Assessment of ASX Clearing and Settlement Facilities – September 2019 Appendix C2. Financial Stability Standards for Securities Settlement Facilities

Standard 16: Tiered participation arrangements

A securities settlement facility should identify, monitor and manage the material risks to the securities settlement facility arising from tiered participation arrangements.

16.1 A securities settlement facility should ensure that its rules, procedures and agreements allow it to gather basic information about indirect participation in order to identify, monitor and manage any material risks to the securities settlement facility arising from such tiered participation arrangements.

Since ASX Settlement does not assume credit or liquidity risk as principal, the primary risks that could arise from indirect participation are operational. In particular, indirect participation arrangements that concentrate settlement activity within a few direct participants could concentrate operational risk to the facility. ASX Settlement is able to access basic information on indirect participation via the separate participant identifiers (known as PIDs) assigned to trading or clearing participants (in ASX Trade or ASX Clear, respectively) that do not settle directly. ASX Settlement currently considers the risks from concentration of indirect participants to be low.

Given the nature of the wholesale OTC market in debt securities that Austraclear settles, many participants have direct access to Austraclear. Furthermore, since Austraclear does not assume credit or liquidity risk as principal, the primary risks that could arise from indirect participation are operational. In particular, indirect participation arrangements that concentrate settlement activity within a few direct participants could concentrate operational risk to the facility. Significant activity associated with indirect participation is often, but not always, recorded in a separate sub-participant branch of, or the sub-accounts of, direct Austraclear participants. Austraclear is able to monitor the activity in separate sub-participant branches or sub-accounts. Austraclear is not able to monitor indirect participation activity in custodian-operated omnibus accounts where the custodian operates a single Austraclear account and maintains their own books and records for clients' holdings. Austraclear currently considers the operational risks from concentration of indirect participants to be low due to the sophistication and tenure of custodians providing services to their clients.

16.2 A securities settlement facility should identify material dependencies between direct and indirect participants that might affect the securities settlement facility.

ASX Settlement and Austraclear monitor dependencies arising from tiered participation indirectly using a variety of means. These include regular discussions with participants on developments in their business and risk management activities, participants' own risk assessments, and discussions with new participants as part of the induction process. Based on this information, the ASX SSFs have not identified any material dependencies between direct and indirect participants that might affect their operations.

16.3 A securities settlement facility should identify indirect participants responsible for a significant proportion of transactions processed by the securities settlement facility and indirect participants whose transaction volumes or values are large relative to the capacity of the direct participants through which they access the securities settlement facility in order to manage the risks arising from these transactions.

In general, participation in ASX Settlement is broader and more direct than that in ASX Clear. At end June 2019, there were 83 direct ASX Settlement participants (excluding temporary special-purpose participants), compared with 33 (active) direct participants in ASX Clear. Due to this, and given the vertical integration of the ASX Group, monitoring of tiered participation risks in ASX Clear would also be expected to highlight any such risks that may require further investigation in ASX Settlement (see Appendix C.1, CCP Standard 18).

In general, most wholesale OTC debt market participants have direct access to Austraclear. At end June 2019 there were 930 direct Austraclear participants.

The ASX SSFs encourage participants to develop appropriate risk control measures in managing their relationships with clients, including any substantial indirect participants. ASX does not set thresholds, either formal or informal, at which it would encourage direct participation by an indirect participant. ASX's general approach to managing risks associated with participants' business activities is based on a framework that can flexibly detect and react to new risks as they arise, rather than setting firm ex ante activity limits.

16.4 A securities settlement facility should regularly review risks arising from tiered participation arrangements and should take mitigating action when appropriate.

Neither ASX Settlement nor Austraclear are directly exposed to financial risks from indirect participation. Significant operational risks associated with indirect participation at ASX Settlement would be identified and mitigated through the application of ASX's concentration risk monitoring policy, which focuses on participation in ASX Clear (see SSF Standard 16.3). Austraclear's exposure to operational risks from indirect participants is limited by the bilateral nature of settlement between its participants and its relatively broad participation base.