Assessment of ASX Clearing and Settlement Facilities – September 2019 1. Summary of Regulatory Priorities

This section summarises actions taken by the ASX CS facilities during the 12 months to June 2019 (the assessment period) in relation to recommendations identified in the Bank's 2018 Assessment of ASX Clearing and Settlement Facilities (the 2018 Assessment), and summarises the recommendations identified by the Bank in its 2019 Assessment of the facilities against the FSS. Further detail is provided in section 2, which describes the material developments in the CS facilities relevant to the FSS; section 3, which provides the results of a detailed assessment conducted by the Bank of the facilities' legal basis.

1.1 Progress against 2018 Recommendations

In the Bank's 2018 Assessment, the ASX CS facilities were rated ‘observed’ or ‘broadly observed’ for all FSS, with the exception of the Operational Risk Standard (CCP Standard 16, SSF Standard 14), which was rated as ‘partly observed’ in each facility. The 2018 Assessment made recommendations for steps to be taken for the CS facilities to observe or to continue to observe various standards. Table 1 summarises actions taken by the facilities in relation to these recommendations during the assessment period.

The Bank's 2018 Assessment also identified a number of areas of supervisory focus for the current assessment period. Material developments in each of these areas are described in sections 2 and 3 (see Appendix A for a mapping of these sections to each area of supervisory focus).

1.2 2019 Assessment and Regulatory Priorities

It is the Bank's assessment that the CS facilities ‘observed’ or ‘broadly observed’ all relevant requirements under the FSS as at 30 June 2019, with the exception of the General Business Risk Standard (CCP Standard 14, SSF Standard 12), which was rated as ‘partly observed’ in each facility (Table 2).[1] On balance, the Bank has concluded that the facilities have conducted their affairs in a way that causes or promotes overall stability in the Australian financial system.[2] However, the facilities will need to place a high priority on addressing the recommendations related to general business risk. Compared to the 2018 Assessment, the Bank has raised each of the CS facilities' ratings for Operational Risk (CCP Standard 16 and SSF Standard 14) to ‘broadly observed’ and lowered each of the facilities' ratings for General Business Risk (CCP Standard 14 and SSF Standard 12) to ‘partly observed’, reflecting issues identified as part of the Bank's detailed review of ASX's legal basis (see section 3).

Table 1: Summary of Progress against 2018 Recommendations to Observe or Continue Observing the FSS
Recommendation Standard Facility Actions

Governance. The ASX CS facilities should take the following steps to strengthen their governance arrangements in line with the FSS and consistent with the CCP Resilience Guidance:

  • as part of ASX's Building Stronger Foundations program, the facilities should implement plans to more clearly define their risk appetite and embed this in business processes and decision-making throughout the organisation
  • as part of ASX's Building Stronger Foundations program, the facilities should implement plans to clarify responsibilities under ASX's three-lines-of-defence model, improve first-line risk ownership and increase resourcing for the second-line risk function
  • ASX Clear and ASX Clear (Futures) should ensure that roles and processes in relation to the governance of financial risk management are appropriately formalised and documented in order to ensure that the CS Boards have sufficient information to effectively oversee the CCPs
  • ASX Clear and ASX Clear (Futures) should ensure that their arrangements for disclosure to, and soliciting feedback from, stakeholders cover all relevant aspects of the CCPs' risk management frameworks, including margin sensitivity analysis, reverse stress testing and management of procyclicality.
CCP and SSF
Standard 2		 All facilities

Partly addressed.

ASX revised its risk appetite statement to categorise risks at a more granular level and define key risk indicators (KRIs) that quantify the Board's risk tolerance for a range of key risk metrics. ASX has started to develop business unit level KRIs to help embed the Board-defined risk appetite in its day-to-day operations.

ASX updated its Enterprise Risk Management Policy to clarify roles and responsibilities of its second-line risk function and recruited additional staff. ASX also implemented a ‘risk champion’ program to promote group-wide risk initiatives, and introduced more explicit risk management goals into its review of senior executive performance. ASX plans to continue to promote stronger first-line risk ownership in the coming assessment period.

Towards the end of the assessment period, ASX implemented a range of measures intended to formalise and document roles and processes in relation to the governance of risk management. ASX plans to conduct further work in the coming assessment period to formalise and document these roles and processes.

ASX plans to update its policy to include the disclosure and feedback requirements set out in the CCP Resilience Guidance in the coming assessment period.

CCP Resilience Guidance. To align financial risk management practices with the CCP Resilience Guidance the ASX CCPs should implement plans to:

  • enhance the comprehensiveness of stress testing to ensure risks are appropriately identified, captured and stressed
  • enhance analysis and justification of assumptions used in stress testing models so that risks are adequately captured
  • remove assumptions made by ASX Clear that customer positions will be able to be ported and that excess collateral will not be withdrawn or decreased during periods of stress to more accurately reflect the extreme but plausible conditions appropriate for stress testing.
CCP
Standards 4 and 7		 Both CCPs

Partly addressed.

The ASX CCPs established a multi-year work program to address this recommendation. Key enhancements to date include the implementation of a more comprehensive credit stress testing approach at ASX Clear (Futures) and the removal of the assumption that clients in ASX Clear could be ported in the event their clearing participant defaulted.

Intraday exposures. ASX should introduce a process for ongoing review and resizing of its margin buffer to cover potential variation margin exposures created during ASX 24's Night Session.

By 30 June 2020, ASX Clear (Futures) should put in place arrangements to be able to monitor and manage intraday exposures created during ASX 24's Night Session on a near real-time basis, or take other steps to ensure comprehensive management of intraday exposures created during ASX 24's Night Session.

CCP
Standard 6		 ASX Clear (Futures)

Partly addressed.

ASX Clear (Futures) reviewed its margin buffer to cover potential variation margin exposures created in the overnight session. ASX plans to enhance its backtesting approach to verify whether initial margin is sufficient to cover variation margin exposures during the Night Session and plans to remove the overnight margin buffer once this can be validated.

ASX Clear (Futures) implemented a risk-visualisation tool to aid monitoring and management of intraday exposures on a near real-time basis. ASX has introduced a prototype checklist to review these data against a set of risk metrics, which may then trigger a review of relevant risk management arrangements.

Liquidity add-ons. ASX Clear and ASX Clear (Futures) should complete the implementation of add-ons to manage liquidity risk for cash market products and products margined using the CME SPAN model. CCP
Standard 6		 Both CCPs

Partly addressed.

ASX Clear (Futures) has implemented plans to scale up margin requirements for larger portfolios based on estimated liquidation costs. ASX is continuing work to develop its approach to liquidity add-ons at ASX Clear.

Operational risk management. The ASX CS facilities should implement plans under ASX's Building Stronger Foundations program to:

  • consolidate and develop a consistent enterprise-wide view of systems, policies, procedures and controls to identify, monitor and manage operational risks
  • improve systems and processes supporting change management and incident management
  • enhance knowledge management and embed additional resource in order to reduce reliance on key individuals.
CCP Standard 16, SSF Standard 14 All facilities

Partly addressed.

ASX implemented the first phase of an Enterprise Risk, Internal Audit and Compliance Application intended to improve the way that it captures, consolidates and analyses operational risk data. ASX also made progress towards development of standardised risk dashboards to report key risk metrics.

ASX has performed a stocktake of key business policies, procedures and controls as well as underlying business processes to identify where improvements to documentation are necessary to provide a consistent end-to-end view of its operations.

ASX implemented the first phase of an IT service management tool to support the management of incidents and issues, and provide a centralised knowledge management functionality. ASX also increased its resourcing for first-line and second-line risk management and compliance functions in order to reduce reliance on key individuals.

Table 2: Ratings of FSS Observance(a),(b)
Standard ASX Clear ASX Clear (Futures) ASX Settlement Austraclear
CCP and SSF Standard 1: Legal Basis Observed (→) Observed (→) Observed (→) Observed (→)
CCP and SSF Standard 2: Governance Broadly observed (→) Broadly observed (→) Broadly observed (→) Broadly observed (→)
CCP and SSF Standard 3: Framework for the Comprehensive Management of Risks Observed (→) Observed (→) Observed (→) Observed (→)
CCP and SSF Standard 4: Credit Risk Broadly observed (→) Broadly observed (→) N/A N/A
CCP and SSF Standard 5: Collateral Observed (→) Observed (→) N/A N/A
CCP Standard 6: Margin Observed (→) Broadly observed (→) --- ---
CCP Standard 7 and SSF Standard 6: Liquidity Risk Broadly observed (→) Broadly observed (→) Observed (→) Observed (→)
CCP Standard 8 and SSF Standard 7: Settlement Finality Observed (→) Observed (→) Observed (→) Observed (→)
CCP Standard 9 and SSF Standard 8: Money Settlements Observed (→) Observed (→) Observed (→) Observed (→)
SSF Standard 9: Central Securities Depositories --- --- Observed (→) Observed (→)
CCP Standard 10: Physical Deliveries N/A Observed (→) --- ---
SSF Standard 10: Exchange-of-value Settlement Systems --- --- Observed (→) Observed (→)
CCP Standard 11: Exchange-of-value Settlements Observed (→) Observed (→) --- ---
CCP Standard 12 and SSF Standard 11: Participant Default Rules and Procedures Observed (→) Observed (→) Observed (→) Observed (→)
CCP Standard 13: Segregation and Portability Observed (→) Observed (→) --- ---
CCP Standard 14 and SSF Standard 12: General Business Risk Partly observed (↓↓) Partly observed (↓↓) Partly observed (↓↓) Partly observed (↓↓)
CCP Standard 15 and SSF Standard 13: Custody and Investment Risks Observed (→) Observed (→) N/A Observed (→)
CCP Standard 16 and SSF Standard 14: Operational Risk Broadly observed (↑) Broadly observed (↑) Broadly observed (↑) Broadly observed (↑)
CCP Standard 17 and SSF Standard 15: Access and Participation Requirements Observed (→) Observed (→) Observed (→) Observed (→)
CCP Standard 18 and SSF Standard 16: Tiered Participation Arrangements Observed (→) Observed (→) Observed (→) Observed (→)
CCP Standard 19 and SSF Standard 17: FMI Links Observed (→) Observed (→) Observed (→) Observed (→)
CCP Standard 20 and SSF Standard 18: Disclosure of Rules, Key Policies and Procedures, and Market Data Observed (→) Observed (→) Observed (→) Observed (→)
CCP Standard 21 and SSF Standard 19: Regulatory Reporting Observed (→) Observed (→) Observed (→) Observed (→)

(a) The arrows in brackets indicate the change in ratings from last year: a horizontal arrow indicates no change; a single vertical up arrow indicates a single upgrade (e.g. from ‘broadly observed’ to ‘observed’); a single vertical down arrow indicates a single downgrade (e.g. from ‘observed’ to ‘broadly observed’); and a double vertical down arrow indicates a downgrade by two grades (e.g. from ‘observed’ to ‘partly observed’). Green text is used for upgraded ratings and red text for downgraded ratings.
(b) ‘N/A’ means that the Bank has determined that the standard is not applicable to the ASX facility; ‘---’ means that an equivalent standard does not exist for the type of facility (e.g. for CCP Standard 6: Margin, there is no equivalent standard for SSFs).

The Bank has made recommendations that the CS facilities should address to observe or continue to observe relevant requirements in the FSS. This includes recommendations to strengthen ASX's processes for identifying and managing legal risks, strengthen the legal basis of the CS facilities' access to general business risk capital, ensure that ASX Clear provides appropriate client segregation after implementation of the CHESS replacement system, and continue to address issues identified in ASX's governance arrangements and operational risk management. These recommendations are set out in Table 3 and will be a key part of the Bank's regulatory priorities in the next assessment period.

Table 3: 2019 Recommendations to Observe or Continue Observing the FSS
Recommendation Standard Facility

Legal Basis. The ASX CS facilities should take the following steps to strengthen their legal basis:

  • ASX Clear (Futures) should take all possible steps to achieve designation as a settlement system in New Zealand and develop a procedure supporting the repatriation of New Zealand dollar (NZD) collateral
  • the ASX CCPs should implement changes to their operating rules to enhance the legal certainty of default management actions
  • the ASX CS facilities should review and update processes and procedures governing the commissioning, reviewing and updating of legal opinions
  • the ASX CS facilities should establish a periodic review, to be carried out at least every five years, of operating rules and procedures for all CS facilities to ensure they are clear and understandable and are consistent with industry standards and market protocols.

For more information, see section 3.

CCP and SSF Standard 1 All facilities

Governance. The ASX CS facilities should continue to implement plans to strengthen their governance arrangements in line with the FSS and consistent with the CCP Resilience Guidance:

  • as part of ASX's Building Stronger Foundations program, the facilities should complete implementation of plans to embed their risk appetite in business processes and decision-making throughout the organisation
  • as part of ASX's Building Stronger Foundations program, the facilities should complete implementation of plans to improve first-line risk ownership
  • ASX Clear and ASX Clear (Futures) should ensure that roles and processes in relation to the governance of financial risk management are appropriately formalised and documented in order to ensure that the CS Boards have sufficient information to effectively oversee the CCPs
  • ASX Clear and ASX Clear (Futures) should ensure that their arrangements for disclosure to, and soliciting feedback from, stakeholders cover all relevant aspects of the CCPs' risk management frameworks, including margin sensitivity analysis, reverse stress testing and management of procyclicality.

For more information, see sections 2.1.1 and 2.3.

CCP and SSF Standard 2 All facilities

CCP Resilience Guidance. To align financial risk management practices with the CCP Resilience Guidance the ASX CCPs should continue to implement plans to:

  • enhance the comprehensiveness of stress testing to ensure risks are appropriately identified, captured and stressed
  • enhance analysis and justification of assumptions used in stress testing models so that risks are adequately captured
  • remove the assumption made by ASX Clear that excess collateral will not be withdrawn or decreased during periods of stress to more accurately reflect the extreme but plausible conditions appropriate for stress testing.

For more information, see section 2.1.

CCP Standards 4 and 7 Both CCPs

Cover 2 breaches. ASX Clear and ASX Clear (Futures) should formalise thresholds for the frequency and magnitude of Cover 2 stress test breaches that would result in a recalibration of the overall default fund or additional initial margin (AIM) buffer.

For more information, see section 2.1.

CCP Standard 4 Both CCPs

Intraday exposures. By 30 June 2020, ASX Clear (Futures) should embed, review and refine its arrangements to monitor and manage intraday exposures created during ASX 24's Night Session on a near real-time basis, or take other steps to ensure comprehensive management of intraday exposures created during ASX 24's Night Session.

For more information, see section 2.1.2.

CCP Standard 6 ASX Clear (Futures)

Liquidity add-ons. ASX Clear should complete the implementation of addons to manage liquidity risk for cash market products and products margined using the CME SPAN model.

For more information, see section 2.1.2.

CCP Standard 6 ASX Clear

Inter-commodity spread concessions (ICCs). ASX Clear (Futures) should complete the review of its methodology for calibrating ICCs used in its margining model and resume reviews of ICCs on a regular basis.

For more information, see section 2.1.2.

CCP Standard 6 ASX Clear (Futures)

Segregation and portability. ASX Clear should conduct an assessment of whether the protections from arrangements utilising a commingled house/client account structure remain materially equivalent to those provided by omnibus or individual client segregation. ASX should consult with the Bank on the outcome of this assessment within 12 months of the CHESS replacement system going live.

For more information, see section 3.

CCP Standard 13 ASX Clear

General business risk. The ASX CS facilities should implement changes to the ASX Group Support Agreement to ensure that business, operational and investment risk capital is available to the CS facilities when required, including in circumstances where the financial standing of the CS facilities or the ASX Group entities holding the capital is in doubt.

For more information, see section 3.

CCP Standard 14 and SSF Standard 12 All facilities

Operational risk management. The ASX CS facilities should complete implementation of plans under ASX's Building Stronger Foundations program to:

  • consolidate and develop a consistent enterprise-wide view of systems, policies, procedures and controls to identify, monitor and manage operational risks
  • improve systems and processes supporting change management and incident management
  • enhance knowledge management in order to reduce reliance on key individuals.

For more information, see section 2.3.

CCP Standard 16, SSF Standard 14 All facilities

Risk management systems. ASX should establish a long-term plan to ensure that its core systems have the functionality to fully support its risk management approach, including migrating risk management systems currently operated on non-core systems to core systems.

For more information, see section 2.1.3.

CCP Standard 16 Both CCPs

In addition to recommendations to enable the facilities to observe or continue to observe the FSS, the Bank has identified several areas that will be an important part of its supervisory engagement with ASX in the next assessment period. These include a broader review of the ASX Group Support Agreement covering aspects outside the scope of the 2018/19 special topic assessment of the CS facilities' legal basis, and are summarised in Table 4.

Table 4: 2019/20 Areas of Supervisory Focus
Development Standard Facility
Planned work by the ASX CS facilities

Legal basis. Completion of work to enhance, formalise and document business-as-usual (BAU) controls for legal risks.

For more information, see section 3.

CCP Standard 1 and SSF Standard 1 All facilities

Settlement finality. Implementation of planned changes to operating rules for all CS facilities to clarify that changes to operating hours are exceptional and require individual justifications.

For more information, see section 3.

CCP Standard 8 and SSF Standard 7 All facilities

CCP Resilience Guidance. Implementation of ASX's plans to address gaps against the CCP Resilience Guidance that are minor but indicative of good practice in financial risk management.

For more information, see section 2.1.

CCP Standards 2, 4, 5, 6, 7 and 15 Both CCPs

Liquid resources. The implementation of the additional liquidity facility by ASX Clear.

For more information, see section 2.1.1.

CCP Standard 7 ASX Clear

CHESS replacement. The development of the new clearing and settlement system for cash market transactions, including how the new system aligns with the requirements in the FSS and supports ASX's risk management capabilities, and the clarity, effectiveness and documentation of default management processes.

For more information, see section 2.4.

CCP Standard 14 ASX Clear and ASX Settlement

Cyber resilience. Continued enhancement of ASX's cyber resilience via:

  • the implementation of actions identified in ASX's Cyber Strategy roadmap
  • ASX's evaluation of current and emerging technology that could lead to further enhancements to the abilities of ASX to recover from cyber attacks in a timely manner.

For more information, see section 2.4.

CCP Standard 16, SSF Standard 14 All facilities
Other

ASX Group support agreement. The Bank will conduct a broader review of the ASX Group Support Agreement, covering aspects outside the scope of the 2018/19 special topic assessment of the CS facilities' legal basis.

For more information, see section 3.

CCP Standard 14 and SSF Standard 12 All facilities
Collateral concentration limits. The Bank will discuss with ASX Clear its conclusion that it is not necessary to impose concentration limits for equity collateral. CCP Standard 5 ASX Clear

In addition to the recommendations and supervisory focus, the Bank expects ASX to work towards continual strengthening of its risk management arrangements. This is in accordance with the general obligation on CS facilities to do all things necessary to reduce systemic risk. ASX recognises this and has governance arrangements in place to motivate and encourage continuous improvement. As part of its ongoing supervisory engagement, the Bank will continue to discuss with ASX areas where there may be opportunities for improvement.

Footnotes

In undertaking its Assessment, the Bank has applied the rating system used in the Principles for Financial Market Infrastructures: Disclosure Framework and Assessment Methodology produced by the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions in December 2012. See Appendix C for more detail on this system. [1]

Section 821A(aa) of the Corporations Act requires that a CS facility licensee, to the extent reasonably practicable to do so, comply with the FSS and do all other things necessary to reduce systemic risk. [2]