidity from the Reserve Bank against eligible collateral (Key Consideration 8). The use of offsetting transaction arrangements with participants should ensure that ASX Clear does not face a liquidity shortfall in respect of cash market transactions, while ASX plans to consult on proposals to address uncovered liquidity shortfalls in respect of derivatives transactions as part of broader enhancements to its recovery plan (Key Consideration 10). |
| Principle 8. Settlement finality Rating: Observed ASX Clear's settlements involve AUD cash payments between participants and the CCP for the purposes of margin payments and other derivative related payments such as options premia and the settlement of cash securities trades. Cash settlements of margin occur via Austraclear, with interbank obligations settled on a real-time gross settlement (RTGS) basis across ESAs at the Bank, via RITS. Settlement of securities trades and lodgement of non-cash collateral takes place in ASX Settlement, with securities delivery obligations effected within CHESS and interbank cash obligations also settled via RITS on an RTGS basis. ASX Clear defines the point at which settlement is final through contract specifications set out in its Operating Rules and Procedures, and those of ASX. The finality of its money settlements is further defined in the Austraclear Regulations and ASX Settlement Operating Rules, supported by the PSNA (Key Consideration 1). Contract specifications set out in ASX Clear's and ASX's Operating Rules and Procedures also specify procedures and timetables for final settlement (Key Consideration 2). Participants are not able to submit payment or transfer instructions in ASX Clear that may be revoked (Key Consideration 3). |
| Principle 9. Money settlements Rating: Observed ASX Clear conducts its money settlements across ESAs at the Bank, via RITS (Key Consideration 1). Margin payments are settled in RITS via Austraclear instructions, while securities-related payment obligations are settled in RITS via the CHESS batch operated by ASX Settlement. ASX Clear does not conduct settlement across its own books or in commercial bank money (Key Considerations 2, 3, 4, 5). The role and responsibilities of commercial settlement banks acting on behalf of participants for money settlements, known as Payment Providers, are governed by legal agreements between those banks, ASX Clear, ASX Settlement and the Australian Payments Clearing Association (APCA). ASX is considering the introduction of a formal framework to engage Payment Providers on changes to settlement processes. |
| Principle 10. Physical deliveries Rating: Not applicable ASX Clear does not clear any contracts with physical delivery obligations. |
| Principle 11. Central securities depositories Rating: Not applicable Principle 11 not relevant to central counterparties. |
| Principle 12. Exchange-of-value settlement systems Rating: Observed ASX Clear eliminates principal risk in the settlement of cash equity transactions by ensuring that the transfer of securities occurs if and only if the associated payment is settled at the same time (Key Consideration 1). In order to eliminate principal risk, ASX Clear employs the DvP model 3 settlement mechanism in ASX Settlement. |
| Principle 13. Participant-default rules and procedures Rating: Observed ASX Clear has sufficient powers under its Operating Rules and Procedures to manage a participant default, and has documented an internal framework setting out its default management approach (Key Consideration 1). Powers and tools available to ASX Clear include the power to suspend a defaulted participant, the power to apply margin and pooled financial resources to meet losses, and a range of close-out and hedging tools (Key Considerations 1, 2). Participants are also required to report any default event or expected default to the CCP. ASX Clear has published its Operating Rules that set out its default management powers and a high-level overview of its approach to default management (Key Consideration 3). Default management procedures are tested and reviewed on at least an annual basis (Key Consideration 4). |
| Principle 14. Segregation and portability Rating: Broadly observed ASX Clear offers three types of account structure: individual client segregation for options and futures; omnibus segregation with net margining for futures; and single accounts for all house and client cash market transactions (Key Consideration 2). Individual client segregation for options and futures provides protection to customers (or ‘clients’) against the default of both their clearing participant and a fellow client, and supports transfer to another clearing participant in such a scenario. ASX has proposed an arrangement for cash market transactions that ensures that commingled accounts will afford materially equivalent protection to that provided by omnibus protection. The first of two stages of implementation of arrangements to enhance protection of client cash equities positions in this way has been completed (Key Considerations 1, 2 and 3). ASX Clear has publicly disclosed its current segregation and portability arrangements, including the current obstacles to portability (Key Consideration 4). |
| Principle 15. General business risk Rating: Broadly observed ASX Clear identifies, monitors and manages its general business risks in the context of its overall Enterprise Risk Management Policy (Key Consideration 1). It has access to sufficient funds held at group level to support continued operations as a going concern if it incurs general business losses. These funds are backed by equity and invested in liquid assets. The legal basis of ASX Clear's access to funds held at group level has been enhanced through a new clause in the ASX Group Support Agreement (Key Considerations 2, 3, 4). ASX Clear has developed a basic recovery plan and has commenced work towards enhancing this plan in line with forthcoming CPSS-IOSCO guidance on recovery planning (Key Consideration 3). ASX maintains viable arrangements to raise additional equity for its CS facilities as required (Key Consideration 5). |
| Principle 16. Custody and investment risks Rating: Broadly observed The assets of ASX Clear and its participants are administered and held within the ASX Group in accordance with robust group-wide controls (Key Consideration 1). A portion of these assets is held in liquid form to ensure prompt access as required (Key Consideration 2). ASXCC invests the assets of ASX Clear according to its Investment Mandate in instruments with low credit, market and liquidity risk. Following changes during 2013/14, ASX Clear's treasury investments place less reliance on unsecured investments concentrated in the large domestic banks (Key Consideration 4). ASX is in dialogue with the Bank about its expectations for further reductions in these exposures. ASXCC does not use custodian banks for its investments (Key Consideration 3). |
| Principle 17. Operational risk Rating: Observed ASX Clear's key operating systems are DCS and CHESS. ASX Clear manages its operational risks in the context of its group-wide Enterprise Risk Management Framework. ASX Clear considers that it has sufficient well-trained and competent personnel and other resources to operate DCS and CHESS, and has taken steps to ensure that business development work does not risk the availability of these resources for key systems (Key Consideration 1). Responsibility for approving and reviewing operational risk management policy is shared between the ASX Limited and CS Boards, the Audit and Risk Committee and individual departments. The management of each department is responsible for implementing operational risk controls in their respective areas (Key Consideration 2). ASX Clear sets clear operational reliability objectives and pursues policies designed to achieve those objectives. Key objectives for DCS and CHESS, such as minimum availability of 99.8 per cent and peak capacity utilisation of 50 per cent, were met during 2013/14 (Key Considerations 3, 4). ASX Clear maintains physical and information security policies based on relevant domestic and international standards (Key Consideration 5). ASX Clear maintains business continuity arrangements that provide a high degree of redundancy and, through the use of dual sites, target the resumption of operations within two hours following disruptive events. These arrangements are regularly tested in real time during live operations. Participants are required to maintain appropriate operational and business continuity arrangements that complement ASX Clear's own arrangements, and are appropriate to the nature and scale of their business. ASX Clear monitors participants' compliance with these requirements, and broader operational performance, on an ongoing basis (Key Consideration 6). ASX Clear manages operational interdependencies with participants, ASX Settlement and Austraclear through its participant monitoring processes and group-wide risk management framework. Its dependencies on service providers and utilities are subject to ongoing monitoring and contingency arrangements where appropriate. ASX Clear has introduced clauses in its legal agreements with key outsourcing and critical service providers that impose requirements on those providers equivalent to those under the FSS (which align with the Principles). Additional clauses provide for access to information for the Bank, and notice to the Bank in the case of termination (Key Consideration 7). |
| Principle 18. Access and participation requirements Rating: Observed ASX Clear has objective and transparent participation requirements set out in its Operating Rules and Procedures (Key Consideration 1). These include minimum capital and other financial requirements, which were reviewed in 2013/14, as well as the requirement that participants maintain operational and risk management arrangements tailored to the specific activities of ASX Clear. ASX Clear's participation requirements promote the efficient operation of the facility, and do not impose discriminatory or restrictive access constraints such as minimum turnover levels (Key Consideration 2). ASX Clear monitors participants' compliance with requirements on an ongoing basis, and has the authority to suspend or terminate participation, or take other disciplinary or remedial action in the event of a breach of these requirements (Key Consideration 3). |
| Principle 19. Tiered participation arrangements Rating: Observed ASX Clear applies a risk-based approach to its monitoring of tiered participation arrangements, with a particular focus on client activity in exchange-traded derivatives. ASX Clear does not formally monitor concentration in tiered participation arrangements for cash market transactions due to the relatively low exposures involved. ASX Clear has a formal standard that governs its risk-based approach to monitoring of concentration in tiered participation arrangements and documents mitigating steps (Key Consideration 4). During 2013/14, clients of ASX Clear's participants represented 78 per cent of the initial margin held by ASX Clear to cover its derivatives-related credit exposures to both participants and (indirectly) their clients. In managing the risks associated with tiered arrangements, ASX Clear's ability to monitor tiering risks on cash market transactions is limited by the commingling of house and client positions. ASX can, however, gather more detailed information from participants on an ad hoc basis (Key Considerations 1, 2). ASX Clear does not maintain formal thresholds at which substantial indirect participants are encouraged to seek direct participation, but does actively manage risks posed by indirect participant activity through its relationship with the direct participant (Key Consideration 3). ASX Clear conducts daily monitoring of client-level data on derivatives-related exposures, with the use of predefined triggers for further action. |
| Principle 20. FMI links Rating: Observed ASX Clear maintains links to two other FMIs: ASX Settlement and Austraclear. ASX Clear assumes no direct financial risks from these links, but is exposed to operational risks. These are managed in the context of ASX's group-wide framework for operational risk management (Key Consideration 1). The legal basis of each link is supported by finality legislation (Key Consideration 2). ASX Clear does not maintain links with any other CCPs (Key Considerations 7, 8). |
| Principle 21. Efficiency and effectiveness Rating: Observed ASX Clear offers a range of participation options and clearing services designed to meet the needs of its participants and the ASX and Chi-X markets. ASX's Code of Practice for cash equities clearing and settlement addresses transparency and accessibility in the provision of these services and formalises avenues for user governance, including via a user Forum (Key Consideration 1, see also Principle 2). ASX Clear's goals and objectives are determined by the ASX Limited Board (for group-level strategic direction and business priorities) and the ASX Clear Board (for goals and objectives specific to the clearing service) (Key Consideration 2). ASX Clear measures the effectiveness of its services via participant and user feedback. ASX Clear performance reports are presented to ASX management on a monthly basis. Matters covered in these reports include operational performance, settlement and netting efficiency, incident management and participant complaints (Key Consideration 3). |
| Principle 22. Communication procedures and standards Rating: Observed While ASX Clear uses a proprietary messaging standard, this is acceptable given the domestic orientation of the service. ASX Clear is consulting with users, via a Technical Committee established under the Code of Practice, on a proposal to adopt the internationally accepted ISO 20022 SWIFT standard as part of a broader renewal of its CHESS system (Key Consideration 1). |
| Principle 23. Disclosure of rules, key procedures, and market data Rating: Observed ASX Clear fully discloses its Operating Rules and Procedures to participants, and publicly discloses its rules, fees and a range of additional relevant information on its risk management procedures (Key Consideration 1). This includes information regarding the process of novation, and general descriptions of system design and the roles and obligations of ASX Clear and its participants (Key Consideration 2). ASX Clear provides new participants with comprehensive documentation, and verifies their understanding of their responsibilities as participants; existing participants are also provided with education on their obligations where required (Key Consideration 3). A full breakdown of the various fees ASX Clear charges, including available discount and incentive schemes, is published on the ASX website (Key Consideration 4). ASX has published its response to the CPSS-IOSCO Disclosure Framework and plans to periodically update and enhance this document where appropriate (Key Consideration 5). During 2013/14, ASX redesigned its website, providing links to information that is subject to disclosure requirements from a central location. |
| Principle 24. Disclosure of market data by trade repositories Rating: Not applicable Principle 24 not relevant to central counterparties. |
| Summary Assessment by Principle |
|---|
| Principle 1. Legal basis Rating: Observed ASX Clear (Futures) is a separate legal entity within the ASX Group that solely provides clearing services. ASX Clear (Futures)' legal basis is founded on clear and understandable rules that operate within the framework of relevant laws and regulations (Key Considerations 1, 2). The certainty of this legal basis in relevant jurisdictions is reinforced by supporting legislation, including ASX Clear (Futures)' protection as a netting market under the PSNA and the protection of money settlement finality through Austraclear under the same legislation, and is subject to periodic review by ASX Legal (Key Considerations 1, 4). ASX Clear (Futures) has publicly outlined the key features of its legal basis on its website and, from time to time, for information, provides legal opinions to participants or other stakeholders in respect of the legal basis of significant new services (Key Consideration 3). ASX has not identified any material risks arising from potential conflicts of law relating to the operations of ASX Clear (Futures) (Key Consideration 5). |
| Principle 2. Governance Rating: Observed ASX Clear (Futures) pursues objectives that place a high priority on risk management, through compliance with relevant FSS and the broader Corporations Act requirement to do all other things necessary to reduce systemic risk. ASX Clear (Futures) must also comply with all its other obligations under Part 7.3 of the Corporations Act, including to operate in a fair and effective manner. ASX Clear (Futures) also acknowledges public policy objectives directed at financial market and payments system integrity, as well as the interests of customers and other stakeholders (Key Consideration 1). ASX Clear (Futures)' governance arrangements are documented and publicly disclosed. These arrangements give ultimate responsibility for the oversight of operations and risk management of ASX Clear (Futures) to the ASX Limited Board and the ASX Clear (Futures) Board. Board and committee charters document Board roles and lines of responsibility and accountability (Key Considerations 2, 3). ASX has conflict handling procedures in place to address potential conflicts of interest that may arise by virtue of its group structure, requiring staff and directors to act in the best interests of each facility as appropriate. Changes to the composition of the CS Boards during 2013/14 further support these conflict handling procedures (Key Consideration 3). The performance of each relevant Board is reviewed at least annually for both individual directors and the Board as a whole. The relevant Boards each include a majority of independent non-executive directors and the ASX Clear (Futures) Board includes directors appointed for their expertise in clearing and settlement matters (Key Consideration 4). Board remuneration is designed to attract and retain appropriately skilled and qualified directors. The reporting lines of management are set out in the CS Boards' Charter, along with roles and responsibilities of key management personnel (Key Consideration 5). Remuneration of senior management in risk management roles is structured to provide appropriate incentives for sound and effective risk management. ASX maintains a clear and documented risk management framework, subject to regular internal and external review. Governance of this risk management framework is supported by a newly established participant Risk Committee. Key processes and internal controls are subject to review by ASX's Internal Audit unit, which is itself subject to periodic external review (Key Consideration 6). ASX utilises formal and informal consultation processes to ensure that the design and decisions of ASX Clear (Futures) reflect the interests of participants and other stakeholders, including via the new participant Risk Committee (Key Consideration 7). |
| Principle 3. Framework for the comprehensive management of risks Rating: Broadly observed ASX maintains an Enterprise Risk Management Policy that sets out its framework for managing the full range of strategic, legal, financial and operational risks faced by ASX Clear (Futures). This high-level framework is supported by more granular policies and a governance structure to oversee ASX Clear (Futures)' risk management activities (Key Consideration 1). ASX Clear (Futures)' risk management framework imposes proportional, risk-based obligations such as initial margin and contributions to pooled risk resources that are related to exposures, and places incentives on participants, including additional collateral requirements where required, to control the risks that they bring to the CCP (Key Consideration 2). As part of its risk management framework, ASX Clear (Futures) reviews risks associated with interdependencies with other entities on an ongoing basis, and in relation to new initiatives, applying appropriate tools to manage these risks (Key Consideration 3). ASX Clear (Futures) has prepared a basic recovery plan on the basis of its existing powers and plans to consult on enhancements to its Operating Rules that would support a more comprehensive recovery plan (Key Consideration 4). |
| Principle 4. Credit risk Rating: Broadly observed ASX Clear (Futures) maintains a comprehensive framework for managing its credit exposures to participants (Key Consideration 1). Under this framework, ASX Clear (Futures) regularly monitors information on participants' credit standing through financial reporting requirements, public information, and further investigation where required. Monitoring of participants' credit standing is risk based, and ASX maintains a list of participants deemed to warrant more intensive monitoring. In responding to any issues identified through monitoring, ASX Clear (Futures) is able to impose activity restrictions or additional controls, including calls for additional collateral (Key Consideration 2). ASX Clear (Futures) also monitors and manages the magnitude of exposures to participants through both daily and intraday initial and variation margin calculations (Key Consideration 2), and through daily stress tests that measure the effects of extreme but plausible scenarios on exposures (Key Consideration 5). ASX Clear (Futures) holds sufficient financial resources to cover its largest potential credit exposure to any two participants and their affiliates in the extreme but plausible scenarios covered in its stress tests, consistent with the Bank's view that ASX Clear (Futures) is systemically important in multiple jurisdictions (Key Considerations 4, 6). ASX Clear (Futures) has the capacity to call additional margin from participants in the event that their stress-test exposures exceed predetermined STELs. During 2013/14, ASX Clear (Futures) enhanced the review of its capital stress-test model by introducing monthly reverse stress testing and review of market conditions to supplement the existing daily and formal annual review of scenarios. ASX Clear (Futures) has also engaged an external expert to conduct an annual validation of the capital stress-test model. This work is ongoing. Responsibility for increasing financial resources in response to persistent and widespread STEL breaches that exceed available financial resources lies with the CS Boards and the ASX Limited Board (Key Consideration 5). While ASX Clear (Futures) has some discretionary powers to address uncovered credit losses, these are not sufficient to reliably and fully address losses in all scenarios. ASX plans to consult on proposals to enhance its loss allocation and replenishment powers (Key Consideration 7). |
| Principle 5. Collateral Rating: Observed ASX Clear (Futures) limits the assets it routinely accepts as collateral to cash, or assets with low credit and market risks (Key Consideration 1). ASX Clear (Futures) applies haircuts to collateral. These are calibrated to stressed market conditions, to limit the need for procyclical adjustments (Key Considerations 2, 3). Collateral holdings are not sufficiently concentrated as to impair ASX Clear (Futures)' ability to liquidate such assets quickly without significant adverse price effects (Key Consideration 4). ASX Clear (Futures) retains discretion over whether to accept foreign currency collateral on a case-by-case basis, and takes into account concentration limits in exercising this discretion (Key Consideration 5). ASX Clear (Futures) employs well-designed and operationally flexible systems to manage collateral movements for securities and derivatives trades (Key Consideration 6). |
| Principle 6. Margin Rating: Broadly observed ASX Clear (Futures) applies initial and variation margin to derivatives exposures, using margin systems that are tailored to the particular attributes of the cleared products (Key Consideration 1). Timely price data are available for most products subject to ASX Clear (Futures)' margin systems, and ASX Clear (Futures) applies appropriate models to estimate prices when timely and reliable data are not available (Key Consideration 2). ASX Clear (Futures)' margin models ensure that initial margin meets a single-tailed confidence level of 99.7 per cent of the estimated distribution of future exposure, applying appropriate and conservative assumptions regarding close-out periods, product risks, portfolio effects, product offsets and floors to limit the need for procyclical changes (Key Considerations 3, 5). In addition, ASX Clear (Futures) applies variation margin to derivatives positions daily, and may call intraday margin as part of scheduled processes or in the event of significant market movements (Key Consideration 4). ASX Clear (Futures) performs daily and periodic backtesting of its margin models to assess the adequacy of initial margin against the targeted level of cover and performs an annual review of margin policy. ASX Clear (Futures) uses quarterly sensitivity analysis to validate the assumptions underpinning margin models, including to test the reliability of implicit or explicit product offsets (Key Consideration 6). ASX Clear (Futures) regularly reviews and validates its margin models. An external expert was recently engaged for a three-year period to conduct a comprehensive review of all key risk models, including those that support margining (Key Consideration 7). This work is ongoing. |
| Principle 7. Liquidity risk Rating: Broadly observed ASX Clear (Futures) maintains a robust framework for managing its liquidity risk (Key Consideration 1). Under this framework, ASX Clear (Futures) provides participants with information to assist them in managing their liquidity needs and risks, and employs an experienced Portfolio Risk Manager to monitor and manage ASX Clear (Futures)' own settlement and funding flows (Key Consideration 2). ASX Clear (Futures) holds sufficient liquid resources to meet its payment obligations on time in the event that the two participants with the largest aggregate payment obligation to the CCP were to default in the extreme but plausible scenarios envisaged in its stress tests (Key Considerations 4, 9). These liquid resources comprise a portfolio of high quality assets managed by ASXCC on ASX Clear (Futures)' behalf, supported by procedures to ensure timely and reliable access to liquidity from the portfolio as required (Key Considerations 5, 7). To enhance its management of liquidity risk, ASX Clear (Futures) has access, via ASXCC as an ESA holder, to Australian dollar liquidity from the Reserve Bank against eligible collateral (Key Consideration 8). ASX plans to consult on proposals to address uncovered liquidity shortfalls in ASX Clear (Futures) as part of broader enhancements to its recovery plan (Key Consideration 10). |
| Principle 8. Settlement finality Rating: Observed The vast majority of ASX Clear (Futures) settlements involve AUD cash payments between participants and the CCP for the purposes of margin payments and the settlement of cash-settled derivatives contracts. Each day, ASX Clear (Futures) calculates the net obligations of each of its participants. Those participants with a net obligation to the CCP are required to make payments to ASX Clear (Futures) by 11.00 am, for both AUD and NZD-denominated contracts. Once these payments have been received, ASX Clear (Futures) makes payments to those participants with a net obligation from the CCP. AUD cash settlements occur via Austraclear, with interbank obligations settled on an RTGS basis across ESAs at the Reserve Bank of Australia, via RITS. NZD cash settlements occur via NZClear, an SSF owned and operated by the Reserve Bank of New Zealand. ASX Clear (Futures) defines the point at which settlement is final through contract specifications set out in its Operating Rules and Procedures, and those of ASX 24. The finality of its money settlements is further defined in the Austraclear and NZClear rules, supported by finality legislation in the relevant jurisdictions (Key Consideration 1). Contract specifications set out in ASX Clear (Futures)' and ASX 24's Operating Rules and Procedures also specify procedures and timetables for final settlement (Key Consideration 2). ASX Clear (Futures) does not allow settlement instructions that may be revoked (Key Consideration 3). |
| Principle 9. Money settlements Rating: Observed ASX Clear (Futures) conducts its AUD money settlements, which constitute over 98 per cent of its settlement flows, via Austraclear instructions that settle across ESAs at the Bank, via RITS. NZD money settlements are also conducted in central bank money via participation as a non-bank in the NZClear system (Key Consideration 1). Other foreign currency settlements take place in commercial bank money (Key Considerations 2, 4). Commercial banks involved in the settlement of foreign currency transactions must be highly rated and subject to prudential regulation to ensure that credit, liquidity and operational risks are minimised (Key Consideration 3). Arrangements with commercial banks are also governed by standard legal agreements that include general information regarding the timing and availability of funds (Key Consideration 5). |
| Principle 10. Physical deliveries Rating: Observed ASX Clear (Futures)' Operating Rules and Procedures clearly state its and participants' obligations with respect to the delivery of physical instruments or commodities (Key Consideration 1). In accordance with these rules and procedures, ASX Clear (Futures) monitors and enforces compliance with delivery procedures (Key Consideration 2). |
| Principle 11. Central securities depositoriesntral securities depositories Rating: Not applicable Principle 11 not relevant to central counterparties. |
| Principle 12. Exchange-of-value settlement systems Rating: Observed ASX Clear (Futures) eliminates principal risk in the settlement of derivatives contracts involving the transfer of a security or physical asset in exchange for cash by ensuring that delivery occurs only if payment occurs (Key Consideration 1). For transactions involving securities transfers, ASX Clear (Futures) employs the DvP model 1 settlement mechanism in Austraclear. |
| Principle 13. Participant-default rules and procedures Rating: Observed ASX Clear (Futures) has sufficient powers under its Operating Rules and Procedures to manage a participant default, and has documented an internal framework setting out its default management approach (Key Consideration 1). Powers and tools available to ASX Clear (Futures) include the power to suspend a defaulted participant, the power to apply margin and pooled financial resources to meet losses, and a range of close-out and hedging tools, including the auction of open OTC derivatives positions to surviving participants (Key Considerations 1, 2). During 2013/14, ASX introduced a mechanism to encourage participants to participate competitively in the auction of a defaulted participants' portfolio. Participants are also required to report any default event or expected default to the CCP. ASX Clear (Futures) has published its Operating Rules that set out its default management powers, and a high-level overview of its approach to default management (Key Consideration 3). Default management procedures are tested and reviewed on at least an annual basis. Participants clearing OTC derivatives are represented on a Default Management Group that participates in annual tests of OTC default management arrangements, including the auction process (Key Consideration 4). |
| Principle 14. Segregation and portability Rating: Observed[1] ASX Clear (Futures) offers individual and omnibus segregation to customers (or ‘clients’) of its OTC clearing participants and in July 2014 added an individual segregation offering to the existing omnibus segregation for exchange-traded derivatives (Key Consideration 2). Individual segregation provides protection to clients not only in the event of the default of their clearing participant, but also the concurrent default of a fellow client (Key Consideration 1). The availability of individually segregated client accounts, margined on a gross basis, also increases the likelihood that client positions could be transferred in the event of a clearing participant default (Key Consideration 3). ASX Clear (Futures) plans to extend its segregation arrangements to support the posting of excess client collateral. ASX Clear (Futures) has produced a fact sheet on its segregation and portability arrangements, which it requires that participants make available to their clients. This is published on ASX's website (Key Consideration 4). |
| Principle 15. General business risk Rating: Broadly observed ASX Clear (Futures) identifies, monitors and manages its general business risks in the context of its overall Enterprise Risk Management Policy (Key Consideration 1). It has access to sufficient funds held at group level to support continued operations as a going concern if it incurs general business losses. These funds are backed by equity and invested in liquid assets. The legal basis of ASX Clear (Futures)' access to funds held at group level has been enhanced through a clause in the ASX Group Support Agreement (Key Considerations 2, 3, 4). ASX Clear (Futures) has developed a basic recovery plan and has commenced work towards enhancing this plan in line with forthcoming CPSS-IOSCO guidance on recovery planning (Key Consideration 3). ASX maintains viable arrangements to raise additional equity for its CS facilities, as required (Key Consideration 5). |
| Principle 16. Custody and investment risks Rating: Broadly observed The assets of ASX Clear (Futures) and its participants are administered and held within the ASX Group in accordance with robust group-wide controls (Key Consideration 1). A portion of these assets is held in liquid form to ensure prompt access as required (Key Consideration 2). ASXCC invests the assets of ASX Clear (Futures) according to an Investment Mandate in instruments with low credit, market and liquidity risk. Following changes during 2013/14, ASX Clear (Futures)' treasury investments place less reliance on unsecured investments concentrated in the large domestic banks (Key Consideration 4). ASX is in dialogue with the Bank about its expectations for further reductions in these exposures. ASXCC does not use custodian banks for its investments (Key Consideration 3). |
| Principle 17. Operational risk Rating: Observed ASX Clear (Futures)' key operating systems are Genium INET (Genium) and Calypso. Genium replaced the previous SECUR system for the clearing of exchange-traded derivatives in May 2014. Calypso was first used for the clearing of OTC derivatives transactions in September 2013. ASX Clear (Futures) manages its operational risks in the context of its group-wide Enterprise Risk Management Framework. ASX Clear (Futures) considers that it has sufficient well-trained and competent personnel and other resources to operate Genium and Calypso, and has taken steps to ensure that business development work does not risk the availability of these resources for key systems, including recently for the introduction of Genium and Calypso (Key Consideration 1). Responsibility for approving and reviewing operational risk management policy is shared between the ASX Limited and CS Boards, the Audit and Risk Committee and individual departments. The management of each department is responsible for implementing operational risk controls in their respective areas (Key Consideration 2). ASX Clear (Futures) sets clear operational reliability objectives and pursues policies designed to achieve those objectives. Key objectives for Genium, SECUR and Calypso, such as minimum availability of 99.8 per cent and peak capacity utilisation of 50 per cent, were met during 2013/14 (Key Consideration 3, 4). ASX Clear (Futures) maintains physical and information security policies based on relevant domestic and international standards (Key Consideration 5). ASX Clear (Futures) also maintains business continuity arrangements that provide a high degree of redundancy and, through the use of dual sites, target the resumption of operations within two hours following disruptive events. These arrangements are regularly tested in real time during live operations. Participants are required to maintain appropriate operational and business continuity arrangements that complement ASX Clear (Futures)' own arrangements, and are appropriate to the nature and scale of their business. ASX Clear (Futures) monitors participants' compliance with these requirements, and broader operational performance, on an ongoing basis (Key Consideration 6). ASX Clear (Futures) manages operational interdependencies with participants and Austraclear through its participant monitoring processes and group-wide risk management framework. Its dependencies on service providers and utilities are subject to ongoing monitoring and contingency arrangements where appropriate, including an escrow arrangement for Genium and Calypso source code subject to third-party vendor support. ASX Clear (Futures) has introduced clauses in its legal agreements with key outsourcing and critical service providers that impose requirements on those providers equivalent to those under the FSS (which align with the Principles). Additional clauses provide for access to information for the Bank, and notice to the Bank in the case of termination (Key Consideration 7). |
| Principle 18. Access and participation requirements Rating: Observed ASX Clear (Futures) has objective and transparent participation requirements set out in its Operating Rules and Procedures (Key Consideration 1). These include minimum capital and other financial requirements, as well as the requirement that participants maintain operational and risk management arrangements tailored to the specific activities of ASX Clear (Futures). Additional requirements apply for OTC derivatives clearing participants. ASX Clear (Futures)' participation requirements promote the efficient operation of the facility, and do not impose discriminatory or restrictive access constraints such as minimum turnover levels or location requirements (Key Consideration 2). ASX Clear (Futures) monitors participants' compliance with requirements on an ongoing basis and has the authority to suspend or terminate participation or take other disciplinary or remedial action in the event of a breach of these requirements (Key Consideration 3). |
| Principle 19. Tiered participation arrangements Rating: Observed ASX Clear (Futures) applies a risk-based approach to its monitoring of tiered participation arrangements. To date, the focus of this monitoring has been on client activity in exchange-traded derivatives, since an account structure that permits client clearing of OTC derivatives transactions has only relatively recently been introduced. ASX Clear (Futures) has a formal standard that governs its risk-based approach to monitoring of concentration in tiered participation arrangements and documents mitigating steps (Key Consideration 4). During 2013/14, clients of ASX Clear (Futures)' participants represented 69 per cent of initial margin held by ASX Clear (Futures) to cover its credit exposures to both participants and (indirectly) their clients. In managing the risks associated with tiered arrangements, ASX Clear (Futures) is able to gather information on indirect participation, although with some limitations. ASX Clear (Futures) will obtain better data to support its monitoring as participants and their clients make use of the newly introduced individually segregated account structure for both OTC and exchange-traded derivatives. Where data limitations remain, ASX can also seek more detailed information from participants on an ad hoc basis (Key Considerations 1, 2). ASX Clear (Futures) does not maintain formal thresholds at which large indirect participants are encouraged to seek direct participation, but does actively manage risks posed by indirect participant activity through its relationship with the direct participant (Key Consideration 3). ASX Clear (Futures) conducts daily monitoring of its client-level data, with the use of predefined triggers for further action. |
| Principle 20. FMI links Rating: Observed ASX Clear (Futures) maintains links to two other FMIs: Austraclear and NZClear. ASX Clear (Futures) assumes no direct financial risks from these links, but is exposed to operational risks. These are managed in the context of the operational risk management practices of both FMIs (Key Consideration 1). The legal basis of each link is supported by finality legislation (Key Consideration 2). ASX Clear (Futures) does not maintain links with any other CCPs (Key Considerations 7, 8). |
| Principle 21. Efficiency and effectiveness Rating: Observed ASX Clear (Futures) offers a range of participation options and clearing services designed to meet the needs of its participants and the ASX 24 market. ASX Clear (Futures) participants are able to influence risk management policies and broader service developments via a participant Risk Committee and OTC Product Committee that make recommendations and proposals to the ASX Clear (Futures) Board (Key Consideration 1, see also Principle 2). ASX Clear (Futures)' goals and objectives are determined by the ASX Limited Board (for group-level strategic direction and business priorities) and the ASX Clear (Futures) Board (for goals and objectives specific to the clearing service) (Key Consideration 2). ASX Clear (Futures) measures the effectiveness of its services via participant and user feedback. ASX Clear (Futures) performance reports are presented to ASX management on a monthly basis. Matters covered in these reports include operational performance, netting efficiency, incident management and participant complaints (Key Consideration 3). |
| Principle 22. Communication procedures and standards Rating: Observed ASX Clear (Futures) uses the internationally used OMnet Application Programming Interface as a communication standard for clearing of financial products traded on ASX 24. For OTC interest rate derivatives, ASX Clear (Futures) uses the internationally used Calypso clearing system for clearing-related messaging (Key Consideration 1). |
| Principle 23. Disclosure of rules, key procedures, and market data Rating: Observed ASX Clear (Futures) fully discloses its Operating Rules and Procedures (including the OTC Handbook) to participants, and publicly discloses its rules, fees and a range of additional relevant information on its risk management procedures (Key Consideration 1). This includes information regarding the process of novation, and general descriptions of system design and the roles and obligations of ASX Clear (Futures) and its participants (Key Consideration 2). ASX Clear (Futures) provides new participants with comprehensive documentation, and verifies their understanding of their responsibilities as participants; existing participants are also provided with education on their obligations where required (Key Consideration 3). A full breakdown of the various fees ASX Clear (Futures) charges, including available discount and incentive schemes, is published on the ASX website (Key Consideration 4). ASX has published its response to the CPSS-IOSCO Disclosure Framework and plans to periodically update and enhance this document where appropriate (Key Consideration 5). During 2013/14, ASX redesigned its website, providing links to information that is subject to disclosure requirements from a central location. |
| Principle 24. Disclosure of market data by trade repositories Rating: Not applicable Principle 24 not relevant to central counterparties. |
| Summary Assessment by Principle |
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| Principle 1. Legal basis Rating: Observed ASX Settlement is a legal entity within the ASX Group that solely provides settlement services. ASX Settlement's legal basis is founded on clear and understandable rules that operate within the framework of relevant laws and regulations (Key Considerations 1, 2). The certainty of this legal basis in relevant jurisdictions is reinforced by supporting legislation, including ASX Settlement's protection as an approved netting arrangement under the PSNA, and is subject to periodic review by ASX Legal (Key Considerations 1, 4). ASX Settlement has publicly outlined the key features of its legal basis on its website and, from time to time, for information, may provide legal opinions to participants or other stakeholders in respect of the legal basis of significant new services (Key Consideration 3). ASX has not identified any material risks arising from potential conflicts of law relating to the operations of ASX Settlement (Key Consideration 5). |
| Principle 2. Governance Rating: Observed ASX Settlement pursues objectives that place a high priority on risk management, through compliance with relevant FSS and the broader Corporations Act requirement to do all other things necessary to reduce systemic risk. ASX Settlement must also comply with all its other obligations under Part 7.3 of the Corporations Act, including to operate in a fair and effective manner. ASX Settlement also acknowledges public policy objectives directed at financial market and payments system integrity, as well as the interests of customers and other stakeholders (Key Consideration 1). ASX Settlement's governance arrangements are documented and publicly disclosed. These arrangements give ultimate responsibility for the oversight of the operations and risk management of ASX Settlement to the ASX Limited Board and the ASX Settlement Board. Board and committee charters document Board roles and lines of responsibility and accountability (Key Considerations 2, 3). ASX has conflict handling procedures in place to address potential conflicts of interest that may arise by virtue of its group structure, requiring staff and directors to act in the best interests of each facility as appropriate. Changes to the composition of the CS Boards during the 2013/14 further support these conflict handling procedures (Key Consideration 3). The performance of each relevant Board is reviewed at least annually for both individual directors and the Board as a whole. The relevant Boards each include a majority of independent non-executive directors and the ASX Settlement Board includes directors appointed for their expertise in clearing and settlement matters (Key Consideration 4). Board remuneration is designed to attract and retain appropriately skilled and qualified directors. The reporting lines of management are set out in the CS Boards' Charter, along with roles and responsibilities of key management personnel (Key Consideration 5). Remuneration of senior management in risk management roles is structured to provide appropriate incentives for sound and effective risk management. ASX maintains a clear and documented risk management framework, subject to regular internal and external review. Key processes and internal controls are subject to review by ASX's Internal Audit department, which is itself subject to periodic external review (Key Consideration 6). ASX utilises formal and informal consultation processes to ensure that the design and decisions of ASX Settlement reflect the interests of participants and other stakeholders. This includes the establishment of a new advisory forum, introduced in accordance with commitments under the ASX Code of Practice for Clearing and Settlement of Cash Equities in Australia (the Code of Practice), which provides user feedback in relation to the ongoing development of cash market clearing and settlement infrastructure and services (Key Consideration 7). |
| Principle 3. Framework for the comprehensive management of risks Rating: Broadly observed ASX maintains an Enterprise Risk Management Policy that sets out its framework for managing the full range of strategic, legal, financial and operational risks faced by ASX Settlement. This high-level framework is supported by more granular policies (currently being refreshed) and a governance structure to oversee ASX Settlement's risk management activities (Key Consideration 1). ASX Settlement's risk management framework does not place financial obligations on participants, but provides incentives to participants to control the risks that they bring to the SSF (Key Consideration 2). As part of its risk management framework, ASX Settlement reviews on an ongoing basis risks associated with interdependencies with other entities, and in relation to new initiatives, applies appropriate tools to manage these risks (Key Consideration 3). ASX Settlement has prepared a basic recovery plan on the basis of its existing powers and intends to enhance this plan in line with forthcoming CPSS-IOSCO guidance on recovery planning (Key Consideration 4). |
| Principle 4. Credit risk Rating: Not applicable ASX Settlement does not extend credit to participants or provide a settlement guarantee. Accordingly, ASX Settlement does not assume credit risk as principal. ASX Settlement's use of a DvP settlement mechanism ensures that participants do not face credit risks arising from ASX Settlement's settlement processes. |
| Principle 5. Collateral Rating: Not applicable Since ASX Settlement does not assume credit risk as principal (see Principle 4), it does not collect collateral from participants. |
| Principle 6. Margin Rating: Not applicable Principle 6 not relevant to securities settlement facilities. |
| Principle 7. Liquidity risk Rating: Observed ASX Settlement conducts settlement on a DvP Model 3 basis, and does not assume payment obligations in the settlement process. While participants face liquidity exposures arising from the possible reconstitution of the multilateral net batch in a default, including via the implementation of offsetting transaction arrangements related to novated transactions, ASX Settlement's back-out procedures are designed to limit concentrated liquidity exposures for non-defaulting participants (Key Consideration 1). These procedures are disclosed to participants through ASX Settlement's Operating Rules and Procedures (Key Consideration 2). ASX Settlement does not assume liquidity risk as principal through its settlement process (Key Considerations 3, 5, 6, 7, 8, 9, 10). ASX is considering whether any additional information could be disclosed to participants on the potential liquidity impact of reconstitution of the ASX Settlement batch in scenarios that extend beyond the management of an ASX Clear participant default. |
| Principle 8. Settlement finality Rating: Observed ASX Settlement defines the point at which settlement is final in its Operating Rules, and finality is ensured by its approval under Part 3 of the PSNA. Money settlements linked to securities transfers in ASX Settlement occur in RITS. The finality of interbank obligations arising from its settlements is protected by the approval of RITS under Part 2 of the same legislation (Key Consideration 1). Final settlement occurs each day in a single multilateral net batch on a DvP Model 3 basis (Key Consideration 2). ASX Settlement defines clear cut-off times for the cancellation of payment or transfer instructions (Key Consideration 3). |
| Principle 9. Money settlements Rating: Observed ASX Settlement conducts its money settlements across the ESAs of Payment Providers at the Bank, via RITS (Key Consideration 1). ASX Settlement does not conduct settlements across its own books or in commercial bank money (Key Considerations 2, 3, 4, 5). Payment Providers that effect money settlements on behalf of participants must be prudentially regulated and meet ASX Settlement's application criteria. The roles and responsibilities of commercial bank Payment Providers are governed by legal agreements between those banks, ASX Settlement, ASX Clear and the Australian Payments Clearing Association (APCA). ASX is considering the introduction of a formal framework to engage Payment Providers on changes to settlement processes. |
| Principle 10. Physical deliveries Rating: Not applicable ASX Settlement does not settle obligations requiring physical delivery. |
| Principle 11. Central securities depositories Rating: Observed ASX Settlement operates a central securities depository that maintains a record of securities holdings and movements for ASX-listed securities, and securities listed by Approved Listing Market Operators (ALMOs), through the CHESS sub-register. Securities registries maintain a separate record of holdings on behalf of issuers, using information on securities movements provided by CHESS. ASX Settlement employs a range of controls to ensure the integrity of these securities. These controls are subject to annual audit. ASX Settlement's Operating Rules and Procedures identify participants' interests in each type of security held within ASX Settlement, identify how these interests can be transferred within the facility, and provide that participants' securities would not be subject to claims by creditors in the event that ASX Settlement entered external administration (Key Consideration 1). ASX Settlement does not allow overdrafts or debit balances in securities accounts within its system, and all securities (or interests in securities) are held in a dematerialised form (Key Considerations 2, 3). ASX Settlement's Operating Rules set out its obligations in providing safekeeping of participant assets, and ASX Settlement employs operational controls and insurance to mitigate custody risk (Key Consideration 4). Participant assets are segregated from ASX Settlement's own assets, and ASX Settlement supports the segregation of participant and client assets through the use of identifiers for securities holders (Key Consideration 5). ASX Settlement does not provide any ancillary services that could pose a risk to its central securities depository function (Key Consideration 6). |
| Principle 12. Exchange-of-value settlement systems Rating: Observed ASX Settlement eliminates principal risk in settlements involving the transfer of a security in exchange for cash by ensuring that delivery occurs if and only if the associated payment is settled at the same time (Key Consideration 1). For the purchase of securities, ASX Settlement does this through the use of a DvP Model 3 settlement mechanism, which completes settlement via a multilateral net batch. |
| Principle 13. Participant-default rules and procedures Rating: Observed ASX Settlement has powers under its Operating Rules and Procedures to manage a participant default, and has documented procedures setting out how to manage a default. Powers available to ASX Settlement include powers to suspend or terminate the participant status of a defaulted participant (Key Considerations 1, 2). Participants are also required to report any default event or expected default to the SSF. ASX Settlement sets out its default management powers in its Operating Rules and Procedures (Key Consideration 3). Given that ASX Settlement is not exposed to financial loss in the event of a participant default, its handling of a default situation is largely procedural in nature (Key Consideration 4). |
| Principle 14. Segregation and portability Rating: Not applicable Principle 14 not relevant to securities settlement facilities. |
| Principle 15. General business risk Rating: Broadly observed ASX Settlement identifies, monitors and manages its general business risks in the context of its overall Enterprise Risk Management Policy (Key Consideration 1). It has access to sufficient funds held at group level to support continued operations as a going concern if it incurs general business losses. These funds are backed by equity and invested in liquid assets. The legal basis of ASX Settlement's access to funds held at group level has been enhanced through a clause in the ASX Group Support Agreement (Key Considerations 2, 3, 4). ASX Settlement has developed a basic recovery plan and has commenced work towards enhancing this plan in line with forthcoming CPSS-IOSCO guidance on recovery planning (Key Consideration 3). ASX maintains viable arrangements to raise additional equity for its CS facilities as required (Key Consideration 5). |
| Principle 16. Custody and investment risks Rating: Not applicable ASX Settlement does not have any financial investments, and its participants do not lodge collateral or other assets with the SSF. General business risk capital covering the needs of ASX Settlement is invested at the group level. Arrangements for the investment of those funds are discussed under Principle 15. |
| Principle 17. Operational risk Rating: Observed ASX Settlement's key operating system is CHESS. ASX Settlement manages its operational risks in the context of its group-wide Enterprise Risk Management Framework. ASX Settlement considers that it has sufficient well-trained and competent personnel and other resources to operate CHESS, and has taken steps to ensure that business development work does not risk the availability of these resources for key systems (Key Consideration 1). Responsibility for approving and reviewing operational risk management policy is shared between the ASX Limited and CS Boards, the Audit and Risk Committee and individual departments. The management of each department is responsible for implementing operational risk controls in their respective areas (Key Consideration 2). ASX Settlement sets clear operational reliability objectives and pursues policies designed to achieve those objectives. Key objectives for CHESS, such as minimum availability of 99.8 per cent and peak capacity utilisation of 50 per cent, were met during 2013/14 (Key Considerations 3, 4). ASX Settlement maintains physical and information security policies based on relevant domestic and international standards (Key Consideration 5). ASX Settlement also maintains business continuity arrangements that provide a high degree of redundancy and, through the use of dual sites, target the resumption of operations within two hours following disruptive events. These arrangements are regularly tested in real time during live operations. Participants are required to maintain appropriate operational and business continuity arrangements that complement ASX Settlement's own arrangements, and are appropriate to the nature and scale of their business. ASX Settlement monitors participants' compliance with these requirements, and broader operational performance, on an ongoing basis (Key Consideration 6). ASX Settlement manages operational interdependencies with participants and ASX Clear through its participant monitoring processes and group-wide risk management framework. Its dependencies on service providers and utilities are subject to ongoing monitoring and contingency arrangements where appropriate. ASX Settlement has introduced clauses in its legal agreements with key outsourcing and critical service providers that impose requirements on those providers equivalent to those under the FSS (which align with the Principles). Additional clauses provide for access to information for the Bank, and notice to the Bank in the case of termination (Key Consideration 7). |
| Principle 18. Access and participation requirements Rating: Observed ASX Settlement has objective and transparent participation requirements set out in its Operating Rules and Procedures (Key Consideration 1). These include financial requirements, as well as the requirement that participants maintain operational arrangements tailored to the specific activities of ASX Settlement. ASX Settlement's participation requirements promote the efficient operation of the facility, and do not impose discriminatory or restrictive access constraints such as minimum turnover levels (Key Consideration 2). ASX Settlement monitors participants' compliance with requirements on an ongoing basis, and has the authority to suspend or terminate participation or take other disciplinary or remedial action in the event of a breach of these requirements (Key Consideration 3). |
| Principle 19. Tiered participation arrangements Rating: Observed In managing the risks associated with tiered arrangements, ASX Settlement is able to gather basic information on indirect participation (Key Considerations 1, 2). ASX Settlement does not maintain formal thresholds at which substantial indirect participants are encouraged to seek direct participation, but does actively manage risks posed by indirect participant activity through its relationship with the direct participant (Key Consideration 3). The partially overlapping participation base between ASX Settlement and ASX Clear allows for tiered participation risks to be monitored and addressed jointly (Key Consideration 4). |
| Principle 20. FMI links Rating: Observed ASX Settlement maintains a link to one other FMI, ASX Clear, for the settlement of novated securities transactions. There are no direct financial risks associated with this link, but ASX Settlement is exposed to operational risks. These are managed in the context of ASX's group-wide framework for operational risk management (Key Consideration 1). The legal basis of the link is supported by finality legislation (Key Consideration 2). ASX Settlement does not maintain links with any other central securities depositories (Key Considerations 3, 4, 5, 6). |
| Principle 21. Efficiency and effectiveness Rating: Observed ASX Settlement offers a range of participation options and settlement services designed to meet the needs of its participants, the ASX and Chi-X markets, and the ALMOs that it serves. ASX's Code of Practice for cash equities clearing and settlement addresses transparency and accessibility in the provision of these services and formalises avenues for user governance, including via a user Forum (Key Consideration 1, see also Principle 2). ASX Settlement's goals and objectives are determined by the ASX Limited Board (for group-level strategic direction and business priorities) and the ASX Settlement Board (for goals and objectives specific to the cash market settlement service). ASX Settlement measures the effectiveness of its services via participant and user feedback. ASX Settlement performance reports are presented to ASX management on a monthly basis. Matters covered in these reports include operational performance, settlement and netting efficiency, incident management and participant complaints (Key Consideration 3). |
| Principle 22. Communication procedures and standards Rating: Observed While ASX Settlement uses a proprietary messaging standard, this is acceptable given the domestic orientation of its service. ASX Settlement is consulting with users, via a Technical Committee established under the Code of Practice, on a proposal to adopt the internationally accepted ISO 20022 SWIFT standard as part of a broader renewal of its CHESS system (Key Consideration 1). |
| Principle 23. Disclosure of rules, key procedures, and market data Rating: Observed ASX Settlement fully discloses its Operating Rules and Procedures to participants, and publicly discloses its rules, fees and a range of additional relevant information on its risk management procedures (Key Consideration 1). This includes information regarding the general descriptions of system design and the roles and obligations of ASX Settlement and its participants (Key Consideration 2). ASX Settlement provides new participants with comprehensive documentation, and verifies their understanding of their responsibilities as participants; existing participants are also provided with education on their obligations where required (Key Consideration 3). A full breakdown of the various fees ASX Settlement charges, including available discount and incentive schemes, is published on the ASX website (Key Consideration 4). ASX has published its response to the CPSS-IOSCO Disclosure Framework and plans to periodically update and enhance this document where appropriate (Key Consideration 5). During 2013/14, ASX redesigned its website, providing links to information that is subject to disclosure requirements from a central location. |
| Principle 24. Disclosure of market data by trade repositories Rating: Not applicable Principle 24 not relevant to securities settlement facilities. |
| Summary Assessment by Principle |
|---|
| Principle 1. Legal basis Rating: Observed Austraclear is a separate legal entity within the ASX Group that solely provides settlement and related depository services. Austraclear's legal basis is founded on clear and understandable rules that operate within the framework of relevant laws and regulations (Key Considerations 1, 2). The certainty of this legal basis in relevant jurisdictions is reinforced by supporting legislation, including Austraclear's protection as an RTGS system under the PSNA, and is subject to periodic review by ASX Legal (Key Considerations 1, 4). Austraclear has publicly outlined the key features of its legal basis on its website and, from time to time, for information, provides legal opinions to participants or other stakeholders in respect of the legal basis of significant new services (Key Consideration 3). ASX has not identified any material risks arising from potential conflicts of law relating to the operations of Austraclear (Key Consideration 5). |
| Principle 2. Governance Rating: Observed Austraclear pursues objectives that place a high priority on risk management, through compliance with relevant FSS and the broader Corporations Act requirement to do all other things necessary to reduce systemic risk. Austraclear must also comply with all its other obligations under Part 7.3 of the Corporations Act, including to operate in a fair and effective manner. Austraclear also acknowledges public policy objectives directed at financial market and payments system integrity, as well as the interests of customers and other stakeholders (Key Consideration 1). Austraclear's governance arrangements are documented and publicly disclosed. These arrangements give ultimate responsibility for the oversight of operations and risk management of Austraclear to the ASX Limited Board and the Austraclear Board. Board and committee charters document Board roles and lines of responsibility and accountability (Key Considerations 2, 3). ASX has conflict handling procedures in place to address potential conflicts of interest that may arise by virtue of its group structure, requiring staff and directors to act in the best interests of each facility as appropriate. Changes to the composition of the CS Boards during 2013/14 further support these conflict handling procedures (Key Consideration 3). The performance of each relevant Board is reviewed at least annually for both individual directors and the Board as a whole. The relevant Boards each include a majority of independent non-executive directors and the Austraclear Board includes directors appointed for their expertise in clearing and settlement matters (Key Consideration 4). Board remuneration is designed to attract and retain appropriately skilled and qualified directors. The reporting lines of management are set out in the CS Boards' Charter, along with roles and responsibilities of key management personnel (Key Consideration 5). Remuneration of senior management in risk management roles is structured to provide appropriate incentives for sound and effective risk management. ASX maintains a clear and documented risk management framework subject to regular internal and external review. Key processes and internal controls are subject to review by ASX's Internal Audit unit, which is itself subject to periodic external review (Key Consideration 6). ASX utilises formal and informal consultation processes to ensure that the design and decisions of Austraclear reflect the interests of participants and other stakeholders. Austraclear has also established an Advisory Committee that provides a standing forum for user feedback on the design and ongoing development of services (Key Consideration 7). |
| Principle 3. Framework for the comprehensive management of risks Rating: Broadly observed ASX maintains an Enterprise Risk Management Policy that sets out its framework for managing the full range of strategic, legal, financial and operational risks faced by Austraclear. This high-level framework is supported by more granular policies (currently being refreshed) and a governance structure to oversee Austraclear's risk management activities (Key Consideration 1). Austraclear's risk management framework does not place financial obligations on participants, but provides incentives to participants, such as additional operational requirements for collateral managers, to control the risks that they bring to the SSF (Key Consideration 2). As part of its risk management framework, Austraclear reviews risks associated with interdependencies with other entities on an ongoing basis, and in relation to new initiatives, applying appropriate tools to manage these risks (Key Consideration 3). Austraclear has prepared a basic recovery plan on the basis of its existing powers and intends to enhance this plan in line with forthcoming CPSS-IOSCO guidance on recovery planning (Key Consideration 4). |
| Principle 4. Credit risk Rating: Not applicable Austraclear does not extend credit to participants or provide a settlement guarantee. Accordingly, Austraclear does not assume credit risk as principal. Austraclear's use of a DvP settlement mechanism ensures that participants do not face credit risks arising from Austraclear's settlement processes. |
| Principle 5. Collateral Rating: Not applicable Since Austraclear does not assume credit risk as principal (see Principle 4), it does not collect collateral from participants. |
| Principle 6. Margin Rating: Not applicable Principle 6 not relevant to securities settlement facilities. |
| Principle 7. Liquidity risk Rating: Observed Austraclear settlements are conducted in real time on a DvP Model 1 basis, allowing participants to manage their liquidity risk exposures to bilateral counterparties (Key Consideration 1). Austraclear does not assume liquidity risk as principal through its settlement process (Key Considerations 2, 3, 5, 6, 7, 8, 9, 10). |
| Principle 8. Settlement finality Rating: Observed Austraclear defines the point at which settlement is final in its Regulations, and finality is ensured by its approval under Part 2 of the PSNA. The finality of interbank obligations arising from its settlements is protected by the approval of RITS under the same legislation (Key Consideration 1). Final settlement occurs on a DvP (or equivalent simultaneous exchange of assets) Model 1 basis in real time (Key Consideration 2). Austraclear defines clear cut-off times for the cancellation of payment or transfer instructions (Key Consideration 3). |
| Principle 9. Money settlements Rating: Observed Austraclear conducts its AUD money settlements across the ESAs of Participating Banks at the Bank, via RITS (Key Consideration 1). Participating Banks that effect money settlements on their own behalf or on behalf of other participants must be prudentially regulated and meet Austraclear's participation requirements (Key Consideration 3). In July 2014 Austraclear began offering a foreign currency settlement service, initially supporting the settlement of payments in Chinese renminbi across the books of the Bank of China (Sydney branch) (Key Considerations 2, 3). Austraclear's Regulations and legal agreement with Bank of China state that payments through this service settle with finality in real time (Key Consideration 5). |
| Principle 10. Physical deliveries Rating: Not applicable Austraclear does not settle obligations requiring physical delivery. |
| Principle 11. Central securities depositories Rating: Observed Austraclear acts as central securities depository for the securities that it settles. Austraclear employs a range of controls to ensure the integrity of these securities. These controls are subject to annual audit. Austraclear's Regulations and Procedures identify the interests held by participants in each type of security held within Austraclear, identify how these interests can be transferred within the facility, and provide that participants' securities would not be subject to claims by creditors in the event that Austraclear entered external administration (Key Consideration 1). Austraclear does not allow overdrafts or debit balances in securities accounts within its system, and maintains paper securities in immobilised form, with other securities dematerialised (Key Considerations 2, 3). Austraclear's Regulations set out its obligations in providing safe keeping of participant assets, and Austraclear employs operational controls and insurance to mitigate custody risk (Key Consideration 4). Participant assets are segregated from Austraclear's own assets, and Austraclear supports the segregation of participant and client assets through optional sub-accounts (Key Consideration 5). Austraclear's provision of ancillary services to issuers is subject to operational risk controls (Key Consideration 6). |
| Principle 12. Exchange-of-value settlement systems Rating: Observed Austraclear eliminates principal risk in settlements involving the transfer of a security in exchange for cash or another security by ensuring that delivery occurs if and only if the associated payment is settled at the same time (Key Consideration 1). For the purchase of securities, Austraclear does this through the use of a DvP Model 1 settlement mechanism, which simultaneously settles linked payment and securities obligations on an item-by-item basis in real time. Collateral substitutions arising from the ASX Collateral service are performed on a delivery-versus-delivery (DvD) basis, whereby linked securities transactions settle simultaneously, including where a chain of substitutions are being performed. |
| Principle 13. Participant-default rules and procedures Rating: Observed Austraclear has powers under its Operating Rules and Procedures to manage a participant default, and has documented procedures setting out how to manage a default, including in respect of special purpose participants that are collateral managers. Powers available to Austraclear include powers to suspend or terminate the participant status of a defaulting participant (Key Considerations 1, 2). Participants are also required to report any default event or expected default to the SSF. Austraclear sets out its default management powers in its Regulations and Procedures (Key Consideration 3). Since Austraclear is not exposed to financial loss in the event of a participant default, its handling of a default situation is largely procedural in nature (Key Consideration 4). |
| Principle 14. Segregation and portability Rating: Not applicable Principle 14 not relevant to securities settlement facilities. |
| Principle 15. General business risk Rating: Broadly observed Austraclear identifies, monitors and manages its general business risks in the context of its overall Enterprise Risk Management Policy (Key Consideration 1). It has access to sufficient funds held at group level to support continued operations as a going concern if it incurs general business losses. These funds are backed by equity and invested in liquid assets. The legal basis of Austraclear's access to funds held at group level has been enhanced through a clause in the ASX Group Support Agreement (Key Considerations 2, 3, 4). Austraclear has developed a basic recovery plan and has commenced work towards enhancing this plan in line with forthcoming CPSS-IOSCO guidance on recovery planning (Key Consideration 3). ASX maintains viable arrangements to raise additional equity for its CS facilities as required (Key Consideration 5). |
| Principle 16. Custody and investment risks Rating: Observed The assets of Austraclear are invested on its own behalf in cash or other high-quality liquid assets, which allow prompt access to its assets when required (Key Considerations 1, 2). Austraclear controls investment risk by limiting its approved counterparties to large Australian banks, and investing predominantly in cash (Key Consideration 4). Austraclear does not use custodian banks for its investments (Key Consideration 3). |
| Principle 17. Operational risk Rating: Observed Austraclear's key operating system is EXIGO. Austraclear manages its operational risks in the context of its group-wide Enterprise Risk Management Framework. Austraclear considers that it has sufficient well-trained and competent personnel and other resources to operate EXIGO, and has taken steps to ensure that business development work does not risk the availability of these resources for key systems (Key Consideration 1). Responsibility for approving and reviewing operational risk management policy is shared between the ASX Limited and CS Boards, the Audit and Risk Committee and individual departments. The management of each department is responsible for implementing operational risk controls in their respective areas (Key Consideration 2). Austraclear sets clear operational reliability objectives and pursues policies designed to achieve those objectives. Key objectives for EXIGO, such as minimum availability of 99.9 per cent and peak capacity utilisation of 50 per cent, were met during 2013/14 (Key Consideration 3, 4). Austraclear maintains physical and information security policies based on relevant domestic and international standards (Key Consideration 5). Austraclear also maintains business continuity arrangements that provide a high degree of redundancy and, through the use of dual sites, target the resumption of operations within two hours following disruptive events. These arrangements are regularly tested in real time during live operations. Participants are required to maintain appropriate operational and business continuity arrangements that complement Austraclear's own arrangements, and are appropriate to the nature and scale of their business. Austraclear monitors participants' compliance with these requirements, and broader operational performance, on an ongoing basis (Key Consideration 6). Austraclear manages operational interdependencies with participants, and ASX Clear and ASX Clear (Futures) through its participant monitoring processes and group-wide risk management framework respectively. Its dependencies on service providers and utilities are subject to ongoing monitoring and contingency arrangements where appropriate. Austraclear has introduced clauses in its legal agreements with key outsourcing and critical service providers that impose requirements on those providers equivalent to those under the FSS (which align with the Principles). Additional clauses provide for access to information for the Bank, and notice to the Bank in the case of termination (Key Consideration 7). |
| Principle 18. Access and participation requirements Rating: Observed Austraclear has objective and transparent participation requirements set out in its Regulations and Procedures (Key Consideration 1). These include minimum capital and other financial requirements, as well as the requirement that participants maintain operational arrangements tailored to the specific activities of Austraclear, including additional requirements for special purpose participants that are collateral managers. Austraclear's participation requirements promote the efficient operation of the facility, and do not impose discriminatory or restrictive access constraints such as minimum turnover levels (Key Consideration 2). Austraclear monitors participants' compliance with requirements on an ongoing basis, and has the authority to suspend or terminate participation or take other disciplinary or remedial action in the event of a breach of these requirements (Key Consideration 3). |
| Principle 19. Tiered participation arrangements Rating: Observed In managing the risks associated with tiered arrangements, Austraclear is able to gather basic information on indirect participation (Key Considerations 1, 2). Austraclear does not maintain formal thresholds at which substantial indirect participants are encouraged to seek direct participation, but does actively manage risks posed by indirect participant activity through its relationship with the direct participant (Key Consideration 3). Austraclear is not directly exposed to financial risks arising from tiered participation (Key Consideration 4). |
| Principle 20. FMI links Rating: Observed Austraclear maintains three links to other FMIs:
|
| Principle 21. Efficiency and effectiveness Rating: Observed Austraclear meets the needs of its participants and the markets it serves by: providing an appropriate range of registry, central securities depository and settlement services; maintaining a flexible participation structure; and by establishing the Austraclear Advisory Committee, comprised of user representatives, to provide input on the design, operation and future development of Austraclear (Key Consideration 1, see also Principle 2). Austraclear's goals and objectives are determined by the ASX Limited Board (for group-level strategic direction and business priorities) and the Austraclear Board (for goals and objectives specific to the settlement service). Austraclear measures the effectiveness of its services via participant and user feedback. Austraclear performance reports are presented to ASX management on a monthly basis. Matters covered in these reports include operational performance, settlement failures, incident management and participant complaints. |
| Principle 22. Communication procedures and standards Rating: Observed The Austraclear System supports the internationally accepted SWIFT Message Protocol. Participants can also access Austraclear via the internet or a secure private network (Key Consideration 1). |
| Principle 23. Disclosure of rules, key procedures, and market data Rating: Observed Austraclear fully discloses its Regulations and Procedures to participants, and publicly discloses its rules, fees and a range of additional relevant information on its risk management procedures (Key Consideration 1). This includes information regarding the general descriptions of system design and the roles and obligations of Austraclear and its participants (Key Consideration 2). Austraclear provides new participants with comprehensive documentation, and verifies their understanding of their responsibilities as participants; existing participants are also provided with education on their obligations where required (Key Consideration 3). A full breakdown of the various fees ASX Clear charges, including available discount and incentive schemes, is published on the ASX website (Key Consideration 4). ASX has published its response to the CPSS-IOSCO Disclosure Framework and plans to periodically update and enhance this document where appropriate (Key Consideration 5). During 2013/14, ASX redesigned its website, providing links to information that is subject to disclosure requirements from a central location. |
| Principle 24. Disclosure of market data by trade repositories Rating: Not applicable Principle 24 not relevant to securities settlement facilities. |
| Principle | Rating | Recommendations |
|---|---|---|
| 3. Framework for the comprehensive management of risks | Broadly observed | In order to fully observe Principle 3, ASX Clear should implement plans to enhance its recovery plan consistent with forthcoming CPSS-IOSCO guidance on recovery planning. |
| 4. Credit risk | Broadly observed | In order to fully observe Principle 4, ASX Clear should implement mechanisms
consistent with forthcoming CPSS-IOSCO guidance on recovery planning that
would fully address any uncovered credit losses and replenish financial
resources following a participant default. ASX Clear should also complete the full validation of its capital stress test model by external experts and consider further enhancements to its reverse stress testing approach that take into account the impact of systematic shocks across multiple products. ASX Clear is encouraged to continually refine and enhance its reverse stress testing methodology and its integration into existing risk management processes. |
| 6. Margin | Broadly observed | In order to fully observe Principle 6, ASX Clear should complete the full
validation of its SPAN margin model and Derivatives Pricing System by external
experts, and carry out plans for these external experts to perform a full
validation of the Cash Market Margining model within the next two years. ASX Clear is encouraged to continually refine and enhance its margin backtesting and sensitivity analysis methodologies and their integration into existing risk management processes. |
| 7. Liquidity risk | Broadly observed | In order to fully observe Principle 7, ASX Clear should implement mechanisms
consistent with forthcoming CPSS-IOSCO guidance on recovery planning that
would fully address any uncovered liquidity shortfall related to derivatives
transactions following a participant default. ASX Clear should also complete the full validation of its liquidity stress test model by external experts, and enhance its sensitivity analysis approach to allow it to systematically examine the effect of underlying assumptions. This should include assumptions on the porting of client derivatives positions and the degree to which timely settlement can be achieved without the use of offsetting transaction arrangements. |
| 9. Money settlements | Observed | ASX Clear is encouraged to work with ASX Settlement to introduce a framework to formally engage Payment Providers on changes to settlement processes in response to regulatory or market-driven change. |
| 14. Segregation and portability | Broadly observed | In order to fully observe Principle 14, ASX Clear should complete implementation of enhanced client protection arrangements for cash equities that provide materially equivalent protection to house/client omnibus account segregation. |
| 15. General business risk | Broadly observed | In order to fully observe Principle 15, ASX Clear should carry out plans to enhance its recovery plan in line with forthcoming CPSS-IOSCO guidance, and ensure that the capital it holds under Key Consideration 2 continues to be sufficient to fund the enhanced plan. As ASX Clear further develops its recovery plan, it should also review and integrate its recapitalisation processes with its broader recovery planning arrangements. |
| 16. Custody and investment risks | Broadly observed | In order to fully observe Principle 16, ASX Clear should implement plans to further reduce the concentration of unsecured exposures to the large domestic banks under the ASXCC treasury investment policy. The Bank has opened a dialogue with ASX on the detail of its expectations for the credit and liquidity risk profile of ASXCC's investment portfolio, as well as the time frame over which these expectations should be met. |
| 17. Operational risk | Observed | In order to continue to observe Principle 17, ASX Clear will need to review its operational arrangements in light of the proposed establishment of a special resolution regime for FMIs in Australia. In particular, ASX Clear will need to ensure that its operations are organised in such a way as to facilitate effective crisis management actions under that regime once finalised. |
| 22. Communication procedures and standards | Observed | ASX Clear is encouraged to implement proposals to move to internationally accepted messaging standards as part of a future renewal of the CHESS system. |
| Principle | Rating | Recommendations |
|---|---|---|
| 3. Framework for the comprehensive management of risks | Broadly observed | In order to fully observe Principle 3, ASX Clear (Futures) should implement plans to enhance its recovery plan consistent with forthcoming CPSS-IOSCO guidance on recovery planning. |
| 4. Credit risk | Broadly observed | In order to fully observe Principle 4, ASX Clear (Futures) should implement
mechanisms consistent with forthcoming CPSS-IOSCO guidance on recovery
planning that would fully address any uncovered credit losses and replenish
financial resources following a participant default. ASX Clear (Futures) should also complete the full validation of its capital stress test model by external experts. ASX Clear (Futures) is encouraged to continually refine and enhance its reverse stress testing methodology and its integration into existing risk management processes. |
| 6. Margin | Broadly observed | In order to fully observe Principle 6, ASX Clear (Futures) should complete
the full validation of its SPAN and OTC IRS Historic VaR margin models
by external experts. ASX Clear (Futures) is encouraged to carry out plans to further enhance its margin backtesting and sensitivity analysis to test coverage of actual static participant portfolios on a daily and periodic basis. ASX Clear (Futures) is also encouraged to continually refine and enhance its margin backtesting and sensitivity analysis methodologies and their integration into existing risk management processes. |
| 7. Liquidity risk | Broadly observed | In order to fully observe Principle 7, ASX Clear (Futures) should implement
mechanisms consistent with forthcoming CPSS-IOSCO guidance on recovery
planning that would fully address any uncovered liquidity shortfall following
a participant default. ASX Clear (Futures) should also complete the full
validation of its liquidity stress test model by external experts. ASX Clear (Futures) is encouraged to continually refine and enhance its liquidity reverse stress testing methodology and its integration into existing risk management processes. |
| 14. Segregation and portability | Observed[2] | ASX Clear (Futures) should carry out plans to implement enhanced client segregation arrangements that support the lodgement of excess client collateral in order to meet requirements of the corresponding CCP Standard 13. |
| 15. General business risk | Broadly observed | In order to fully observe Principle 15, ASX Clear (Futures) should carry out plans to enhance its recovery plan in line with forthcoming CPSS-IOSCO guidance, and ensure that the capital it holds under Key Consideration 2 continues to be sufficient to fund the enhanced plan. As ASX Clear (Futures) further develops its recovery plan, it should also review and integrate its recapitalisation processes with its broader recovery planning arrangements. |
| 16. Custody and investment risks | Broadly observed | In order to fully observe Principle 16, ASX Clear (Futures) should implement plans to further reduce the concentration of unsecured exposures to the large domestic banks under the ASXCC treasury investment policy. The Bank has opened a dialogue with ASX on the detail of its expectations for the credit and liquidity risk profile of ASXCC's investment portfolio, as well as the time frame over which these expectations should be met. |
| 17. Operational risk | Observed | In order to continue to observe Principle 17, ASX Clear (Futures) will need to review its operational arrangements in light of the proposed establishment of a special resolution regime for FMIs in Australia. In particular, ASX Clear (Futures) will need to ensure that its operations are organised in such a way as to facilitate effective crisis management actions under that regime once finalised. |
| Principle | Rating | Recommendations |
|---|---|---|
| 3. Framework for the comprehensive management of risks | Broadly observed | In order to fully observe Principle 3, ASX Settlement should implement plans to enhance its recovery plan consistent with forthcoming CPSS-IOSCO guidance on recovery planning. |
| 9. Money settlements | Observed | ASX Settlement is encouraged to work with ASX Clear to introduce a framework to formally engage Payment Providers on changes to settlement processes in response to regulatory or market-driven change. |
| 15. General business risk | Broadly observed | In order to fully observe Principle 15, ASX Settlement should carry out plans to enhance its recovery plan in line with forthcoming CPSS-IOSCO guidance, and ensure that the capital it holds under Key Consideration 2 continues to be sufficient to fund the enhanced plan. As ASX Settlement further develops its recovery plan, it should also review and integrate its recapitalisation processes with its broader recovery planning arrangements. |
| 17. Operational risk | Observed | In order to continue to observe Principle 17, ASX Settlement will need to review its operational arrangements in light of the proposed establishment of a special resolution regime for FMIs in Australia. In particular, ASX Settlement will need to ensure that its operations are organised in such a way as to facilitate effective crisis management actions under that regime once finalised. |
| 22. Communication procedures and standards | Observed | ASX Settlement is encouraged to implement proposals to move to internationally accepted messaging standards as part of a future renewal of the CHESS system. |
| Principle | Rating | Recommendations |
|---|---|---|
| 3. Framework for the comprehensive management of risks | Broadly observed | In order to fully observe Principle 3, Austraclear should implement plans to enhance its recovery plan consistent with forthcoming CPSS-IOSCO guidance on recovery planning. |
| 15. General business risk | Broadly observed | In order to fully observe Principle 15, Austraclear should carry out plans to enhance its recovery plan in line with forthcoming CPSS-IOSCO guidance, and ensure that the capital it holds under Key Consideration 2 continues to be sufficient to fund the enhanced plan. As Austraclear further develops its recovery plan, it should also review and integrate its recapitalisation processes with its broader recovery planning arrangements. |
| 17. Operational risk | Observed | In order to continue to observe Principle 17, Austraclear will need to review its operational arrangements in light of the proposed establishment of a special resolution regime for FMIs in Australia. In particular, Austraclear will need to ensure that its operations are organised in such a way as to facilitate effective crisis management actions under that regime once finalised. |
| Principle | Responsible authority |
|---|---|
| 1. Legal basis | |
| 2. Governance | |
| 11. Central securities depositories | |
| 13. Participant default rules and procedures | |
| 14. Segregation and portability | |
| 15. General business risk | Joint responsibility of ASIC and the Reserve Bank |
| 16. Custody and investment risks | |
| 17. Operational risk | |
| 18. Access and participation requirements | |
| 19. Tiered participation arrangements | |
| 20. Financial market infrastructure links | |
| 23. Disclosure of rules, key procedures and market data | |
| 3. Framework for the comprehensive management of risks | |
| 4. Credit risk | |
| 5. Collateral | |
| 6. Margin | Reserve Bank |
| 7. Liquidity risk | |
| 8. Settlement finality | |
| 9. Money settlements | |
| 10. Physical deliveries | |
| 12. Exchange-of-value settlement systems | |
| 21. Efficiency and effectiveness | ASIC |
| 22. Communication procedures and standards | |
| 24. Disclosure of market data by trade repositories | Not applicable to CCPs or SSFs |
Footnotes
While ASX Clear (Futures) is assessed as observing Principle 14, the Bank has assessed that ASX Clear (Futures) broadly observes the corresponding CCP Standard 13. This difference in ratings is due to an additional requirement under the Bank's supplementary interpretation of CCP Standards 13.2 and 13.3 that ASX Clear (Futures) offer an account structure that provides protection for client collateral in excess of margin requirements lodged with the CCP. ASX Clear (Futures) is consulting on proposals to provide this additional protection for client collateral. [1]
As noted in Table 3, the Bank has assessed that ASX Clear (Futures) broadly observes the corresponding CCP Standard 13. [2]