2010/11 Assessment of Clearing and Settlement Facilities in Australia 5.2 ASX Clear (Futures)

Background

ASX Clear (Futures) provides central counterparty services for derivatives traded on the ASX 24 market.

ASX Clear (Futures) operates within a sound legal framework, based on its Operating Rules and Procedures. Under section 822B of the Corporations Act, these rules constitute a contract under seal between ASX Clear (Futures) and each of its participants, as well as between participants. Among other things, the rules set out the rights and obligations of ASX Clear (Futures) and each of its participants in respect of ASX Clear (Futures)' provision of central counterparty services. The netting arrangements contained in the ASX Clear (Futures) Operating Rules and Procedures are further protected under Part 5 of the Payment Systems and Netting Act. This provides certainty for the netting process in the event of the insolvency of an ASX Clear (Futures) participant.

Given the concentration of counterparty risk in a central counterparty, effective risk-management processes are crucial. ASX Clear (Futures) manages the risk associated with the potential for a participant default through a range of measures:

Participation requirements and ongoing monitoring. ASX Clear (Futures) participants are required to hold at least $5 million in net tangible assets (NTA). Over time, ASX Clear (Futures) plans to implement a further increase in this NTA requirement to $10 million, with a higher requirement for those clearing for third parties.
Margining and other collateralisation of exposures by participants. ASX Clear (Futures) levies margin on all derivatives products to cover any losses potentially arising should a participant default in normal market conditions. ASX Clear (Futures) also calls for Additional Initial Margins (AIMs) from participants when individually large or concentrated exposures are identified, including through stress testing.
The maintenance of pooled risk resources. Should margin and other collateral collected from a defaulting participant prove insufficient to meet its obligations, ASX Clear (Futures) has access to pooled risk resources in a Clearing Guarantee Fund (CGF). The aggregate value of the CGF is currently $400 million, calibrated to ensure coverage in extreme but plausible market conditions. The CGF includes $370 million of paid-up funds: $30 million in ASX Clear (Futures)' own capital; a $70 million subordinated loan from ASXCC, in turn funded by a subordinated loan from ASX Limited; participant commitments of $120 million; and a further subordinated loan from ASXCC of $150 million, funded in turn by a 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 ASX Clear (Futures)' Operating Rules and Procedures set out that payment could potentially be made a significant time after a participant default.

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

Adequacy of ASX Clear (Futures)' Risk Resources

The risk resources available to ASX Clear (Futures) to meet losses arising in the event of a participant default comprise any initial margin or other collateral (e.g. AIMs) collected from the defaulting participant, and pooled risk resources held in the CGF.

ASX Clear (Futures) calculates total initial margin requirements across each participant's portfolio using the OMX RIVA version of the internationally accepted SPAN methodology. Margin setting policy (i.e. the means by which SPAN parameters are used and determined) is reviewed annually; following this year's review, several minor amendments were made to internal processes.

Preparations are underway for the replacement of the current OMX RIVA SPAN methodology with CME SPAN, with implementation planned for early 2012. The CME SPAN methodology is widely regarded as the international standard, and its introduction is expected to improve risk estimation and attribution at ASX Clear (Futures). As discussed under Harmonisation and Linking of Central Counterparty Activity, above, its introduction is also part of broader efforts to harmonise the operations of the two central counterparties.

The value of ASX Clear (Futures)' risk resources was unchanged throughout the assessment period, comprising $370 million paid-up funds and $30 million promissory participant commitments (Graph 8). ASX Clear (Futures) has recently changed rules clarifying that the promissory commitments would be called upon after the commercial bank-funded subordinated ASXCC loan in the event of a default. It has also removed the promissory commitments from its STEL calculation, in recognition of the potential delay in receipt of these resources. As a result, any stress-test exposures above the level of paid-up resources result in collection of additional collateral.

Exposures in excess of STELs were identified on several days in April and May 2011, resulting in STEL AIMs being collected from one C-rated participant (bottom panel of Graph 9). In addition, a small capital-based position limit (CBPL) AIM call was made late in the period to cover a participant's portfolio that exceeded its CBPL. Overall, the utilisation of AIMs during the period was low, suggesting that the level of initial margin rates has been well calibrated, and that the size of ASX Clear (Futures)' CGF has remained sufficient to prevent an over reliance on variable resources.

Comparison of potential stress-test losses with the level of available risk resources offers some guidance as to the resilience of ASX Clear (Futures) to a participant default in extreme market conditions. During 2010/11, the stress-test exposure of the participant with the highest potential loss was typically well below the value of the paid-up component of the CGF (top panel of Graph 9).

In May 2010, the SPI 200 future ‘up’ stress-test scenario was strengthened, with prices across the board now increasing in this scenario by 14.5 per cent, compared with 9.5 per cent previously. This change was adopted towards the end of May 2010 following an episode of declining prices over a period of 10 days. In response, Clearing Risk Management thought it prudent to allow for the possibility of a more substantial rise in prices given the potential for the market to rapidly bounce back from such a decline. The change to this scenario has remained in place during the 2010/11 assessment period. In addition, the annual review of stress-test parameters in November 2010 resulted in a number of parameter changes, mostly small decreases to the magnitude of price movements used in the equity futures scenarios and small increases to the magnitude of price movements used in the interest rate futures scenarios.

Operational Performance

ASX Clear (Futures)' core system is the SECUR system. SECUR recorded 100 per cent system availability in 2010/11, with average capacity utilisation of 23 per cent and peak utilisation of 40 per cent. This met the minimum availability target of 99.8 per cent and the capacity headroom target of 100 per cent above peak utilisation. Following a breach of the capacity headroom target in 2009/10, a change was implemented in the June 2011 quarter to ensure SECUR has sufficient capacity.

ASX conducts business continuity tests of its key systems over two-year cycles. The most recent testing for the SECUR system was carried out in February 2011, and revealed no problems.

Summary

It is the Reserve Bank's assessment that ASX Clear (Futures) complied with the Financial Stability Standard for Central Counterparties during the assessment period.

The Assessment highlights a number of important developments since the previous Assessment. In particular, ASX Clear (Futures) has recognised that promissory resources – though legally callable – may not be available on a sufficiently timely basis, if called upon in the manner contemplated by the ASX Clear (Futures)' rules. So while they provide some level of additional comfort, the potential delay in receipt of these funds means that they should be given less weight in determining the adequacy of ASX Clear (Futures)' default resources under Measure 7 of the relevant FSS. Accordingly, ASX has agreed to remove the promissory component from calculations of participants' STELs. The Reserve Bank considers this to be a welcome improvement to ASX Clear (Futures)' risk framework.