## 1ausea2019005

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### Overview of FMIs and market structure
- Financial Market Infrastructures (FMIs) in Australia generally operate reliably, with new entrants and competitors emerging.
- RITS (Reserve Bank Information and Transfer System) is the only domestic systemically important interbank payment system and is operated by the Reserve Bank of Australia (RBA).
- ASX Limited (ASX) operates an integrated infrastructure including trading platforms, two central counterparties (CCPs), and two securities settlement systems (SSSs).
- Since 2011, ASX has faced competition from foreign infrastructures in some markets, including Chi-X Australia Pty Ltd (Chi-X), LCH Limited (LCH Ltd), and Chicago Mercantile Exchange (CME).

### Supervision, oversight, and regulatory framework
- Authorities and roles:
  - RBA: sole responsibility for payment systems; statutory powers from the Payment Systems (Regulation) Act 1998 (PSRA), Payment Systems and Netting Act 1998 (PSNA), and Part 7.3 of the Corporations Act 2001.
  - ASIC: responsible for market integrity, consumer protection, and licensing/assessment of CS facilities under Part 7.3 of the Corporations Act.
  - Treasury: advises government and supports drafting legislation for FMI supervision and resolution.
  - APRA: participates on the PSB; prudential regulator of banks and payment system participants.
  - CFR (Council of Financial Regulators): non-statutory coordinating body chaired by RBA; members: RBA, APRA, ASIC, Treasury.
  - ACCC: responsible for competition issues under Competition and Consumer Act 2010.
- Assessment:
  - Clearing and Settlement (CS) facility supervision and oversight are strong; legal and regulatory framework generally clear and transparent.
  - Adoption of the CPSS-IOSCO Principles for Financial Market Infrastructures (PFMI) and subsequent guidance has strengthened supervisory approaches.
  - Cooperation among authorities is close domestically and with foreign authorities; cooperation frameworks for crisis events need further development.
- Transparency and disclosure:
  - RBA and ASIC publish Acts, guidance, assessment reports, and explanatory texts on their websites.
  - RBA has created the FMI Review Committee (FMIRC) to strengthen governance of policy decisions and approvals of FMI assessments.

### Enforcement and competition powers (gaps identified)
- Identified gaps:
  - Enforcement powers for supervision of CCPs and SSSs should be strengthened in accordance with the PFMI.
  - RBA currently has no independent enforcement powers; RBA may request ASIC issue a direction but ASIC is not required to do so.
  - Minister may overrule ASIC’s decision regarding directions; Minister delegated certain responsibilities to ASIC in 2016 but legal basis for enforcing corrective actions should be strengthened with independent powers for the RBA.
  - ASIC and the ACCC currently lack explicit legislative powers to promote fair and effective competition between FMIs.
- Recommendations (selected):
  - Strengthen legal basis of direction powers for supervision of CS facilities, with independence from the Minister and own powers for the RBA. Timing: I. Responsibility: ASIC, RBA, Treasury.
  - Broaden the suite of enforcement tools for CS facilities. Timing: ST. Responsibility: ASIC, RBA, Treasury.
  - Grant ASIC and the ACCC powers to promote fair and effective competition between FMIs.
  - Consider granting rule-writing powers to supervisors in addition to directions powers.

### Resolution planning and special resolution regime
- Status and actions:
  - February 2015: government issued a high-level consultation paper on establishing a special resolution regime for CS facilities and trade repositories.
  - CFR authorities are developing drafting instructions for legislation to establish FMI resolution regime.
  - Authorities aim to have legislation ready for introduction into Parliament in 2019.
- Key recommendations and considerations:
  - Government should prioritize finalization of the special resolution regime for domestic FMIs.
  - Address Australia-specific market structure issues: vertically-integrated exchange groups, dominance of a few domestic and global banks, diversity and capacity of private-sector liquidity providers.
  - Consider treatment of affiliated entities within groups (implications for a point-of-entry strategy).
  - Include broad directions powers in resolution regime to conduct resolvability assessments and improve FMI resolvability ex ante. Timing: I. Responsibility: CFR.
  - Include broad powers to appoint a statutory manager, transfer critical FMI functions to a solvent third party or bridge FMI, and ensure streamlined and timely process for issuance of directions. Timing: I. Responsibility: CFR.
  - Ensure appropriate staffing with necessary knowledge and expertise regarding resolution of systemically-important FMIs. Timing: I. Responsibility: RBA, ASIC, and Treasury.

### Cyber risks and new technologies
- Cyber resilience supervision:
  - Cyber resilience is a key supervisory priority for RBA and ASIC.
  - RITS and ASX’s CS facilities are subject to regular cyber resilience assessments against CPMI-IOSCO guidance and international standards.
  - Authorities agreed FMIs will implement enhancements to meet the two-hour recovery time objective (RTO) where they provide a material net benefit.
  - Recommendation: supplement facility-level assessments with industry-wide cyber resilience tests.
- Distributed ledger technology (DLT) and ASX CHESS replacement:
  - ASX announced in December 2017 plans to replace CHESS with a permissioned, private DLT system developed with vendor Digital Asset (DA); ASX owns a minority stake in DA.
  - Design: shared, replicated ledger; initially only ASX and clearing and settlement members authorized to participate; ASX the only permissioned writer to the ledger.
  - Supervisory approach: ASIC and RBA monitoring developments and specifying expectations; preliminary self-assessment concluded nothing intrinsic to envisaged DA DLT prevents compliance with regulatory obligations.
  - Authorities have allocated specific staffing resources to oversee CHESS replacement and plan to discuss regulatory approvals and go-live milestones.

### ASX Clear: governance, risk management, and operational issues
- Systemic role and participants:
  - ASX Clear is the sole CCP for equity markets in Australia; critical to domestic equity market functioning.
  - Interconnectedness: 35 participants, including the 4 domestic systemically important banks (D-SIBs), large foreign banks, 2 trading platforms, 1 SSS.
  - Settlement on T+2; daily average value of cash equity trades in first half of 2018 approximately AUD 5 billion.
- Governance and ERM:
  - ASX implementing group-wide ERM; concerns that CCP-specific risks could be marginalized within group-level ERM.
  - CCPs lack dedicated CCP-specific internal risk committees and dedicated CCP-specific staffing; services and staff shared via ASX Operations Pty Limited.
  - Recommendations:
    - Establish CCP-specific internal risk committees, dedicated CCP-specific risk management and staffing, risk management systems, and resolution-friendly shared services agreements accounting for intra-group inter-dependencies.
    - Consider ring-fencing CS facilities within ASX group structure through a dedicated ERM, risk committee, staff, and risk management systems. Timing: ST. Responsibility: ASX.
- Recovery planning:
  - Recovery plan should address reliance on parent funding and other group services and fully address group interdependencies. Timing: I. Responsibility: ASX Clear.
- Credit, collateral, and liquidity:
  - Initial margin methodology uses a 20-year historic period and a 99.9 percent confidence level; calibration intended to limit procyclicality.
  - Recommendation: address procyclicality more comprehensively through the annual validation process for margin models. Timing: ST. Responsibility: ASX Clear.
  - Eligible collateral currently: cash (AUD) and domestic equities (S&P/ASX200 and suitable ETFs); conservative haircuts applied; no concentration limits on equity collateral—recommend applying concentration limits and broadening eligible collateral to include government and semi-government bonds. Timing: I. Responsibility: ASX Clear.
  - Prefunded default fund assets: A$250 million.
  - Committed liquidity facility from ASX Ltd: A$150 million, of which A$100 million is backed by a committed liquidity facility from a commercial bank.
  - Remaining liquidity needs covered by Offsetting Transaction Arrangements (OTAs); recommendation to increase and diversify qualifying liquid resources and move use of OTAs to a later stage in the waterfall. Timing: I. Responsibility: ASX Clear.
  - Recommendation to diversify the committed bank credit line that parent ASX Ltd holds to mitigate liquidity risk.
- Intraday margining and segregation:
  - ASX Clear can call intraday margin for equity options five times per day.
  - CHESS limitations: does not support intraday netting during the day or segregation of house and client cash equity positions; CHESS reliability 99.9 percent availability but technology is aging and replacement recommended. Timing: ST-MT. Responsibility: ASX Clear.
  - Recommendation: implement operational capacity to conduct intraday margin calls and separate house and client accounts when CHESS replacement is in place.
- Operational risk and CHESS replacement:
  - Independent external review recommended changes to technology governance and operational risk management; ASX is responding and has hired additional resources and ring-fenced teams for CHESS replacement.
  - ASX intends further security reviews of DA platform prior to implementation.

### Key statistics and FMI landscape (selected figures)
- RITS average daily activity (April 2017–March 2018): over 47,000 RTGS transactions each day; aggregate daily value around AUD 180 billion (11 percent of annual GDP).
- Direct Entry system daily aggregate value (April 2017–March 2018): around AUD 70 billion; direct entry payments represented almost 90 percent of this value.
- New Payments Platform (NPP) launched: February 2018.
- RITS aggregate daily value (Annex III): around AUD 179 billion.
- Cash equity clearing average per day: approximately AUD 5 billion.
- CHESS holds a value of approximately AUD 2 trillion in securities.
- Austraclear holds government bonds valued at approximately AUD 1.9 trillion.
- Participants (as of March 31, 2018):
  - RITS: 98 (of which 40 are indirect participants)
  - ASX Clear: 35
  - ASX Clear (Futures): 20
  - LCH Ltd SwapClear: 5 direct Australian participants (110 in total); a further 23 Australian entities are clients
  - Austraclear: 882 (179 full participants, 194 associate participants, 212 special purpose participants, and 297 public trusts)
  - ASX Settlement: 90 (33 ASX Clear participants, 27 general settlement participants, 17 account-only settlement participants, 12 product issuer settlement participants, and 1 suspended participant)
- CCP financial resources (2017 Average, in millions of AUD):
  - Initial Margin (excluding add-ons):
    - ASX Clear: 1,090 (cash 150; equity derivatives 940)
    - ASX Clear (Futures): 5,425
    - LCH Ltd SwapClear: 118,060
    - CME IRD Service: 31,205
  - Default Fund:
    - ASX Clear: 250
    - ASX Clear (Futures): 650
    - LCH Ltd SwapClear: 7,908
    - CME IRD Service: 3,540
  - Total:
    - ASX Clear: 1,340
    - ASX Clear (Futures): 6,075
    - LCH Ltd SwapClear: 125,968
    - CME IRD Service: 34,745
  - Note: CME IRD Service initial margin figure includes add-ons.

### Critical service providers (CSPs) and RBA oversight
- RBA considers CSPs in its supervisory approach; FSS expects CS facilities to scrutinize CSPs (PFMI Annex F).
- Key CSP for RITS: SWIFT.
- Failure of SWIFT would:
  - severely impair the ability of members to effect third-party payments,
  - severely impair management of Austraclear settlements via the RITS Automated Information Facility (that uses SWIFT messages).
- RBA participates in the SWIFT Oversight Forum and receives information from the SWIFT Oversight Group.

### Cooperation with New Zealand authorities and cross-border issues
- Cooperation arrangements exist for ASX Clear (Futures) between RBA and RBNZ, and between ASIC and FMA.
- Recommendation: consolidate relationship agreements (e.g., include FMA and ASIC in RBNZ/RBA MOU for CCPs located in Australia) to ensure all authorities receive the same information simultaneously.
- Cross-border importance:
  - ASX Clear (Futures) is systemically important for New Zealand banks that depend on it for clearing NZD IRD; New Zealand banks currently clear indirectly through direct clearing members of ASX Clear (Futures).
- For resolution and crisis management, Australian authorities participate in the Crisis Management Group (CMG) for LCH Ltd.

### Implementation of PFMI and supervisory practice
- ASIC and RBA have publicly adopted the PFMI and related guidance (cyber resilience, recovery of FMIs, resilience of CCPs).
- Authorities conducted one full PFMI assessment in 2014 and plan repeat on a five-year basis; RBA conducts annual assessments against the FSS.
- CPMI-IOSCO implementation monitoring (Annex II):
  - Level 1: Australia has the highest ratings in all categories.
  - Level 2: Payment Systems — PFMI implemented in a complete and consistent manner; CCPs and CSDs — consistent or broadly consistent with identified gaps in Principles 15, 21 and 22.
  - Level 2/3: Australia found to observe all responsibilities.

### Selected supervisory recommendations (excerpt)
- Increase transparency of regulatory expectations for potential (privately operated) systemically important payment systems. Timing: ST. Responsibility: RBA.
- Strengthen legal basis of direction powers for supervision of CS facilities, with independence from the Minister and own powers for the RBA. Timing: I. Responsibility: ASIC, RBA, Treasury.
- Broaden the suite of enforcement tools for CS facilities. Timing: ST. Responsibility: ASIC, RBA, Treasury.
- Strengthen legal and regulatory frameworks for fair and effective competition among CS facilities. Timing: I. Responsibility: ASIC, RBA, Treasury, ACCC.
- Complement cyber resilience assessments with industry-wide tests. Timing: ST. Responsibility: CFR.
- Enhance crisis communication framework for authorities/supervisors of CS facilities. Timing: ST. Responsibility: ASIC, RBA.
- Update MOUs with ACCC on CS facilities matters. Timing: ST. Responsibility: RBA, ASIC, ACCC.
- Finalize the proposed special resolution regime for FMIs. Timing: I. Responsibility: CFR.
- Clarify the point at which settlement is final in the operating rules. Timing: I. Responsibility: ASX Clear and ASX Settlement.
- Replace the aging CHESS system with modern technology. Timing: ST-MT. Responsibility: ASX Clear.
- Increase and diversify qualifying liquid resources to move the use of OTAs to a later stage in the waterfall. Timing: I. Responsibility: ASX Clear.
- Apply concentration limits on collateral and broaden the range of eligible collateral to include government and semi-government bonds. Timing: I. Responsibility: ASX Clear.

*Source: IMF Mission material in 1ausea2019005.*

### EXECUTIVE SUMMARY __________________________________________________________________________ 5

### EXECUTIVE SUMMARY

### Overview of FMIs and market structure
- Financial Market Infrastructures (FMIs) in Australia generally operate reliably, and the competitive landscape has seen new entrants and competitors emerge.
- The Reserve Bank Information and Transfer System (RITS), operated by the Reserve Bank of Australia (RBA), is the only domestic systemically important interbank payment system.
- The domestically incorporated ASX Limited (ASX) group operates an integrated infrastructure including trading platforms, two central counterparties (CCPs), and two securities settlement systems (SSSs).
- Since 2011, the ASX has faced competition from foreign infrastructures in some markets, including Chi-X Australia Pty Ltd (Chi-X) for cash equities trading and the LCH Limited (LCH Ltd) and the Chicago Mercantile Exchange (CME) for some over the counter (OTC) derivatives clearing.

### Supervision, oversight, and regulatory framework
- The Australian authorities responsible for the regulation, supervision, and oversight of FMIs are the RBA and the Australian Securities and Investments Commission (ASIC).
- The RBA has sole responsibility for payment systems, while ASIC and the RBA have complementary regulatory responsibilities for CCPs and SSSs.
- The FSAP assessment is that Clearing and Settlement (CS) facility supervision and oversight are strong and that the FMI legal and regulatory framework generally is clear and transparent.
- Adoption of the CPSS-IOSCO Principles for Financial Market Infrastructures (PFMI) and subsequent guidance has strengthened the authorities’ approach with more comprehensive requirements and assessments, and increased diligence in following up on findings.
- Cooperation among the authorities is close, both domestically as well as with foreign authorities, although cooperation frameworks need to be further developed to manage FMI crisis events.
- The mission recommends the RBA consider updating its approach to payment systems oversight, in particular to increase the transparency around expectations for potential (privately operated) systemically important payment systems.

### Enforcement and competition powers (gaps identified)
- Enforcement powers for the supervision of CCPs and SSSs should be strengthened in accordance with the PFMI.
- Currently, the RBA has no independent enforcement powers to underpin its oversight. The RBA may request that ASIC issue a direction to comply with the FSS or to reduce systemic risk; however, ASIC is not required to do so.
- The Minister may overrule ASIC’s decision regarding whether to make or to revoke a direction. Although there is no evidence of such intervention by the Minister (and the Minister has delegated certain responsibilities to ASIC), the current legal basis for enforcing corrective actions should be strengthened with independent powers for the RBA.
- It is recommended that legislation should grant ASIC and the ACCC the powers to promote fair and effective competition between FMIs, as such powers are lacking.
- Supervisory powers could be broadened, for example, by granting rule writing powers in addition to directions powers.

### Resolution planning and special resolution regime
- In 2015, the Australian government issued a high-level consultation paper to establish a special resolution regime for CS facilities (and trade repositories) consistent with international standards, requesting feedback on scope, powers, safeguards, funding, and international cooperation.
- The Council of Financial Regulators (CFR) authorities are developing drafting instructions for legislation that would establish a resolution regime for FMIs.
- The government should prioritize finalization of its special resolution regime for domestic FMIs, since it currently lacks the necessary framework and tools to resolve an FMI.
- Authorities will need to address Australia-specific financial market structure issues, including CS facilities that are part of a vertically-integrated exchange group, dominance of a few domestic financial institutions and a few global banks, and diversity and capacity of private-sector liquidity providers.
- Important considerations include treatment of affiliated entities within groups (implications for a point-of-entry strategy) and the breadth of ex-ante resolvability assessments and FMI resolution plans.

### Cyber risks and new technologies
- New supervisory challenges, particularly related to cyber risks and new technologies, are appropriately addressed by ASIC and the RBA; nevertheless, cyber resilience of FMIs would further benefit from industry-wide cyber tests.
- RITS and ASX’s CS facilities are subject to regular cyber resilience assessments by the authorities against CPMI-IOSCO guidance, international standards, and good practices.
- Authorities could supplement these with industry-wide cyber resilience tests to gain insights into the impact of a cyber incident on the industry as a whole.
- With regard to distributed ledger technology (DLT) and other new technologies, ASIC’s and RBA’s approach includes monitoring developments and specifying expectations.
- Supervision of the replacement of ASX’s CS systems, which uses DLT technology, can be fully addressed within the existing regulatory framework. It involves a permissioned model, where only ASX, clearing members, and issuers would be authorized to participate. Private contractual information would be available only to the transaction parties, and ASX would be the only permissioned writer to the ledger.

### ASX Clear: governance, risk management, and operational issues
- The FSAP’s assessment of elements of ASX Clear’s governance and risk management framework identified several areas where further attention is warranted.
- ASX Ltd and the authorities are encouraged to consider the impact of the current governance structure on compliance with CS risk management requirements, including whether a simpler structure would help meet requirements related to competition issues in the equity market more easily.
- The planned FMI resolution regime will also have to address the integrated functions and any resulting obstacles to the FMI’s resolvability.
- ASX Clear’s recovery plan should address its reliance on parent funding and on other group services.
- Further improvements to its risk management systems should be considered, such as:
  - the operational capacity to implement intraday margin calls,
  - separate house and client accounts,
  - implementation of concentration limits on collateral, and
  - availability of sufficient pre-funded liquid resources before applying mechanical liquidity allocation mechanisms.
- Operational risks need to be further addressed in line with authorities’ requirements.
- Replacement of the aging CHESS system with modern technology is recommended to increase operational reliability and support compliance with financial risk management requirements (e.g., operational capacity to conduct intraday margin calls and segregated house and client accounts).

### Key recommendations (excerpted from Table 1)
- Increase transparency of regulatory expectations for potential (privately operated) systemically important payment systems. Timing: ST. Responsibility: RBA.
- Strengthen legal basis of direction powers for supervision of CS facilities, with independence from the Minister and own powers for the RBA. Timing: I. Responsibility: ASIC, RBA, Treasury.
- Broaden the suite of enforcement tools for CS facilities. Timing: ST. Responsibility: ASIC, RBA, Treasury.
- Strengthen the legal and regulatory frameworks in the area of fair and effective competition among CS facilities. Timing: I. Responsibility: ASIC, RBA, Treasury, ACCC.
- Complement cyber resilience assessments with industry-wide tests. Timing: ST. Responsibility: CFR.
- Enhance the crisis communication framework for authorities for/supervisors of CS facilities. Timing: ST. Responsibility: ASIC, RBA.
- Update MOUs with ACCC on CS facilities matters. Timing: ST. Responsibility: RBA, ASIC, ACCC.
- Streamline cooperation agreements with New Zealand authorities for ASX Clear (Futures). Timing: ST. Responsibility: RBA, ASIC, RBNZ, FMA.
- Finalize the proposed special resolution regime for FMIs. Timing: I. Responsibility: CFR.
- Address challenges related to current and potential FMI structure(s), and FMI-specific, FMI group, FMI linkages, and inter-dependency factors. Timing: I. Responsibility: CFR.
- Include broad directions powers in the Australian resolution regime to conduct resolvability assessments and improve FMI resolvability ex ante. Ensure a streamlined and timely process for issuance of directions. Timing: I. Responsibility: CFR.
- Include broad powers in the Australian resolution regime to appoint a statutory manager to resolve a distressed, failing, or failed FMI. Timing: I. Responsibility: CFR.
- Include broad powers in the Australian resolution regime to transfer critical FMI functions to a solvent third party or bridge FMI. Timing: I. Responsibility: CFR.
- Ensure appropriate staffing with necessary knowledge and expertise regarding resolution of systemically-important FMIs. Timing: I. Responsibility: RBA, ASIC, and Treasury.
- Clarify the point at which settlement is final in the operating rules. Timing: I. Responsibility: ASX Clear and ASX Settlement.
- Address procyclicality through the annual validation process for margin models. Timing: ST. Responsibility: ASX Clear.
- Consider ring-fencing CS facilities within the ASX group structure through a dedicated ERM, risk committee, staff, and risk management systems. Timing: ST. Responsibility: ASX.
- Address group interdependencies fully in ASX Clear’s recovery plan. Timing: I. Responsibility: ASX Clear.
- Replace the aging CHESS system with modern technology. Timing: ST-MT. Responsibility: ASX Clear.
- Increase and diversify qualifying liquid resources to move the use of OTAs to a later stage in the waterfall. Timing: I. Responsibility: ASX Clear.
- Apply concentration limits on collateral and broaden the range of eligible collateral to include government and semi-government bonds. Timing: I. Responsibility: ASX Clear.

*EXECUTIVE SUMMARY — AUSTRALIA, INTERNATIONAL MONETARY FUND*

### 7. The following FMIs offer payment, clearing, and settlement services in Australia (see

### 1ausea2019005 - 7. The following FMIs offer payment, clearing, and settlement services in Australia (see

### FMI landscape and primary functions
- Payment systems:
  - RITS:
    - Principal domestic payment system in aggregate value of payments.
    - Handles time-critical, high value payments and settles payments from other systemically important FMIs.
    - Between April 2017 and March 2018, it settled an average of over 47,000 real-time gross settlement (RTGS) transactions each day, with an aggregate daily value of around AUD 180 billion (11 percent of annual GDP).
  - CLS Bank (CLS):
    - International payment system for settling foreign exchange trades in 18 currencies, including the Australian dollar.
  - Direct Entry system:
    - Governed by AusPayNet rules; largest retail payment system.
    - Non-cash retail payments’ daily aggregate value between April 2017 and March 2018 was around AUD 70 billion.
    - Direct entry payments (credit transfers and direct debits) represented almost 90 percent of this value.
  - Card payments:
    - Cleared domestically or through international schemes.
    - Main debit cards: eftpos (managed by ePAL), Mastercard, Visa.
    - Most debit cards are dual-network (eftpos + one international network).
    - International card schemes also offer four-party and three-party credit/charge cards.
  - New Payments Platform (NPP):
    - Fast payments system launched in February 2018.
    - Enables close-to-immediate funds availability 24/7 across different financial institutions.
    - Supported by RBA’s Fast Settlement Service in RITS to settle every single payment in real-time in central bank funds across each institution’s Exchange Settlement Account (ESA).

- CCPs (central counterparties):
  - ASX Clear Pty Limited (ASX Clear):
    - CCP for ASX-quoted cash equities, debt products and warrants traded on ASX and Chi-X markets; equity-related derivatives on ASX market and OTC; Chi-X quoted warrants.
    - Daily average value of cash equity trades in the first half of 2018 was approximately AUD 5 billion.
  - ASX Clear (Futures) Pty Limited (ASX Clear (Futures)):
    - CCP for futures and options on interest rate, equity, energy and commodity products traded on ASX 24.
    - Clears AUD- and NZD-denominated OTC interest rate derivatives (IRD).
  - LCH Ltd's SwapClear:
    - Provides CCP services for OTC IRD.
  - CME:
    - Licensed to provide CCP services for OTC IRD, and non-AUD IRD traded on CME or Chicago Board of Trade for which CME permits portfolio margining for OTC IRD.

- SSSs and CSDs (securities settlement systems / central securities depositories):
  - ASX Settlement Pty Limited (ASX Settlement):
    - SSS for ASX-quoted cash equities, debt products and warrants on ASX and Chi-X; also for non-ASX listed securities quoted on other trading platforms.
  - Austraclear Pty Limited (Austraclear):
    - SSS for trades in debt securities, including government bonds and repurchase agreements.
  - IMB Limited:
    - Provides SSS services for trades in its own securities.

### Systemic importance and interconnections
- Authorities’ view:
  - Australian authorities consider these FMIs systemically important in Australia, except for CME and IMB.
  - RBA determines systemic importance for payment systems by size, interconnectedness, and substitutability.
  - ASIC and RBA consider domestic CS facilities (CCPs and SSSs) systemically important given central market roles; IMB is an exception due to narrow scope.
  - Systemic importance of foreign CS facilities is assessed by connections to the Australian financial system and materiality of those connections; based on these criteria CME is not considered systemically important for the Australian system at this juncture.
- Cross-border importance:
  - ASX Clear (Futures) is systemically important for New Zealand banks, which depend on it for clearing NZD IRD; New Zealand banks currently clear indirectly through direct clearing members of ASX Clear (Futures).

### Financial resources of CCPs (2017 Average, in millions of AUD)
- Initial Margin (excluding add-ons):
  - ASX Clear: 1,090 (cash 150; equity derivatives 940)
  - ASX Clear (Futures): 5,425
  - LCH Ltd SwapClear: 118,060
  - CME IRD Service: 31,205
- Default Fund:
  - ASX Clear: 250
  - ASX Clear (Futures): 650
  - LCH Ltd SwapClear: 7,908
  - CME IRD Service: 3,540
- Total:
  - ASX Clear: 1,340
  - ASX Clear (Futures): 6,075
  - LCH Ltd SwapClear: 125,968
  - CME IRD Service: 34,745
- Note: CME IRD Service initial margin figure includes add-ons.

### Governance, supervisory, oversight, and coordination framework
- Reserve Bank of Australia (RBA):
  - Responsible for regulating and overseeing payment systems in Australia.
  - Payments System Board (PSB) determines RBA payments system policy; objectives: (i) controlling risk in the financial system; (ii) promoting efficiency of payments system; (iii) promoting competition in payment services consistent with financial stability.
  - PSB composition: RBA Governor (chair), one other RBA appointee, an appointee from APRA, and up to five independent members.
  - RBA established the FMI Review Committee (FMIRC) in 2014 to strengthen governance for policy decisions and approval of FMI assessments.
  - RBA’s statutory powers derive from:
    - Payment Systems (Regulation) Act 1998 (PSRA): gather information, designate payment systems, set Standards and Access Regimes for designated payment systems.
    - Payment Systems and Netting Act 1998 (PSNA): legal certainty on settlement finality in approved RTGS systems and netting arrangements.
    - Part 7.3 of the Corporations Act 2001: conditions for licensing and operation of CS facilities.
- ASIC:
  - Responsible for market integrity and consumer protection for financial products and for facilities that trade, clear or settle transactions involving financial products.
  - Under Part 7.3 of Corporations Act, ASIC and RBA have separate but complementary responsibilities for CS facilities.
  - ASIC assesses compliance with license requirements for CS facilities; Minister delegated licensing and non-disallowance of operating rules to ASIC officers in 2016.
  - ASIC and RBA have an MoU to promote transparency, avoid duplication, and minimize regulatory burden.
- Treasury:
  - Advises the Australian Government on financial sector regulatory framework and supports drafting of legislation for FMI supervision and resolution.
- APRA:
  - Role limited to its seat on the PSB; prudential regulator of banks and supervisor of payment system participants.
- Council of Financial Regulators (CFR):
  - Non-statutory coordinating body chaired by RBA; members include RBA, APRA, ASIC, Treasury (agency heads + one other senior representative).
  - Coordinates FMI-related issues, shares information, coordinates responses to potential threats to financial stability.
  - Recent CFR activities include developing a special resolution regime for FMIs and regulatory expectations/legal reforms to support fair and effective competition for trade and post-trade infrastructures (with ACCC involvement).
- ACCC:
  - Responsible for competition issues related to FMIs and payment systems under Competition and Consumer Act 2010.
  - Investigated regulations/procedures for five clearing systems operated by AusPayNet and the NPP in an authorization context.
  - MoU with RBA to coordinate competition and access policy for the payments system.

### Recent developments
- Resolution regime for FMIs:
  - February 2015: Government issued high-level consultation paper “Resolution Regime for Financial Market Infrastructures” to solicit stakeholder views on legislative proposals for a special resolution regime for domestic CS facilities and systemically-important trade repositories.
  - October 2015: Government response to the 2014 Financial System Inquiry agreed regulators should have clear powers to manage failures; further development of an FMI resolution regime is ongoing, building on CFR’s November 2015 paper and lessons from banking and insurance resolution regimes.
- ASX CHESS replacement and DLT adoption:
  - ASX began evaluating replacement options for CHESS in 2015.
  - December 2017: ASX announced plans to replace CHESS with a new system that includes a permissioned, private DLT system.
  - DLT design: shared, replicated ledger and a distributed database synchronizing mechanism; initially only ASX and clearing and settlement members authorized to participate; ASX is the only permissioned writer to the ledger.
  - Expected benefits: market efficiencies through elimination of messaging and manual processes, integrity of databases, and industry standardization.
  - ASX is working with vendor Digital Asset (DA), in which it owns a minority stake, to develop the replacement system.

### Analysis highlights and supervisory recommendations
- Oversight of payment systems:
  - RBA oversight of RITS is clearly described (joint statement by ASIC and RBA, 2013); criteria for oversight include (i) sole/principal system by aggregate value; (ii) mainly handles time-critical, high-value payments; (iii) used to effect settlement in other systemically important FMIs.
  - RBA intends to monitor developments in other payment systems and periodically review whether they should be subject to PFMI assessments; this approach is not yet formalized.
  - PSRA provides legal basis for designation and oversight but has been applied in practice only to certain retail payment systems; some systems (e.g., NPP) have not been designated.
  - RBA considers CLS systemically important for Australia and participates in CLS Oversight Committee chaired by FRBNY; joint statement and PSRA do not currently cover oversight of foreign-based payment systems.
- Recommended RBA actions to improve clarity and effectiveness:
  - Outline criteria for determining whether a payment system will be deemed systemically important and required to meet PFMI requirements.
  - Create a category of prominent, but less systemically important, payment systems which might be expected to meet some subset of the PFMI.
  - Develop a formal approach for conducting a ‘horizon scanning process’ to identify payment systems that meet criteria and ensure appropriate oversight.
- CS facilities supervision:
  - Corporations Act clearly outlines criteria for CS facilities to be subject to supervision, licensing requirements, and possible ministerial exemptions (considering factors in ASIC’s Regulatory Guide 211).
  - Division of responsibilities between ASIC and RBA regarding CS facilities is clearly outlined in the Corporations Act; MOU and cooperation manage overlaps in practice.

*Source: IMF Mission material in 1ausea2019005.*

### 27. The RBA also considers critical service providers (CSPs) in its supervisory approach.

### 1ausea2019005 - 27. The RBA also considers critical service providers (CSPs) in its supervisory approach.

### Critical service providers (CSPs) and RBA oversight
- Under the FSS, CS facilities are expected to scrutinize critical service providers against the oversight expectations for CSPs (PFMI Annex F).
- The key CSP for RITS is the Society for Worldwide Interbank Financial Telecommunications (SWIFT).
- Failure of SWIFT would:
  - severely impair the ability of members to effect third-party payments,
  - severely impair the management of Austraclear settlements via the RITS Automated Information Facility (that uses SWIFT messages).
- The RBA is represented in the SWIFT Oversight Forum and receives information on the oversight activities of the National Bank of Belgium and the SWIFT Oversight Group.

### Powers and resources (Responsibility B)
- Internal governance and escalation:
  - Oversight activities located in the Payments Policy Department; RITS operations conducted within the Payments Settlements Department.
  - Both departments report to different managers with reporting lines converging at the level of the Deputy Governor.
  - Assessment findings are discussed within the PSB, which is chaired by the Governor and largely comprised of independent board members.
  - Two departments have information-sharing arrangements; Payments Policy Department has access to RITS data (activity, liquidity usage and availability, incidents).
- Legal and statutory powers:
  - The PSRA allows the RBA to obtain information from payments system participants, to designate a payment system, and to set access regimes and standards for designated payment systems; PSRA specifies fines for certain rule breaches.
  - Information powers for CS facilities are outlined in the Corporations Act:
    - Section 821C obliges a licensed CS facility to give such assistance to ASIC or the RBA as reasonably is requested (including access to books and records or provision of other relevant information).
    - The ASIC Act gives ASIC inspection and investigation powers, including power to inspect books, require production of documents, and summon individuals to appear before ASIC and answer inquiries.
  - Enforcement powers for CS facilities:
    - Rest with the Minister and ASIC.
    - ASIC can undertake assessment of a CS facility’s compliance with its obligations under the Corporations Act; RBA can assess compliance with the FSS.
    - The Minister may require a special report and an audit report on the special report, may give the licensee a written direction, and has the power to suspend or cancel a license.
    - ASIC is empowered to give directions in writing, at its own instigation or at the request of the RBA.
    - Directions issued by the Minister or ASIC are enforceable by court order.
    - In 2016, the Minister delegated her role to ASIC for more timely consideration of decisions.
- Staffing resources:
  - ASIC’s Market Infrastructure team:
    - Team comprised of 32 people directly involved in markets infrastructure.
    - CS facilities team has at least five members, including a senior manager and at least one technical senior specialist.
  - RBA Payments Policy Department:
    - Team of 21 people responsible for FMI oversight and policy development.
    - 17 staff members involved in regulation and oversight of CS facilities.
    - RBA has arrangements to seek technical expertise (legal, IT) and has an FMI training program.

### Recommendations on enforcement and competition powers
- Strengthen legal basis for ASIC’s and RBA’s supervisory enforcement powers for CS facilities and increase independence from the Minister:
  - Under current provisions, RBA has no independent enforcement powers; RBA may request ASIC issue a direction but ASIC is not required to do so.
  - The Minister may overrule ASIC’s decision to make or to revoke a direction and can exercise delegated powers.
  - Recommendation: strengthen legal basis for directions powers and ensure sufficient independence from the Minister in day to day supervision.
  - Mission recommends that RBA is granted enforcement powers independently from ASIC.
- Grant authorities additional powers to support fair and effective competition between/among infrastructures:
  - Regulatory expectations for ASX conduct require transparent and non-discriminatory treatment and terms and conditions, including pricing, that are fair and reasonable.
  - Treasury, in cooperation with ASIC, the ACCC, and the RBA, is pursuing legislative changes to make regulatory expectations legally enforceable:
    - ASIC would be provided with rule-making powers.
    - ACCC would be granted an arbitration power for binding resolution of material disputes between ASX and a user seeking access to ASX CS services.
  - RBA to be involved from a financial stability perspective in competition between post-trade infrastructures.

### Transparency (Responsibility C)
- RBA public disclosures:
  - RBA Act outlines high-level objectives regarding payment systems.
  - The Act, the joint statement, the PSRA, RBA policies, PSB reports, assessment reports (including ratings), explanatory texts, and other information are disclosed via the RBA’s website.
- ASIC and RBA supervisory transparency:
  - Corporations Act, ASIC’s Regulatory Guide 211, CS facility licensees, the FSS, the joint statement on implementing the PFMI in Australia, assessment reports (including ratings), media releases, explanatory texts, and other information are disclosed via the RBA website and the ASIC website.

### Implementation of the PFMI (Responsibility D)
- Adoption and guidance:
  - ASIC and the RBA have publicly adopted the PFMI; joint statement commits ASIC and the RBA to apply the PFMI in supervision and oversight of all FMI types.
  - Additional guidance adopted includes:
    - guidance on cyber resilience for financial market infrastructures issued in June 2016,
    - recovery of financial market infrastructures—revised report issued in July 2017,
    - resilience of central counterparties, issued in July 2017.
- Assessment practice:
  - PFMI reflected in the FSS; FSS is more specific on requirements such as recovery and orderly wind-down, financial resources, and the requirement that CCP services be provided by a legal entity separate from entities providing unrelated-risk services.
  - Authorities conducted one full assessment against the PFMI in 2014 and plan to repeat this on a five-year basis.
  - RBA conducts an annual assessment against the FSS.
  - ASIC uses the PFMI in thematic assessments (e.g., cyber resilience).
  - Authorities use the five responsibilities to conduct self-assessments of their regulation, supervision, and oversight of FMIs in Australia.
- Effectiveness of oversight:
  - RBA oversight of RITS has enhanced RITS’s observance of the PFMI.
  - Payments Policy and Payments Settlements Departments organize monthly senior management meetings and quarterly working-level meetings; issues escalated to the Governor when necessary.
  - In crisis events, the Assistant Governor responsible for the Payment Policy Department is part of the crisis management team.
  - Supervision of CS facilities is effective with supervisory expectations having increased importantly in recent years:
    - Authorities meet quarterly on a technical level, every six months at a strategic level, and every year with the ASX Board.
    - Annual FSS assessments are comprehensive with annual deep dives (initially financial risks, more recently operational risks, and the coming year legal risks).
    - Example: ASX strengthened financial risk management following RBA assessments and is following up on operational risk requirements from ASIC and the RBA.
- Internal review and consistency:
  - RBA created the FMIRC after self-assessment against the five responsibilities:
    - FMIRC is a senior-level internal review committee that reviews day-to-day oversight activities.
    - FMIRC reports to both the Executive Committee and the PSB.
    - Responsibilities include review and, for CS facilities, approval of staff routine oversight and supervisory decisions, interpretation of the PFMI, review of an FMI’s progress in meeting recommendations, review of FMI assessments, and for CS facilities, approval of the assessments.
    - For RITS, approval of assessments is the responsibility of the PSB.
  - Consistency supported by publication of detailed assessment reports, including assessments of each relevant FMI’s observance of the Principles.

### Cooperation among authorities (Responsibility E)
- Domestic cooperation:
  - Cooperation between ASIC and the RBA is strong and effective under the Corporations Act and the RBA-ASIC MOU.
  - Authorities consult as part of assessments, organize joint meetings with CS facilities, and brief each other on meeting outcomes.
  - The CFR typically facilitates constructive coordination among authorities.
- MOUs and information sharing:
  - MOUs between the ACCC and RBA and ASIC need updating to better support information sharing among authorities.
  - Relevant legislation: ACCC has general responsibility for competition; RBA has specific responsibilities in relation to payments systems (including ability to impose access regime or set standards for designated systems).
  - Both RBA–ACCC and ASIC–ACCC MOUs should be updated to reflect recent cooperation on competition for CS facilities (ASIC and RBA) and trading platforms (ASIC), to facilitate sharing of information.
- Crisis cooperation and communication:
  - Need to enhance cooperation in times of crisis through a dedicated communication framework for CS facilities that is regularly tested.
  - Existing frameworks:
    - ASIC has developed a market wide industry crisis communication framework.
    - RBA has a crisis communication framework for payment systems.
  - Authorities need to enhance the crisis communication framework to include incidents that affect CS facilities; CFR could be used to facilitate effective communication and coordination if an FMI was in financial or operational distress.
  - The framework needs regular testing to identify and solve barriers to effective crisis communication and coordination.
- International cooperation:
  - Typically facilitated by an MOU and allows information sharing and crisis management with foreign authorities.
  - RBA’s participation in the CLS and SWIFT oversight committees provides information about observance of these systems with the PFMI and identifies issues relevant for FX settlement involving the AUD and messaging services for RITS, CLS, other FMIs, and participants.
  - RBA and ASIC cooperate with the Bank of England, the European Securities and Markets Authority, and the U.S. Commodity Futures Trading Commission in relation to supervision of LCH Ltd, the ASX CCPs, and CME.
  - For resolution and crisis management, Australian authorities participate in the Crisis Management Group (CMG) for LCH Ltd.

### Box 1 — Supervision and Oversight of Cyber Risks and New Technologies (high-level findings)
- Cyber resilience:
  - Cyber resilience is a key supervisory priority for the RBA and ASIC.
  - RBA conducted an initial assessment of RITS; RBA and ASIC jointly conducted an initial assessment of ASX CS facilities based on the 2016 CPMI-IOSCO cyber resilience guidance.
  - External reviews were conducted against industry standards.
  - On the two-hour recovery time objective (RTO) requirement, it was agreed FMIs will implement enhancements to systems that would provide a material net benefit to meet the two-hour RTO.
  - ASIC assessed cyber resilience of other regulated entities using standards-based surveillance tools and self-assessments adapted from the NIST Framework and recently commenced a second round of these assessments.
  - Authorities could supplement assessments with industry-wide cyber resilience tests involving supervisors, FMIs, banks, and other market participants; scenarios reflect cyber events and crisis management through active role playing.
- ASX CHESS replacement:
  - ASX’s replacement of the CHESS system is a main supervisory challenge given the early stage of the project; no regulatory approvals have been granted by ASIC or the RBA.
  - Authorities have engaged closely with ASX on design and business requirements, including functional, non-functional, and technical specifications.
  - Now that ASX has released the replacement system’s functional scope and implementation roadmap, regulators plan to discuss regulatory approvals and milestones for go-live.
  - Authorities have allocated specific staffing resources to oversee this work and are encouraged to continue engaging with ASX at all levels to ensure operational risks are identified, managed, and mitigated.
- Distributed ledger technology (DLT) and new technologies:
  - ASIC’s and RBA’s approach includes monitoring developments and specifying expectations.
  - Current view: existing regulatory framework accommodates emerging application of DLT to FMIs.
  - For ASX’s CHESS replacement, a preliminary self-assessment concluded there is nothing intrinsic to the envisaged DA DLT technology that would prevent ASX Clear and ASX Settlement from complying with regulatory obligations on an ongoing basis.
  - ASIC developed an information sheet to help evaluate whether use of DLT allows an entity to meet regulatory obligations.
  - All CS facilities are expected to demonstrate the appropriateness of their technology (and human resources) for the services they offer.

*Source: 1ausea2019005 - 27. The RBA also considers critical service providers (CSPs) in its supervisory approach.*

### 48. A cooperation arrangement with New Zealand authorities is in place for ASX Clear

### 48. A cooperation arrangement with New Zealand authorities is in place for ASX Clear

### Cooperation arrangements and recommendation
- A cooperation arrangement with New Zealand authorities is in place for ASX Clear (Futures).
- Cooperation arrangements exist between the RBA and Reserve Bank of New Zealand (RBNZ), and between ASIC and the New Zealand Financial Markets Authority (FMA).
- Recommendation: consolidate relationship agreements between the Australian and New Zealand authorities—e.g., by including the FMA and ASIC in the RBNZ/RBA MOU for CCPs located in Australia—to ensure all authorities are able to receive the same information at the same time.

### Resolution planning and central bank liquidity support
- Progress:
  - Authorities issued a public consultation and are refining the design of the FMI resolution regime and preparing drafting instructions for FMI resolution legislation, with a view to having legislation ready for introduction into Parliament in 2019.
  - Australia currently lacks the necessary framework and tools to resolve an FMI that is in distress, failing, or that has failed; authorities are encouraged to finalize the regime expeditiously.
- Key structural issues to address:
  - CS facilities that are part of vertically-integrated exchange groups.
  - Dominance of major domestic banks and a few global banks in the Australian financial market.
  - Diversity and capacity of private-sector liquidity providers.
- Policy considerations and tools:
  - Decisions on breadth of authorities’ powers, particularly regarding affiliated entities within groups.
  - Point-of-entry strategy trade-offs between predictability for FMIs/participants and flexibility for resolution authorities.
  - Use pre-positioning powers to enhance timeliness and efficacy of resolution actions (ex-ante resolvability assessments, FMI resolution plans, requirements on FMIs to remove barriers to resolution).
  - Resolution plans should address FMI-specific features (e.g., for CCPs: risk management, margining, collateral, investment interdependencies within the ASX group, preservation of netting sets, ensuring positions and collateral are kept together, necessary license transfers).
  - Ensure appropriate staffing with necessary knowledge and expertise for systemically-important FMIs to support formulation, implementation, and operationalization of resolution.
- Cross-learning:
  - Authorities should review experiences from Australia’s bank and insurer resolution regimes (Crisis Resolution Powers Bill passed February 2018) for lessons on recovery planning, directions powers, stay arrangements, and safeguards.
  - Less developed aspects (e.g., NCWO principles, resolution planning) are being addressed in parallel FSAP recommendations and should inform FMI regime design.
  - Interactions between bank and FMI resolution regimes are important given banks’ roles as FMI participants and counterparties.
- Controversial issues to address explicitly:
  - Time limitations on stays, payment moratoria, suspension of shareholder rights and writing down of equity, application of NCWO principle and its counterfactual, payment of claims, temporary last-resort public funding, allocation of and recoupment of any losses.
  - Benefit from other jurisdictions’ experiences and specialized coordination with supervisors and resolution authorities.
- Central bank liquidity support and ESAs:
  - CCPs licensed in Australia have access to ESAs and liquidity facilities of the RBA.
  - CCPs systemically important in Australia are required to settle their AUD obligations using an ESA in their name or a related body acceptable to the RBA.
  - CCPs can hold funds as overnight deposits at the RBA; large daily variations in balances without notice are discouraged.
  - CCPs can obtain central bank liquidity support against eligible collateral.

### Selected issues on ASX Clear — overview
- Scope: analysis focuses on key elements of governance and risk management of ASX Clear relevant to financial stability; not a complete risk management framework review and did not assess detailed margin, collateral, stress testing, or liquidity risk policies.

### Systemic risk
- ASX Clear is sole CCP for equity markets in Australia and is critical to domestic equity markets’ functioning.
- Interconnectedness:
  - 35 participants, including the 4 domestic systemically important banks (D-SIBs), large foreign banks, 2 trading platforms, 1 SSS.
- Settlement and exposures:
  - Settlement is on T+2; credit exposures are short term.
  - Multilateral netting efficiencies mean failure would create liquidity and credit stresses among participants.
- Assessment:
  - ASX Clear operations generally reliable; additional steps warranted to increase compliance with the PFMI.

### Procyclicality, haircuts, and margin models
- Haircut methodology:
  - Uses a 20-year historic period, which included the high volatility during the 2008 global financial crisis, and a 99.9 percent confidence level.
  - Calibration intended to keep haircuts relatively stable during stress and limit procyclicality.
- Recommendation:
  - Address procyclicality more comprehensively through the annual validation process for margin models.

### Legal risk (Principles 1, 8)
- Legal foundation:
  - Corporations Act, PSNA, and ASX Clear rules govern novation, netting, collateral arrangements, default procedures, and enforceability.
- Cross-border considerations:
  - ASX Clear currently has no overseas clearing members and does not accept non-domestic collateral.
  - If access is extended to non-local clearing members or non-domestic collateral, identify and mitigate conflicts of law through legal opinions in line with good international practices.
- Finality of settlement:
  - PSNA provides statutory foundation for finality, but ASX Settlement rules should more clearly define the point at which settlement is final.
  - Current rules describe payment and security delivery rights and obligations at settlement in CHESS at T+2 (i.e., 11.30 a.m.) and the last opportunity for participants to revoke a transaction, but do not explicitly describe the exact point at which settlement is final—required by the PFMI for resolution scenarios.

### Governance and overall risk management approach (Principles 2, 3)
- Current ERM approach:
  - ASX is implementing a group-wide enterprise risk management (ERM) model.
  - Counterparty credit risks are reviewed by the ASX Board among other risk types.
- Shortcomings and recommendations:
  - CCP-specific risks could be marginalized within group-level ERM.
  - The two ASX CCPs have individual boards and external Risk Consultative Committees but no CCP-specific internal risk committees.
  - CCPs do not have dedicated CCP-specific staffing (including risk management staffing); services and staff are shared via ASX Operations Pty Limited.
  - Recommend establishing CCP-specific internal risk committees, dedicated CCP-specific risk management and staffing, risk management systems, and resolution-friendly shared services agreements accounting for intra-group inter-dependencies.
  - Option: separate risk committee for each CCP with a dedicated ERM and inclusion of critical staff and systems within each CCP legal entity to simplify consideration of competition issues.
- Recovery planning:
  - Recovery plan currently identifies a few interdependencies with other ASX subsidiaries; should be extended to comprehensively analyze intragroup dependencies (e.g., parent funding).
  - Recovery plan could define scenarios where all subsidiaries are simultaneously impacted or where participants default against multiple subsidiaries, especially where participants provide additional services to ASX (e.g., liquidity, investment).

### Credit and liquidity risk (Principles 4, 5, 6, 7 and 16)
- Credit risk management:
  - Recently strengthened and generally in line with the PFMI.
  - Risk waterfall: initial margin and additional margins for equities and equity derivatives; default fund assets cover potential additional losses.
  - MPOR assumptions evaluated and made more conservative.
  - Credit stress testing methodology incorporates CPMI-IOSCO 2017 guidance; daily stress tests, back testing, and sensitivity analysis conducted.
  - Robust independent validation of models in place.
- Intraday margin calls and CHESS limitations:
  - ASX Clear can call intraday margin for equity options five times per day.
  - CHESS does not support intraday netting during the day, impeding real-time monitoring of intraday exposures and intraday margin calls for cash equities.
  - ASX Clear can estimate netted exposures for cash equities three times per day and, subject to an AUD 100 thousand minimum threshold, can call for additional initial margin based on intraday stress test exposures.
  - Recommendation: introduce more frequent and accurate intraday margin calls for cash equities once the CHESS replacement system is implemented.
- Segregation:
  - CHESS does not support segregation of house and client cash equity positions.
  - Legal provisions prevent use of client assets for house purposes, but operationally segregated accounts at ASX Clear would facilitate compliance and porting of client positions during stress events.
- Collateral policy improvements:
  - Eligible collateral: cash (AUD) and domestic equities (stocks in the S&P/ASX200 and exchange-traded funds meeting minimum liquidity criteria).
  - Cash mainly covers cash equity exposures; equities mainly cover equity derivatives exposures.
  - Conservative haircuts applied to non-cash collateral.
  - Absence of concentration limits on equity collateral could impair ability to liquidate without adverse price effects in stressed circumstances; recommendation to enforce conservative concentration limits.
  - Equity collateral not eligible for posting at RBA liquidity facilities; recommend considering extending eligible collateral to government and semi-government bonds.
- Qualifying liquid resources and OTAs:
  - Liquidity stress test cover 2 exposure calculation performed daily to estimate liquidity shortfall after default of the two ASX Clear clearing participants and their affiliates generating the largest aggregate payment obligation.
  - Prefunded default fund assets: A$250 million.
  - Committed liquidity facility from ASX Ltd: A$150 million, of which A$100 million is backed by a committed liquidity facility from a commercial bank.
  - Prefunded resources invested in assets other than cash count as AUD qualifying liquid resources only if invested in securities collateral eligible for posting at the RBA.
  - Remaining liquidity needs covered by Offsetting Transaction Arrangements (OTAs) that mechanically repo securities due to a defaulting participant back to the participant delivering the securities until a later point in time (involuntary repo).
  - Recommendations:
    - Reconsider reliance on OTAs and consider including other liquidity resources such as commercial credit lines in addition to prefunded resources/parent funding and OTAs.
    - Benefits of commercial credit lines: more transparency upfront to liquidity providers and participants regarding contingent liability sizes relative to OTAs.
    - OTAs should be used judiciously and later in the liquidity resource sequence due to potential mechanical allocation effects that could create liquidity pressure.
    - Given constraints in Australia’s financial system, credit lines could be sourced from a syndicate of banks or nonbank financial institutions.
    - Diversify the committed bank credit line that parent ASX Ltd holds to mitigate liquidity risk.
- Investment liquidity risk limits:
  - Investment portfolio liquidity risks limited via investments in only liquid government bonds; unsecured cash subject to counterparty limits.
  - Unsecured exposure to any single counterparty limited to ASX’s capital to cover investment risks, which is ring-fenced from ASX’s other capital.

### Operational risk (Principle 17)
- IT and operational resilience:
  - ASX increased IT resources to manage upgrades to IT governance and risk management and the CHESS replacement project.
  - Independent external review (instigated by ASIC and the RBA) recommended changes to technology governance and operational risk management; ASX is responding under ASIC and RBA oversight.
  - ASX hired additional resources and ring-fenced teams for the CHESS replacement project to avoid resource conflicts.
- CHESS system:
  - Reliability: 99.9 percent availability.
  - Technology is old and needs replacement.
  - ASX considered a DLT-based replacement; Board reviewed two external security assessments of the prototype platform developed by DA; assessments limited by prototype state and found no significant deficiencies relative to DA’s security claims.
  - ASX intends to commission further security reviews of the DA platform prior to implementation.

*Source: 1ausea2019005 - 48. A cooperation arrangement with New Zealand authorities is in place for ASX Clear*

### Annex I. FSAP 2006 Recommendations and Follow-Up

### Annex I. FSAP 2006 Recommendations and Follow-Up

### Legal foundation (CPI)
- Recommended action: Require entities, located outside the Australian jurisdiction, that apply for participation in RITS either as a branch or on a remote basis to provide a legal opinion that analyzes possible conflict of laws and potential legal risk for RITS and its participants.
- Current status:
  - Implemented.
  - Since 2011 the RBA has a requirement that all overseas-domiciled RITS members provide an independent legal opinion that the RITS Membership Agreement is enforceable in their home jurisdiction.
  - Following the signing of new RITS Membership Agreements in 2017, the RBA has been working with foreign members on the provision of legal opinions that meet the RBA’s requirements.
  - The RBA is currently reviewing legal opinions that it has received from foreign members.

### Security and operational reliability, and contingency arrangements (CPVII)
- Recommended actions:
  - Require security enhancement of the proprietary communication network to meet international standards with regards confidentiality, integrity and authenticity of the transmitted information and data.
  - Consider an external review of the RBA’s business continuity plan that would include the assessment of the hardware, software, and internal procedures.
- Current status:
  - Security enhancement: Implemented.
    - At the time of the FSAP, implementation of a new, more secure, RITS user interface was well advanced.
    - The member functionality aspect of this project was implemented in December 2006, bringing RITS security into line with international standards with respect to confidentiality, integrity, and authenticity in the transmission of information and data.
  - Business continuity: Implemented.
    - At the time of the FSAP, the RBA was in the process of building a new geographically remote backup site.
    - Previously, backup arrangements were split over two sites: a business recovery site (alternative workspace for critical staff located outside the CBD) and a geographically remote corporate recovery site (providing synchronous backup of IT operations).
    - These functions were combined in mid-2007 at a new business recovery site.

### Efficiency and practicality of the system (CPVIII)
- Recommended action: Consider following up its studies of RITS costs and pricing structure by consulting RITS users. The RBA should consider a review of the pricing structure to ensure that it promotes efficient functioning of the system.
- Current status:
  - Implemented.
  - In July 2012, the RBA implemented a revised pricing structure for RITS services.
  - The revised structure represented the first substantial change to RITS fees since the commencement of RTGS in 1998 and was designed to provide a more representative distribution of costs among RITS participants.
  - The fee structure is reviewed annually, although not every review results in changes to the fees.

### Governance of the payment system (CPX)
- Recommended action: Consider establishing a consultative framework with the users in order to ensure RITS continues to meet users’ needs in terms of efficiency, practicality and service level. The RBA could re-establish its advisory user groups, representing different categories of RITS participants to discuss issues related to technical and business features of RITS.
- Current status:
  - Implemented.
  - The RBA now holds RITS User Group forums in Sydney every six months (with dial-in facilities available).
  - The forums allow members to suggest improvements and for the RBA to consult on planned upgrades.
  - The RBA also liaises closely with the industry through AusPaynet and the Australian Financial Markets Association (AFMA), and directly with RITS members on proposed changes to RITS.
  - Communication with users has been enhanced with the launch of the RITS Information Facility, through which all relevant RITS documents are available online.

### Central Bank Responsibilities in Applying the CPSIPS
- Recommended actions:
  - Consider whether current arrangements avoid potential conflicts of interest between the policy and oversight functions (that fall under the jurisdiction of the PSB) and the Bank’s role as an operator of the RITS system.
  - Strengthen the implementation of the PSB’s oversight responsibility by developing formal methods and procedures.
- Current status:
  - Partially implemented.
  - Australia established a separate board responsible for payments system policy and oversight, enforced up to and including the level of Assistant Governor: Payments Policy Department responsible for payments system policy and oversight; Payments Settlements Department responsible for operating RITS.
  - The RBA decided not to implement separation at the senior executive level, citing benefits from internal discussion at the RBA's Executive Committee.
  - Other procedures are in place to identify and address any conflicts of interest that might arise.
  - Formalization of oversight methods and procedures has been implemented, including regular monitoring and reporting. Details are set out in the Self-Assessment against the Responsibilities for SIPS.

*Source: 1ausea2019005 - Annex I. FSAP 2006 Recommendations and Follow-Up*

### Annex II. CPMI-IOSCO Implementation Monitoring Assessment Results for Australia

### Level 1
- Purpose: Assess whether a jurisdiction has completed the process of adopting the legislation and other policies that will enable it to implement the principles and responsibilities.
- Assessment result for Australia:
  - Australia has the highest ratings in all categories, meaning that final implementation measures are in force for all types of FMIs, both for the Principles as well as the Responsibilities.
- Publication: CPMI-IOSCO ‘Implementation monitoring of PFMIs: Fourth update to Level 1 assessment report,’ July 2017.

### Level 2
- Purpose: Assess whether the content of new legislation and policies is complete and consistent with the principles and responsibilities.
- Assessment results:
  - Payment Systems: The PFMI have been implemented in a complete and consistent manner.
  - CCPs: Implementation measures are consistent or broadly consistent with the PFMI. Identified gaps relate to the implementation of Principles 15, 21 and 22.
  - CSDs / securities settlement systems: Regulations are consistent or broadly consistent with the PFMI. Identified gaps relate to the implementation of Principles 15, 21, and 22.
- Publication: CPMI-IOSCO – ‘Implementation monitoring of PFMI: Level 2 assessment report,’ December 2015.

### Level 2/3
- Purpose: Assess whether the content of new legislation and policies are complete and consistent with the responsibilities and implemented by the authorities.
- Assessment result:
  - Australia is found to observe all responsibilities.
- Publication: CPMI-IOSCO ‘Assessment and review of application of Responsibilities for authorities,’ November 2015.

*Source: 1ausea2019005 - Annex II. CPMI-IOSCO Implementation Monitoring Assessment Results for Australia*

### Annex III. FMI Statistics

### Aggregate and market-level values
- RITS is the backbone of the economy with an aggregate daily value of around AUD 179 billion.
- Cash equity clearing amounts to approximately AUD 5 billion on average per day.
- CHESS holds a value of approximately AUD 2 trillion in securities.
- The value of government bonds held in Austraclear is approximately AUD 1.9 trillion.
- The most actively traded derivatives at ASX Clear (Futures) are Treasury bond futures.
- LCH.Ltd dominates in central clearing of AUD OTC IRD.

### Participants (as of March 31, 2018)
- RITS: 98
  - Of which 40 are indirect participants
- ASX Clear: 35
- ASX Clear (Futures): 20
- LCH Ltd SwapClear: 5 direct Australian participants (110 in total); a further 23 Australian entities are clients
- Austraclear: 882
  - Of which 179 are full participants, 194 are associate participants, 212 are special purpose participants, and 297 are public trusts
- ASX Settlement: 90
  - Of which 33 are ASX Clear participants, 27 are general settlement participants, 17 are account-only settlement participants, 12 are product issuer settlement participants, and 1 is a suspended participant

### Initial margin and default fund (2016–2018, annual averages)
- Data presented (In millions AUD) for:
  - ASX Clear
  - ASX Clear (Futures)
  - LCH Ltd SwapClear
  - CME IRD Service
- Default fund balances are AUD spot balances as at 31 March 2018, 31 December 2017 and 31 December 2016.
- Source for statistics: RBA.

*Source: 1ausea2019005 - Annex III. FMI Statistics*

### Annex IV. Governance of FMIs within the RBA
- Governance structure elements (as presented):
  - Reserve Bank Board
  - Audit Committee
  - Governor & Deputy Governor
  - Executive Committee
  - Payments Settlements Department
  - Payments Policy Department
  - Audit Department
  - Risk and Compliance Department
  - Reserve Bank Board Risk Management Committee
  - FMI Review Committee
  - Payments System Board
- Source: RBA

*Source: 1ausea2019005 - Annex IV. Governance of FMIs within the RBA*

### Annex V. Main Acts and Regulations for FMIs in Australia

### Key laws, applications, FMIs, and authorities
- Corporations Act, Part 7.3
  - Application: Licensing regime for CS facilities
  - FMI: CCPs, SSS, and CSDs (ASX Clear, ASX Clear Futures, ASX Settlement, Austraclear, LCH. Ltd, and CME)
  - Authority: The Minister: Issues CS facility licenses; ASIC: issues TR licenses, administers licenses, and oversees compliance with license obligations; RBA: sets standards and oversees compliance with standards
- ASIC Act
  - Application: ASIC mandate and general enforcement powers
  - FMI: CCPs, SSS, and CSDs, and TRs
  - Authority: ASIC
- RG 211
  - Application: Elaborates on expected outcomes of the Corporations Act, Part 7.3 (CS facility stability, clearing and settlement process, supervision of CS facility and participants and risk management)
  - FMI: CCPs, SSS, and CSDs
  - Authority: ASIC
- RG 249
  - Application: Elaborates on expected outcomes of the Corporations Act, Part 7.5A (TR licensing and supervision)
  - FMI: TRs
  - Authority: ASIC
- FSS
  - Application: Implements risk management expectations of CS facilities (based on Corporations Act 827D)
  - FMI: CCPs, SSS, and CSDs
  - Authority: RBA
- Payment Systems and Netting Act
  - Application: Protections against zero-hour rule, generally unwinding risk for RTGS system and multilateral netting arrangements and supports the enforceability of FMI rules
  - FMI: RITS, CHESS, and Austraclear (all as RTGS system); ASX Settlement for cash equities (as netting arrangement), ASX Clear, ASX Clear (Futures), LCH Ltd, and CME and CLS (as netting markets)
  - Authority: RBA: ‘approves’ RTGS or netting arrangements; Treasury/Minister: An FMI can be declared through regulation to be a netting market or the Minister can approve a CS facility as a netting market.
- RBA Act
  - Application: PSB responsibilities to ensure risk management, efficiency, and competition. Also, stipulates PSB’s role under Corporations Act
  - FMI: Payment systems, CCPs, SSS, and CSDs
  - Authority: RBA
- Payment Systems (Regulation) Act
  - Application: Designation of payment systems, access regime, standards, and information powers
  - FMI: Payment systems (currently only used for retail payment systems)
  - Authority: RBA
- Cheques Act
  - Application: Turn-back of checks for which failed drawee has not settled
  - FMI: Payment systems
  - Authority: RBA

- Sources for the legal and regulatory table: RBA and ASIC.

*Source: 1ausea2019005 - Annex V. Main Acts and Regulations for FMIs in Australia*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1ausea2019005.pdf_