Assessment of ASX Clearing and Settlement Facilities – September 2022

The Reserve Bank today released the 2022 Assessment of the ASX Clearing and Settlement Facilities. The Bank concluded that ASX’s clearing and settlement (CS) facilities have conducted their affairs in a way that promotes overall stability in the Australian financial system. However, ASX will need to place a high priority on addressing recommendations related to operational risk. The Assessment found that ASX also needs to make significant progress in addressing recommendations on governance and risk management. In addition, the Bank expects ASX to take a more proactive role in ensuring that its regulatory obligations are being met.

The Assessment includes a detailed review of ASX’s planned replacement of the CHESS clearing and settlement system for cash equities. It found that the target state for the replacement system broadly meets the relevant standards, but that further assurances will be needed to verify that the system will meet these standards in practice.

The Bank was disappointed by the delay to the go-live date for CHESS replacement. ASX will need to demonstrate that appropriate arrangements are in place to manage risks related to its dependence on key vendors. The Bank will work closely with the Australian Securities and Investments Commission (ASIC) in supervising ASX’s response to these matters.

Effective governance and risk management arrangements, and a proactive approach to meeting regulatory obligations, are critical to the longer-term performance of the ASX CS facilities. The Bank found that:

• ASX should address recommendations from an external review that highlighted weaknesses in the practical implementation of ASX’s risk management framework
• ASX has made progress in addressing governance-related recommendations from the 2021 Assessment but there are several key outstanding items that ASX must address over the coming year
• ASX has made some improvements to its processes for notifying the Bank, although there were significant delays in the notification of some key information.

The Bank also conducted a detailed review of ASX’s margining arrangements. The review found that risk exposures had been reduced by the implementation of overnight variation margining at ASX Clear (Futures).

RBA Assistant Governor (Financial System) Brad Jones said, ‘The ASX clearing and settlement facilities are critical to the smooth functioning of the Australian financial system. It is important that ASX further strengthen its governance and risk management arrangements to the high standards expected of critical market infrastructure. The safe and timely replacement of CHESS must also remain a high priority for ASX.’

Background

The Reserve Bank is responsible for the supervision of Australian-licensed CS facilities with a focus on the reduction of systemic risk. Systemically important CS facilities are assessed on a regular basis against the Financial Stability Standards (FSS) determined by the Bank.

The Bank conducts annual assessments of ASX’s four CS facilities: two central counterparties – ASX Clear Pty Limited and ASX Clear (Futures) Pty Limited – and two securities settlement facilities – ASX Settlement Pty Limited and Austraclear Limited. These assessments include a rating of the CS facilities’ observance against each financial stability standard.

For more information on the Bank’s approach to assessing CS facilities, see: The Reserve Bank’s Approach to Supervising and Assessing Clearing and Settlement Facility Licensees.

ASIC has separate, but complementary, responsibilities for the supervision of CS facilities. In carrying out supervision of CS facilities, the RBA works closely with ASIC.