On 11 February, ASX issued its “Consultation on proposed changes to the ASX Recovery Rules to allocate US settlement bank investment losses between the ASX CCPs and their clearing participants”. The propose changes seek to address the increased investment exposure of clearing members to US settlement banks due to the inclusion of variation margin exposures in ASX Clear (Futures) overnight (2 a.m.) margin calls.
FIA is generally supportive of the proposed changes and has also made certain suggestions for consideration by the ASX.
FIA agrees with ASX that USD settlement bank losses should be allocated to clearing participants based on principles of mutualisation, and potential and actual user pays. However, ASX’s proposed methodology may have the unintended consequence of penalising international banks. As such, FIA has suggested what it believes is a fairer and simpler method of allocating such losses that reflects these principles.
As all participants now face increased liability from non-default losses due to the increased investment limits for US settlement banks, FIA believes that clearing participants and also ASX should be prepared for a higher share in this contingent loss. FIA has therefore urged ASX to increase its current skin in the game.
To allow clearing members to better understand the risks and provide feedback if necessary, FIA has also requested for greater transparency on the details of the US settlement banks. FIA also encourages ASX to put in place a robust control mechanism to ensure investment limits are not materially breached.
FIA also put forward certain suggestions for the mitigation of wrong way risk when a US settlement bank and a clearing member belong to the same group.
