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Risk management

ASX Clear has multiple layers of risk controls, which seek both to reduce the likelihood that a clearing participant will default and to manage the risk to the clearing house if a default occurs

Enhancing the stability of Australia’s financial markets

A key requirement of the Reserve Bank of Australia’s Financial Stability Standards for Central Counterparties is that a central counterparty must have sufficient risk controls to provide a high degree of confidence that it can settle its obligations if there is a default by its two largest clearing participants and their affiliates in extreme but plausible market conditions.

As a result, ASX Clear has multiple layers of risk controls, including:

  • minimum capital requirements for clearing participants, monitored through financial returns
  • end of day margining of clearing participants' cash market positions and derivative market positions
  • at times of high market volatility, intraday margining of clearing participants' derivatives market positions
  • daily stress testing of clearing participant positions under extreme but plausible market conditions to ensure the ongoing adequacy of clearing house financial resources
  • additional margining of clearing participants where the size of their margins, or the projected shortfalls from closing their positions if they were to default in extreme but plausible market conditions, exceed acceptable levels, and
  • conditions to restrict permissions, impose limits or direct participants to close out contracts.

Posting collateral

The ASX Clear Operating Rules require clearing participants to call sufficient cash or collateral from their clients to ensure they can satisfy their margin obligations. 

Information for clients

ASX Clear does not directly specify the form of collateral your broker may accept from you as their client.

As a result, collateral arrangements between you and your broker are for you and your broker to determine.

Contact your broker directly for information about:

  • the collateral they will accept to cover margin obligations
  • the amount of collateral they require
  • whether they hold your collateral or pass it through to ASX Clear.

Before they can pass on your collateral to ASX Clear, you must sign the Addendum to a derivatives client agreement, acknowledging that you have read and understood certain operating rules of ASX Clear relating to cover and default.

Information for participants

ASX Clear does not directly specify the form of collateral you may accept from your clients – only that it must be sufficient to meet your margin obligations. 

The types of collateral you can provide to ASX Clear to satisfy your margin requirements is set out in the ASX Clear Acceptable Collateral List.

Before you can pass on client collateral to ASX Clear, the client must sign the Addendum to a derivatives client agreement, acknowledging that they have read and understood the rules relating to cover and default.

ASX Clear Acceptable Collateral List

Derivatives Client Agreement – Minimum Terms

ASX Clear’s approach to participant exercise errors

This section outlines the approach ASX Clear generally follows where, as a result of a participant error (whether caused or contributed to by its client or not) the participant:

  • fails to exercise an options CCP Contract, or
  • exercises an options CCP Contract

and the participant asks ASX Clear to help contact counterparty participants who are sellers of the Options CCP Contract in order to address the error.

If a participant has made an error by sending or not sending a clearing message in the Derivatives Clearing System (DCS), and an options CCP Contract is exercised or not exercised as a result, they can ask ASX Clear to contact sellers of the affected option series who have been allocated or not allocated an exercise notice and ask them if they are prepared to address the exercise error.

The request for help must be made by the authorised signatory of the requesting participant, who must contact ASX Clearing Operations by 9:00am on the next business day. The requesting participant should also provide a written request as soon as possible to clearing@asx.com.au including:

  • clearing participant ID
  • Account number
  • ASX code
  • affected option series
  • number of contracts affected
  • nature of error (that is, whether as a result of the error there was a non-exercise or exercise of the affected Options CCP Contracts), and
  • their contact details.

Where ASX Clear has received such a request we will, to the extent reasonably practicable, contact the counterparty participants by 9:30am on that business day to tell them there has been an error and ask if they are prepared to address it. We may disclose the identity of the requesting participant to the counterparty participant when we contact them.

It is at the absolute discretion of the counterparty participant whether they agree to address an exercise error. If the counterparty participant indicates they are prepared to address the error, or consent to their details being provided, we will tell both parties the other’s contact details. It is then a matter for both parties to contact each other and negotiate whether they will address the exercise error and the terms of any agreement.

Except for certain limited circumstances related to an exercise error other than at expiry, any actions agreed between the requesting participant and counterparty participant to address a participant exercise error occur directly between those participants, outside the exercise and allocation process undertaken by ASX Clear. As a result, ASX Clear and Derivatives Clearing System records will not reflect any arrangement agreed between them. Under no circumstances will ASX Clear undertake to resolve the participant exercise error on behalf of the requesting participant.

Note that, notwithstanding anything contained in this document, a participant does not have a right to have its exercise error addressed and ASX Clear and counterparty participants are under no obligation to address the error.

The approach to exercise errors set out in this section does not apply to situations where a clearing participant is experiencing technical problems transmitting clearing messages before the exercise cut-off time.

If a clearing participant is experiencing technical problems that prevent them from sending clearing messages, they may contact us before exercise cut-off and ask for emergency assistance under ASX Clear Operating Rule 6.9, including asking ASX Clear to submit exercise notices on their behalf. ASX Clear will deal with requests for help in those circumstances in accordance with the ASX Clear Operating Rules.

Managing defaults

ASX Clear has the power to take a range of steps if it declares an event of default in relation to a clearing participant, including:

  • suspending the participation of the defaulting clearing participant
  • closing out their open positions by:
    • matching them with equal and opposite positions registered in their account
    • at our discretion, allowing certain derivative positions to expire, or
    • executing market transactions to offset their net open exchange-traded derivatives positions, and
  • where the defaulting clearing participant’s client positions are individually accounted for at ASX Clear, transferring the defaulting clearing participant’s open client positions, either with or without any associated collateral, to another (non-defaulting) clearing participant where the client has an existing contractual relationship.

Section 15 of the ASX Clear Operating Rules sets out the circumstances that constitute a default event and the discretionary powers we have if a default occurs.

In invoking these powers, ASX Clear’s priority will be to minimise the impact of the default on the market as a whole, in a manner consistent with its licence obligations.

 

Section 15 of the ASX Clear Operating Rules sets out the circumstances that constitute a default event and the discretionary powers we have if a default occurs.

In invoking these powers, ASX Clear’s priority will be to minimise the impact of the default on the market as a whole, in a manner consistent with its licence obligations.

 

ASX Clear Participant Default - an Overview

Insolvency Practitioner Fact Sheet

Participant Default FAQs

ASX Clear Rulebook