Assessment of ASX Clearing and Settlement Facilities – September 2019 List of tables

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.

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.

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.

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.

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.

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.

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 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.

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.

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.

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.

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.

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.

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.

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.

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.

The CS facility should be in a legal entity that is not exposed to risks unrelated to those that arise from clearing or settlement.

If assets held to cover the CS facility's general business risks are not held by the facility itself, the facility should have legally certain arrangements in place that guarantee access to liquid net assets held by a related entity.

The legal basis of a CS facility should clearly define the rights and interests of a CS facility, its participants and, where relevant, its participants' customers in the assets held in custody, directly or indirectly, by the CS facility, including:

• interests in, and rights to use and dispose of, collateral (including cross-border collateral)
• authority to transfer ownership rights or property interests
• rights to make and receive payments, in all cases, notwithstanding the bankruptcy or insolvency of its participants, participants' customers, or a custodian bank
• establishing that claims against collateral provided to it by a participant should have priority over all other claims, and the claims of the participant to that same collateral should have priority over the claims of third-party creditors.

A CCP should have segregation and portability arrangements that effectively protect a participant's customers' positions and collateral from the default or insolvency of that participant, and disclose any legal or operational constraints that may impair such arrangements.

An SSF operating a central securities depository should have appropriate rules, procedures and controls to safeguard the rights of securities issuers and holders and ensure that, to the extent permissible by law, the creditors of the SSF have no claim over securities deposited or registered by participants.

There should be a clear legal basis regarding the timing of final settlement of a CS facility's obligations, including the point at which transactions are irrevocable. Similarly, netting arrangements and, for CCPs, novation arrangements should be legally certain.

A CCP's rules, policies and procedures should clearly identify the point in the clearing process at which the CCP assumes the risk exposure and the nature and scope of that exposure.