Assessment of ASX Clearing and Settlement Facilities – September 2019 Appendix C1. Financial Stability Standards for Central Counterparties

Standard 2: Governance

A central counterparty should have governance arrangements that are clear and transparent, promote the safety of the central counterparty, and support the stability of the broader financial system, other relevant public interest considerations, and the objectives of relevant stakeholders.

ASX Clear ASX Clear (Futures)
Broadly observed Broadly observed

2.1 A central counterparty should have objectives that place a high priority on the safety of the central counterparty and explicitly support the stability of the financial system and other relevant public interest considerations.

The high-level objectives of the ASX CCPs are set out in the CS Boards' Charter, which is available on the ASX public website. The objectives prioritise the boards' responsibilities in the area of risk management and, in particular, the ASX CCPs' responsibility for complying with relevant financial stability standards (FSS).

The ASX CCPs' objectives recognise the public interest. These objectives are reflected in the ASX Limited Board Charter, which provides that the Board has a responsibility to oversee the conduct of the ASX Group consistent with licence obligations, as well as public policy objectives directed at financial market and payments system integrity. The CS Boards' Charter also specifically acknowledges the boards' public interest responsibilities, as well as the CCPs' obligations under Part 7.3 of the Corporations Act. These include that the ASX CCPs, to the extent that it is reasonably practicable to do so, comply with relevant FSS and do all other things necessary to reduce systemic risk arising from their services, and that they provide their services in a fair and effective way. The CS Boards' Charter also notes that ASX's Cash Equities Clearing and Settlement Code of Practice reflects its commitment to comply with the Council of Financial Regulators' (CFR) Regulatory Expectations for the Conduct of Cash Equity Clearing and Settlement Services in Australia.[8]

To support the interests of its customers, ASX maintains a customer charter, which is referenced in the CS Boards' Charter and is available on the ASX public website.[9] The ASX customer charter establishes commitments that ASX: works with its customers to deliver products and services that meet their needs and provide them with choice; makes its products and services available on a non-discriminatory basis and on reasonable commercial terms; and manages its businesses and operations on a commercial basis to benefit its customers and provide appropriate returns to ASX shareholders. The ASX customer charter recognises ASX's role as a provider of critical infrastructure to the Australian financial markets and commits to making the necessary investments to ensure that it can fulfil this role and provide confidence to market participants, investors and regulators.

The ASX CCPs' governance arrangements allow for consideration of stakeholder views. When considering new services or major operational or risk management changes, ASX uses stakeholder forums and other formal and informal consultation processes to communicate proposed changes to relevant stakeholders (see CCP Standard 2.8). Consultations and non-confidential responses to consultations are made available on the ASX public website. In addition, the ASX Group has disclosure obligations under the Corporations Act and ASX Listing Rules, which it manages in accordance with those laws and rules.

2.2 A central counterparty should have documented governance arrangements that provide clear and direct lines of responsibility and accountability. These arrangements should be disclosed to owners, the Reserve Bank and other relevant authorities, participants and, at a more general level, the public.

The governance arrangements of ASX Clear and ASX Clear (Futures) are documented on the ASX public website. This documentation includes the charters of the ASX Limited Board, the CS Boards (which include the ASX Clear Board and the ASX Clear (Futures) Board), and board committees. The charters provide information about the role and composition of the CS Boards and board committees. The CS Boards are responsible for the oversight and risk management of the ASX CS facilities (see CCP Standard 2.3). The board committees advise the ASX Limited Board on a number of matters.

  • The Audit and Risk Committee is responsible for the oversight of ASX Group enterprise-wide risk. The committee monitors ASX's financial management, internal controls, audit function and legal compliance, and assists the CS Boards in fulfilling their responsibility for the oversight of risk management of the ASX CS facilities.
  • The Remuneration Committee oversees the remuneration and incentive framework for the Managing Director and Chief Executive Officer (CEO), non-executive directors, senior executives, and ASX staff more generally (see CCP Standard 2.5).
  • The Nomination Committee is responsible for reviewing matters relating to board composition and performance, succession planning, and training for non-executive board members (see CCP Standard 2.4).

The charters also provide information about the key senior managers of the CCPs, including the Managing Director and CEO, and the Chief Risk Officer (CRO). Profiles of CS facility directors are also publicly available online. Key governance policies and charters are reviewed regularly by the relevant boards and committees. Each of the charters of ASX Limited and the CS Boards are reviewed and approved by the respective board on an annual basis.

The ASX Limited Annual Report provides information about ASX Group's risk management arrangements, including the roles of boards, key committees, key subsidiary boards (including the CS Boards), and the roles of Group Executives who report directly to the Managing Director and CEO. Explanatory documentation on the ASX website also describes: the FSS and the Principles; group and business structure, including biographies of Group Executives; and risk management policies (in summary form). ASX's response to the CPMI-IOSCO Disclosure Framework also summarises key governance and risk management arrangements (see CCP Standard 20.5).

Under the Corporations Act, ASX must notify ASIC as soon as practicable after a person becomes or ceases to be a director, secretary or senior manager of the ASX CCPs, including when a person changes from one of those positions to another. Changes to these positions and senior risk management personnel are also notified to the Bank.

During the previous assessment period, an independent external review of ASX's technology governance, operational risk and control frameworks identified that ASX's three lines of defence model for risk management, in particular the risk management and compliance functions for operations and technology, had been under-resourced and lacked clarity regarding roles and responsibilities for risk activities across the organisation. During the assessment period, ASX strengthened its three lines of defence model by updating its Risk Appetite Statement and Enterprise Risk Policy, recruiting additional risk management and compliance staff particularly for operations and technology, and educating staff on their roles in the three lines of defence model through the introduction of new training programs and by nominating risk champions (see section 2.3). ASX has also consolidated its documentation of the governance arrangements describing the direct lines of responsibility and accountability during the assessment period.

2.3 The roles and responsibilities of a central counterparty's board of directors (or equivalent) should be clearly specified, and there should be documented procedures for its functioning, including procedures to identify, address and manage member conflicts of interest. The board should regularly review both its overall performance and the performance of its individual board members.

Ultimate responsibility for the oversight of risks faced by ASX Clear and ASX Clear (Futures) lies with the ASX Limited Board and each CCP's respective board. The ASX Limited Board is accountable for the overall management of the ASX Group. Its responsibilities include:

  • reviewing the Group's corporate strategy and approving major initiatives
  • overseeing and monitoring the ASX Group's performance consistent with its strategic goals, licence obligations and public policy objectives
  • reviewing and approving financial plans, and monitoring financial performance
  • appointing and assessing the performance of the Managing Director and CEO
  • overseeing the risk management, internal control and compliance functions, including the implementation of ASX's Enterprise Risk Management Policy
  • ensuring that appropriate mechanisms are in place for identifying, controlling, monitoring and reporting significant risks
  • reporting to, and communicating with, shareholders.

The ASX Limited Board Charter describes the responsibilities of the CS boards. The CS Boards provide oversight of the clearing and settlement operations of the CS subsidiaries, including the management of clearing risk. The CS Boards are responsible for, among other matters, overseeing the adequacy of management, systems and processes, and culture to achieve ongoing compliance with the FSS. The CS Boards' Charter elaborates on the roles and responsibilities of the ASX Clear and ASX Clear (Futures) boards. The CS Boards' Charter places requirements on the structure of the CS Boards, including that the majority of directors and the Chair be independent. The ASX Clear and ASX Clear (Futures) boards (the Clearing Boards) meet regularly and receive detailed reports on each CCP's business and operations, risk management and financial performance. During the assessment period, the ASX Clear Board and the ASX Clear (Futures) Board each had ten formal meetings. In addition, the directors of ASX Clear who are not also directors of ASX Limited met three times to consider conflict-sensitive matters.

Board performance is reviewed periodically by the relevant board. The process may be facilitated by external independent consultants. A number of tools may be used, including skills matrices and surveys, and externally facilitated group discussions. Details of board performance reviews are set out in the ASX Limited Annual Report (the same process applies for the key subsidiary boards).

The CS Boards' Charter sets out how the boards address directors' interests and potential conflicts. Directors of the CS Boards must disclose all material personal interests (such as shareholdings, directorships and consultancy arrangements) which may potentially conflict with their duties. If there is a change in a director's material personal interests, the director must notify that change at the next meeting of the CS Boards. If there is a real possibility of a material conflict of interest and duty on a matter being voted on at a meeting of the CS Boards, the director must not be present for the discussion or vote related to that matter.

2.4 The board should comprise suitable members with the appropriate skills and incentives to fulfil its multiple roles. This typically requires the inclusion of non-executive board member(s).

At the end of the assessment period:

  • the ASX Limited Board had ten members, comprising the Chairman, the Managing Director and CEO, and eight non-executive directors
  • the ASX Clear Board comprised one executive director (the ASX Managing Director and CEO) and five independent non-executive directors, two of whom were members of the ASX Limited Board
  • the ASX Clear (Futures) Board comprised one executive director (the ASX Managing Director and CEO) and seven independent non-executive directors, four of whom were members of the ASX Limited Board.

There are five directors who serve on all four CS Boards; one additional director serves on both the ASX Clear and ASX Settlement boards and three additional directors serve on both the ASX Clear (Futures) and Austraclear boards. The differences between the composition of the CS Boards, and between the CS Boards and ASX Limited, are primarily for business reasons, but also support ASX's conflict handling arrangements (see CCP Standard 2.9).

As set out in the CS Boards' Charter, directors of the CS facilities are appointed by the relevant CS Boards with input from the Nomination Committee. In addition, the ASX Limited Board may appoint or remove directors from the CS Boards. Directors are selected based on relevant skills and expertise. Two of the non-executive directors of ASX Clear and four of the non-executive directors of ASX Clear (Futures) are also members of the ASX Limited Board, while the remaining three are external directors appointed for their expertise in clearing and settlement operational and risk management matters. This helps to ensure that directors have the capacity to conduct informed independent review of relevant issues. The directors of ASX Clear and ASX Clear (Futures) have experience in senior roles across a range of financial sectors globally, including international banking, asset management, and financial, derivatives and capital markets.

The CS Boards' Charter sets out the ASX policy that the majority of directors on each CS board must be independent. The Board Policy and Guideline to Relationships Affecting Independent Status is available on the ASX website.[10] The independence of directors is assessed according to this policy, which is aligned to the ASX Corporate Governance Council's Corporate Governance Principles and Recommendations for listed companies. Each board considers whether directors are free of business or other relationships that could materially interfere with, or could reasonably be perceived to interfere with, the independent exercise of the director's judgement. The biographies of the directors, which show their relationship with other ASX Group companies, are set out on the ASX website.[11]

Selection, succession planning and training for board members are matters that are addressed by the Nomination Committee and boards at appropriate intervals. New directors receive a comprehensive induction co-ordinated by the Company Secretariat. The boards also receive regular briefings at board meetings, workshops, customer engagement meetings and site visits. This helps to ensure that directors are kept informed of relevant market and industry developments, and assists in developing the skills and technical knowledge of the boards.

Directors' fees at ASX Limited, ASX Clear and ASX Clear (Futures) are considered at regular intervals by the ASX Limited Remuneration Committee. ASX's fee structure is designed to assist it in attracting and retaining appropriately skilled and qualified non-executive directors and recognises the workload and level of skill and expertise that a director must have to effectively meet their responsibilities. Remuneration of directors is determined by the ASX Limited Board on the recommendation of the Remuneration Committee. In conducting a review, the ASX Limited Board may take advice from an external remuneration consultant. The process involves benchmarking against a group of peer companies. ASX's fee structure for ASX Limited non-executive director remuneration comprises a single base fee (plus superannuation) in respect of a director's appointment to the ASX Limited Board and any committee or subsidiary boards (including the CS Boards). Additional chair fees apply for non-executive directors who serve as chair of a board or committee.

2.5 The roles and responsibilities of management should be clearly specified. A central counterparty's management should have the appropriate experience, mix of skills and integrity necessary to effectively discharge its responsibilities for the operation and risk management of the central counterparty. Compensation arrangements should be structured in such a way as to promote the soundness and effectiveness of risk management.

ASX has clear and direct reporting lines between management and the CS Boards. These are set out in the CS Boards' Charter, along with the roles and responsibilities of the Managing Director and CEO, Chief Operating Officer (COO) and the CRO.

In the normal course, the Managing Director and CEO has responsibility for the overall operational and business management and profit performance of ASX, while the CRO has responsibility for the overall clearing risk management of the ASX CS facilities and for ensuring that CS facility licence obligations are met. The COO is also responsible for the delivery of overall operations of the ASX Group and reports directly to the CEO, as does the CRO. The Chief Information Officer (CIO) and Executive General Manager, Operations report to the COO. Both COO and CRO have a direct reporting line to the CS Boards and are entitled to attend and be heard at CS Board meetings. The CRO and COO are invited to attend and present at meetings of the ASX Limited Board and Audit and Risk Committee.

ASX has a remuneration policy and performance management framework in place, which aims to ensure that management personnel have an appropriate mix of skills and experience to discharge their responsibilities. The ASX Limited Remuneration Committee has delegated responsibility from the ASX Limited Board to conduct detailed examination of certain matters under ASX's remuneration and incentive framework, including succession plans, recruitment and retention strategies. The committee also reviews the remuneration arrangements of the ASX Group directors and the remuneration and incentive framework for all ASX staff, including the Managing Director and CEO, the Deputy CEO, Group Executives and General Managers. The committee members are appointed by the ASX Limited Board, and must consist of at least three members, a majority of whom must be independent non-executive directors, and an independent chair who is not the Chairman of ASX Limited. The committee has direct access to ASX senior management and the authority to seek independent advice. The CS Boards have delegated responsibility to the committee for compensation arrangements and performance management processes relating to the CRO and COO. The CS Boards provide input on the setting of key performance indicators and may review the performance outcomes for these positions.

ASX carries out succession planning and management processes in order to promote leadership continuity in key positions, and develop intellectual depth and business knowledge. This includes the periodic review of a ‘talent assessment tool’ by Group Executives and Human Resources to identify and manage the development of high potential staff according to individual and business needs. Succession and contingency planning is conducted for Group Executives, General Managers and other key staff.

2.6 The board should establish a clear, documented risk management framework that includes the central counterparty's risk tolerance policy, assigns responsibilities and accountability for risk decisions, and addresses decision-making in crises and emergencies. Governance arrangements should ensure that the risk management and internal control functions have sufficient authority, independence, resources and access to the board, including through the maintenance of a separate and independent internal audit function.

ASX has a documented risk management framework, which is described under CCP Standard 3.1. The ASX Limited Board has established a group-wide risk appetite statement, which was substantially revised during the assessment period. The revisions were made in response to the 2017-18 external review of technology governance, operational risk and controls finding that the previous risk appetite statement lacked the level of detail required to be an effective decision-making tool. The updated risk appetite statement adopts more granular risk categories, increasing the number of categories from two to seven and is accompanied by a set of key risk indicators (KRIs) that set quantitative thresholds defining ASX's risk tolerance in each risk category.

The CS Boards are responsible for the management of CS licensees within the ASX risk appetite and operational tolerances set by the ASX Limited Board. The CS Boards are also responsible for approving and reviewing high-level risk management policies relevant to clearing and settlement operations. The boards have oversight of all new clearing and settlement risk policies and standards, as well as material changes to existing clearing and settlement policies and standards. Each board considers these policies and standards in accordance with its respective obligations. Board feedback is incorporated before risk policies and standards are approved.

Responsibilities under the high-level risk management policy relevant to CCP risk are distributed as follows.

  • Key policies and standards under ASX's Clearing Risk Policy Framework, such as margin policy, stress test standards and investment mandates, are reviewed by the CS Boards on an annual basis. Reporting to the CS Boards occurs quarterly on the operation of the CCPs and their compliance with risk management policies and standards, and on broader management and operational matters. Internal Audit conducts a rotational risk-based independent audit program (see CCP Standard 2.7); this includes review of whether relevant operational functions comply with board-approved policies and standards, where necessary using external specialists to assist with reviews. The CS Boards may also request external reviews.
  • The Audit and Risk Committee has responsibility for the oversight of the Enterprise Risk Management Framework.
  • The Risk Committee is a senior management committee responsible for managing the framework associated with risk management of the ASX Group. The committee is chaired by the CRO, who exercises delegated authority from the CEO. The CRO is the sole decision-maker on the committee and the remaining committee members may provide recommendations to assist the CRO in making decisions.
  • The Regulatory Committee is a senior management committee responsible for managing the processes associated with the development of ASX policies in relation to the licensed entities in the ASX Group, including the CS facilities. The committee is chaired by the ASX Group General Counsel and Company Secretary.
  • The Technology, Operations and Security Committee is a senior management committee chaired by the COO. The primary responsibility of the committee is to oversee ASX's technology, operations and security strategies, and the investments that support such strategies. The COO is the sole decision-maker on the committee and the remaining committee members may provide recommendations to assist the COO in making decisions.
  • Individual functions are responsible for: identifying business-specific risks; applying controls; maintaining risk management systems; reporting on the effectiveness of risk controls; and implementing enhancements and taking remedial action as appropriate. Each function is required to maintain a record of its risk profile, reviewing this on a six-monthly basis and updating as appropriate. This record includes KRIs and action plans to address any identified risk that is not adequately mitigated. During the assessment period, the Technology, Operations and Clearing Risk functions also defined business-unit level KRIs through a separate process as part of the Building Stronger Foundations program, which ASX has aligned to the Board KRIs defined in its RAS. During the next assessment period, ASX plans to develop business-unit level KRIs for remaining business units. The new KRIs will be aligned with the business-unit level KRIs defined through ASX's annual risk profiling exercise. Documented policies and standards specify requirements for periodic formal review of the business unit risk profile and KRIs. More frequent reviews are undertaken where there are potential changes to technology, legal or regulatory requirements, or business drivers.

The CRO has a direct reporting line to the CS Boards. Within ASX's management structure, the functions primarily responsible for CCP financial risk management report to the CRO, who, in the normal course, in turn reports directly to the CEO. None of the functions within the CRO's portfolio have a primary revenue or profit objective (see CCP Standard 2.5). There are two teams with primary responsibility for CCP financial risk management: Clearing Risk Quantification and Development (CRQD), and Clearing Risk Policy and Management (CRPM). The CRO has a separate team for managing enterprise risk (see ‘ASX Group Structure’ in Appendix B.1). In addition, ASX maintains working groups that discuss matters relevant to financial risk management (see CCP Standard 3.1).

Directors are entitled to obtain independent advice. The ASX Limited Annual Report addresses directors' access to information, management and advice. To the extent that directors wish to seek independent advice, they can raise this in board meetings, with the Managing Director and CEO, or with the Chairman. The participant Risk Consultative Committees (RCCs) (see CCP Standard 2.8) also provide advice to the ASX Clear and ASX Clear (Futures) boards on risk management matters, consistent with the Bank's supplementary interpretation of this sub-standard (see introduction to Appendix C). ASX Clear also obtains participant feedback on risk management matters through a number of other channels, including the Business Committee and an Advisory User Group for matters relating to exchange-traded options (ETOs).

Model validation

The Clearing Boards regularly review and discuss with management matters of risk policy, including changes to margin and stress test methodologies.

ASX has developed a framework for model validation, set out in its Model Validation Standard. This framework identifies models to be validated, defines what constitutes ‘model validation’, describes the model validation approach to be applied to the identified models, and specifies model validation governance arrangements. Key models at the CCPs include the capital stress-testing model, liquidity stress-testing model, CME SPAN margin model, the OTC interest rate derivatives (IRD) Filtered Historical Simulation Value at Risk (FHSVaR) model for OTC derivatives, and CMM (ASX Clear only). Oversight of these models, model validation strategy and the model validation framework is provided by the Risk Quantification Working Group (RQWG) in the first instance, which is responsible for recommending changes to the CRO, Risk Committee or CS Boards, depending on the materiality of the change.

ASX amended its Model Validation Standard during the assessment period, in order to clarify the roles of the Clearing Risk and Internal Audit functions in model validation, provide more detail on the key objectives of the model validation framework and formalise documentation of governance arrangements for model validation, including the role of the CS Boards, Audit and Risk Committee, and Risk Committee in the review of model validation findings. ASX has engaged an independent third-party for model validations, which will validate all clearing risk models over a three-year period under the oversight of ASX Internal Audit. The scope of ASX's model validation includes evaluation of conceptual soundness, verification of model processes and benchmarking, and ongoing analysis of model outcomes such as backtesting (see CCP Standards 4.5, 4.6, 5.3, 6.5, 6.6 and 7.8). The ASX CCPs' approach to independent model validation is discussed in more detail under CCP Standards 4.5 and 6.7.

2.7 A central counterparty's operations, risk management processes, internal control mechanisms and accounts should be subject to internal audit and, where appropriate, periodic external independent expert review. Internal audits should be performed, at a minimum, on an annual basis. The outcome of internal audits and external reviews should be notified to the Reserve Bank and other relevant authorities.

ASX maintains an internal audit plan that provides for a three-to-five-year review cycle of key operational and risk management processes, and internal control mechanisms that are governed by ASX's enterprise risk management framework, business continuity framework and enterprise compliance framework, using the internal audit methodology. The internal audit plan is approved by the ASX Limited Audit and Risk Committee, and those aspects of the audit plan that are relevant to the CS Boards are approved by those boards. ASX's internal audit arrangements are set out in the Internal Audit Charter, which is reviewed and approved by the ASX Limited Audit and Risk Committee every two years and made available on the ASX public website.

The internal audit function operates independently of other functions within ASX's Risk Group. Its principal objective is to ‘provide independent, objective assurance and advisory activity designed to add value and improve the operations of ASX’. Its scope covers the policies, processes and procedures of all risk management and internal control systems. Internal Audit also has reporting lines to the Audit and Risk Committee and Managing Director and CEO for audit purposes, and to the CRO for administrative purposes. Internal Audit also has reporting lines to the CS Boards for matters relating to the CS facilities. If a potential conflict arises between Internal Audit and the CRO, Internal Audit would use the reporting lines to the Managing Director and CEO, Audit and Risk Committee or the CS Boards.

The role and performance of the internal audit function is regularly reviewed by the ASX Limited Audit and Risk Committee. Internal Audit is also reviewed by external independent auditors on a three-year cycle. Following the external review of technology governance and operational risk and control frameworks in late 2017, the next audit will be aligned to the timeline for enhancing ASX's three lines of defence model, and is planned for 2019/20. The last audit, conducted in October/November 2014, concluded that Internal Audit was appropriately carrying out its role as the key provider of assurance services within ASX, and was operating in accordance with the International Standards for the Professional Practice of Internal Auditing. The performance of the General Manager, Internal Audit is also assessed each year by the Audit and Risk Committee.

ASX has a clearly defined methodology for internal audit, based on the International Professional Practices Framework set out by the Institute of Internal Auditors.[12] The internal audit methodology allows for ad hoc reviews if, for example, material new risks are identified or other changes to ASX's business occur. This is a matter which the General Manager, Internal Audit and the Audit and Risk Committee consider. The CS Boards may also request ad hoc reviews.

During the previous assessment period, the Bank was notified of findings from internal audit reports and external reviews, including the external review of ASX's technology governance and operational risk and controls. The reviews identified a number of weaknesses, including that information provided to executive and board forums was often in summarised form that lacked detailed analysis, and that there was limited formal sharing of information across the risk governance structure. ASX has previously made changes to its management committee structure and arrangements for Board meetings designed to address these concerns (see SSF Standard 2.6). During the assessment period, ASX also progressed its implementation of a new governance, risk and compliance system. Once use of the system is embedded, it will provide an enterprise-wide view of risk and compliance information, supporting enhancements in the analysis of this information presented to executive and board forums.

2.8 Governance arrangements should ensure that the central counterparty's design, rules, overall strategy and major decisions reflect appropriately the legitimate interests of its direct and indirect participants and other relevant stakeholders. Governance arrangements should provide for consultation and stakeholder engagement through appropriate forums on operational arrangements, risk controls and default management rules and procedures. Major decisions should be clearly disclosed to relevant stakeholders and, where there is a broad market impact, the public.

The interests of direct and indirect participants and other relevant stakeholders are recognised in the ASX Limited Board Charter, the CS Boards' Charter and the ASX Customer Charter (see CCP Standard 2.1).

The views of participants and other stakeholders are sought through formal and informal means. ASX routinely conducts public consultations when considering major changes to existing services or new service offerings. These consultations allow for written submissions and discussion in both bilateral and open forums. Participants' views may also be gathered through the induction program for new participants, as well as ongoing participant liaison and compliance checks.

ASX Clear also maintains several standing forums for participant consultation.

  • The ASX Clear RCC, comprising of representatives from nine participants and their clients, is a self-governing body chaired by an elected member. The RCC is consulted on material changes to default management processes, the margining methodology, the default fund, position and liquidity limits, participation criteria, and other changes affecting ASX Clear's risk management practices or related rules. The RCC's proposals and recommendations are incorporated in papers presented to the ASX Clear Board. While the board is not obliged to accept the RCC's proposals or recommendations, it is required to provide reasons for any decision not to do so. During the assessment period, the RCC discussed a range of issues including: the Bank's 2018 assessment of ASX against the FSS; the CHESS replacement consultation; changes to porting assumptions in the credit stress testing model; corrections to the methodology for determining Cover 2 compliance; and changes to the margin period of risk (MPOR) for cash market margining.
  • The Business Committee is a stakeholder consultative group for ASX's cash market clearing and settlement services, established under the Code of Practice for Clearing and Settlement of Cash Equities in Australia (the Code of Practice). The Business Committee comprises representatives of a broad range of cash market clearing participants, settlement participants, AMOs, issuer registries and industry associations representing relevant stakeholders. The key objective of the Business Committee is to provide user input to the boards of ASX Clear and ASX Settlement on the design, operation and development of the clearing and settlement services and infrastructure for the Australian cash equity market, and provide a formal mechanism for ASX Clear and ASX Settlement to consult users on their strategic plans and investment decisions in relation to these services. The Business Committee's proposals and recommendations are presented to the ASX Clear and ASX Settlement boards for consideration. Although the boards are not obliged to accept the Business Committee's advice, they are required to provide reasons for any decision not to do so. Where it considers it appropriate, the Business Committee can appoint a Technical Committee to assist with the performance of its duties. During the assessment period, the Business Committee discussed a range of initiatives, including: the CHESS Replacement project; the performance of ASX's cash market clearing and settlement service performance; ASX's technology governance and operational risk management; and regulatory matters.
  • ASX Clear seeks participant feedback on matters relating to ETOs through an ETO Advisory User Group, as well as regular engagement with the ETO subcommittee of the Stockbrokers Association of Australia. The ETO Advisory User Group, representing participants, clients and financial advisers, is a forum for participants to advise ASX on the developments of the ETO market, and provides a forum for broader user feedback, including on risk management matters.

Similarly, ASX Clear (Futures) also maintains several standing structures for participant consultation.

  • The ASX Clear (Futures) RCC, comprising representatives from 19 futures and OTC participants, is a self-governing body chaired by an elected member. Client representatives must have held an individual client account for at least six months and have a margin requirement of at least $2 million at the time of selection; currently there are no client representatives on the committee. The RCC is consulted by ASX on material changes to default management processes, the margining methodology, the default fund, position or liquidity limits, participation criteria, new products, and other changes affecting ASX Clear (Futures)' risk management practices or related rules. The RCC's proposals and recommendations are incorporated in papers presented to the ASX Clear (Futures) Board, which is not obliged to accept the RCC's advice but is required to provide reasons for any decision not to follow such advice. During the assessment period, the Risk Consultative Committee discussed a range of issues including: the Bank's 2018 assessment of ASX against the FSS; the risk management of electricity products; introducing liquidity risk add-ons to better determine the margin requirements for large portfolios; and changes to the approach to calibrating scenarios for the capital stress testing model.
  • The ASX Rates Product Advisory User Group consists of participants and other end users of ASX 24 interest rate products. The User Group may be consulted by ASX Clear (Futures) on matters related to exchange-traded and OTC IRD products, including business, operational and technical aspects of new interest rates product and service offerings and material changes to the ASX Clear (Futures) Operating Rules. The committee meets on a quarterly basis. ASX is also advised on matters related to specific asset classes by a number of other user groups representing key participants and end users: the ASX 24 Futures Clearing User Group; the Energy Product User Group; the Equity Derivatives User Group; and the Agricultural Product Advisory User Group.
  • ASX Clear (Futures) has also established a Default Management Group (DMG), comprised of experts from OTC participants for an annual term (see CCP Standard 12.1). The DMG is consulted on aspects of the default management process as set out in the Operating Rules, and while the ASX Clear (Futures) Board is not obliged to accept the DMG's advice, it is required to provide reasons for any decision not to follow such advice. The DMG most recently met in November 2018 in connection with the OTC default management fire drill (see CCP Standard 12.4).

In addition, ASX Clear (Futures) has formalised in its Operating Rules a requirement that it consult participants on proposed rule amendments, except those requested by its regulators or required to enable ASX Clear (Futures) to comply with its CS facility licence or other regulatory obligations.

2.9 A central counterparty that is part of a group of companies should ensure that measures are in place such that decisions taken in accordance with its obligations as a central counterparty cannot be compromised by the group structure or by board members also being members of the board of other entities in the same group. In particular, such a central counterparty should consider specific procedures for preventing and managing conflicts of interest, including with respect to intragroup outsourcing arrangements.

ASX has conflict-handling arrangements to manage potential conflicts of interest that its directors and staff may face. The potential for intragroup conflicts arising from ASX's group structure is addressed by intragroup service agreements, which set out the basis on which other group entities will provide services to the CS facilities and specify that the entities providing the services must have sufficient financial and other resources to meet their obligations. These agreements provide that ASX Group staff are under a duty to act in the best interests of the facility that is receiving the services. The Bank will be reviewing these agreements during the next assessment period (see section 3).

ASX's governance arrangements are designed to ensure that shared directorships within the ASX Group cannot compromise each CS facility's compliance with its licence obligations, including observance of the FSS. ASX considers that there is limited potential for shared directorships to create conflicts between ASX's group-wide commercial interests and the risk management function of the CS facilities. More broadly, it considers that conflicts between directors' roles on the CS Boards and the ASX Limited Board are unlikely given the distinct roles the separate entities perform, and in view of group-wide arrangements to manage matters such as operations and compliance. If a conflict were to arise, a director sitting on multiple CS Boards would be expected to make decisions in the best interests of each facility.

The structure of the ASX Clear Board further limits the potential for conflict related to the clearing of cash equities. Two directors are able to form a quorum of the ASX Clear Board, allowing matters that raise potential conflicts of interest in relation to AMOs and Approved Listing Market Operators (ALMOs) to be considered and decided as required without the involvement of directors that are also on the ASX Limited Board. The independent directors of ASX Clear who are not also directors of ASX Limited met on three occasions during the assessment period to consider conflict-sensitive information.

Footnotes

These are set out in the Council of Financial Regulators' Regulatory Expectations for the Conduct of Cash Equity Clearing and Settlement Services in Australia, available at <https://www.cfr.gov.au/publications/policy-statements-and-other-reports/2016/regulatory-expectations-policy-statement/>. [8]

The CS Boards' Charter is available at <https://www.asx.com.au/documents/about/CS-Board-Charter.pdf>. [9]

Available at <https://www.asx.com.au/documents/about/ASXL-guidelines-affecting-independent-status.pdf>. [10]

Available at <http://www.asx.com.au/about/board-and-management.htm>. [11]

The Institute of Internal Auditors is the leading international organisation representing internal auditors. It has developed a set of standards that provides a framework for carrying out and evaluating the performance of internal audits. [12]