Clearing & Settlement of OTC Derivatives in Australia

Transcription

1 Clearing & Settlement of OTC Derivatives in Australia Allan McGregor & Nicholas Linder 14 August 2013

2 Contents Global Move toward OTC Clearing ASX Financial Market Infrastructure ASX OTC Clearing Service Overview & and Cleared Products ASX & Local Regulatory Environment ASX OTC Clearing Participants ASX Governance Structure OTC Novation Approach OTC Margin Methodologies OTC Default Management Approach CCP Financial Resources OTC Default Fund and Waterfall ASX OTC Client Clearing Target Service Model 2

3 3 Global Move towards OTC Clearing The September 2009 G20 communique called for (i) all standardised OTC derivatives contracts to be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end 2012 at the latest; and (ii) OTC derivative contracts should be reported to trade repositories. Basel III, Capital Directive IV Regulatory Capital requirements increasing, imposes larger capital charges on bilateral trades (across multiple asset classes) Globally, clearing is gradually being mandated (recent example being Japan). Australia has not made A$ clearing mandatory yet. ASX is responding to regulatory drivers and domestic market requirements with its Financial Markets Infrastructure roadmap.

4 ASX Financial Market Infrastructure EQUITIES FUTURES OTC Clearing Collateral Management ASX OTC MARKETS ASX 24 Client Clearing Q Q Reduced risk Basel 3 efficiency ASX CLEAR ASX CLEAR (FUTURES) GLOBAL CCPs Efficient margining Broader collateral use ASX COLLATERAL Collateral Optimisation 1H 2014 Q /2015 Collateral Optimisation GLOBAL COLLATERAL POOLS CHESS AUSTRACLEAR GLOBAL CSDs All dates expressed as calendar years 4

5 ASX OTC Clearing Service - Overview Product Coverage Vanilla AUD IRS, OIS and Basis Swaps (extension to other currencies and asset classes) Default management / Risk management Cross Margining between related ASX listed and OTC derivative products Single default fund extending ASX current $270mln contribution and existing futures participant contributions Additional contributions from OTC participants Onshore Default management with access to RBA repo for AUD liquidity Commonwealth bonds eligible as non-cash collateral extension to State Gov t bonds ASX CCP will link to ASX Collateral to enable efficient use of AUD non-cash collateral Operational management Futures style novation within Australian timezone 15 hour operating cycle it will be extended beyond this as demand increases Regulatory alignment Service will align with relevant regulatory requirements DCO, EMIR, CPSS-IOSCO 5

6 ASX OTC Cleared Products The ASX will initially accept the following types of vanilla IRD under the service: AUD Interest Rate Swaps ( IRS ) referencing BBSW, including fixed/floating IRS and floating/floating tenor basis swaps Overnight Index Swaps ( OIS ) referencing AONIA ASX-listed IR futures contracts eligible for cross margining (BAB & Bond futures) By vanilla we mean IRS that: have a fixed notional amount through the life of the transaction; use market standard AUD date, payment and legal documentation conventions have market standard stub periods and fees Service enhancements are being developed for: Increased choice of BBSW tenors & extended OIS maturities (EOY 2013) AUD FRAs (2014) NZD vanilla IRS / OIS (2014) 6

7 7 ASX & Local Regulatory Environment As holders of a Clearing and Settlement (CS) Facility license, ASX Clear (ASXCL) and ASX Clear (Futures) (ASXCLF) are both required to comply with the Financial Stability Standards (FSS) for Central Counterparties (CCPs). The OTC IRD Clearing Service will conform in all respects with local regulation and, where possible, be consistent with relevant international standards and regulations; CPSS-IOSCO PFMI, EMIR/ESMA and Dodd-Frank.

8 ASX OTC Clearing Participants Only certain legal entities are eligible to participate in the service in order to safeguard the integrity and capital of ASX, as well as to protect other clearing and market participants Must meet minimum capital and other requirements (ASXCLF Operating Rules) Be able to participate in any OTC Default Management Plan (DMP) as specified by ASX Must have proven risk management capabilities in the onshore OTC markets Must demonstrable the capability to meet BAU clearing requirements on an ongoing basis (margins, settlements, reporting, etc) Legal validation- must hold appropriate licences with Australian regulators Under the first phase of the service access will only be available to direct Clearing Participants, with client clearing to follow in phase 2 (expected H1 2014) 8

9 9 ASX Governance Structure ASX Board C&S Board ASX Management The ASX s Main and Clearing and Settlement boards encompass both commercial and risk expertise, including a number of independent directors. The C&S board is empowered to consider commercial and risk decisions separately, and fulfil the purpose of a risk committee with delegated powers from the main board. ASXCLF Risk Committee ASXCLF OTC Product Committees ASXCLF OTC Default Management Group As part of the ASX OTC IRD Clearing service launch, there will be CCP-wide and OTC-specific advisory committees put in place, with members drawn from CP firms. Committees will be able to recommend courses of action to ASX management regarding significant risk and commercial matters. ASX provides inclusive governance arrangements for Australian market participants

10 10 OTC Novation Approach ASX uses an enhanced Futures Style novation-on-receipt approach, coupled with an absolute pre-receipt fat finger trade level check on risk (PV01) and a postreceipt portfolio level check on risk (VM + IM VaR utilisation) against available Clearing Participant collateral: Trade submission & matching (via Markit Wire under Phase 1) Trade eligibility check (including PV01 limit) Regular portfolio exposure limit check (VM + IM, including new trades) End of Day margin calculation (fail leads to trade rejection) (fail leads to collateral call) Point of novation

11 OTC Margin Methodologies Variation Margin (VM) Called at a minimum daily, supplemented by intra-day calls where necessary Cash settled Call amount = change in CP OTC portfolio NPV since last call NPV based on single projection/discount curve approach per instrument class (i.e. BBSW for IRS, OIS for AONIA), but extension to OIS discounting expected by EOY 2013 Initial Margin (IM) Called at a minimum daily, supplemented by intra-day calls where necessary Cash settled, or covered via the application of eligible non-cash collateral Eligible collateral primarily CGS, but expected to extend to high quality semi-govt debt by EOY 2013 Call amount = Margin Requirement less collateral cover already posted Margin Requirement based on Historical Simulation VaR (5 year lookback, 5 day holding period, 99.7% confidence interval), but subject to liquidity risk add-ons and application of weighting to observed volatility (expected by EOY 2013) 11

12 OTC Margin Methodologies Additional Initial Margin (AIMs) Called ad-hoc as an intra-day margin call Cash settled Call amount based on CP portfolio stress tests, less collateral cover already in place and a limit assigned to each CP Stress tests designed around extreme but plausible market scenarios in relevant interest rates and prices Treatment of Cross Margined Futures Futures eligible for cross margining against cleared OTC positions are risk margined net within a CP s OTC portfolio (i.e. cross margining offsets manifest themselves as portfolio offsets in calculations such as IM and AIMs) VM for cross margined futures positions are unaffected by the cross margining process, as all VM is settled net across Futures and OTC positions for each CP 12

13 OTC Default Management Approach Approach based on international CCP best practise for OTC IRD clearing: hedge-then-auction amongst non-defaulting CPs Hedging based on clearable instruments (OTC & Futures) Hedging performed by panel of traders called from non-defaulting CPs Default Auction managed by ASX, with non-defaulters bidding on the defaulter s portfolio of cleared OTC & cross-margined futures Hedge-then-auction managed around the holding period for Initial Margin (5 business days) 13

14 14 CCP Financial Resources OTC Clearing service will utilise existing ASXCLF default fund; $370mm total OTC CPs will add default fund commitments targeting a $100mm increase; $470mm total (when all OTC CPs on board)

15 15 OTC Default Fund and Waterfall The ASXCLF Default Fund and Waterfall is designed to support the OTC IRD Clearing service: 1. The waterfall has been made contingent on the type of CP that defaults (OTC or Futures) 2. ASX is increasing its commitment to the fund to support both types of CP (OTC & Futures) 3. ASX is undertaking to enhance the fund and the waterfall through additional resources to support client clearing as well as the use of an OTCspecific juniorisation scheme

16 16 OTC Client Clearing Target Service Model Attributes Clearing Model Account Structure Trade Affirmation Backloading Trade Netting Margin model Holding Period Cross Margining Collateral Portability Client Protection Model Individual Client Account (without excess) Client Omnibus Account Markitserv (Markitwire) Pre-agreed by counterparty and CP of both parties Margin risk checked by ASX before novation Any trade > 2 days old tagged as backloaded trade Description Automatic and User Defined (manual) options Full and partial termination Across trades that share common economic terms within same client account (level 2) Filtered Historical Simulation Value at Risk (FHS Hvar) 5 year rolling period with volatility filter 99.7% confidence level Liquidity Multipliers Price Alignment Interest ( PAI ) days (for Client portability) Yes On commencement of Futures Client Clearing Cash and non cash for IM Cash only for VM Portability permitted subject to satisfaction of certain objective criteria (including acceptance of portfolio by alternative Clearing Participant)

17 Interested? Contact Information ASX OTC Clearing Business Development Enquiries Allan McGregor: or ph: Christopher Day: or ph: ASX OTC Clearing Risk Management Enquiries Nicholas Linder: or ph: ASX OTC Clearing Website : ASX Collateral Business Development Enquiries Blair Harrison: Blair.Harrison@asx.com.au or ph: Ash Moosa: Ash.Moosa@asx.com.au or ph: ASX Collateral Website: