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

Standard 9: Money settlements

A central counterparty should conduct its money settlements in central bank money where practical and available. If central bank money is not used, a central counterparty should minimise and strictly control the credit and liquidity risk arising from the use of commercial bank money.

9.1 A central counterparty should conduct its money settlements in central bank money, where practical and available, to avoid credit and liquidity risks. A central counterparty that the Reserve Bank determines to be systemically important in Australia and has Australian dollar obligations should settle its Australian dollar obligations across an Exchange Settlement Account held at the Reserve Bank, in its own name or that of a related body corporate acceptable to the Reserve Bank.

ASX Clear

ASX Clear's money settlements are all settled in central bank money. Margin payments occur via Austraclear, with the interbank obligations settled on an RTGS basis across ESAs at the Bank, via RITS. ASX Clear uses ASXCC's ESA to settle these obligations in RITS.

The interbank element of net securities-related payment obligations arising in the CHESS settlement batch administered by ASX Settlement (see CCP Standard 8.2) are also settled across ESAs at the Bank, via RITS. These obligations are settled on behalf of participants between commercial settlement banks known as payment providers.

ASX Clear (Futures)

AUD and NZD money settlements in ASX Clear (Futures) are settled in central bank money. Non AUD or NZD cash collateral (currently EUR, JPY, USD and GBP) are settled via arrangements with commercial banks.

AUD settlements, which represent the vast majority of money settlements in ASX Clear (Futures), are initiated via the submission of standard settlement instructions to Austraclear. Any interbank settlements arising from these instructions occur on an RTGS basis across ESAs at the Bank, via RITS. ASX Clear (Futures) uses ASXCC's ESA to settle its obligations in RITS.

During the assessment period, ASX Clear (Futures) changed its payment arrangements for NZD payments as a result of the RBNZ decommissioning the cash payment functionality in NZClear. ASX Clear (Futures) now uses Payments NZ's High Value Clearing System to facilitate the settlement of NZD margin payments on a RTGS basis across ASXCC's ESAS account at RBNZ. Transactions are settled in the RBNZ ESAS between ASXCC's RBNZ ESAS account and the RBNZ ESAS accounts of ASX Clear (Futures) participants or their Participating ESAS account holders. Settlement of these transactions occurs in central bank money in real time. ASXCC manages credit and liquidity exposures in respect of post-settlement balances held in its account at RBNZ in accordance with the ASXCC investment mandate (see CCP Standard 15).

9.2 If central bank money is not used, a central counterparty should conduct its money settlements using a settlement asset with little or no credit or liquidity risk.

ASX Clear's money settlements are all settled in central bank money.

For ASX Clear (Futures), cash payments in foreign currencies other than NZD (i.e. EUR, JPY, USD and GBP) are settled in commercial bank money via arrangements with commercial banks; this includes USD intraday margin payments made during the overnight session (see CCP Standard 6.4). Commercial bank money settlement agents and commercial settlement banks used for settlement of foreign currency transactions must be highly rated and subject to appropriate prudential regulation in order to limit any credit or liquidity risk associated with settlement in commercial bank money (see CCP Standard 9.3).

9.3 If a central counterparty settles in commercial bank money or its participants effect settlements using commercial settlement banks, it should monitor, manage and limit credit and liquidity risks arising from the commercial bank money settlement agents and commercial settlement banks. In particular, a central counterparty should establish and monitor adherence to strict criteria for commercial banks appropriate to their role in the settlement process, taking account of matters such as their regulation and supervision, creditworthiness, capitalisation, access to liquidity and operational reliability. A central counterparty should also monitor and manage the concentration of its and its participants' credit and liquidity exposures to commercial bank money settlement agents and settlement banks.

ASX Clear

ASX Clear does not settle in commercial bank money or effect settlement using a commercial settlement bank. The role of commercial settlement banks acting on behalf of participants is covered by the terms of the CHESS Payment Interface Standard Payments Provider Deed entered into by ASX Clear, ASX Settlement, the Australian Payments Network Limited (AusPayNet) and the relevant commercial bank. This deed sets out payment authorisation deadlines and other operational requirements for payment providers that act as commercial settlement banks for participants.

The process of updating the deed involves negotiation with AusPayNet and payment providers, which could create delays in implementing changes to authorisation deadlines or other operational requirements required to support changes to the settlement process. ASX, working with AusPayNet, has established a framework for formally engaging payment providers on changes to settlement processes in response to regulatory or market-driven change. This is in the form of an AusPayNet standing sub-committee comprising representatives of the payment providers, with ASX acting as an observer. The role of the committee is to consider and provide feedback on proposed amendments to the CHESS Payment Interface Standard Payments Provider Deed, facilitate consultation with payment providers, and helps ensure that payment providers are notified of any upcoming developments.

ASX Clear (Futures)

ASX has developed a CCP Settlement Policy designed to address settlement risks arising from payment, clearing and settlement processes. The policy includes a list of approved settlement banks for each currency. A commercial bank must meet certain criteria (set out in ASXCC's Investment Mandate) before it can be used by ASX Clear (Futures) as a money settlement agent for foreign currency payments other than NZD. Commercial banks must be an approved counterparty, have a minimum S&P short- and long-term rating of A-1 and A respectively, and offer a banking platform and connectivity that are compatible with ASX processes and procedures. Arrangements for settlement of foreign currencies other than NZD make use of standard web interfaces for banking, with instructions via phone available as a contingency. In addition, the Portfolio Risk Management team monitors intraday its exposures to settlement banks against a counterparty exposure limit of $75 million. In order to manage its exposure to any individual settlement bank, ASX uses multiple settlement banks for the settlement of overnight USD margin payments at ASX Clear (Futures). In the event that its exposure to a commercial settlement bank exceeds this amount, ASX is required to notify the General Manager of CRPM and the CRO. The CRO would determine the appropriate actions and escalations if required.

All foreign currency lodgements are monitored by ASX Clear (Futures)' risk management and treasury functions, and ASX Clear (Futures) is in regular contact with the participant until funds are received. In cases where participants wish to post cash collateral in a different currency to the underlying requirement, participants must lodge a request, which is reviewed and then approved or denied by the Portfolio Risk Management team. In determining whether the foreign currency cover request is approved or denied, the Portfolio Risk Manager will take into account the limits on foreign currency, as well as the concentration risk in accepting the request. The CCP also has put in place thresholds for large or concentrated holdings of non-AUD collateral which trigger escalation to the CRO if breached (see CCP Standard 5.6).

ASXCC also maintains funds in foreign currencies to cover its exposure to liquidity risk if it needed to make foreign currency payments. During the assessment period, foreign currency collateral peaked at around $420 million (AUD equivalent) – around 6 per cent of average total collateral levels at ASX Clear (Futures) during the year. The aggregate level of foreign currency payments at ASX Clear (Futures) is low, comprising around 4 per cent of total money settlements.

9.4 If a central counterparty conducts money settlements on its own books, it should minimise and strictly control its credit and liquidity risks.

ASX Clear and ASX Clear (Futures) do not conduct money settlements on their own books.

9.5 A central counterparty's legal agreements with any commercial bank money settlement agents should state clearly when transfers on the books of the relevant commercial bank are expected to occur, that transfers are to be final when effected, and that funds received should be transferable as soon as possible, at a minimum by the end of the day and ideally intraday, in order to enable the central counterparty and its participants to manage credit and liquidity risks.

ASX Clear does not conduct settlements via commercial bank money settlement agents.

For ASX Clear (Futures), payments in foreign currencies made via commercial banks are generally covered by standard terms and conditions for commercial accounts at those banks, including general information about timing of transactions and availability of funds. ASX maintains close contact with its commercial banks in order to monitor and manage the risk of its foreign currency payments.