2010/11 Assessment of Clearing and Settlement Facilities in Australia Appendix B: Detailed Information Relevant to Assessment against the Financial Stability Standards

B1. Financial Stability Standard for Central Counterparties

In assessing whether a facility has met the Financial Stability Standard for Central Counterparties, the Reserve Bank considers a number of broad principles or measures. The full text of these measures and associated guidance is available on the Reserve Bank's website.^[1] The following provides summary details of the information the Reserve Bank has used to assess ASX Clear Pty Limited (ASX Clear) and ASX Clear (Futures) Pty Limited (ASX Clear (Futures)) against each of these measures. This updates the information presented in the Reserve Bank's 2009/10 Assessment for material changes in policies and procedures over 2010/11.

B1.1 ASX Clear

1. Legal framework

The central counterparty must have a well-founded legal basis.

ASX Clear is a wholly owned subsidiary of ASX Clearing Corporation Limited (ASXCC), itself a wholly owned subsidiary of ASX Limited. It acts as the central counterparty for cash equities, pooled investment products, warrants, certain fixed-income products and equity- and commodity-related derivatives traded on the ASX market. Under the Trade Acceptance Service, it can also act as central counterparty for trades on approved market operator (AMO) platforms, such as Chi-X Australia Pty Ltd (Chi-X).

The legal basis for ASX Clear's operations is set out in the ASX Clear Operating Rules and Procedures. Under section 822B of the Corporations Act 2001, these rules have effect as a contract under seal between ASX Clear and each of its participants, and between each participant and each other participant. Furthermore, the netting arrangements contained in the ASX Clear Operating Rules and Procedures are protected as a ‘netting market’ under Part 5 of the Payment Systems and Netting Act 1998. This provides certainty for the netting process in the event of the insolvency of a participant.

The ASX Clear Operating Rules and Procedures define the nature and scope of its obligation to provide clearing services to participants, and describe the conditions under which final and irrevocable settlement of obligations is deemed to have occurred. The Operating Rules and Procedures also set out the rights and obligations of participants, including in the event of default or suspension.

2. Participation requirements

The requirements for participation in the central counterparty must promote the safety and integrity of the central counterparty and ensure fair and open access. Participation requirements must:

be based on objective and publicly disclosed criteria;

ASX Clear has objective and transparent participation requirements, which are publicly available and form part of the Operating Rules and Procedures. The Operating Rules and Procedures also provide for an appeals process should an application for participation be rejected or a participant's access be terminated.

At the end of June 2011, ASX Clear had 48 participants – 45 of these were also ASX market participants, while three provided specialist third-party clearing services.

ensure that participants in the central counterparty are of a sufficient financial standing such that the central counterparty is not exposed to unacceptable credit risks;

ASX Clear's participation requirements are designed to promote the safety and integrity of the central counterparty. Participants clearing cash equities or options are required to comply with a risk-based capital regime under which, subject to Direct Participants maintaining a minimum of $5 million in ‘core capital’ and General Participants maintaining a minimum of $10 million in core capital, they must hold liquid capital in excess of a ‘total risk requirement’, which reflects counterparty risk, large-exposure risk, position risk and operational risk. Brokers that do not have a need to undertake their own clearing, or choose not to hold the required amount of capital, may use the services of specialist third-party clearers. ASX Clear intends to further increase core capital requirements to $10 million for Direct Participants from 1 January 2013. However, any such change will be subject to sufficient depth and competition in the third-party clearing market. ASX Clear intends to increase core capital requirements from $10 million to $20 million for General Participants, effective 1 January 2012. Participants that only clear futures may elect to be covered by an alternative capital regime, based either on a net tangible assets (NTA) requirement or compliance with the regime of another prudential supervisor. At the end of the assessment period all but three of ASX Clear's 48 participants were subject to the risk-based regime; two were subject to NTA requirements and one was subject to the regime of another prudential supervisor.

Following the transfer of market regulatory responsibilities to the Australian Securities and Investments Commission (ASIC), the Capital Monitoring area of ASX Compliance, responsible for monitoring, assessing and investigating of matters relating to participant financial requirements, has been transferred to Clearing Risk Management.

Clearing Risk Management, which reports to the Chief Risk Officer (CRO), covers both central counterparties and focuses on day-to-day participant activity. This involves monitoring risk profiles, open positions and settlement of obligations to the central counterparties. Clearing Risk Management also determines and reviews participants' internal credit ratings (ICR).

A participant's ICR is based on its external credit rating (if available), or that of its parent if either that parent provides a formal guarantee to the central counterparty or the participant carries the parental corporate name. Otherwise, the rating is based on the participant's capital position (or that of its parent where that parent is unrated but provides a formal guarantee to the central counterparty).

Clearing Risk Management maintains a ‘watch list’ of participants deemed to warrant more intensive monitoring. Inclusion on the watch list might, for instance, reflect issues arising from routine review of financial returns by the Capital Monitoring area, or concerns emerging from a specific event or media report. Participants on the watch list are subject to greater scrutiny in respect of the exposures they bring to the central counterparty and, should a participant's perceived financial standing deteriorate further, restrictions may be placed on its trading, clearing and settlement activities.

ASX Clear participants submit capital liquidity returns on a monthly basis. These returns may be a trigger for follow-up enquiries, for example, if: the ratio of liquid capital to the total risk requirement falls below 1.7; there are sustained losses on outstanding positions; or there is a significant fall in liquid capital held. More stringent reporting requirements apply where a participant's capital falls below certain stated thresholds. A range of ‘spot checks’ verify the accuracy of participant returns. Individual spot checks are, for example, triggered by two or more historical inaccuracies in the submitter's returns, while industry-wide spot checks are conducted to look at multiple participants' compliance with a specific aspect of the capital rules.

require that participants have the operational capacity to settle their obligations with the central counterparty in a timely manner; and

Under the Operating Rules and Procedures, ASX Clear participants are subject to requirements regarding technical and operational capacity, including business continuity. The Operating Rules also include provisions to ensure that a participant's management structure is designed to achieve compliance with the ASX Clear Operating Rules and Procedures, including meeting settlement obligations.

allow the CS facility licensee as operator of the central counterparty to suspend or cancel the participation of an institution which breaches the applicable participation or other risk-control requirements.

ASX Clear has wide-ranging powers to sanction its participants in order to preserve the integrity of the central counterparty. ASX Clear may suspend or terminate a participant's authority to clear all, or any category of, market transactions in the event of a default, or in the event of a breach of the Operating Rules and Procedures that may have an adverse impact on the central counterparty. The action taken in the event of a breach will depend on a number of factors, including the participant's history of compliance and whether the breach implies negligence, incompetence or dishonesty. Where a breach has been identified and the participant has taken appropriate steps to rectify it, ASX Clear will typically continue to monitor the participant closely for a period of time. Breaches are also referred to ASIC and, in most cases, are investigated by the Executive Office of ASX Compliance. Disciplinary action relating to rule breaches is brought before the ASX Compliance Officer (prior to 1 August 2010, this was dealt with by the Disciplinary Tribunal).

3. Understanding risks

The central counterparty's rules and procedures must enable each participant to understand the central counterparty's impact on each of the financial risks the participant incurs through participation in the central counterparty.

The ASX Clear Operating Rules and Procedures are comprehensive and are publicly available on the ASX website. The Operating Rules and Procedures explain the role and responsibilities of each category of participant and ASX Clear. Some background information on ASX Clear's operations and risk management is also available on the ASX website.

ASX Clear must lodge any changes to its Operating Rules with ASIC. Under section 822E of the Corporations Act, the Minister for Financial Services and Superannuation (the Minister) has 28 days to consider, and potentially disallow, any rule changes made by a licensed clearing and settlement (CS) facility. ASX Clear consults with its participants on important rule changes, and notifies participants of all changes to the Operating Rules and Procedures.

4. Novation

The rules and procedures governing the central counterparty must clearly identify:

the nature and scope of novation; and

The nature and scope of novation is set out in the ASX Clear Operating Rules and Procedures. Through the process of novation, ASX Clear takes on the financial obligations of the seller to the buyer, and the buyer to the seller. The obligations of ASX Clear are to each clearing participant as principal, irrespective of whether that participant is acting on behalf of a client.

the point in the clearing process at which trades are novated.

The point at which trades are novated is set out in the Operating Rules and Procedures. These specify that a broker-to-broker transaction on the ASX market is novated to ASX Clear upon the acceptance and registration of the details of that market transaction within the clearing system. For equities market transactions, novation occurs with effect from the matching of the trade on the market. In the case of derivatives transactions, novation takes place at the time of registration (which is when the contract has been properly designated to accounts of both participants). For both cash equities and derivatives, novation can occur no later than the evening of the day of the trade.

5. Settlement

Settlement arrangements must ensure that the central counterparty's exposures are clearly and irrevocably extinguished on settlement. This requires that:

where settlement involves the exchange of one asset for another, it must be done on an appropriate delivery-versus-payment basis; and

where payments, including net payments, are made to extinguish other obligations, payment must be made by real-time gross settlement.

Settlement of obligations between a central counterparty and its participants can involve two processes:

The exchange of one asset for another, such as cash equities. In this case, ASX Clear utilises the settlement facility provided by ASX Settlement Pty Limited (ASX Settlement); or
Payments to or from the central counterparty, including margin payments relating to derivatives positions. In this instance, the facility provided by Austraclear Limited (Austraclear) must be used.

In each case, ASX Clear calculates bilateral net positions between itself and each of its clearing participants. These positions reflect both cash payment and securities obligations. The relevant netting arrangements are outlined in the ASX Clear Operating Rules and Procedures and are protected as a ‘netting market’ under Part 5 of the Payment Systems and Netting Act.

ASX Settlement's settlement process involves the use of a Model 3 delivery-versus-payment (DVP) mechanism, whereby cash payments and securities transfers are settled simultaneously in a single daily multilateral net batch. As the outcome of this process, ASX Settlement participants face a net cash settlement obligation to or from ASX Settlement and a net securities settlement obligation in respect of each line of stock. Once participants' net obligations have been calculated, ASX Settlement confirms that sufficient securities are available in each participant's securities account in the Clearing House Electronic Sub-register System (CHESS). The transfer of securities within the system is then restricted until the settlement process has been completed. Net cash payment obligations are forwarded for settlement in the Reserve Bank Information and Transfer System (RITS) across payment providers' exchange settlement (ES) accounts. Once cash settlement has been confirmed, ASX Settlement effects the net transfer of securities within CHESS.

Participants settle routine margin payments in respect of ASX derivatives positions via cash transfers in Austraclear, which settle in real time via RITS. As part of its plans for central counterparty harmonisation, during the assessment period ASX consolidated ASX Clear and ASX Clear (Futures)' ES accounts into a single ASXCC ES account. Margin-related funds movements and treasury investment-related settlements in RITS for both central counterparties are now settled using ASXCC's ES account.

Settlement in both ASX Settlement and Austraclear is final and irrevocable. In the case of ASX Settlement, finality is supported both by its Operating Rules and Procedures and ASX Settlement's approval under Part 3 of the Payment Systems and Netting Act. Settlement according to Austraclear's Regulations and Procedures is also final and irrevocable by virtue of its approval under Part 2 of the Payment Systems and Netting Act.

ASX Clear also clears grain and wool futures. These instruments may be physically settled through commodity warehouses, with ASX Clear transferring title to the buyer only once payment is received from the seller.

6. Default arrangements

The CS facility licensee as operator of the central counterparty must ensure that it has clear rules and procedures to deal with the possibility of a participant being unable to fulfil its obligations to the central counterparty. The arrangements for dealing with a default must ensure that in this scenario timely action is taken by the central counterparty and the participants in the central counterparty, and that risks to the central counterparty and its participants are minimised.

Details of ASX Clear's default arrangements are provided in Section 6 of this Assessment.

7. Risk controls

The CS facility licensee as operator of a central counterparty must have comprehensive risk-control arrangements in place. These arrangements must provide the operator of the central counterparty with a high degree of confidence that, in the event of extreme volatility in relevant markets, the central counterparty will be able to settle all of its obligations in a timely manner. As a minimum, the risk-control arrangements must provide the CS facility licensee as operator of the central counterparty with a high degree of confidence that the central counterparty will be able to settle its obligations in the event that the participant with the largest settlement obligations cannot meet them. In all but the most extreme circumstances, a central counterparty must be able to settle its obligations using liquid assets as defined in this standard.

The CS facility licensee as operator of a central counterparty must:

ensure that its risk-control measures, typically a combination of its own capital, margins, guarantee funds and pre-determined loss-sharing arrangements, provide sufficient coverage and liquidity; and
undertake regular and rigorous stress testing to ensure the adequacy of its risk controls.

The adequacy of risk-control measures must be approved by the board of the central counterparty, or an appropriate body as delegated by the board.

The risk controls of a central counterparty are crucial in providing a high degree of confidence that it would be able to meet its obligations in the event of a participant failure. The inability of a central counterparty to meet its obligations could be extremely disruptive to the financial system. The focus of the Reserve Bank in this area is to ensure that the combination of risk controls implies a very low probability of failure of the central counterparty.

ASX Clear's financial resources are at the core of its risk controls. These comprise: margin and other collateral calls based on participants' positions; and pooled financial resources of $550 million (of which $250 million is fully paid up and invested in high-quality liquid assets). Stress testing is carried out daily to gauge the adequacy of financial resources and to monitor the risks associated with individual participants' positions. Where large or concentrated exposures are identified by stress testing, additional collateral calls are made on participants. These risk controls are supplemented by ASX Clear's participation requirements and participant-monitoring arrangements (Measure 2).

i. Margins

ASX Clear levies margins on derivatives products. Initial (risk) margin provides cover in the event that a participant defaults and an adverse price change occurs before the central counterparty can close out the participant's positions. Initial margin is calibrated so as to cover three standard deviations of the 60-day historical distribution of price movements until a position can be closed out, assuming a close-out period of either one or two days. ASX Clear also levies so-called premium margin on sold exchange-traded option positions, updating this daily to reflect mark-to-market changes in the close-out price, and levies mark-to-market margin on both bought and sold low exercise price options, and all futures positions. All margin rates are reviewed on a three-monthly cycle, supplemented with ad hoc reviews during especially volatile market conditions.

ASX Clear calculates total initial margin requirements across each participant's portfolio using a margining engine based on Theoretical Intermarket Margin System (TIMS) methodology, developed by the Options Clearing Corporation. On 20 September 2010, ASX moved the calculation of margin (using the TIMS methodology) to ASX Clear's in-house Derivatives Clearing System (DCS). This methodology will continue to be used in the near term, although a longer-term project is planned to replace it with CME Standard Portfolio Analysis Risk (SPAN) (see Section 5 of this Assessment).

Margin requirements are calculated overnight (with mark-to-market margins based on closing contract prices each day), and are notified to participants the next morning. As discussed in Measure 5, from February 2010, all margin obligations are settled via Austraclear and must be met by 10.30 am. Both variation and intraday margin obligations must be settled in cash, while participants may use cash or non-cash collateral to meet initial (risk) and premium margin obligations. Securities are eligible to be used as collateral only if strict criteria set by ASX Clear are met, and are subject to a haircut. In general, acceptable collateral includes: S&P/ASX 200 index constituent stocks; exchange-traded funds that the ASX deems are mature and liquid and where issuer risk is considered low (currently only the SPDR S&P/ASX 200 Fund); and stocks lodged as specific cover for a call option on that stock. The list of acceptable collateral is reviewed at least quarterly, in order to reflect changes to the S&P/ASX 200 constituent list. ASX Clear restricts the use of participant or related entity issued stocks to manage the potential risk of correlated default of a participant and the collateral issuer. ASX Clear also accepts guarantees from banks with a short-term S&P credit rating of at least A−1+ as collateral, as long as the bank is not a related entity of the participant.

In the event of sharp intraday price movements, ASX Clear may also call margin intraday. This must be met by participants within two hours of notification. System enhancements have enabled intraday margin calls to reflect changes in participants' positions; previously, intraday margin calls only reflected price movements.

Under ASX Clear's Contributions and Additional Cover (CAC) methodology, a participant is also required to post additional collateral should stress-test outcomes (see below) reveal that the potential loss arising from its positions as at the close of the previous day exceed its stress-test exposure limit (STEL). Comparison of potential stress-test losses with the STEL offers some guidance as to the resilience of the central counterparty to a participant default in extreme market conditions. Commencing 1 October 2009, ASX Clear introduced a regime where STELs are linked to participants' ICRs. In normal market conditions, highly-rated (i.e. A− and B-rated) participants are eligible for discounts on the additional collateral called.

In addition, ASX Clear may call capital-based position limit (CBPL) CAC from participants with large portfolios (proxied by risk margin requirements) relative to their liquid capital. CAC calls are typically made on participants by 9.30 am and must be settled within two hours, either via the transfer of cash in Austraclear, or through the provision of a bank guarantee from an approved Authorised Deposit-taking Institution (ADI). ASX Clear may also call CAC from participants where it has counterparty credit risk concerns.

There are potential shortcomings to relying too heavily on variable calls for additional collateral, particularly given lags in the calculation and settlement of such calls. Consequently, in deciding whether a central counterparty has sufficient fixed resources, ASX considers the size, frequency, duration and distribution of the additional collateral calls across participants. This process is documented in guidance on the circumstances in which ASX would consider increasing the central counterparties’ fixed risk resources instead of relying on additional collateral.

ii. Guarantee fund

ASX Clear maintains additional pooled financial resources to protect against losses in excess of margin and other collateral assets posted by a defaulting participant. ASX Clear holds paid-up financial resources of $250 million, which consist of: own equity ($3.5 million); funds held in a restricted capital reserve ($71.5 million); and fully-drawn subordinated loans from ASXCC (totalling $175 million), which is ultimately funded by a commercial bank loan facility ($100 million) and a subordinated loan from ASX Limited ($75 million). ASX Clear also has the right under its Operating Rules and Procedures to levy its participants up to $300 million collectively in ‘Emergency Assessments’ should a loss caused by a participant's default exceed its other resources.

ASX Clear uses daily capital stress tests to monitor the risks undertaken by individual participants and the adequacy of the central counterparty's financial resources. Stress tests are based on 99 scenarios, each calibrated to a one-in-30-year event. The scenarios cover extreme price moves and volatility shifts at the market-wide, sector and individual stock levels. ASX Clear regularly reviews stress-test scenarios and occasionally amends them to reflect current market conditions. During 2010/11, several changes to stress-test parameters were made. The annual review of parameters occurred in November 2010 and resulted in the replacement of health-sector scenarios with telecommunication-sector scenarios and the introduction of individual-stock scenarios for four stocks, replacing scenarios for other stocks previously included in the individual-stock stress-test scenarios. The increase in the market-up scenario remained in place during the 2010/11 assessment period, after the maximum ten-day fall exceeded 7 per cent in May 2010, triggering the Rebound Regime, which aims to capture the possible market bounce effect following certain downward market movements.

In December 2010, ASXCC became the controlling entity for ASX Clear's treasury investments, which are now conducted through ASXCC's ES account. In respect of both cash margin collected and pooled risk resources, ASX Clear invests funds in accordance with a defined treasury investment policy, endorsed by the ASX Clear Clearing Board (one of the CS Boards). The policy is designed to ensure that risk resources can be reliably accessed on a timely basis. The policy restricts treasury investments to liquid assets – such as bank bills and certificates of deposit – and applies issuer investment limits scaled according to the credit standing of the issuing counterparty. This policy was updated in November 2010, with the definition of liquid assets changed so that it is more focused on market liquidity than investment maturity. Eligible investment counterparties comprise Australian federal or state government agencies and Australian Prudential Regulation Authority (APRA) supervised ADIs, with a minimum short-term S&P credit rating of A−1 and long-term credit rating of A. Individual counterparty limits and concentration limits also apply; the maximum exposure to any investment counterparty is 33 per cent.

In addition, the policy sets upper limits for the average maturity of investments and the market risk of the portfolio. It also imposes an overarching liquidity requirement that is sufficient to cover: ‘ordinary’ liquidity needs (which accounts for payment obligations, and is based on the maximum payment on any given day over the previous year); liquidity needs in the event of a default (referred to as the default liquidity requirement or DLR); and the value of cash margin posted by the largest clearing participant. To ensure the adequacy of the DLR, ASX Clear carries out regular liquidity stress tests. The DLR is currently set at $300 million and is met by liquid assets held in respect of ASX Clear's paid-up risk resources of $250 million, and a further $50 million available under a committed standby liquidity facility. This $50 million committed liquidity facility was previously provided to ASX Clear by a commercial bank, but upon expiry of this facility in June 2010 it was replaced with a similar facility provided by ASX Limited.

iii. Loss sharing

This measure of the Standard applies to arrangements where participants commit to meet any settlement shortfall. The arrangement does not require that a facility have loss-sharing arrangements in place, but where they exist they should be documented, legally enforceable and acknowledged by all participants in the central counterparty. One element of ASX Clear default resources is a promissory component up to a fixed amount (the Emergency Assessments referred to in the previous section of this Measure). This is not an open-ended commitment and does not constitute a loss-sharing arrangement as contemplated by Measure 7(iii).

8. Governance

The central counterparty must have effective, accountable and transparent governance
arrangements.

Ultimate responsibility for the control of the financial risks faced by ASX Clear lies with the ASX Limited Board and the ASX Clear Clearing Board. The ASX Limited Board, which is accountable to ASX Group (ASX) shareholders, is responsible for overseeing the processes for identifying significant risks to ASX and ensuring that appropriate and adequate control, monitoring and reporting mechanisms are in place. In addition, the ASX Limited Board assigns certain responsibilities to the ASX Clear Clearing Board (as specified in the ASX Limited Board Charter), including the management of ASX Clear's clearing and settlement risk, and its compliance with the Financial Stability Standards (FSS).

The ASX Limited Board Charter also places requirements on the Board structure, including that the majority of members and the Chair be independent (defined as being free of business or other relationships that could interfere with independent exercise of judgement). There are currently nine members of the ASX Limited Board, comprising the ASX Chief Executive Officer (CEO) and eight independent, non-executive directors. The ASX Limited Board appoints the members of the ASX Clear Clearing Board, which comprises one executive director (the ASX CEO) and six non-executive directors. The independent directors are appointed for their skill and expertise in clearing and settlement operational and risk-management matters. The seven directors filling these positions are also on the boards of ASX Clear (Futures), ASX Settlement and Austraclear. ASX Clear (Futures) and Austraclear share a common chair, as do ASX Clear and ASX Settlement. Four of the non-executive directors are also members of the ASX Limited Board, and two are external directors appointed for their expertise in clearing and settlement matters. The ASX Limited Board Charter and the profiles of all board members are publicly available online.

The ASX Clear Board meets between six and eight times each year, and receives detailed reports on ASX Clear's business and operations, risk management and financial performance. It is responsible for approving capital, liquidity and stress-testing arrangements.

Within ASX's management structure, reporting lines for those units primarily responsible for financial risk management are segregated from other business units, reporting to the CRO who in turn reports directly to the CEO. There are five functional areas within ASX with at least some responsibility for central counterparty financial risk management, which are: the Clearing Risk Policy unit; the Clearing Risk Management unit; the Enterprise Risk unit; the Internal Audit unit; and the Portfolio Risk Manager. The CRO is not responsible for any other functions, and none of the units within the CRO's portfolio have a revenue or profit objective. In addition, ASX maintains a number of executive committees that have some responsibility for financial risk management.

9. Operational risk

The CS facility licensee as operator of a central counterparty must identify sources of operational risk and minimise these through the development of appropriate systems, controls and procedures.

ASX Clear's key operating systems are DCS and CHESS. Operational risk in the CHESS system is dealt with in the discussion of ASX Settlement (see Appendix B2, below).

i. Security and operational reliability

The security of DCS is supported by access controls, restricting access both physically and virtually. The process to request access to systems is documented, monitored and formally audited. ASX Clear performs external-penetration and vulnerability testing on DCS regularly. Technology-security policy is considered by external auditors twice a year. ASX's Internal Audit unit routinely monitors compliance with policy, reporting to the Audit and Risk Committee on a quarterly basis.

ASX Clear has a number of arrangements in place to ensure DCS is operationally reliable:

operational processes are documented and supported by internal procedures;
the design and effectiveness of control procedures supporting the core operational and systems processes are subject to regular independent external and internal audits;
critical IT infrastructure is designed to ensure resilience against component failure, including full redundancy at the primary site; and
availability targets are documented and defined formally for critical services.

Notwithstanding these arrangements, should an infrastructure failure occur at the primary site, failover to ASX's backup site is targeted to occur within one hour. A comprehensive test is completed over a two-year cycle to demonstrate that normal functions can be carried out using systems located at the backup site. ASX Clear also regularly tests its ability to operate its primary systems from the backup site.

Over the 2010/11 assessment period, DCS was available 100 per cent of the time. The availability target for DCS is 99.8 per cent.

DCS capacity is monitored on an ongoing basis, with monthly reviews of current and projected capacity requirements. ASX Clear ensures that it has sufficient technical and human resource capacity to operate DCS during peak periods, including in the event of operational incidents or system failure. Average capacity utilisation of DCS over the assessment period was 14 per cent, while peak utilisation was 30 per cent. ASX has increased the capacity of DCS over the past 12 months, to bring usage in line with its policy, such that peak utilisation does not exceed 50 per cent of capacity.

ASX Clear has arrangements in place to ensure that changes to DCS and supporting infrastructure do not disrupt its normal operations. ASX Clear operates a separate test environment for DCS and has a formal, documented change-management process.

ASX Clear also has arrangements in place to ensure it has well-trained and competent personnel operating DCS. Staff are provided with relevant policies and guidelines from commencement of employment, with weekly communications thereafter. Staff are evaluated with reference to each defined operational process. ASX Clear has a formal succession-planning and management process in place.

ii. Business continuity procedures

ASX maintains extensive contingency plans detailing the appropriate operational response to a CS facility disruption, including coverage of the various lines of authority, means of communication, and failover procedures. These plans are updated periodically. The risk that an operational incident at the main site disrupts DCS is mitigated through maintenance of a backup site. ASX also has procedures in place to manage the availability of staff with specific skills in the event of a contingency, with migration to the backup site targeted to occur within one to two hours. In addition, as noted in the previous Assessment, ASX is in the process of implementing arrangements to have some operational staff at its backup site during business hours in order to support rapid recovery in the event of a disruption.

ASX Clear's Operating Rules and Procedures require participants to maintain adequate business continuity arrangements to allow the recovery of usual operations within one to two hours following a contingency event. If a participant fails to do so, ASX Clear may impose sanctions. Spot checks of participants' business continuity management are triggered if a participant has been experiencing operational problems. These include examination of governance and processes.

ASX Clear regularly tests business-recovery arrangements. Connectivity and procedural testing of the backup site are performed monthly by representatives from ASX Clear. Live tests (i.e. where market and clearing and settlement services are provided in real time from the backup site) are conducted on a two-year cycle. Test results are formally documented and reported to ASX senior management and are also made available to internal and external auditors.

The adequacy of ASX Clear's business continuity procedures is reviewed regularly, as part of broader reviews of ASX Clear's operational risk policy.

iii. Outsourcing

No operational functions are outsourced by ASX Clear. However, external suppliers are used for various services, such as utilities, hardware maintenance, operating system and product maintenance, and certain security-related specialist independent services. ASX Clear no longer relies on an external vendor for the software underpinning margining (i.e. TIMS software, discussed in Section 5 of this Assessment). TIMS margin calculations have been integrated within DCS since September 2010.

iv. External administration of a related body

Within the ASX structure, most operational resources are provided by ASX Operations Limited, a subsidiary of ASX Limited. In the event that ASX Operations Limited became subject to external administration and this particular event did not impact upon the capacity of ASX Clear to continue operating, ASX Clear would be able to retain use of resources under provisions within the written support agreement between it and ASX Operations Limited (to the extent permissible by law).

10. Regulatory reporting

ASX Clear, as a CS facility licensee, is required to meet certain reporting obligations to the Reserve Bank under the FSS for Central Counterparties. These obligations include the reporting of: breaches of the Standard; the failure of a participant to fulfil the central counterparty's risk-control requirements; and the central counterparty's failure to enforce its own risk-control requirements. There are also obligations to report financial and stress-testing results on a quarterly basis. ASX Clear satisfied all reporting obligations during the assessment period.

B1.2 ASX Clear (Futures)

1. Legal framework

The central counterparty must have a well-founded legal basis.

ASX Clear (Futures) is a wholly owned subsidiary of ASXCC, itself a wholly owned subsidiary of ASX Limited. It acts as the central counterparty for all futures and options products that are traded on the ASX 24 market.

The legal basis for ASX Clear (Futures)'s operations is set out in its Operating Rules and Procedures. Under section 822B of the Corporations Act, these rules have effect as a contract under seal between ASX Clear (Futures) and each of its participants, and between each participant and each other participant. Furthermore, the netting arrangements contained in ASX Clear (Futures)' Operating Rules and Procedures are protected as a ‘netting market’ under Part 5 of the Payment Systems and Netting Act. This provides certainty for the netting process in the event of the insolvency of a participant.

ASX Clear (Futures)' Operating Rules and Procedures define the nature and scope of its obligation to provide clearing support to participants, and describe the conditions under which final and irrevocable settlement of obligations is deemed to have occurred. The Operating Rules and Procedures also set out the rights and obligations of participants, including in the event of default or suspension.

2. Participation requirements

The requirements for participation in the central counterparty must promote the safety and integrity of the central counterparty and ensure fair and open access. Participation requirements must:

be based on objective and publicly disclosed criteria;

ASX Clear (Futures) has objective and transparent participation requirements, which are publicly available and form part of its Operating Rules and Procedures. The Operating Rules and Procedures also provide for an appeals process should an application for participation be rejected or a participant's access be terminated.

At the end of June 2011, ASX Clear (Futures) had 15 participants, predominantly large foreign banks and their subsidiaries.

ensure that participants in the central counterparty are of a sufficient financial standing such that the central counterparty is not exposed to unacceptable credit risks;

ASX Clear (Futures)' participation requirements are designed to promote the safety and integrity of the central counterparty. They cover: minimum capital and financial obligations; business and managerial requirements; operational resources; business continuity arrangements; and risk- and liquidity-management arrangements.

Participants are subject to a minimum NTA requirement of $5 million, with management discretion to impose a higher requirement. Over time, ASX Clear (Futures) plans to implement a further increase in this NTA requirement to $10 million, with a higher requirement for those participants clearing for third parties. Participants are obliged to lodge a detailed financial report with the Capital Monitoring unit on a monthly basis.

Each participant's financial standing is monitored on an ongoing basis by Clearing Risk Management, a unit that covers both central counterparties and reports to the CRO. Within Clearing Risk Management, Capital Monitoring is responsible for monitoring, assessing and investigating matters relating to financial requirements, including monitoring participants' monthly NTA statements for any matters of concern. (Prior to December 2010, Capital Monitoring sat within ASX Compliance.)

Clearing Risk Management is also responsible for the day-to-day monitoring of participants' risk profiles, open positions and settlements of obligations to the central counterparties. In addition, it determines and reviews participants' ICRs, drawing on information provided by participants in their monthly statements. A participant's ICR is based on its external credit rating (if available), or that of its parent if either that parent provides a formal guarantee to the central counterparty or the participant carries the parental corporate name. Otherwise, the rating is based on the participant's capital position (or that of its parent where the parent is unrated but provides a formal guarantee to the central counterparty). Clearing Risk Management also maintains a ‘watch list’ of participants deemed to warrant more intensive monitoring. Inclusion on the watch list might, for instance, reflect issues arising from routine review of financial returns by ASX Compliance, or concerns emerging from a specific event or media report. Participants on the watch list are subject to greater scrutiny in respect of the exposures they bring to the central counterparty and, should a participant's perceived financial standing deteriorate, restrictions may be placed on its trading, clearing and settlement activities.

require that participants have the operational capacity to settle their obligations with the central counterparty in a timely manner; and

Under the Operating Rules and Procedures, the ASX Clear (Futures) Clearing Board (one of the CS Boards) must be satisfied that a potential participant has (or will have) managerial, operational, financial and appropriate complementary business continuity arrangements in place to enable it to meet its ongoing obligations, and is in a position to make an immediate transfer of funds to meet its obligations.

allow the CS facility licensee as operator of the central counterparty to suspend or cancel the participation of an institution which breaches the applicable participation or other risk-control requirements.

Under the Operating Rules and Procedures, a clearing participant may be suspended under a number of circumstances, including the participant's default, the appointment of external management, or the breach of financial requirements. The ASX Clear (Futures) Clearing Board can also suspend a clearing participant for misconduct, breaches of the Operating Rules and Procedures, or if it ceases to satisfy the admission requirements.

3. Understanding risks

ASX Clear (Futures)' Operating Rules and Procedures are comprehensive and publicly available. The Operating Rules and Procedures explain the role and responsibilities of participants and ASX Clear (Futures). Background information on ASX Clear (Futures)' operations and risk management is also available on the ASX website.

ASX Clear (Futures) must lodge any changes to its Operating Rules with ASIC. Under section 822E of the Corporations Act, the Minister has 28 days to consider, and potentially disallow, any rule changes made by a licensed CS facility. ASX Clear (Futures) consults with its participants on important rule changes. Announcements affecting participants are issued as ‘ASX 24 Notices’.

4. Novation

The rules and procedures governing the central counterparty must clearly identify:

the nature and scope of novation; and

The nature and scope of novation is set out in ASX Clear (Futures)' Operating Rules and Procedures. Through the process of novation, ASX Clear (Futures) takes on the financial obligations of the seller to the buyer, and the buyer to the seller. The obligations of ASX Clear (Futures) are to each participant as principal, irrespective of whether that participant is acting on behalf of a client.

the point in the clearing process at which trades are novated.

The point at which trades are novated is set out in the Operating Rules and Procedures. These specify that a transaction on the ASX 24 market is novated to ASX Clear (Futures) upon the registration of a matched trade by the market, which occurs in ASX 24's SYCOM system. Non-market trades are novated once their details have been approved and registered by ASX Clear (Futures).

5. Settlement

Settlement arrangements must ensure that the central counterparty's exposures are clearly and irrevocably extinguished on settlement. This requires that:

where settlement involves the exchange of one asset for another, it must be done on an appropriate delivery-versus-payment basis; and
where payments, including net payments, are made to extinguish other obligations, payment must be made by real-time gross settlement.

The vast majority of ASX Clear (Futures) settlements involve cash payments to or from the central counterparty. These include margin payments and the settlement of cash-settled derivative contracts. Settlement of payments generally occurs on a net basis. Each day, ASX Clear (Futures) calculates the net obligations of each of its participants. ASX Clear (Futures) participants with a net obligation to the central counterparty are required to make payments to ASX Clear (Futures) in Austraclear by 11.00 am. Once these payments have been received, ASX Clear (Futures) makes payments to those participants with a net obligation from the central counterparty. Interbank settlement of these payments occurs between participants' appointed banks and ASX Clear (Futures) in real time across ES accounts at the Reserve Bank, via the real-time gross settlement (RTGS) system RITS.

In some cases, the settlement of derivatives contracts cleared by ASX Clear (Futures) involves the transfer of a security or physical asset, with a corresponding transfer of cash. For each type of security or asset, ASX Clear (Futures)' arrangements ensure that delivery occurs if, and only if, payment occurs. For 90-day bank accepted bill futures, ASX Clear (Futures) utilises the standard settlement process in Austraclear. The delivery of greasy wool is via a warehouse, with ASX Clear (Futures) retaining title documentation until payment has been made.

The settlement of obligations is final and irrevocable according to the terms of ASX Clear (Futures)' and ASX 24's Operating Rules and Procedures, which set out contract specifications, including the means of settlement. For payments and securities obligations settled through Austraclear, finality is reinforced by Austraclear's Regulations and Procedures and its approval under Part 2 of the Payment Systems and Netting Act. Any interbank transactions arising from these settlements are settled in real time across ES accounts held with the Reserve Bank. Payments within this system are also final and irrevocable; this is again supported by the approval of RITS under Part 2 of the Payment Systems and Netting Act.

6. Default arrangements

Details of ASX Clear (Futures)' default arrangements are provided in Section 6 of this Assessment.

7. Risk controls

The CS facility licensee as operator of a central counterparty must:

ensure that its risk-control measures, typically a combination of its own capital, margins, guarantee funds and pre-determined loss-sharing arrangements, provide sufficient coverage and liquidity; and
undertake regular and rigorous stress testing to ensure the adequacy of its risk controls.

The adequacy of risk-control measures must be approved by the board of the central counterparty, or an appropriate body as delegated by the board.

At the core of ASX Clear (Futures)' risk controls are its financial resources. These comprise margin and other collateral lodged in accordance with participants' positions, and pooled financial resources of $400 million (of which $30 million is promissory). Stress testing is carried out daily to gauge the adequacy of financial resources and to monitor the risks associated with individual participants' positions. Where large or concentrated exposures are identified by stress testing, additional collateral is required to be posted by participants. These risk controls are supplemented by ASX Clear (Futures)' participation requirements and participant-monitoring arrangements (Measure 2).

i. Margins

ASX Clear (Futures) levies margin on the derivatives products it clears.

Initial margin is calibrated so as to cover three standard deviations of the 60-day historical distribution of price movements, considering both one- and two-day price movements, sufficient for an adequate close-out period. All margin rates are reviewed on a three-monthly cycle, with the possibility of more frequent ad hoc reviews in times of greater market volatility.

ASX Clear (Futures) calculates total initial margin requirements across each participant's portfolio using the OMX RIVA version of the internationally accepted SPAN methodology; this is due to be replaced by CME SPAN, which is widely regarded as best practice, in the first quarter of 2012. Margin requirements are calculated overnight based on closing contract prices each day, and are notified to participants by 6.00 am the next day. Margin obligations must be met via Austraclear by 11.00 am – breaches of any margin payment deadline are escalated to ASX Compliance and may attract a financial penalty. Participants generally meet these obligations using cash, although they may also use high-quality liquid non-cash collateral, such as eligible debt securities and foreign-currency deposits. Acceptable collateral is reviewed annually, and haircuts are applied in respect of all non-cash collateral posted. ASX Clear (Futures) does not accept participant/parental issued collateral, in order to reduce the possibility that it might face the default of a clearing participant and a collateral issuer.

ASX Clear (Futures) also levies variation (mark-to-market) margin on derivatives positions to cover gains or losses arising from price movements over the preceding day. Should conditions warrant, ASX Clear (Futures) is also able to call variation margin intraday, based on either changes in positions or movements in prices. Intraday margin calls can be made at various times throughout the day. Participants are required to meet an intraday margin call within two hours of notification. Both variation and intraday margin obligations must be settled in cash.

ASX Clear (Futures) also uses a system of STEL Additional Initial Margin (AIM), based on participants' exposures in ASX 24's four largest contracts. STEL AIM calls are intended to cover potential losses from large or concentrated positions with the central counterparty in extreme market conditions. ASX Clear (Futures) calculates potential exposures using a system of stress tests (see below) and makes AIM calls to cover potential stress losses in excess of a stated threshold – the participant's STEL. STELs are linked to the value of ASX Clear (Futures)' risk resources and vary according to the credit quality of participants. In normal market conditions highly-rated participants with NTAs above a minimum threshold are eligible for discounts on their STEL AIM calls. As of 13 July 2011, ASX Clear (Futures) excludes its $30 million in promissory risk resources when calculating STELs; previously these resources were taken into consideration for A-rated participants. The change recognises the potential for a significant delay in receipt of these resources.

The STEL AIM system is designed to provide a high degree of confidence that the central counterparty will be able to meet its obligations, even in the event that losses arising from a defaulting participant's positions exceed ASX Clear (Futures)' pooled risk resources and ordinary initial margin requirements. However, there are potential shortcomings to relying too heavily on variable calls for additional collateral, particularly given lags in the calculation and settlement of such calls. Consequently, in deciding whether a central counterparty has sufficient fixed resources, ASX considers the size, frequency, duration and distribution of the additional collateral calls across participants. This process is documented in guidance on the circumstances in which ASX would consider an increase to the central counterparties’ fixed risk resources instead of relying on additional collateral.

Like other margins, STEL AIMs are calculated overnight, notified to participants at 6.00 am the next day, and must be met by 11.00 am. Participants may meet these obligations using cash or non-cash collateral, including Australian Government securities and bank bills or letters of credit from ADIs.

In addition, ASX Clear (Futures) may call CBPL AIMs from participants with large portfolios (proxied by initial margin requirements) relative to their NTA. ASX Clear (Futures) may also call AIMs from participants where it has counterparty credit risk concerns.

ii. Guarantee fund

ASX Clear (Futures) maintains a buffer of financial resources to protect against losses arising in the event of a default that exceed the value of margin and other collateral assets contributed by the defaulting participant. The value of ASX Clear (Futures)' Clearing Guarantee Fund (CGF) includes $370 million of paid-up funds, comprising $30 million in ASX Clear (Futures)' own capital, a $70 million subordinated loan provided by ASXCC (ultimately funded by ASX Limited), paid-up participant commitments of $120 million, and a subordinated loan from ASXCC of $150 million (ultimately funded by a subordinated commercial bank loan). In addition, ASX Clear (Futures) may call on participants for up to $30 million in promissory commitments, although it cannot rely on the timeliness of these funds, as the rules set out that payment could potentially be made a significant time after a participant default. ASX Clear (Futures)' Operating Rules and Procedures state that the ASX Clear (Futures) Board shall be entitled to apply the pooled financial resources upon default by a clearing participant. The rules stipulate the order in which the resources will be applied, and make it clear that the contributions of all participants, not just those in default, may be called upon in a default event. ASX Clear (Futures) recently amended its rules, clarifying that the subordinated ASXCC loan will be called upon prior to calling for promissory commitments in the event of a default. In recognition of the potential for a significant delay in the receipt of the promissory risk resources, ASX Clear (Futures) has also removed the promissory commitments from its STEL calculation.

ASX Clear (Futures) uses daily stress tests of its four major contracts to monitor the risks undertaken by individual participants and the adequacy of the CGF. ASX Clear (Futures) uses a suite of portfolio and single-contract stress-test scenarios based on statistical analysis of historical market movements. These provide consistent tests across contract types and are tailored to ASX Clear (Futures)' risk tolerance, as defined by its board. The stress scenarios aim to capture one-in-30 year events for single asset scenarios and one-in-100 year events for multi-asset scenarios, and are reviewed annually.

In December 2010, ASXCC became the controlling entity for ASX Clear (Futures)' treasury investments, which are now conducted through ASXCC's ES account. In respect of both cash margin collected and pooled risk resources, ASX Clear invests funds in accordance with a defined treasury investment policy, endorsed by the ASX Clear Clearing Board (one of the CS Boards). The policy is designed to ensure that risk resources can be reliably accessed on a timely basis. The policy restricts treasury investments to liquid assets – such as bank bills and certificates of deposit – and applies issuer investment limits scaled according to the credit standing of the issuing counterparty. This policy was updated in November 2010, with the definition of liquid assets changed so that it is more focused on market liquidity than investment maturity. Eligible investment counterparties comprise Australian federal or state government agencies and APRA-supervised ADIs, and must have a minimum short-term S&P credit-rating of A−1 and long-term credit rating of A. Individual counterparty limits and concentration limits also apply; the maximum exposure to any investment counterparty is 33 per cent.

The treasury investment policy also sets upper limits for the average maturity of investments and the market risk of the portfolio (estimated by value-at-risk modelling), and an overarching liquidity requirement based on assumed ‘ordinary’ liquidity needs (e.g. for the return of margin to participants, based on the maximum required over the previous year), liquidity needs in the event of a default (i.e. the DLR) and the value of cash margin posted by the largest clearing participant. ASX Clear (Futures) uses a liquidity stress-testing model to assess the adequacy of its liquidity arrangements. The model, which is similar to that used by ASX Clear, calculates the maximum liquid funds that ASX Clear (Futures) would need to access in order to meet obligations arising in the event of a clearing participant default. The model is based on ASX Clear (Futures)' capital stress tests. The liquidity stress-test assumptions were refined in November 2010 so that a default is now more onerous because it is assumed to occur prior to receipt of the previous day's variation margin payments, if owed by the defaulter, or after any variation margin payments have been paid, if owed to the defaulter.

The results of the liquidity stress tests are compared with the DLR. The DLR is currently set at $370 million – equal to the non-promissory component of ASX Clear (Futures)' CGF. Breaches of the DLR trigger a review of the adequacy of the DLR. Such a review will take into account the outcome of the capital stress tests, as any AIM calls will provide extra liquidity.

iii. Loss sharing

This measure of the Standard applies to arrangements where participants commit to meet any settlement shortfall. The arrangement does not require that a facility have loss-sharing arrangements in place, but where they exist they should be documented, legally enforceable and acknowledged by all participants in the central counterparty. One element of ASX Clear (Futures)' default resources is a promissory component up to a fixed amount (the promissory participant commitments referred to in the previous section of this Measure). This is not an open-ended commitment and does not constitute a loss-sharing arrangement as contemplated by Measure 7(iii).

8. Governance

The central counterparty must have effective, accountable and transparent governance arrangements.

Ultimate responsibility for the control of the financial risks faced by ASX Clear (Futures) lies with the ASX Limited Board and the ASX Clear (Futures) Clearing Board. The ASX Limited Board, which is accountable to ASX shareholders, is responsible for overseeing the processes for identifying significant risks to ASX and ensuring that appropriate and adequate control, monitoring and reporting mechanisms are in place. In addition, the ASX Limited Board assigns certain responsibilities to the ASX Clear (Futures) Clearing Board (as specified in the ASX Limited Board Charter), including the management of ASX Clear (Futures)' clearing and settlement risk, and its compliance with the FSS.

The ASX Limited Board Charter also places requirements on the Board structure, including that the majority of members and the Chair be independent (defined as being free of business or other relationships that could interfere with independent exercise of judgement). There are currently nine members of the ASX Limited Board, comprising the ASX CEO and eight independent, non-executive directors. The ASX Limited Board appoints the members of the ASX Clear (Futures) Clearing Board, which comprises one executive director (the ASX CEO) and six non-executive directors. The independent directors are appointed for their skill and expertise in clearing and settlement operational and risk-management matters. The seven directors filling these positions are also on the boards of ASX Clear, ASX Settlement and Austraclear. ASX Clear (Futures) and Austraclear share a common chair, as do ASX Clear and ASX Settlement. Four of the non-executive directors are also members of the ASX Limited Board, and two are external directors appointed for their expertise in clearing and settlement matters. The ASX Limited Board Charter and the profiles of all board members are publicly available online.

The ASX Clear (Futures) Clearing Board meets between six and eight times each year, and receives detailed reports on ASX Clear (Futures)' business and operations, risk management and financial performance. It is responsible for approving capital, liquidity and stress-testing arrangements.

9. Operational risk

The CS facility licensee as operator of a central counterparty must identify sources of operational risk and minimise these through the development of appropriate systems, controls and procedures.

ASX Clear (Futures)' key operating system is SECUR.

i. Security and operational reliability

The security of SECUR is supported by access controls, restricting access both physically and virtually. The process to request access to systems is documented, monitored and formally audited. ASX Clear (Futures) performs external penetration and vulnerability testing on SECUR regularly. Technology-security policy is considered by external auditors twice a year. ASX's Internal Audit unit routinely monitors compliance with this policy, reporting to the Audit and Risk Committee on a quarterly basis.

ASX Clear (Futures) has a number of arrangements in place to ensure SECUR is operationally reliable:

operational processes are documented and supported by internal procedures;
the design and effectiveness of control procedures supporting the core operational and systems processes are subject to regular independent external and internal audits;
critical IT infrastructure is designed to ensure resilience against component failure, including full redundancy at the primary site; and
availability targets are documented and defined formally for critical services.

Nevertheless, should infrastructure fail at the primary site, operations are switched over to ASX's backup site within a target of one hour. A comprehensive test is completed over a two-year cycle to demonstrate that normal functions can be carried out using systems located at the backup site. ASX Clear (Futures) also regularly tests its ability to operate its primary systems from its backup site.

Over the 2010/11 assessment period, SECUR was available 100 per cent of the time. The availability target for SECUR is 99.8 per cent of the time.

SECUR capacity is monitored on an ongoing basis, with monthly reviews of current and projected capacity requirements. ASX Clear (Futures) requires that it has sufficient technical and human resources to operate SECUR during peak periods, including in the event of operational incidents or system failure. Average capacity utilisation of SECUR over the assessment period was 23 per cent, while peak utilisation was 40 per cent. In accordance with its capacity policy, ASX upgraded SECUR in the June 2011 quarter to ensure that peak utilisation does not exceed 50 per cent.

ASX Clear (Futures) has arrangements in place to ensure that changes to SECUR and supporting infrastructure do not disrupt its normal operations. ASX Clear (Futures) operates a separate test environment for SECUR and has a formal, documented change-management process.

ASX Clear (Futures) also has arrangements in place to ensure that it has well-trained and competent personnel operating SECUR. Staff are provided with relevant policies and guidelines from commencement of employment, with weekly communications thereafter. Staff are evaluated with reference to each defined operational process. ASX Clear (Futures) has a formal succession-planning and management process in place.

ii. Business continuity procedures

ASX maintains extensive contingency plans detailing the appropriate operational response to a CS facility disruption, including coverage of the various lines of authority, means of communication, and procedures to respond to failures. These plans are periodically updated. The risk that an operational incident at the main site disrupts SECUR is mitigated through maintenance of a backup site. ASX also has procedures in place to ensure that staff with specific skills are in place in the event of a contingency, with migration to the backup site targeted to occur within one to two hours. In addition, as noted in the previous Assessment, ASX is in the process of implementing arrangements to have some operational staff at its backup site during business hours in order to support rapid recovery in the event of a disruption.

ASX Clear (Futures)' Operating Rules and Procedures require participants to maintain adequate business continuity arrangements to allow the recovery of usual operations within approximately one to two hours following a contingency event. If a participant fails to do so, ASX Clear (Futures) may impose sanctions. Spot checks of participants' business continuity management are triggered if a participant has been experiencing operational problems, and include examination of governance and processes.

ASX Clear (Futures)' regularly tests business-recovery arrangements. Connectivity and procedural testing of the backup site are performed monthly by representatives from ASX Clear (Futures). Live tests (i.e. where market and clearing and settlement services are provided in real time from the backup site) are conducted on a two-year cycle. Test results are formally documented and reported to ASX senior management and are also made available to internal and external auditors.

The adequacy of ASX Clear (Futures)' business continuity procedures is reviewed regularly as part of broader reviews of ASX Clear (Futures)' operational risk policy.

iii. Outsourcing

No operational functions are outsourced by ASX Clear (Futures). However, external suppliers are used for various services, such as to provide utilities, hardware maintenance, operating system and product maintenance, and certain security-related specialist independent services. Since mid 2008, ASX Clear (Futures) has been responsible for first- and second-level operational support of SECUR. This includes business continuity arrangements, and computer-system support not involving changes to system components or underlying source code. Previously, these high-levels of support were provided by NASDAQ OMX, which continues to provide third-level and software support. During the previous assessment period, a new agreement was finalised to extend this support beyond 2013.

iv. External administration of a related body

Within the ASX structure, most operational resources are provided by ASX Operations Limited, a subsidiary of ASX Limited. In the event that ASX Operations Limited became subject to external administration, and this particular event did not impact upon the capacity of ASX Clear (Futures) to continue operating, ASX Clear (Futures) would be able to retain use of resources under provisions within the written support agreement between it and ASX Operations Limited (to the extent permissible by law).

10. Regulatory reporting

CS facility licensees, as operators of central counterparties, are required to meet certain reporting obligations to the Reserve Bank under the FSS for Central Counterparties. These obligations include the reporting of: breaches of the Standard; the failure of a participant to fulfil the central counterparty's risk-control requirements; and the central counterparty's failure to enforce its own risk-control requirements. There are also obligations to report financial and stress-testing results on a quarterly basis. ASX Clear (Futures) satisfied all reporting obligations during the assessment period.

B2. Financial Stability Standard for Securities Settlement Facilities

In assessing whether a facility meets the Financial Stability Standard for Securities Settlement Facilities the Reserve Bank considers a number of measures. The full text of these measures and associated guidance is available on the Reserve Bank's website. The following provides a summary of the information the Reserve Bank has used to assess ASX Settlement and Austraclear against each of these measures. This updates the information presented in the Reserve Bank's 2009/10 Assessment for material changes in policies and procedures over 2010/11.

B2.1 ASX Settlement

1. Legal framework

The securities settlement facility must have a well-founded legal basis.

ASX Settlement is a wholly owned subsidiary of ASX Limited. It provides settlement services for the ASX market and will provide services to Chi-X Australia once trading commences on this AMO's platform on 31 October 2011. ASX Settlement provides a transfer service for a small number of transactions undertaken on the National Stock Exchange, the Asia Pacific Exchange and the SIM Venture Securities Exchange.

The legal basis for ASX Settlement's operations is set out in its Operating Rules and Procedures. Under section 822B of the Corporations Act, these rules and procedures have effect as a contract under seal between ASX Settlement and each of its participants, as well as between each of the participants. The Operating Rules and Procedures set out the rights and obligations of participants and ASX Settlement, including in the event of default or suspension.

The netting arrangements undertaken by ASX Settlement with respect to its participants' obligations have approval as a netting arrangement under Part 3 of the Payment Systems and Netting Act. This provides certainty for the netting process in the event of the insolvency of an ASX Settlement participant or a payments provider.

2. Participation requirements

The requirements for participation in the securities settlement facility must promote the safety and integrity of the securities settlement facility and ensure fair and open access. Participation requirements must:

be based on objective and publicly disclosed criteria;

ASX Settlement has objective and transparent participation requirements, which are publicly available and form part of its Operating Rules and Procedures. The Operating Rules and Procedures also provide for an appeals process should an application for participation be rejected or a participant's access be terminated. ASX Settlement had 132 participants as at end June 2011.

require that participants have the operational capacity and financial standing to settle their obligations through the securities settlement facility in a timely manner; and

Participation requirements address financial and business integrity issues, as well as operational and technical matters.

A settlement participant must post a settlement bond of $500,000, unless it is subject to prudential supervision as an ADI; is an approved clearing facility or an AMO under ASX Settlement Operating Rules and Procedures; is a CS facility that complies with the FSS; or only acts as a Participant Bidder in a takeover. In addition, a sponsoring participant (i.e. a participant that also acts in ASX Settlement on behalf of non-participants) that is not covered by the National Guarantee Fund compensation arrangements (under the Corporations Act) must post a sponsorship bond of $500,000.

Performance and sponsorship bonds must be issued by an Australian bank or appropriately regulated insurance company. Funds held under a performance bond would be drawn upon by ASX Settlement in the event that the participant breached ASX Settlement rules. In a similar vein, funds held under a sponsorship bond would be drawn upon to meet any losses suffered by ASX Settlement, an issuer, or a holder sponsored by an ASX Settlement participant arising from a breach of the rules or other offence committed by the participant. The monitoring, assessment and investigation of matters relating to financial requirements is dealt with by ASX Compliance, a separate subsidiary within ASX, with its own board.

allow the CS facility licensee as operator of the securities settlement facility to suspend or cancel the participation of an institution which breaches the applicable participation or other risk-control requirements.

The ASX Settlement Operating Rules and Procedures allow it to suspend or terminate a participant from its facility in the event of a failure to comply with the Operating Rules and Procedures, or where a payment provider fails to authorise a participant's payment for interbank settlement. During the 2010/11 assessment period, ASX Settlement chose to suspend a participant following an event of non-compliance with ASX Settlement's risk control requirements.

ASX Settlement also levies fees on a participant that fails to meet its settlement obligations on a timely basis. The fee is 0.1 per cent of the value of the settlement obligation, but with a minimum and maximum fee of $100 and $5,000, respectively. Participants are also required to close out any positions remaining unsettled on the fifth day after the trade date (i.e. two days after the scheduled settlement date). ASX Settlement also operates a regime to benchmark the settlement performance. This regime uses peer-group benchmarking and provides a participant's compliance unit with a ranking of its settlement performance (based on the value of its trades which have failed to settle) against its market group peers.

3. Understanding risks

The securities settlement facility must make sufficient information publicly available, via its rules and procedures and the provision of relevant information on settlement activity, such that each participant is able to understand the securities settlement facility's impact on each of the financial risks the participant incurs through participation in the facility.

The ASX Settlement Operating Rules and Procedures are comprehensive and publicly available. The Operating Rules and Procedures explain the role and responsibilities of each category of participant and ASX Settlement. Background information on ASX Settlement's operations and risk management is also available on the ASX website.

ASX Settlement must lodge any changes to its Operating Rules with ASIC. Under section 822E of the Corporations Act, the Minister has 28 days to consider, and potentially disallow, any rule changes made by a licensed CS facility. ASX Settlement consults with its participants on important rule changes, and notifies participants of all changes to the Operating Rules and Procedures.

A variation to this measure of the Standard in February 2009 requires a licensed CS facility as operator of a securities settlement facility to make publicly available any relevant information on settlement activity. Since November 2009, settlement participants ‘tag’ securities-lending-related settlement instructions submitted to CHESS and, from December 2009, participants disclose outstanding positions, both borrowed and lent. ASX publishes aggregate data on its website daily.

4. Certainty of title

The CS facility licensee as operator of the securities settlement facility must ensure that under the facility's rules and procedures, participants, or where relevant, their clients, have a clear and unambiguous title to, or interest in, securities held, deposited or registered on their behalf, including in circumstances where the solvency of the operator of a securities settlement facility is in doubt. This requires that its rules and procedures:

clearly identify the type of title or interest held by participants for particular securities, to the extent such title or interest is recognised by the facility's rules or procedures;

Securities are dematerialised and held in CHESS. Title is held in the name of clients of ASX Settlement participants. The system does not record any details of encumbrances, other than collateral lodged in favour of ASX Clear.

A CHESS sub-register forms part of the issuer's securities register. Maintenance and reconciliation of the complete register is the responsibility of the issuer or its appointed agent. Most ASX Settlement participants settle across a centralised settlement account and subsequently allocate securities to end-clients in the CHESS sub-register. As part of its end-of-day processes, CHESS reports net movements on each sub-register to the holder of the issuer's complete register. Settlement participants utilise the centralised account under ‘trust’ provisions and are obliged to give irrevocable legal title to an end-client as long as that client has met all relevant conditions in respect of the settlement.

clearly identify the way in which the transfer of (or any other forms of dealing with) securities and related payments can be effected through the facility; and

The transfer of title to securities in CHESS is given effect by electronic book entry. Settlement occurs via a DVP process in a daily scheduled batch-settlement cycle (see Measure 5). The ASX Settlement Operating Rules and Procedures also provide for transferring securities without payment, where required.

ensure that, to the extent permissible by law, the creditors of the operator of the securities settlement facility have no claim over securities or other assets held, deposited or registered by participants in the facility.

In the event of ASX Settlement's insolvency, the rules and arrangements for title within ASX Settlement provide a high degree of assurance that participants' securities will be immune from claims by ASX Settlement's creditors. ASX Settlement is not the legal owner of any participant or client assets, with these assets recorded in CHESS in the name of the participant or sponsored client.

5. Settlement

The CS facility licensee as operator of a securities settlement facility must ensure that its operations do not expose its participants, or the financial system more broadly, to unacceptable levels of risk. The operator of a securities settlement facility must pay particular attention to ensuring settlement finality and the use of high-quality settlement assets in payment for securities.

The operation of a securities settlement facility must eliminate principal risk between its participants and ensure that settlements, once completed, are final and irrevocable.
The assets used to settle the payment obligations in respect of a transaction in the securities settlement facility must carry little or no credit or liquidity risk.
Exposures between providers of cash settlement assets must be settled finally and irrevocably.

Settlement of securities transactions in ASX Settlement occurs on a Model 3 DVP basis. This involves the simultaneous transfer of net payment and net securities obligations between buyers and sellers at the end of the settlement cycle. The ASX Settlement Operating Rules and Procedures establish that settlement according to the terms of those rules is final and irrevocable. This is reinforced through legislation (see Measure 1).

Once a trade has been executed on the ASX market, a trade-related instruction is sent to CHESS. At T+1, CHESS generates a single net batch instruction reflecting the net position of each participant's novated trades in each line of stock. Between T+1 and T+3, participants can also instruct CHESS to include additional non-novated (off-market) transactions in the batch at T+3. During 2010/11, an average of around 80 per cent of the value of net securities settled in the final batch was in respect of non-novated transactions. The majority of these transactions were related to the ‘priming’ of clearing participants' accounts to facilitate settlement of novated trades (i.e. the transfer of securities to a clearing participant's securities account to ensure that they can be delivered in accordance with scheduled obligations).

By 6.00 am on the settlement day, ASX Settlement notifies each participant of its projected net cash and securities settlement obligations. Participants have until 10.30 am to negotiate any additional non-novated transfers necessary to ‘prime’ their accounts for settlement. After the cut-off for new instructions, transfer of securities positions is stopped in CHESS and participants' payment providers are requested to fund the net cash obligations of settlement participants. Payment providers hold ES accounts at the Reserve Bank and act on behalf of settlement participants. There were 12 payment providers operating in ASX Settlement as at 30 June 2011. Payment obligations are settled between payment providers in RITS as a single daily multilateral net batch. Immediately upon confirmation from RITS that the funds transfers have been settled, ASX Settlement completes the net securities transfers in CHESS, thus ensuring DVP settlement. This typically occurs at around noon.

The finality of ASX Settlement's settlement process is reinforced by its approval under Part 3 of the Payment Systems and Netting Act.

In addition, the payments between payment providers as part of the multilateral net batch are protected by virtue of the approval of RITS as an RTGS system under Part 2 of the Payment Systems and Netting Act. This approval protects payments from being voided in the case of a payments provider entering external administration.

If, due to a shortfall of either securities or funds, a participant is unable to settle its scheduled obligations in the batch, ASX Settlement's rules allow for all or some of the transactions of the affected participant to be ‘backed out’. These transactions are then rescheduled for settlement on the next settlement day. The precise parameters of the back-out process depend upon whether or not the failing participant is in default. If the participant is in default, ASX Clear may assume an obligation for novated settlements in accordance with its default-management arrangements. ASX Settlement's back-out algorithm seeks to remove as few transactions from the batch as possible, maximising settlement values and volumes, while minimising the spillover to other participants. Non-novated settlement obligations are typically backed out first.

Building on changes introduced in 2009/10, since 6 September 2010 ASX has eliminated netting between house and client margin payments and plans to implement further improvements to reduce the risks surrounding the settlement process in the future (see Section 5.3 of this Assessment for details).

6. External administration

The rules and procedures for the securities settlement facility must contain mechanisms to deal with the external administration of a participant, or a provider of cash settlement assets, in such a way as to limit the operational and financial impact on both the securities settlement facility and its participants. This requires that the CS facility licensee as operator of the securities settlement facility must:

(allow for the cancellation or suspension of a participant or a provider of cash settlement assets from the security settlement facility:
1. if the participant or provider of cash settlement assets is in external administration; or
2. if there is a reasonable suspicion of external administration; and

The ASX Settlement Operating Rules and Procedures allow for the cancellation or suspension of a participant or a payment provider in the event that it becomes subject to external administration, or if it reasonably suspects that this may occur. Participants and payment providers are required to notify ASX Settlement if they, or any other participant or payment provider, become subject to external administration or if they reasonably suspect that this may occur.

allow participant users of a cash settlement provider which becomes subject to external administration, or which is reasonably likely to become subject to external administration, to quickly nominate a new provider.

The ASX Settlement Operating Rules and Procedures allow participants to nominate a new payment provider if their current provider is subject to, or is reasonably likely to become subject to, external administration.

The ASX Settlement Operating Rules and Procedures allow it to remove transactions from batch settlement under certain circumstances, including where a participant is subject to external administration. ASX Settlement has procedures and mechanisms in place to allow it to recast a batch ensuring that settlement can be carried out in a timely manner (see Measure 5).

7. Operational risk

The CS facility licensee as operator of a securities settlement facility must identify sources of operational risk and minimise these through the development of appropriate systems, controls and procedures.

ASX Settlement's key operating system is CHESS.

i. Security and operational reliability

The security of the CHESS system is supported by access controls, restricting both physical and virtual access. The process to request access to systems is documented, monitored and formally audited. ASX Settlement performs external penetration and vulnerability testing on CHESS regularly. Technology-security policy is considered by external auditors twice a year. ASX's Internal Audit unit routinely monitors compliance with policy, reporting to the Audit and Risk Committee on a quarterly basis.

ASX Settlement has a number of arrangements in place to ensure that CHESS is operationally reliable:

operational processes are documented and supported by internal procedures;
the design and effectiveness of control procedures supporting the core operational and systems processes are subject to regular independent external and internal audit;
critical IT infrastructure is designed to ensure resilience against component failure, including full redundancy at the primary site; and
availability targets are documented and defined formally for critical services.

Nevertheless, should infrastructure fail occur at the primary site, ASX aims to switch operations over to the backup site within one hour. A comprehensive test is completed over a two-year cycle to demonstrate that normal functions can be carried out using systems located at the backup site. ASX Settlement also regularly tests its ability to operate its primary systems from its backup site.

Over the 2010/11 assessment period, CHESS achieved high operational reliability. CHESS was available 99.96 per cent of the time, with just one short outage reported in the March quarter 2011. The availability target for CHESS is 99.8 per cent.

CHESS capacity is monitored on an ongoing basis, with monthly reviews of current and projected capacity requirements. ASX Settlement requires that it has sufficient technical and human resources to operate the clearing and settlement systems during peak periods, including in the event of operational incidents or system failure. Average capacity utilisation of CHESS over the assessment period was 15 per cent, while peak utilisation was 20 per cent. The capacity headroom target for CHESS is 100 per cent over peak utilisation.

ASX Settlement has arrangements in place to ensure that changes to CHESS and supporting infrastructure do not disrupt its normal operations. ASX Settlement operates a separate test environment for CHESS and has a formal, documented change-management process.

ASX Settlement also has arrangements in place to ensure it has well-trained and competent personnel operating CHESS. Staff are provided with relevant policies and guidelines from commencement of employment, with weekly communications thereafter. Staff are evaluated with reference to each defined operational process. ASX Settlement has a formal succession-planning and management process in place.

ii. Business continuity procedures

ASX maintains extensive contingency plans detailing the appropriate operational response to a CS facility disruption, including coverage of the various lines of authority, means of communication, and failover procedures. These plans are periodically updated. The risk that an operational incident at the main site disrupts CHESS is mitigated through maintenance of a backup site. ASX also has procedures in place to manage the availability of staff with specific skills in the event of a contingency, with migration to the backup site targeted to occur within one to two hours. In addition, as noted in the previous Assessment, ASX is in the process of implementing arrangements to have some operational staff at its backup site during business hours in order to support rapid recovery in the event of a disruption.

ASX Settlement requires participants to maintain adequate business continuity arrangements to allow the recovery of usual operations within approximately one to two hours following a contingency event. If a participant fails to do so, ASX Settlement may impose sanctions.

ASX Settlement regularly tests business-recovery arrangements. Connectivity and procedural testing of the backup site are performed monthly by representatives from ASX Settlement. Live tests (i.e. where market and clearing and settlement services are provided in real time from the backup site) are conducted on a two-year cycle. Test results are formally documented and reported to ASX senior management and are also made available to internal and external auditors.

The adequacy of ASX Settlement's business continuity procedures is reviewed regularly, as part of broader reviews of ASX Settlement's operational risk policy.

iii. Outsourcing

No operational functions are outsourced by ASX Settlement. However, external suppliers are used for various services, such as utilities, hardware maintenance, operating system and product maintenance, and certain security-related specialist independent services. ASX Settlement is also reliant on interactions with SWIFT, and would revert to manual processing of SWIFT payments in the event of a SWIFT failure.

iv. External administration of a related body

Within the ASX structure, most operational resources are provided by ASX Operations Limited, a subsidiary of ASX Limited. In the event that ASX Operations Limited became subject to external administration and this particular event did not impact upon the capacity of ASX Settlement to continue operating, ASX Settlement would be able to retain use of resources under provisions within the written support agreement between it and ASX Operations Limited (to the extent permissible by law).

8. Regulatory reporting

CS facility licensees are required to meet certain reporting obligations to the Reserve Bank under the FSS. These obligations include the reporting of: breaches of the Standard; breaches of risk-control requirements; and quarterly financial results. ASX Settlement satisfied all reporting obligations during the assessment period.

B2.2 Austraclear

1. Legal framework

The securities settlement facility must have a well-founded legal basis.

Austraclear is a wholly owned subsidiary of ASX Limited. It provides settlement services for debt securities and for derivatives traded on the ASX 24 and ASX markets.

The legal basis for Austraclear's operations is set out in its Regulations and Procedures. Under section 822B of the Corporations Act, these regulations and procedures have effect as a contract under seal between Austraclear and each of its participants, as well as between each of the participants. The Regulations and Procedures set out the rights and obligations of participants and Austraclear, including in the event of default or suspension.

The finality of settlements undertaken by Austraclear is reinforced by its approval as an RTGS system under Part 2 of the Payment Systems and Netting Act. This approval protects the finality of payments made through Austraclear in the event of a participant entering external administration.

2. Participation requirements

be based on objective and publicly disclosed criteria;
require that participants have the operational capacity and financial standing to settle their obligations through the securities settlement facility in a timely manner; and
allow the CS facility licensee as operator of the securities settlement facility to suspend or cancel the participation of an institution which breaches the applicable participation or other risk-control requirements.

Austraclear had 731 participants as at end June 2011. Austraclear has objective and transparent participation requirements, which are publicly available and form part of the Regulations and Procedures. The Regulations also provide for an appeals process should an application for participation be rejected or a participant's access be terminated. Its participation requirements address issues such as financial standing, business integrity and business continuity arrangements.

Austraclear's Regulations and Procedures allow it to suspend or terminate a participant from its facility in the event of a breach of its Regulations. Clearing and Settlement Operations monitors participants' operational processing performance.

3. Understanding risks

Austraclear's Regulations and Procedures are comprehensive and publicly available. The Regulations and Procedures explain the role and responsibilities of each category of participant and Austraclear. Background information on Austraclear's operations, technical arrangements and risk management is also available on ASX's website.

Austraclear must lodge any changes to its Regulations with ASIC. Under section 822E of the Corporations Act, the Minister has 28 days to consider, and potentially disallow, any rule changes made by a licensed CS facility. Austraclear consults with its participants on important rule changes. Announcements affecting participants are issued as ASX 24 Notices, which are targeted to participants and market users.

4. Certainty of title

clearly identify the type of title or interest held by participants for particular securities, to the extent such title or interest is recognised by the facility's rules or procedures;

Austraclear's Regulations and Procedures identify title for three different classes of securities: paper securities, non-paper securities and dematerialised securities.

Paper securities are negotiable instruments and include some certificates of deposit, promissory notes and bills of exchange. Austraclear holds these securities for the participant as bailee. The participant retains legal and beneficial title. Non-paper securities are electronic securities that are not registered within the Austraclear system. They include Australian Government securities, registrable state and semi-government securities and corporate debt. In each of the registries, Austraclear holds legal title for the participant as nominee. The participant retains beneficial title. Dematerialised securities are electronic securities that are registered in the Austraclear system rather than externally. They include electronic certificates of deposit, electronic promissory notes and electronic bank-accepted bills of exchange. A dematerialised security is held by a participant as a ‘chose in action’. This legal structure imposes rights and obligations that replicate the rights and obligations of a negotiable instrument.

clearly identify the way in which the transfer of (or any other forms of dealing with) securities and related payments can be effected through the facility; and

The transfer of title to securities in the Austraclear system is effected by book entry. Paper securities are transferred through updates to participants' security records. Austraclear also uses ‘allonges’ which maintain the negotiability of paper securities. Non-paper securities are transferred through the passing of beneficial title from the seller to the buyer. Austraclear retains legal title in the relevant registry. Transfers of dematerialised securities are transfers of contractual rights within the Austraclear system.

ensure that, to the extent permissible by law, the creditors of the operator of the securities settlement facility have no claim over securities or other assets held, deposited or registered by participants in the facility.

In the event of Austraclear's insolvency, the rules and arrangements for title within Austraclear provide a high degree of assurance that participants' securities will be immune from claims by Austraclear's creditors. Austraclear is not counterparty to any transactions settled in its system.

5. Settlement

The operation of a securities settlement facility must eliminate principal risk between its participants and ensure that settlements, once completed, are final and irrevocable.

Settlement of securities transactions in Austraclear occurs on a Model 1 DVP basis. This involves the simultaneous transfer of cash and securities obligations between the buyer and seller on an item-by-item basis through the settlement cycle. Austraclear also provides for one-way cash transfers between participants, which are also settled on an item-by-item basis. Austraclear's Regulations and Procedures establish the basis for settlement of transactions entered into the system. By volume, DVP settlements accounted for around 49 per cent of total settlements during the assessment period, and one-way cash transfers account for around 51 per cent. There was also a small number of free-of-payment securities transfers (less than 1 per cent of total volumes). By value, however, DVP payments predominate, accounting for 77 per cent of total transfers in the year to end June 2011.

The assets used to settle the payment obligations in respect of a transaction in the securities settlement facility must carry little or no credit or liquidity risk.

Austraclear settlement participants must either be a ‘participating bank’ or appoint a participating bank to meet payment obligations in central bank money. 59 participating banks were operating in Austraclear and held ES accounts at the Reserve Bank as at 30 June 2011. Settlement of payment obligations occurs between participating banks across ES accounts on an RTGS basis without credit risk. Simultaneously, DVP settlement between settlement participants of cash and securities obligations occurs within Austraclear.

Exposures between providers of cash settlement assets must be settled finally and irrevocably.

The finality of Austraclear's settlement process is ensured by its approval under Part 2 of the Payment Systems and Netting Act. In addition, the payments between participating banks are also protected by virtue of the approval of RITS as an RTGS system under Part 2 of the Payment Systems and Netting Act.

6. External administration

allow for the cancellation or suspension of a participant or a provider of cash settlement assets from the security settlement facility:
1. if the participant or provider of cash settlement assets is in external administration; or
2. if there is a reasonable suspicion of external administration; and

allow participant users of a cash settlement provider which becomes subject to external administration, or which is reasonably likely to become subject to external administration, to quickly nominate a new provider.

Austraclear's Regulations and Procedures allow it to cancel or suspend a participant or a participating bank that becomes subject to external administration, or if it reasonably suspects that this may occur. A participant or a participating bank is also required to notify Austraclear if it becomes subject to external administration or where it reasonably suspects that this may occur.

There is no restriction within the Austraclear Regulations and Procedures on a participant changing its participating bank, including the case where that participant bank is insolvent.

7. Operational risk

Austraclear's key operating system is EXIGO.

i. Security and operational reliability

Since mid 2008 Austraclear has been responsible for first- and second-level operational support of EXIGO. This includes business continuity arrangements, and computer system support not involving changes to system components or underlying source code. Previously this support was provided by NASDAQ OMX, which continues to provide third-level and software support. In 2010, a new agreement was finalised to extend this support beyond 2013.

During the assessment period, EXIGO was available for 100 per cent of the required time. This exceeded the availability target stipulated in Austraclear's ‘Step-in and Service Agreement’ with the Reserve Bank. As outlined in Section 5.4 of this Assessment, there were two minor operational incidents during the assessment period. The Reserve Bank is satisfied with both ASX's immediate responses, and the follow-up action taken to prevent reoccurrence, in relation to the operational incidents that occurred during the year.

Average capacity utilisation for EXIGO was 22 per cent during the assessment period, and peak capacity utilisation was 36 per cent. ASX's capacity headroom policy requires that peak utilisation does not exceed 50 per cent. Following breaches to this policy in the previous assessment period, ASX plans to increase the capacity of EXIGO in September 2011, as part of a broader EXIGO upgrade. The security of the EXIGO system is supported by access controls that are subject to external audit. Austraclear also has a fraud control policy in place which seeks to minimise the risk of fraud occurring within Austraclear, as well as providing procedures for its timely identification and appropriate responses should it occur.

The security of the EXIGO system is supported by access controls that are subject to external audit. Austraclear also has a fraud control policy in place which seeks to minimise the risk of fraud occurring within Austraclear, as well as providing procedures for its timely identification and appropriate responses should it occur.

ii. Business continuity procedures

ASX maintains extensive contingency plans detailing the operational response to a CS facility disruption, including coverage of the various lines of authority, means of communication and failover procedures. These plans are periodically updated. The risk that an operational incident at the main site disrupts EXIGO is mitigated through maintenance of a backup site. ASX also has procedures in place to manage the availability of staff with specific skills in the event of a contingency, with migration to the backup site targeted to occur within one to two hours. In addition, as noted in the previous Assessment, ASX is in the process of implementing arrangements to have some operational staff at its backup site during business hours in order to support rapid recovery in the event of a disruption.

Austraclear tests backup arrangements quarterly and carries out connectivity and procedural testing on a monthly basis. Live tests (i.e. where market and clearing and settlement services are provided in real time from the backup site) are conducted on a two-year cycle; the most recent live test of EXIGO occurred in November 2009 and revealed some issues that have now been resolved. The next test has been delayed until after the next version of the EXIGO software is released in October 2011. Through its Regulations and Procedures, Austraclear also requires that its participants have appropriate disaster recovery arrangements. The adequacy of Austraclear's business continuity procedures is reviewed regularly, as part of broader reviews of Austraclear's operational risk policy.

iii. Outsourcing

No operational functions are outsourced by Austraclear. However, external suppliers are used for various services, such as utilities, hardware maintenance, operating system and product maintenance, and certain security-related specialist independent services. As noted above, NASDAQ OMX provides third-level and software support to EXIGO.

Austraclear is reliant on interactions with SWIFT, and would revert to manual processing of SWIFT payments in the event of a SWIFT failure. The failure of RITS would potentially prevent settlement in EXIGO, although ASX has prepared business plans to consider the potential for EXIGO to continue operating independently.

iv. External administration of a related body

ASX Operations Limited, a subsidiary of ASX Limited, is responsible for supplying Austraclear and other ASX companies with personnel and technological resources. Austraclear has a written support agreement with ASX Operations Limited, which helps to ensure its access to these resources in the event of the external administration of ASX Operations, to the extent permissible by law.

8. Regulatory reporting

CS facility licensees are required to meet certain reporting obligations to the Reserve Bank under the FSS. These obligations include the reporting of: breaches of the Standard; breaches of risk-control requirements; and quarterly financial results. Austraclear satisfied all reporting obligations during the assessment period.

Footnote

Available at <https://www.rba.gov.au/payments-system/clearing-settlement/standards/>. [1]