Assessment of ASX Clearing and Settlement Facilities Appendix A: Summary of Progress 2022/23

Governance: Board oversight. ASX should redouble its efforts to ensure that key issues are appropriately raised with the ASX boards. By 31 March 2024, ASX should undertake a review of its board agendas, papers and minutes to ensure they enable the boards to debate and provide direction on the key issues raised in this Assessment.

For more information, see section 3.1.

Governance: Self-assessment. The CS boards should continue to require the CS Lead Executives to complete a self-assessment of compliance with the FSS on an annual basis.

For more information, see section 3.1.

Governance: Accountability framework. ASX should further strengthen and clarify lines of responsibility and accountability within its CS facilities. It should ensure that its accountability documents:

• are clear and specific, with no gaps or unintended overlaps in accountabilities, and
• articulate desired outcomes and hold executives to high standards.

ASX should complete planned testing of the accountability documents against a set of hypothetical outcome scenarios to validate their effectiveness.

For more information, see section 3.1.

Governance: CHESS replacement stakeholder engagement. ASX should actively consult stakeholders on the solution redesign, project and implementation timeline for the CHESS replacement, and disclose to the regulators and stakeholders the risks and benefits of various transition options.

For more information, see section 3.1.

ASX Clear

ASX Settlement

Governance: CHESS – Accountability statements. By 31 December 2023, ASX should ensure that responsibilities under the CHESS Roadmap are included in ASX accountability documentation.

For more information, see section 4.4.

ASX Clear

ASX Settlement

Governance: CHESS – Governance arrangements. ASX should publish its governance arrangements in relation to the current CHESS and the CHESS Replacement Program by 31 October 2023.

For more information, see section 4.4.

ASX Clear

ASX Settlement

CS Strategy documents were developed and presented to CS boards in September 2022. The strategies explicitly note that each CS facility places a high priority on the safety of the facility and promotes financial stability, with goals and current areas of focus including resilience, safe operations, robust operational performance and sound risk management. ASX plans to review the strategies annually.

In the coming assessment period, the Bank will look for ASX to embed regular reporting to the CS boards on progress against the strategic goals.

ASX Clear

ASX Settlement

ASX introduced several new or enhanced initiatives to improve stakeholder management. These include bilateral meetings between customers and the CEO, invitation of issuer representatives to the Austraclear user forum and a new industry Technical Committee for the CHESS Replacement Program. New metrics were developed to improve measurement and reporting of stakeholder sentiment.

This recommendation is closed for Austraclear and ASX Clear (Futures). However, the ASX boards need to continue their emphasis on stakeholder engagement in relation to the CHESS replacement. ASIC has recently led an initiative to establish an industry Advisory Group for strategic matters relating to cash equities clearing and settlement.

See section 3.1

Internal audit. ASX should complete its response to the recommendations made in the external review of its Internal Audit function. As part of the response, the ASX executive team and new GM IA should identify the cultural changes required to remediate the relationship between Internal Audit and the executive, while ensuring that Internal Audit remains an independent source of challenge. A plan to implement any required changes should be completed by 31 December 2023. The ASX boards and CEO must place a high priority on ensuring that the Internal Audit function is effective and appropriately supported. ASX should commission a follow-up external review by June 2024 to reassess line 3 effectiveness.

For more information, see section 3.1.

Plan to implement cultural change by 31 December 2023

External review by 30 June 2024

Credit risk: Historical scenario exclusion. ASX CS boards should review the exclusion of the historical scenarios by March 2024 and ASX management should put procedures in place to ensure proper governance processes are followed for future decisions.

For more information, see section 5.3.

Credit risk: Specific wrong way risk. ASX should introduce additional stress test scenarios to monitor and mitigate specific wrong way risks at ASX Clear by 31 December 2024.

For more information, see section 5.3.

Credit risk: Outstanding margin in stress tests. ASX should account for outstanding margin payments in its stress test calculations. ASX should present a plan and timeline to the Bank to address this recommendation by 31 December 2023.

For more information, see section 5.3.

Clearing risk policy reviews. ASX should complete all overdue key clearing risk reviews set out in the policies and standards that are rated as high and medium materiality by 30 June 2024.

For more information, see section 5.3.

During the assessment period, ASX Clear (Futures) introduced intraday credit stress testing for exchange traded products and expanded its credit stress testing scenario suite.

ASX completed a liquidity stress testing methodology review with a CCP specialist risk consultant and is expecting to commence model development in the following assessment period.

ASX is also looking to enhance its credit stress testing scenarios at ASX Clear and introduce collateral stress testing at ASX Clear (Futures) in the next assessment period.

Margin: Overnight variation margin. ASX Clear (Futures) should develop a long-term strategy for its overnight margin operations by December 2024.

For more information, see section 3.4.

Margin: ASX Clear intraday margin. ASX Clear should enhance its capacity to monitor the build-up of current exposures to participants and to make intraday margin calls to participants. ASX should provide the Bank with a detailed plan and timeline to address this recommendation by June 2024.

For more information, see section 3.4.

ASX developed an approach to ‘what-if’ margin simulation to inform potential levels of margin increases and extended the margin floor methodology to include volatility risk factors at ASX Clear (Futures).

ASX further intends to: implement ‘what-if’ margin simulation to inform potential level of prospective margin increases; enhance the measurement of procyclicality; and complete the design and implementation of a systematic procyclicality framework.

Operational risk: Ageing asset roadmap. By 31 December 2023, ASX should develop a comprehensive roadmap for the remediation of currently identified ageing assets. This roadmap should:

• include timelines and dependencies for remediation (e.g., key milestones such as business case and funding approval)
• clearly specify the prioritisation of system remediation
• include details of the key risks for assets that will reach the end of their support period or end-of-life before remediation or replacement
• include the implementation of short-term controls to mitigate these risks.

The roadmap should be approved by the ASX boards, and regular progress updates should be provided to the boards.

For more information, see section 3.3.

CCP 16

SSF 14

Operational risk: Evergreen strategy. By 30 June 2024, ASX should develop and begin implementing a long-term strategy to proactively identify ageing assets and remediate the risks before they materialise.

For more information, see section 3.3.

CCP 16

SSF 14

Operational risk: Vendor management. ASX's vendor management policy should be consistently applied for all vendor arrangements supporting the CS facilities. The outsourcing policy should be completed and applied to all outsourcing arrangements for the CS facilities.

For more information, see section 3.3.

CCP 16

SSF 14

CCP 16

SSF 14

CCP 16

SSF 14

ASX completed recommendations from an external review by KPMG of the operating effectiveness of its enterprise risk management framework. These included recommendations on risk identification, management, and reporting. One of the recommendations, relating to control testing, was partially implemented, with testing of all key controls to be completed by 30 June 2024. Implementation of the recommendations was verified by KPMG.

Enhancements were also made to the IT Service Management tool. A business-as-usual (BAU) process to ongoing enhancement has been established. All KPMG ERM recommendations have been closed. ITSM releases and enhancements are on track.

Operational risk: CHESS – Independent review recommendations. By 30 June 2024, ASX should implement the 45 recommendations from the independent review of CHESS replacement, conducted by Accenture. ASX should also ensure that any relevant steps are taken to apply lessons learnt from the external review more holistically across the enterprise.

For more information, see section 4.5.

CCP 16

SSF14

ASX Clear

ASX Settlement

Operational risk: CHESS – The CHESS Roadmap. ASX should:

• by 30 June 2024, implement a robust annual process of updating the CHESS Roadmap to ensure that all planned upgrades and material changes to the current CHESS are incorporated
• provide ASX boards and the regulators with ongoing visibility of the CHESS Roadmap, relevant risks, new deliverables and measures to ensure continued compliance with the FSS
• share the latest CHESS Roadmap with the industry at least on an annual basis
• progress and safely implement currently identified and any new deliverables, including required upgrades.

For more information, see section 4.4.

CCP 16

SSF 14

ASX Clear

ASX Settlement

Operational risk: CHESS – Capacity bottlenecks. By 31 January 2024, ASX should provide the regulators with details of the capacity bottlenecks identified during breakpoint stress tests.

For more information, see section 4.4.

CCP 16

SSF 14

ASX Clear

ASX Settlement

Operational risk: CHESS – Capacity test. By 30 June 2024, subject to the results of the breakpoint stress tests, ASX should test the effect on performance if daily trading volumes go up to 15 million (above 100 per cent headroom to the historic peak of 7 million), identify key bottlenecks, and communicate those to the ASX boards and the regulators.

For more information, see section 4.4.

CCP 16

SSF 14

ASX Clear

ASX Settlement

Operational risk: CHESS – Upgrades to comply with the FSS. ASX should identify any upgrades that are required for CHESS to comply with the FSS and communicate its plans to consult stakeholders and implement these changes in a safe and timely way. ASX is to consult stakeholders in relation to any material changes to the current CHESS and publish key details and timelines for all upgrades to CHESS.

For more information, see section 4.4.

CCP 16

SSF 14

ASX Clear

ASX Settlement

Operational risk: CHESS – Audit of the special report. By 31 December 2023, ASX should provide the Bank and ASIC with details of its progress on meeting the recommendations in the Audit Report.

For more information, see section 4.4.

CCP 16

SSF 14

ASX Clear

ASX Settlement

Operational risk: CHESS – Transition option. ASX should assess the risks and benefits of various transition options during the solution redesign phase and choose a transition option that appropriately manages the transition risks.

For more information, see section 4.5.

CCP 16

SSF 14

Operational risk: CHESS – Back-up plan. ASX should clearly communicate to regulators what their back-up plan will be in the event that the replacement system is not delivered before supportability of the current CHESS is severely compromised. The risks around the back-up plan should be appropriately identified, assessed and monitored, with appropriate controls put in place to mitigate these risks. This communication to the regulators on the back-up plan should be at the same time as communication on the solution selection decision. ASX should also clearly communicate to stakeholders what their back-up plan will be if the selected CHESS replacement solution is unable to be implemented. This communication to stakeholders should be well in advance of the current CHESS being severely compromised to ensure stakeholders have sufficient and appropriate notice to test and implement the back-up plan in a safe manner.

For more information, see section 4.5.

CCP 16

SSF 14

Operational risk: CHESS – Vendor access. ASX should provide the regulators with full and unfettered access to their new delivery partners for the CHESS Replacement Program and contractually require their delivery partners to cooperate with the regulators.

For more information, see section 4.5.

CCP 16

SSF 14

ASX Clear

ASX Settlement

Operational risk: CHESS – Implementation timeline. ASX should publish on its website its project and implementation timeline with dates for key milestones. This plan should have a new and credible go-live date for CHESS replacement.

For more information, see section 4.5.

CCP 16

SSF 14

ASX Clear

ASX Settlement

Operational risk: CHESS – Capacity and system replacement. ASX should implement the new clearing and settlement system for cash market transactions as soon as this can be safely achieved by ASX and users of CHESS. In the short term, ASX should complete work underway to increase the joint capacity of the current CHESS and CORE systems.

For more information, see section 4.4.

CCP 16

SSF 14

ASX Clear

ASX Settlement

Solution decision targeted to be announced by December 2023 and the consultation on the implementation plan to follow. The delivery plan of the replacement system may be done in a phased manner that could address the capacity issues in the current trade registration process in CHESS.

ASX envisages that it will remove dependency on CORE by end-2024 and will complete Phase 1 of capacity improvement by March 2025, after it implements the new stress testing described in section 4.^[20]

Operational risk: CHESS – CHESS replacement go-live. ASX should prepare for cutover, margin and go-live of the CHESS replacement system, including by:

• having comprehensive and effective contingency plans in place for dealing with an issue on the go-live weekend or subsequent to go-live
• successful execution of migration dress rehearsals
• effective arrangements for go-live decision-making, including ASX's compliance with relevant 2021 License Conditions.

For more information, see section 4.5.

CCP 16

SSF 14

ASX Clear

ASX Settlement

Regulatory reporting. ASX should complete its FMI Data Reporting project by 31 December 2023.

For more information, see section 3.6.

CCP 21

SSF 19

Replaces 2021-19.

ASX completed work to identify, analyse and uplift documentation of its regulatory obligations. The regulatory reporting framework was updated to clarify processes and responsibilities for reporting controls.

ASX made significant progress in uplifting its data reporting. The remaining CHESS-related data are expected to be submitted into the upgraded FMI data collection by December 2023.

Outcome: Closed.

A revised version of the accountability map was provided to the Bank in June 2023. This was updated for new senior executives and included additional detail and clarity on lines of responsibility and accountability for senior executives and other accountable persons.

Outcome: Replaced by recommendation 2023-3.

ASX has developed accountability statements for each of the executive and non-executive Accountable Person. The accountability statements were effective from 1 July 2022 and have been revised, as needed, to reflect changes in Accountable Persons and their responsibilities. ASX also introduced a reasonable steps framework whereby accountable persons are required to demonstrate that they have taken the appropriate actions to discharge their accountabilities.

Further work is required to ensure the accountability statements are sufficiently clear and specific, and articulate desired outcomes.

See section 3.1.

Outcome: Closed.

ASX published a Stakeholder Charter in August 2022. The charter articulates:

• key principles of stakeholder engagement
• the engagement framework, including key stakeholders and how we convey important information and consult with them
• the channels for feedback across stakeholder groups.

See section 3.1.

Outcome: Replaced by recommendation 2023-2.

ASX completed its first self-assessment of their compliance with the FSS in December 2022.The Bank will continue to monitor the quality of subsequent self-assessments.

See section 3.1.

Outcome: Replaced by recommendation 2023-10.

ASX completed work to justify and improve the parameterisation of its stress testing framework.

ASX should include outstanding margin obligations in its stress test results.

See section 5.3.

Outcome: Closed.

ASX Clear completed work to remove excess collateral from its stress tests.

Outcome: Closed.

ASX presented its plan to the Bank in November. In line with this plan, ASX implemented recommendations from an external review by KPMG of the operating effectiveness of its enterprise risk management framework. These include recommendations on uplifting risk culture, improving the risk management effectiveness of business areas (line 1), and ensuring the independence of the risk management function (line 2). Implementation of the recommendations was verified by KPMG.

See section 3.1.

Outcome: Closed.

ASX demonstrated that the existing flat-rate margin was sufficient to account for the mark-to-market margin approach for these securities.

See section 3.4.

Outcome: Replaced by recommendation 2023-12.

ASX investigated potential options for an Australian dollar overnight margin call. ASX identified that there were no options found to be feasible in the short term. ASX indicated it would continue the existing US dollar solution in the short term, while developing longer term improvements to the process. These improvements should consider the mitigation of credit exposures to commercial settlement banks.

See section 3.4.

Outcome: Replaced by recommendation 2023-13.

ASX identified that a scheduled intraday margin call might be feasible for ASX Clear. ASX Clear should enhance its capacity to monitor the build-up of current exposures to participants and to make intraday margin calls to participants.

See section 3.4.

Outcome: Replaced by recommendations 2023-12 and 2023-13.

ASX investigated potential options for an Australian dollar overnight margin call at ASX Clear (Futures), which could potentially also be used for margin payments to cover late-in-day price movements for both CCPs where existing payment settlement facilities are not available. ASX identified that there were no options found to be feasible in the short term. ASX Clear (Futures) will consider improvements to overnight margin (including late-in-day movements) as part of its long-term strategy.

ASX Clear identified that introducing a 2pm margin call could be feasible. Making enhancements to its intraday margin process would significantly reduce the materiality of late-in-day movements by collateralising exposures during the day.

See section 3.4.

Outcome: Closed.

An amended RITS membership agreement (and associated deed poll executed by the ASX CCPs) recognising that ASXCC was acting as trustee were executed with the RBA in November 2022.

Outcome: Replaced by recommendation 2022-2.

ASX completed its review on the need for liquidity add-ons for cash market products. The review found that existing margin parameters were sufficiently conservative to cover liquidation costs.

ASX intends to monitor concentration risks in the near-term and will consider the introduction of liquidity add-ons as part of its comprehensive review of margin methodologies (see recommendation 2022-2).

CCP 11

SSF 10

ASX Clear

ASX Settlement

Outcome: Closed.

A near final draft confirming the legal certainty of ASX's powers was provided to the Bank. The opinion will be finalised once a proposed change to the ASX Settlement Rules is in its final form.

Outcome: Replaced by 2024 special topic on ‘Segregation and Portability’.

ASX conducted an equivalence assessment of the protections afforded by the current commingled structure compared with client omnibus or individually segregated accounts and found they remain materially equivalent.

ASX also conducted a feasibility assessment which found that moving away from a commingled account structure within the existing CHESS system would not be prudently feasible.

The equivalence and feasibility assessments were in response to paragraph 7.b. of the Bank's Letter of Expectations for the current CHESS and CHESS replacement.

The Bank will consider these issues in more detail as part of the 2024 special topic on ‘Segregation and Portability’.

See section 3.5.

CCP 16

SSF 14

ASX Clear

ASX Settlement

Outcome: Closed.

An overarching assurance program over all of the CHESS workstreams has been established and an experienced assurance program director is in place. Regular updates have been provided to the Bank.

Outcome: Closed.

ASX introduced a number of new or enhanced initiatives to improve stakeholder management. These include bilateral meetings between customers and the CEO, invitation of issuer representatives to the Austraclear user forum and a new industry Technical Committee for the CHESS Replacement Program.

ASX updated its risk management system (ERMF) to include greater focus on stakeholder management. New metrics were developed to improve measurement and reporting of stakeholder sentiment.

CCP 16

SSF 14

ASX Clear

ASX Settlement

Outcome: Replaced by recommendation 2023-18.

The Digital Asset (DA) agreement was terminated following the findings of the independent review of CHESS Replacement, conducted by Accenture.

CCP 21

SSF 19

Outcome: Replaced by recommendation 2023-27.

ASX completed work to identify, analyse and uplift documentation of its regulatory obligations. The regulatory reporting framework was updated to clarify processes and responsibilities for reporting controls.

ASX made significant progress in uplifting its data reporting. The remaining CHESS-related data are expected to be submitted into the upgraded FMI data collection by December 2023.

CCP/SSF 4

SSF 10

SSF 9

CCP 17, SSF 15

All

Austraclear

Austraclear

All

CCP 1, 2, 16

SSF 1, 2, 9, 14

ASX Clear

ASX Settlement

CCP 16

SSF 14

During the assessment period, ASX delivered several cyber resilience uplift initiatives identified in its Cyber Strategy. ASX has also continued the implementation and embedding of its cyber assurance and testing program. ASX engaged with the government on industry-wide initiatives, analysing the potential impact of cyber threats and known vulnerabilities on its environment and any implications for its security posture.

ASX continued to consider technologies to support its ability to recover operations safely within two hours following an extreme cyber-attack.

CCP 1, 14

SSF 12