Assessment of ASX Clearing and Settlement Facilities – October 2023 2023 Recommendations to Observe or Continue Observing the Financial Stability Standards (FSS)
The Assessment includes a number of new recommendations for the ASX Clearing and Settlement (CS) facilities to strengthen their observance of relevant FSS. All recommendations identified, or updated, in the year to 30 June 2023 are listed below. Where a recommendation was updated in 2023, but identified in previous years, the year when it was first raised is noted in italics.
Following the ASX announcement of a pause in the CHESS Replacement Program in November 2022, the Bank published a letter on 15 December 2022 (the Letter of Expectations) setting out its expectations for the current CHESS and the CHESS replacement. These expectations have been updated as appropriate to reflect developments and restated as recommendations in the Assessment, as identified in italics.
Recommendations
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.
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. (2021)
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. (2021)
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. (Letter of Expectations)
Governance: CHESS – Accountability statements. By 31 December 2023, ASX should ensure that responsibilities under the CHESS Roadmap are included in ASX accountability documentation.
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. (Letter of Expectations)
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.
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.
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.
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. (2018)
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.
Margin: Overnight variation margin. ASX Clear (Futures) should develop a long-term strategy for its overnight margin operations by December 2024. (2022, 2020)
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. (2022, 2020)
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.
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.
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.
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. (Letter of Expectations)
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.
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.
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.
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. (Letter of Expectations)
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.
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. (Letter of Expectations)
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. (Letter of Expectations)
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. (Letter of Expectations)
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. (Letter of Expectations)
Regulatory reporting. ASX should complete its FMI Data Reporting project by 31 December 2023. (2021)