Assessment of ASX Clearing and Settlement Facilities Appendix C1. Financial Stability Standards for Central Counterparties

Standard 15: Custody and investment risks

A central counterparty should safeguard its own and its participants' assets and minimise the risk of loss on and delay in access to these assets. A central counterparty's investments should be in instruments with minimal credit, market and liquidity risks.

15.1 A central counterparty should hold its own and its participants' assets at supervised and regulated entities that have robust accounting practices, safekeeping procedures and internal controls that fully protect these assets.

The AUD-denominated assets of the ASX CCPs and their participants are administered and held within the ASX Group. Intragroup arrangements allow ASX Clear and ASX Clear (Futures) to fully understand the nature of their risk exposure to ASXCC and other group entities such as Austraclear (at which ASXCC's AUD-denominated debt securities are held). This exposure is managed within the context of ASX's overall Clearing Risk Policy Framework. ASX has accounting practices, safekeeping procedures and internal controls to protect its own and its participants' assets (as described under CCP Standard 2.7).

ASX Clear's AUD-denominated non-cash collateral is held in CHESS; ASX Clear (Futures)' AUD-denominated non-cash collateral is held in the CCP's account in Austraclear. ASX Clear's and ASX Clear (Futures)' Operating Rules and Procedures define how collateral is used. The CCPs do not re-use non-cash collateral posted by participants.

Non-AUD-denominated securities held as investments or posted as non-cash collateral are held outside the ASX Group. NZD-denominated investment securities are held in NZClear, which is owned and operated by the RBNZ. Non-cash collateral and investment securities denominated in other currencies (i.e. G4 currencies) are held in Clearstream Banking S.A. (Clearstream), an international central securities depository owned by Deutsche Börse.^[35] As a credit institution, Clearstream is subject to the supervision of the Commission de Surveillance du Secteur Financier and Banque Centrale du Luxembourg in Luxembourg.^[36]

Cash collateral and cash contributed to the default funds (including equity, restricted capital reserves and participant contributions) are controlled by ASXCC, of which ASX Clear and ASX Clear (Futures) are subsidiaries (see ‘ASX Group Structure’ in Appendix B.1). ASXCC makes its investments in accordance with its Investment Mandate and ASX's Investment Risk Policy, which together define investment objectives, investment specifications, and audit and maintenance of the policy (see CCP Standard 15.4).

15.2 A central counterparty should have prompt access to its assets and the assets provided by participants, when required.

AUD-denominated assets invested on behalf of ASX Clear, ASX Clear (Futures) and their participants are held within the ASX Group and subject to ASX's exclusive custody. Cash investments are held directly by ASXCC. AUD-denominated non-cash collateral is lodged directly with ASX Clear in CHESS or ASX Clear (Futures) in Austraclear. NZD-denominated assets are held in NZClear. Assets denominated in G4 currencies are held in Clearstream. The Operating Rules require that collateral from participants is unencumbered. These arrangements aim to ensure that ASX has prompt access to participant collateral and its own contributions to prefunded financial resources, including in the event of a participant default.

15.3 A central counterparty should evaluate and understand its exposures to its custodians, taking into account the full scope of its relationships with each.

ASXCC does not use custodians to hold assets invested on behalf of ASX Clear or ASX Clear (Futures). ASX Clear (Futures) uses Clearstream to hold US treasury bills posted as collateral. No US treasury bills are currently held by ASX Clear (Futures) as collateral, with a maximum of US$1 million held during the assessment period. ASX plans to undertake a risk assessment of Clearstream within the next 12 months.

15.4 A central counterparty's investment strategy should be consistent with its overall risk management strategy and fully disclosed to its participants, and investments should be secured by, or be claims on, high-quality obligors. These investments should allow for quick liquidation with little, if any, adverse price effect.

ASXCC is the controlling entity for the investments of both CCPs. In respect of both cash margin collected and pre-funded pooled risk resources, ASXCC invests funds in accordance with a defined investment policy, endorsed by the ASXCC Board and itself governed by the ASX Enterprise Risk Management Policy. The investment policy, set out in the high-level Investment Risk Policy and the more detailed ASXCC Investment Mandate, articulates the basis for the CCPs' mitigation of investment-related credit, market and liquidity risks (see CCP Standard 7). ASXCC's investment mandate recognises the primacy of maintaining liquidity and credit quality over achieving investment return, given that funds under management are a critical source of liquidity in the event of a market disruption or clearing participant default. The performance of the investment portfolio within the parameters of this policy is closely monitored by ASXCC, with trigger points to automatically escalate potential issues to the CRO before binding limits are reached. For example, trigger points are defined for weighted average maturity.

The ASXCC Investment Mandate defines investment counterparty eligibility criteria and sets investment limits in order to control counterparty investment risk:

• Counterparty eligibility criteria. Counterparties must be Australian Commonwealth or state government entities (including the Bank), the New Zealand government or RBNZ, Australian or New Zealand Authorised ADIs, or off-shore bank counterparties. ADIs and off-shore bank counterparties must also have a S&P short-term issuer credit rating of A-1 or above (A-2 or above if approved only as a repo counterparty). Off-shore bank counterparties are primarily approved for the investment of NZD, EUR, GBP, JPY and USD cash and reverse repo, both on an overnight basis.

  The ASXCC Investment Mandate does not permit investments in securities of ASX Group entities, consistent with the Bank's supplementary interpretation of CCP Standard 15.4 (see introduction to Appendix C). ASXCC is also not permitted to create unsecured exposures to any investment counterparty that is a participant or affiliated with a participant, other than the four major Australian banks.

• Counterparty investment limits. Counterparty investment limits are determined according to factors such as the credit quality of the counterparty or obligor, the size of the AFR, and whether eligible investment counterparties and their affiliates are also clearing participants. Individual unsecured exposures to non-government related issuers or counterparties are limited to the level of capital held across the two CCPs to cover losses arising from custody and investment risks ($75 million), meaning that ASX could absorb losses arising from the default of any single investment counterparty or issuer without allocating losses to participants (see CCP Standard 14.3). This pool of resources is separate to the capital set aside by the ASX CCPs for other general business risks ($71 million). Concentration limits are set on both the proportion of the portfolio that can be invested in state government counterparties and the absolute amount that can be invested with a single counterparty.

ASXCC's investment mandate requires that a portion of its portfolio be held in liquid asset form to cover liquidity risks from both general business risks and risks related to the CCPs' clearing activities (see CCP Standard 7.3). The investment mandate aims for quick liquidation of investments with little, if any, price effect. Only investments in AUD and NZD-denominated instruments that can be liquidated or repurchased for cash within two hours are treated as ‘liquid’ products. These are defined based on the depth of market liquidity and the terms of investment, including whether the instruments are eligible for repurchase transactions with the Bank and the RBNZ (see CCP Standard 7.4). ‘Liquid’ products in other currencies (EUR, GBP, JPY and USD) are defined as those that can be sold for settlement the following business day and which are judged to have an active repo market providing same day liquidity.

ASXCC has set a minimum value per currency of its total investment portfolio that must be invested in ‘core’ liquid assets, called the CLR (see CCP Standard 7.3). For AUD and NZD, ASXCC restricts the asset types eligible to meet the currency-specific CLR to cash held in accounts at central banks or creditworthy commercial banks, and securities issued by the Australian or state governments or the New Zealand Government (held outright or via repo). For EUR, GBP, JPY and USD, the asset types eligible to meet the currency-specific CLR are restricted to government securities issued in the government's own currency; ASXCC has set a requirement that 100 per cent of the ASXCC portfolio in these currencies must be invested in core liquid assets. For AUD and NZD, ASXCC also has a currency-specific ALR designed to reflect the potential for unexpected non-default related liquidity needs in these currencies. ASX calibrates the ALR to ensure that it has sufficient liquid assets in AUD and NZD to cover the peak historical one day outflow in each currency from the ASXCC investment portfolio in percentage terms since 2008 (the earliest date from which data are available). The ALR has been calculated as 11 and 21 per cent of ASXCC's AUD and NZD portfolios, respectively. All other liquid assets in ASXCC's portfolio are counted against the ALR. No ALR is set for EUR, GBP, JPY and USD since 100 per cent of the portfolio in these currencies must be invested in CLR-eligible assets.

As set out in ASX's investment risk policy, market risks are managed by appropriate limits based on the duration, maximum maturity, unrealised mark-to-market losses and VaR of the ASXCC investment portfolio.

The ASXCC investment mandate is reviewed and approved annually by the ASXCC Board and CS Boards and presented to the RCCs for noting. The investment risk policy is reviewed and approved by the ASX Limited Board. The broad approach to investment and investment holdings is disclosed publicly in the ASX Annual Report. In accordance with the CPMI-IOSCO Public quantitative disclosure standards for central counterparties, ASX also discloses the high-level composition of ASXCC's investment holdings on a quarterly basis (see CCP Standard 21.2). ASX's disclosure on investment risk also includes participants' contingent exposure to CCP investment losses. Under ASX's recovery arrangements, ASX would allocate any losses in excess of $75 million between participants, in proportion to the amount of cash each participant has provided to the CCPs. The disclosure provides participants with the calculation steps necessary to determine their contingent exposure if an investment loss greater than $75 million were to be realised.

At end June 2019, over 89 per cent of the investment portfolio was invested in government or semi-government bonds, or reverse repurchase agreements secured by such bonds. The remainder of the portfolio was primarily invested in Bank-eligible securities, or held in deposits with ADIs.

Footnotes

Unless otherwise indicated, in this report ‘Clearstream’ refers to Clearstream Banking S.A. and not to any other similarly named entity within the Deutsche Börse group. [35]

Clearstream will also be supervised as a central securities depository (CSD) by the Commission de Surveillance du Secteur Financier once authorised under the EU CSD Regulation. [36]