ASX ClearingPascal vander Straeten October 2012
Key Players• Financial market regulators are likely to end the Australian Securities Exchange’s monopoly over the clearing of securities trades, a decision that would allow foreign competitors to undercut the stock exchange on price and trigger a big shake- up in the broking industry.• LCH Clearnet• ABN Amro Clearing + Indian National Stock Exchange• CME Group (USA)• Chi-X
ASX products• ASX Clear – fmr ACH: cash market securities (equities, pooled investment products, warrants) and predominantly equity-related derivatives (ETO and ETF)• ASX Clear (futures) – fmr SFECC: futures & options in interest rate, equity energy, and commodity products• ETO: equity options, index options, low exercise price options (LEPOs)
ASX - Exchange traded products• Exchange traded funds (ETF): covers a series of market benchmark indices such as S&P/ ASX 200 index, the Russell High Dividend Yield Fund.• Sector ETF: allows exposure on different sectors while maintaining diversification• Conventional ETF: seek to focus on the return of an indice representing a range of securities• Synthetic Exchange traded funds through a swap agreement tracking the performance of an index.• The current issuers of conventional broad based Australian, sector and specific outcome orientated Australian are Australian Index Investments (Aii), BetaShares, Chimaera Capital, iShares, Russell Investments, State Street Global Advisers and Vanguard Investments
Equities and Exchange Traded Derivatives= futures and options on interest rates, exchange rates and equities and equity indices.•Future contract = A financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financialinstrument, at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset; they are standardized tofacilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. The futuresmarkets are characterized by the ability to use very high leverage relative to stock markets.•Futures can be used either to hedge or to speculate on the price movement of the underlying asset. For example, a producer of corn could use futures tolock in a certain price and reduce risk (hedge). On the other hand, anybody could speculate on the price movement of corn by going long or short usingfutures.•An interest rate future is a futures contract with an interest-bearing instrument as the underlying asset. It is used to hedge against interest ratemovements. For example, borrowers face the risk of interest rates rising. Futures use the inverse relationship between interest rates and bond prices tohedge against the risk of rising interest rates. A borrower will enter to sell a future today. Then if interest rates rise in the future, the value of the future willfall (as it is linked to the underlying asset, bond prices), and hence a profit can be made when closing out of the future (i.e. buying the future).•Treasury futures are contracts sold on the Globex market for March, June, September and December contracts. As pressure to raise interest rates rises,futures contracts will reflect that speculation as a decline in price. Price and yield will always be in an inversely correlated relationship.•In finance, a long position in a security, such as a stock or a bond, or equivalently to be long in a security, means the holder of the position owns thesecurity and will profit if the price of the security goes up. Going long is the more conventional practice of investing and is contrasted with going short. Aninvestor goes long on the underlying instrument by buying call options or writing put options on•In contrast, a short position in a futures contract or similar derivative means that the holder of the position will profit if the price of the futures contract orderivative goes down.
Call Options• The buyer of a call option purchases it in the hope that the price of the underlying instrument will rise in the future. The seller of the option either expects that it will not, or is willing to give up some of the upside (profit) from a price rise in return for the premium (paid immediately) and retaining the opportunity to make a gain up to the strike price (see below for examples).• Call options are most profitable for the buyer when the underlying instrument moves up, making the price of the underlying instrument closer to, or above, the strike price. The call buyer believes its likely the price of the underlying asset will rise by the exercise date. The risk is limited to the premium. The profit for the buyer can be very large, and is limited by how high the underlying instrument’spot price rises. When the price of the underlying instrument surpasses the str in the money".
Put options• The put buyer either believes that the underlying assets price will fall by the exercise date or hopes to protect a long position in it. The advantage of buying a put over short selling the asset is that the option owners risk of loss is limited to the premium paid for it, whereas the asset short sellers risk of loss is unlimited (its price can rise greatly, in fact, in theory it can rise infinitely, and such a rise is the short sellers loss). The put buyers prospect (risk) of gain is limited to the options strike price less the underlyings spot price and the premium/fee paid for it.• The put writer believes that the underlying securitys price will rise, not fall. The writer sells the put to collect the premium. The put writers total potential loss is limited to the puts strike price less the spot and premium already received. Puts can be used also to limit the writers portfolio risk and may be part of an option spread.• The put buyer is short on the underlying asset of the put, but long on the put option itself. That is, the buyer wants the value of the put option to increase by a decline in the price of the underlying asset below the strike price. The writer (seller) of a put is long on the underlying asset and short on the put option itself. That is, the seller wants the option to become worthless by an increase in the price of the underlying asset above the strike price. Generally, a put option that is purchased is referred to as a long put and a put option that is sold is referred to as a short put.
Impact interest rates on call and put options• The Effects of Interest Rates• An increase in interest rates will drive up call premiums and cause put premiums to decrease.• To understand why, you need to think about the effect of interest rates when comparing an option position to simply owning the stock. Since it is much cheaper to buy a call option than 100 shares of the stock, the call buyer is willing to pay more for the option when rates are relatively high, since he or she can invest the difference in the capital required between the two positions.
Impact dividends on call and put options• The Effects of Dividends• Its easier to pinpoint how dividends affect early exercise. Cash dividends affect option prices through their effect on the underlying stock price. Because the stock price is expected to drop by the amount of the dividend on the ex-dividend date, high cash dividends imply lower call premiums and higher put premiums.
Clearing TechnologyASX operates three clearing systems:•CHESS – CHESS is an integrated clearing and settlement system for ASX-listed equity securities. CHESS provides Clearing Participants with confirmation that ASX Clearing Corporations clearing house has accepted the trade for novation and therefore, that the particpants counterparty risk has been effectively transferred, or novated to, ASX.•Derivatives Clearing System (DCS) – DCS is an integrated clearing system used for clearing derivatives traded on ASX Trade. DCS consists of two primary components: • Central Clearing Component (CCC) – Is operated by ASX and maintains clearing information for each participant including their open positions, margin information, accrued interest and details of trades, allocations, give-ups and take-ups. • Member Clearing Module (MCM) – Is provided by ASX to participants and operates within the participant’s office. MCM serves as the participant’s interface to the clearing system and provides the information and functionality necessary for the participant to effectively manage their clearing business. This includes the ability to manage accounts, commissions (including give-up and take-up commissions), trading details, open interest, deliveries, options exercise and assignment activity, cash flow and margin details at an account and product level. MCM only contains information relevant to the individual participant contains no information about other the derivatives activity of other participants.•SECUR – SECUR provides clearing processing for the derivatives trades generated on ASX Trade24. Similar to DCS, SECUR includes fully redundant host components located in the ASX data centres and gateway modules located at market participant sites. – SECUR provides the processing services associated with clearing house novation of trades, allocation of trade ownership, participant position keeping, SPAN margin calculation, and fee and commission processing. SECUR facilitates automated straight through processing of trades from ASX Trade24, via direct connectivity to participant back office systems.
RM Capital requirements• Risk based requirements in compliance with ASX• NTA requirements• Other capital regime
Internal limits• Based on assessment creditworthiness of counterparty and expressed in terms of credit risk limits (face value limits), counterparty risk limits (replacement value), product limits, tenor limits
Regulation• Financial Stability Standards for licensed CS facilities, in accordance with subsection 827D(1) of the Corporations Act 2001, on 30 May 2003.• IOSCO-CPSS principles and Financial Stability Board standards
EBA proposalThe capital of a CCP, including retained earnings andreserves, should be at all times at least equal to the sumof :•1. the CCP‟s gross operational expenses during anappropriate time span for winding down or restructuringits activities;•2. the capital necessary to cover the overall operationaland legal risks;•3. the capital necessary to cover credit, counterpartycredit and market risks ‟not covered‟ by specific financialresources; and,•4. business risk.
LCH Clearnet Default waterfall• Legal obligation to clear OTC derivatives through CCP.• To limit its credit exposures, the Regulation requires a CCP: – to collect margins, – to maintain a pre-funded default fund and to maintain dedicated own resources.These resources make up the „default waterfall‟ of risk mitigants that a CCP uses to cover its losses upon the default of one of its clearing members. In covering its losses, a CCP will use:- firstly the margins posted by the defaulting clearing member;- secondly, the default fund contributions of the defaulting clearing member;- thirdly, its dedicated own resources; and- finally the default fund contributions of non-defaulting clearing members.
ASX Clear Pty default waterfallIn the event of a clearing default:•1. Collateral or other margin or contributions lodged by the defaulting participant with ASX Clear Pty Limited•2. Restricted capital reserve of $71.5 million. In accordance with the terms of ASX Clear Pty Limited’s AustralianClearing and Settlement Facility Licence, unless the Minister agrees otherwise, these funds can only be used by ASXClear Pty Limited for clearing and settlement support•3. Equity capital of $3.5 million and subordinated debt of $75 million provided by ASXCC. Under its licence obligations,ASX Clear Pty Limited is required to comply with the Reserve Bank of Australia’s (RBA) Financial Stability Standards. Inaccordance with the Standards, ASX Clear Pty Limited has determined the Reserve Requirement to be $150 million. Asthe Reserve Requirement may vary from time to time, ASX Clear Pty Limited has the obligation to provide financialresources to cover any shortfall in the Reserve Requirement. ASX Clear Pty Limited may utilise a number of alternativesto provide these financial resources including equity, debt, participant commitments and insurance. ASXCC is also partyto a deed whereby it undertakes to replenish the above equity capital of $3.5 million subject to the solvency of ASXClear Pty Limited and the occurrence of other limited and specific circumstances. ASXCC may also consider othersources of financial resources for ASX Clear Pty Limited as appropriate•4. Non-recourse subordinated debt of $100 million received from ASXCC which borrowed the funds externally•5. Contributions lodged by non-defaulting participants under the ASX Clear Pty Limited clearing rules. No contributionswere lodged in the current or prior period, and•6. Emergency Assessments of $300 million which can be levied on participants (nil has been levied for periods ending30 June 2012 and 2011).
ASX Clear (Futures) Pty Waterfall defaultThe financial resources available to ASX Clear (Futures) Pty Limited will be applied in the following order in the event of aparticipant default:•1. Collateral and participant financial backing lodged by the defaulting participant with ASX Clear (Futures) Pty Limited•2. Equity capital of $30 million and subordinated debt of $70 million provided by ASXCC. ASXCC is party to a deed whereby itundertakes to replenish the above equity capital of $30 million subject to the solvency of ASX Clear (Futures) Pty Limited and theoccurrence of other limited and specific circumstances•3. Participant financial backing lodged by participants, totalling $120 million. Any defaulting participant’s financial backing in thistotal will be included in amounts previously applied as part of amounts in (1) above. Participant financial backing comprises thefollowing: – cash of $86.1 million (30 June 2011: $82.5 million), and – non-cash commitments (letters of credit drawn on major Australian licensed banks) of $33.9 million (30 June 2011: $37.5 million)•4. Non-recourse subordinated debt of $150 million received from ASXCC which borrowed the funds externally, and•5. Secondary commitments of $30 million levied on participants (nil has been levied for the periods ending 30 June 2012 and2011).
National Guarantee Fund• The National Guarantee Fund (NGF), which is administered by SEGC, is maintained to provide compensation for prescribed claims arising from dealings with market participants as set out in the Corporations Act 2001. The net assets of the NGF at 30 June 2012 were $103.4 million (30 June 2011: $106.1 million). If the net assets of the NGF fall below the minimum amount determined by the Minister in accordance with the Corporations Act 2001 (currently $76 million), SEGC may determine that ASX must pay a levy to SEGC. Where a levy becomes payable, ASX may determine that market participants must pay a levy, provided that the total amounts payable under this levy do not exceed the amount payable by ASX to SEGC. The amount in the NGF has not fallen below the applicable minimum amount since the NGF was formed and SEGC has not imposed any levies. Failure by either ASX or a market participant to pay a levy may give rise to a civil action, but does not constitute an offence under the Corporations Act. In accordance with applicable accounting standards neither SEGC nor NGF are consolidated by ASX.• ASX is the only member of SEGC, which is a company limited by guarantee. Accordingly, ASX has a contingent liability to provide a maximum of $1,000 of capital in the event it is called on by SEGC.
LCH Clearnet• Repoclear: min rating BBB – Unconditionally guaranteed by parent – In case of downgrade to BBB-: 110% of initial margin – In case of downgrade to BB+: 200% of initial margin• Swapclear: Initial margin based on VaR 5 day (worst case) holding period (using a 5 yr database) + add-ons capturing credit/ liquidity/ sovereign risk if not captured initially
How risk is mitigated?1. Novation/ registration: the CCP assumes the credit risk. Members act as intermediaries nd are of very high quality (initial margin, variation margin, in some cases market ratings, net capital requirement and operational capability).2. Margining and clearing fund: should one of the members default, then: mark-to-market of positions and collection of losses/ profits through variation margin; initial margin to cover potential losses under in case of default under normal market conditions; topping this initial margin intraday if necessary; maintaining clearing funds in case of abnormal market conditions.3. Secure Payment Systems: accounts with acceptable banks; all payments in major currencies concentrated in central bank. All flows go through this system.4. Legal & regulatory certainty: under supervision of national regulators5. Throughout the trade cycle: the CCP remains the counterparty until expiration of the trade. It also deals with corporate events. It can also net settlements thus decreasing the risk/ impact of fails.6. On a wide variety of markets7. Even in default situations: in case of default the non-defaulter’s position are unaffected. IT has already been tested through time (no knock-out effect on other members): F. ex Barings, Lehman Brothers, Drexel Burnham, ec8. Other benefits: capital allocation efficiency, risk mitigation, multilateral netting, increased liquidity
• In the USA: clear separation between clearing and depository entity => DTCC.• This means that there will be multiple clearing brokers that have to reconcile shares and money against other clearing brokers. It also means that the clearing brokers bear the risk of default on the leg of the transaction that they are servicing.
Preference for futures-style margining based on VaR• broadly acceptable methodology as it ensures that the level of margin collected by ACH reflects the risk of the clearing participant’s exposures. This view is subject to continued close participant involvement in the further development of the rules and procedures required to implement equities margining
Decision not to implement equity market margining• Equity market margining is being introduced to provide additional protection to the pooled financial resources available to ACH and to bolster the ability of the clearing house to withstand the default of a clearing participant. To the extent that margining is a protection mechanism that assists the clearing house to meet its obligations under the Corporations Act and the RBA Financial Stability Standards, it is not appropriate for any party to receive a financial benefit arising from the structure of the margining model. This is consistent with ASX’s position that it is conscious of the cost impact of the proposal.• If the proposal is implemented, it will result in tangible benefits for ASX including but not limited to reduction in risk to the clearing house, which has the flow-on effect of reduced capital risk for ASX group entities.
• In addition to cash and high quality very liquid non-cash collateral, AFMA supports the use of the following for margining requirements:• (a) Commonwealth Government Securities (CGS);• (b) Australian semi-government securities;• (c) bank bills;• (d) ASX 200 securities; and• (e) letters of credit from appropriately rated financial institutions.• The first three forms of collateral are recognised by APRA as high quality liquid assets under APS 210: Liquidity (see table 1), and ASX 200 equities and letters of credit are accepted by ACH for options margining. If participants deposit CGS, semi-government securities and ASX 200 securities, no fees or facilitation costs should be applied other than standard haircuts of 5-10%
Intra group funding arrangements• This issue is closely linked to the range of acceptable collateral.• Intra group funding arrangements are becoming a significant feature of the business operations of some institutions.• This is particularly the case in an environment where the cost of funds has risen substantially. The consultation paper suggests ACH will only accept bank guarantees provided by non-related entities. While there maybe good reasons not to accept a bank guarantee provided by a parent or related entity to a clearing participant, there may be other intra group funding arrangements that should be acceptable from a risk management perspective. While we are not advocating the acceptance of any particular arrangement at this time, we suggest that ACH remains open to considering the acceptability of arrangements or facilities provided on an intra group basis on a case by case basis.
Timing of recalculation, calls, and payments• The consultation paper indicates that in addition to routine end of day calculations, margins will be recalculated during the day to take account of new trading, completed settlements and price movements. This is expected to occur around midday and on an ad hoc basis in response to market volatility. Margin calls will be payable within 2 hours. This is a tight timeframe given the internal approval processes participants have in place to obtain funds. The rules and procedures about margin calls must be absolutely clear so there is no doubt or confusion about the call and payment process and the associated timeline. Members have noted in particular that a recalculation late in the day and any resultant call must take account of the latest time on a business day that a payment can be made through RITS.• It is not entirely clear from the paper that where recalculation of a margin indicates that excess margin is held ACH will return those excess funds within the same timeframes as participants are required to provide them – similar to the process currently in place for ETO margins.• The rules and procedures should also be unequivocal about how and when ACH will dispose of assets held as margin in order to satisfy unpaid calls. This should occur in a manner that is not unduly adverse to the interests of the participant.
Allow offsetting margins between markets• The consultation paper indicates that consideration of margin offsets between the equity cash and derivatives markets will not proceed at this stage. AFMA encourages ASX to continue its consideration of this broader issue in the future, either as a stand alone initiative to allow offsetting between markets, or as part of a closer alignment or merger of the clearing & settlement facilities operated by the ASX group. Industry continues to be of the view there are considerable efficiencies and cost savings to be reaped through a rationalisation of the facilities.
Settlement cycle• The consultation paper also states ASX is not considering a reduction in the settlement cycle from T+3 at this stage because of concerns about operational difficulties in meeting a shorter deadline. AFMA notes that consideration is being given in Europe to reducing the cycle to T+2. We expect that ASX would review this issue if and when such a change comes about.
Exclusion of settlements arising from exercise of ETOs• The consultation paper indicates that the amended algorithm will exclude novated settlements arising from the exercise of ETOs, as these will instead be margined as part of the derivatives margin calculation during the T+3 settlement period. It is not entirely clear what, if any, impact this will have on the current ETO margining.
Contributions and Additional Cover (CAC)• The consultation paper indicates that the introduction of margining to the cash equity market is expected to decrease the frequency of CAC calls. If margin requirements are going to be based on the same stress test calculations formerly used to calculate CAC- related contributions we would expect the margins to not only decrease the frequency of CAC calls but to completely replace them.
International best practice• We are not completely confident in some of the conclusions from ASX’s comparison of international CCPs - for example, whether all the CCPs considered have similar capital and settlement requirements and whether their settlement failure record is comparable. We note that two of our closest neighbouring exchanges (Hong Kong and Singapore) do not impose cash equities margining requirements, and this may have the effect of limiting offshore participation in the Australian market.
• Central counterparty clearing providing capital efficiency and risk management• Delivery versus payment settlement for on- market and bi-lateral transactions• Central securities depository providing efficient management of holdings and securities with certainty of title
Areas of focus• Enhance clearing and settlement services to meet changing customer requirements• Margining of cash equities to further reduce risk• Unbundling of clearing and settlement services to provide customers with greater service flexibilty and price transparency• Collateral management service to provide capital and cost efficiencies for customers
Regulators• ASIC• ASIC is responsible for the supervision of real-time trading on Australia’s domestic markets, including those operated by ASX Group. ASIC is also responsible for enforcing the laws against misconduct on Australia’s financial markets, as well as supervising Australian Financial Services Licence (AFSL) holders.• RBA• The RBA has responsibility for assessing whether licensed clearing and settlement facilities, including those operated by ASX Group, have complied with its Financial Stability Standards and done all other things necessary to reduce systemic risk.
Regulators• Council of Financial Regulators• The Council of Financial Regulators is the coordinating body for Australia’s main financial regulatory agencies. Its members are the RBA (Chair), the Australian Prudential Regulation Authority (APRA), ASIC and Treasury. It aims to facilitate cooperation and collaboration between RBA, APRA, ASIC and Treasury.• The Council also has a role in advising the Government on the adequacy of the architecture of Australia’s financial system.• During the year, the Council reviewed and consulted on reform proposals for the regulation of financial market infrastructure, over-the-counter (OTC) derivatives clearing, and competition in the clearing and settlement of Australia’s cash equity market.• ASX expects new legislation regarding financial market infrastructure regulation will be introduced in 2012-13. There will also be further policy work around OTC clearing in line with Australia’s G20 obligations.• Submissions on the Council’s review of competition in the clearing and settlement of the Australian cash equity market closed in mid-August 2012.
Results fy12• Cash market clearing and settlement - $88.1 million, down 7.5%• Cash market clearing and settlement revenues were both down 7.5% compared to the pcp. Cash market clearing revenue of $45.9 milion declined 7.5% due to the reduction in traded value noted earlier, offset by lower crossings which were 24% compared to 27% in the pcp. Cash market settlement revenue of $42.2 million also declined 7.5% with the number of dominant settlement messages reducing by 3.9%.
Credit risk• The Group is exposed to credit risk, which represents the potential loss that may arise from the failure of a counterparty to meet its obligations or commitments to the Group. Due to the novation process, trades are matched so the Group is not directly exposed to direct price movements in the underlying equities or derivatives. However, equity or derivative price movements may have an impact on the counterparties’ ability to meet their obligations to the Group. Failure to meet these obligations exposes the Group to potential losses on settlement. These are managed by the following layers of risk control: – clearing participant membership requirements and admission standards including minimum capital requirements – participant surveillance including capital monitoring – daily counterparty credit risk control, including margining and collateral management financial resource adequacy, including fixed capital and stress testing, and position limits based on the capital of the participant. – Objective of margining is to avoid the accumulation of profit and losses as well as exposure at CCP level. – Cash margining being equal to MTM + Risk Margin (= RM + RM * portfolio)
Credit risk• Both of the Group’s central clearing counterparty entities continually stress-test clearing participant exposures against the amount and liquidity of variable and fixed financial resources (clearing guarantee fund) available in the event of default. The Group’s ongoing monitoring of participants’ market positions and exposures, coupled with daily margining and collateral management, including possible intraday and additional margin calls, enables it to efficiently manage its central counterparty credit risk and meet its regulatory obligations.
Amounts owing to participants• The current amounts owing to participants represent balances deposited by clearing participants to cover margins on derivative contracts, and are repayable to the participants on settlement or closure of the contracts (refer note 25(a)). Balances lodged in cash are interest bearing and are carried at the amounts deposited which represent fair value. Collateral provided by clearing participants in the form of equity securities and guarantees is not recognised on balance sheet (refer note 25(a)). Amounts lodged in the form of debt securities are carried at fair value. Non-current amounts owing to participants represent cash balances deposited by participants as commitments to clearing guarantee funds which at reporting date had no determined repayment date. Letters of credit provided by clearing participants in respect of commitments are not recognised on balance sheet (refer note 25(a)).
Options margins• If you write an option contract, you have a potential obligation to the market because the taker of the option may exercise their position. A margin is an amount that is calculated by ASX Clear as necessary to ensure that you can meet that obligation.• Margin obligations may arise from: – written call option contracts – written put option contracts – both taken and written LEPO positions – futures positionsSO NO MARGINING IF YOU BUY AN OPTIONS, ONLY WHEN YOU SELL/ WRITE AN OPTIONHow margins are calculated• ASX Clear calculates margins using a system known as ASX Derivatives Margining System (ADMS). ADMS takes into account the volatility of the underlying security when calculating margin obligations.• The total margin for ETOs (EQUITY TRADED OPTIONS) is made up of two components: 1. the premium margin is the market value of the particular position at the close of business each day. It represents the amount that would be required to close out your option position 2. the risk margin covers the potential change in the price of the option contract assuming the maximum probable inter-day movement (daily volatility) in the price of the underlying security. The daily volatility figure, expressed as a percentage is known as the margin interval.• If you have a number of option positions open, ADMS will evaluate the risk associated with your entire options portfolio and calculate your total margin obligation accordingly. It is possible that some option positions may offset others, leading to a reduction in your overall obligation.How margins are met• Your broker will require you to provide cash or collateral to cover your margin obligations to ASX Clear.• There is a range of collateral that is acceptable to ASX Clear. See acceptable collateral for details.• From 14 October 2002 you are able to offset the credit premium of bought option positions against futures initial margin liabilities.LEPO margins• Unlike ordinary exchange traded options, where only the writer is margined, with LEPOs both takers and writers are margined.• This is because the taker of a LEPO does not pay the writer the full premium up front. Instead the taker pays a fraction of the premium to ASX Clear and is margined on the balance outstanding.• To find out more about LEPO margining please refer to the ASX Explanatory booklet Understanding LEPOs (PDF 270KB)Futures margins• Payment of margins• Margins are recalculated on a daily basis to ensure an adequate level of margin cover is maintained.• This means that you may have to increase your level of margin cover if the market moves against you, or your margins may be reduced if the market moves in your favour.• Settlement requirements for trading options are strict. You must pay any margin calls by the time stated in your Client Agreement. Under ASX Operating Rules, this can be no longer than 24 hours after being called.• If you do not meet your margin call in time, your broker can take action to close out your position without further reference to you.
• ASX Clearing Corporation assists ASX participants to more effectively undertake their clearing activity by reducing systemic risk, minimising counterparty risk and by increasing capital efficiency and operating efficiency.• This is achieved through ASX Clearing Corporation’s wholly owned subsidiaries, ASX Clear Pty Limited and ASX Clear (Futures) Pty Limited, which provide central counterparty facilities as well as risk management systems, securities collateralisation services and electronic straight through processing of trades.• Risk management activities are designed to ensure that the interests of its participants and clients are protected and that the integrity of the marketplace is maintained. These activities are primarily focused on two key types of risk: Market Risk and Credit Risk.Market Risk• Market Risk represents the exposure of the clearing house to its clearing participants irrespective of the performance of individual participants. It encapsulates factors that impact upon the entire market such as extremely large price movements, for example, the October 1987 share market crash.Credit Risk• Credit Risk represents the exposure of the clearing house to a loss arising from actions undertaken by an individual clearing participant and its clients. Such factors may include a deterioration of the capitalisation of a participant, or a participant holding a position that is beyond its financial capacity to absorb a loss arising from that position.• Risk Management• ASX undertakes a number of activities to manage these risks including the following: – Margins and position monitoring – Capital Based Position Limits – Guarantee and Capital Reserve – Admission Criteria, including ongoing minimum financial adequacy requirements• ASX operates a fidelity fund to cover losses sustained by a client of an ASX participant caused by dealings with participants, such as defalcation or fraudulent misuse of money or other property which was entrusted to the participant for the purposes of securities trading.Third Party Clearing• Trading participants may designate another entity, such a bank, as their clearing participant for trading activity. The balance sheet of the designated clearing participant is used to evaluate the adequacy of capital for trade. Third party clearing has allowed the entry of new trading participants into the markets, as well as providing established clearing participants with a new line of business.
Singapore, Tokyo, Hong Kong vs ASX• SING: no upfront margin; only daily and intraday margining. There is also a line of credit with several international banks to cover losses
What represents a default?• Defaulting in its obligation• Failing to comply with position limits• Decision of regulator• After agreement with its creditors• Failure to comply with margin calls=> consequence:• Closing out all open positions of defaulting participant• Settling all open positions of defaulting participant• Forced sale-out of open positions• Prohibit membership defaulting participant to CCP, thus suspension• Prohibit access of defaulting participant to CCP services• To hedge risks posed by open positions• Instigate Compliance department to launch investigations.• Defaulting participant remains liable for all its obligations
Avenues for improvement• Expected shortfall instead of VaR• Building up a variety of measures to understand market conditions and liquidity; this includes bond yields, CDS and market implied ratings. In some cases, there may even be a contribution to the spread coming from a negative yield change on AAA.• For example, the 450 bps over 10 year AAA level is an indicative level at which LCH.Clearnet reviews margins held to ensure that enough financial resources have already been called to cover the associated reduced market liquidity.
Merger/ mutualisation of resources and policies between ASX Clear and ASX Clear Futures• Move the two CCPs under one corporate structure and one regulatory regime.• This creates efficiencies around systems and operations, margins and collaterals, CCP capital, and the level of risk.• However differences need to be bridged as: – Number and credit quality of each CCP’s Clearing Participants; – Size and basis of minimum capital requirements for Clearing Participants; – Stress testing models and risk capital structures; – Account structures; – Collateral acceptability, valuation haircuts and lodgement processes; and, – Margining approaches.• So far, harmonisation and enhancement of approached to capital management and risk management.• The deployment of the first stage of ACH’s new risk management system (which includes improved capital and liquidity stress testing, a VaR model for monitoring cash equity market exposures, and improved risk monitoring and reporting);• Contemporised and annually reviewed stress testing scenarios for both ACH and SFECC;• Removal of SFECC double margining on bank holidays;• Removal of overlap between additional margining based on capital-based position limits and on stress testing;• Introduction of mandatory Austraclear settlement for ACH intraday margin calls; and,• Introduction of harmonised policies on: internal counterparty ratings, margin rate setting, risk-based clearing limits, collateral acceptability and minimum capital requirements.• With respect to capital management, the following pieces of work have been completed either as formal projects or as part of the business as usual work of ASX’s CCPs: – SFECC capital injection (increases in ASX capital injected, Clearing Participant commitments and insurance); – Injection of increased capital into ACH; – Introduction of Contributions and Additional Cover on ACH; – Renewal of insurance policies; and, – Creation of ASXCC as a potential longer-term funding vehicle for the two CCPs.• Migration to CME Span margining with margining offset capabilities between two CCPs on combined positions of clearing participants active on both CCPs (particularly across equity derivative products)
Default management tools• Margining• Stress testing• Maintenance of financial resources• Discretionary powers of CCPs