Assessment of ASX Clearing and Settlement Facilities Executive Summary

Purpose In accordance with its responsibilities under the Corporations Act 2001, the Reserve Bank of Australia (the Bank) presents its annual Assessment of the ASX clearing and settlement (CS) facilities. ASX operates four CS facilities: two central counterparties (CCPs) – ASX Clear Pty Limited and ASX Clear (Futures) Pty Limited – and two securities settlement facilities (SSFs) – ASX Settlement Pty Limited and Austraclear Pty Limited. The report details the CCPs' and SSFs' compliance with the Bank's Financial Stability Standards for Central Counterparties (CCP Standards) and Financial Stability Standards for Securities Settlement Facilities (SSF Standards) (together, the Financial Stability Standards or FSS), as well as the facilities' more general obligation to do all other things necessary to reduce systemic risk. The assessment is as at the end of June 2020; however, where relevant, developments after this time are discussed.
Conclusion It is the Bank's assessment that the CS facilities ‘observed’ or ‘broadly observed’ all relevant requirements under the FSS as at 30 June, with the exception of the Margin Standard (CCP Standard 6), which was rated as ‘partly observed’ in ASX Clear (Futures), and the Operational Risk Standard (CCP Standard 16, SSF Standard 14), which was rated as ‘partly observed’ in ASX Clear and ASX Settlement. 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. However, ASX will need to place a high priority on addressing recommendations related to margin at ASX Clear (Futures) and operational risk at ASX Clear and ASX Settlement.
Progress towards previous priorities

ASX has made progress against the Bank's regulatory priorities identified in its 2019 Assessment report:

  • General business risk. ASX has transferred business, operational and investment risk capital to be held directly by the CS facilities to address the risk that the CS facilities are unable to access this capital when required. However, further work is required to mitigate the risk of potential shortfalls in the CCPs' investment risk capital and to formalise the approach to SSF business and operational risk capital.
  • Governance and operational risk management. ASX has substantively completed implementation of the recommendations of an external review of its operational risk management and technology governance carried out in 2018 at the instigation of the Bank and the Australian Securities and Investments Commission (ASIC).
  • Cover 2 breaches. The ASX CCPs have formalised their risk appetite for the frequency and magnitude of Cover 2 stress test breaches.
  • Legal basis. ASX implemented changes to CCP operating rules to enhance the legal certainty of default management actions, and has taken steps to support the repatriation of New Zealand dollar (NZD) collateral in the event of a clearing participant default and seek designation as a settlement system in New Zealand.
Other material developments

Other material developments relevant to the supervision of the ASX CS facilities that occurred during the assessment period include:

  • COVID-19 response. ASX has responded to the significant operational and financial risk management challenges presented by the COVID-19 pandemic. The facilities performed very well in most respects during a time of heightened volatility, although some areas of vulnerability in more extreme stress scenarios have been identified.
  • Clearing House Electronic Sub-register System (CHESS) replacement. ASX continued its work on replacing CHESS, its core system for clearing, settlement and other post-trade services for the Australian cash equities market. ASX consulted on an extension of the timeline of the CHESS replacement project to April 2022.
Priorities for the next assessment period

The Assessment includes recommendations aimed at enabling the ASX CS facilities to either observe or continue to observe the requirements under particular FSS. These recommendations relate to areas such as :

  • addressing constraints to the processing capacity of CHESS and implementing the CHESS replacement system
  • managing the risks associated with large, late-in-day price movements
  • developing a systematic framework to address the risk of destabilising increases in margin and other financial risk requirements during volatile periods
  • enhancing default management and recovery arrangements
  • aligning financial risk management practices and governance arrangements with international guidance on CCP resilience.

The Assessment also identifies areas that will be an important part of the Bank's supervisory engagement with ASX over the next assessment period. These include:

  • a deep-dive assessment by the Bank of the governance arrangements of the ASX CS facilities
  • discussing with ASX whether its CCP stress test scenarios are appropriately calibrated to cover losses in ‘extreme but plausible’ market conditions.