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Introduction to Cash Market Margining

Background

In the aftermath of the Global Financial Crisis (GFC), there has been an increased focus on the importance of systemic risk management. Regulatory and user expectations of central counterparty (CCP) capabilities have increased in response, particularly in relation to the strengthening of CCP risk controls.

In March 2009, the Review of Participation Requirements in Central Counterparties published jointly with the Australian Securities and Investments Commission (ASIC), the RBA highlighted the significance of the GFC and recommended that ASX Clear (previously known as the Australian Clearing House - ACH) “review, particularly in the light of experience from the global financial crisis, whether there is a longer term case for considering other risk controls”.

In contrast to the majority of CCPs worldwide, ASX Clear does not currently require routine up front collateralisation (such as margin) on cash market exposures during the T+3 settlement cycle, or contribution to a mutualised paid-in Default Fund from its Clearing Participants. Either approach ensures that there exists a ‘defaulter pays’ element in the resources available to meet any losses arising from a Clearing Participant default in the cash market. Importantly, this would provide additional protection to the pooled financial resources available to the CCP and therefore add to the reputation of both the CCP and Australia’s financial markets.

Overview of Proposed Approach

ASX is undertaking a project to introduce routine daily margining of Clearing Participants with respect to unsettled cash market transactions. The margining approach is mainly based on a Historic Value at Risk (VaR) simulation of potential losses to ASX Clear in the event that the CCP has to close out a defaulting Clearing Participant’s unsettled novated transactions in normal market conditions. ASX believes that the proposal:

enhances the risk management controls of ASX Clear and therefore further reduces systemic risk in an increasingly complex Australian cash market environment;
is fully aligned with the RBA’s stance as outlined in the ASIC/RBA Review of Participation Requirements in Central Counterparties and subsequent RBA Annual Assessments of ASX’s central counterparties’ compliance with the Financial Stability Standards; and
further demonstrates ASX Clear’s practices to be international best practice.

Taking into consideration the feedback received from ASX Clear Participants, system vendors and industry associations, ASX has carefully reviewed the range of potential risk enhancements and is proposing to implement the following:

Consultation Process

At the end of 2009, ASX released a Consultation Paper entitled ASX Clear Central Counterparty Risk Management Controls seeking feedback on a number of alternative enhancements to ASX Clear’s risk control framework. ASX provided consolidated feedback in February 2010.

In Q2 2010 a second consultation was released entitled ASX Clear Central Counterparty Risk Management Controls - Cash Market Margining seeking additional feedback. This paper proposed a way forward centred on the routine margining of all Clearing Participants with respect to unsettled novated equity market transactions.

Following the extended formal consultation, ASX has also established a stakeholder Working Group to enable industry wide input on the completion of the margin model’s design together with the establishment of operational and reporting requirements. This working group is the principal mechanism for ongoing market feedback throughout implementation.

In conjunction with the Working Group, additional initiatives have been undertaken to increase market awareness and incorporate feedback into the proposal. These include:

Assisting Clearing Participants with estimating the impact of margining on their current and future business activities; and
Bilateral discussions especially where stakeholders are unable to participate through the working group mechanism, and where they do not wish to discuss confidential issues.

Project Status

The below timeline depicts the major milestones and progress to date.

Clearing Timeline

Project Timeline

The following timeline shows the current scheduling for Phase II and Phase III (Intraday Margining) for the Cash Market Margining Project.

Cash Market Margining Project Timeline

CMM Rule and Procedure Amendments

Detailed below are the changes to the various ASX Operating Rules to support the introduction of the Cash Market Margining initiative. Please be aware that these rules are subject to regulatory clearance.

ASX Clear Section 2 - Definitions and Interpretation (PDF 41KB)

ASX Clear Section 8 - Contributions and Emergency Assessments (PDF 135KB)

ASX Clear Section 10 - Accounts (PDF 91KB)

ASX Clear Section 12 - Registration Novation Netting and Settlement (PDF 231KB)

ASX Clear Section 14 - Risk Management (PDF 128KB)

ASX Clear Section 15 - Default (PDF 117KB)

ASX Clear Schedule 1 - Capital Rule Changes (PDF 67KB)

ASX Clear Schedule 1 Annexure - Counterparty Risk Requirement (PDF 59KB)

ASX Clear Procedures (PDF 448KB)

ASX Clear Procedures - Annexure 1 (PDF 149KB)

ASX Clear Procedures - Annexure 2 (PDF 255KB)

ASX Clear Procedures - Annexure 4 4 3_2 (PDF 82KB)

ASX Clear Procedures - Annexure 7 Austraclear Settlement Application (PDF 83KB)

ASX Clear Procedures - Annexure 9 CGB Lodgement Form (PDF 47KB)

ASX Clear Procedures - Annexure 10 CGB Withdrawal Form (PDF 43KB)

ASX Settlement Section 2 - Definitions and Interpretation (PDF 41KB)

ASX Settlement Section 14 - Subpositions (PDF 200KB)

ASX Settlement Procedures (PDF 44KB)

Contacting the ASX

For more information or if have any questions, please feel free to contact the ASX via email on Cashmarket.Margining@asx.com.au

Frequently Asked Questions

Frequently Asked Questions (PDF 149KB)

Historical Reference Material

Additional and/or updated versions of documents will be added to this section as they become available.

Released on 28 May 2013
ACH04013 Cash Market Margining - Formal Rule Lodgement (PDF 45KB)

Released on 21 May 2013
ACH03913 Cash Market Margining - Case Study (PDF 41KB)

Released on 17 May 2013
ACH03413 Cash Market Margining - Margin Rate Review (PDF 54KB)

Attachment A to ACH07412: Technical Description Overview (PDF 628KB)

Released on 26 October 2012
P2012/531: Participant Bulletin - CHESS Release 8.0 (PDF 3.40MB)

P2012/531A: Participant Bulletin - Attachment A to CHESS Release 8.0 (PDF 40.6KB)

Released on 21st August 2012
P2012/399: Participant Bulletin - CHESS Release 8.0 (PDF 72.5KB)

Released on 21st August 2012
CHESS Release 8.0 - Business and Technical Overview (PDF 1.61 MB)

Released on 19th July 2012
ACH03612: Cash Market Margining Initiative - Project Update (PDF 47KB)

Released on 19th July 2012
Cash Market Margining Model Documentation and Report User Guide (PDF 1 MB)

Released on 26th June 2012
ASX Clear Cash Market Margining - Workshop Session 5 Slides (PDF 1.61 MB)

Released on 8th May 2012
ACH02412: Cash Market Margining Initiative - Project Update (PDF 39.8KB)

Released on 8th February 2012
ASX Clear Cash Market Margining - Workshop Session 4 Slides (PDF 1.19 MB)

Released on 23rd December 2011
Clm139/11: Cash Market Margining Project - December 2011 Market Communication (PDF 35.8KB)

Attachment A to Clm139/11: Cash Market Margining Project - December 2011 Market Communication (PDF 128KB)

Released on 7th September 2011
ASX Clear Cash Market Margining - Workshop Session 3 Slides (PDF 648KB)

Released on 22nd March 2011
Cash Market Margining - Workshop Session 2 Slides (PDF 1.8 MB)

Released on 10th December 2010
Cash Market Margining - Workshop Session 1 Slides (PDF 2 MB)

Released on 18th October 2010
Australian Clearing House Central Counterparty Risk Management Controls - Cash Market Margining – 30 June 2010 Market Consultation Document Feedback (PDF 39KB)

Released on 30th June 2010
Australian Clearing House Central Counterparty Risk Management Controls - Cash Market Margining - Market Consultation Document (PDF 257KB)

Released on 25th February 2010
Australian Clearing House Central Counterparty Risk Management Controls - Summary of Responses to key Initiatives (PDF 168KB)

Released on 30th October 2009
Australian Clearing House Central Counterparty Risk Management Controls - Consultation Paper & Request for Comment (PDF 295KB)

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The ASX Group's activities span primary and secondary market services, including capital formation and hedging, trading and price discovery (Australian Securities Exchange); central counterparty risk transfer (ASX Clearing Corporation); and securities settlement for both the equities and fixed income markets (ASX Settlement Corporation).