ASX Clear - Risk Framework Exposure Risk Management

AGENDA Risk Overview Initial Margins Collateral Additional Margins

1. Risk Overview

Risk Overview ASX Clear Clearing Participant 1 Clearing Participant 2 ASX CCP - ASX Clear ASX Clear Futures ASX Clear Reserve Bank of Australia - Financial Stability Standard for Central Counterparties (FSS)

Overview of Risk Controls Clearinghouse own capital

Exposure Risk Management Quantifies, monitors and analyses Clearing Risks from ASX’s Clearing Houses Exposure analysis Risk parameter reviews Collateral reviews Risk monitoring and breach escalation Internal and external reporting Ensures risk controls are undertaken in accordance with approved policies, standards and procedures.

2. Initial Margins

Margins - Derivatives and Cash equities The daily collection of initial margins on ASXCL acts as the primary cover or protection against loss on positions held in the event of a Clearing Participant (CP) default under normal market conditions. ASX utilises SPAN (Standard Portfolio Analysis of Risk) methodology to calculate initial margin requirements on ASX Clear Derivative contracts. HSVaR methodology is used to calculate the Initial margin requirements on ASX Clear Cash market.

Derivatives Initial Margins - SPAN SPAN or Standard Portfolio Analysis of Risk was first developed in 1988 by Chicago Mercantile Exchange (CME). It is a portfolio based margining methodology that looks at a portfolio of instruments in the same ultimate underlying (or Combined Commodity) for calculating initial margin requirements. Key benefits: Flexibility in levying varying margin rates across expiries Refinement in accounting for volatility Precision in forming spreads. How does SPAN Work? IM = Max {Scan Risk + Intra-Commodity Spread Charge + Spot Charge – Inter-Commodity Spread Credit; Short Option Minimum Charge}

Derivatives Initial Margins - SPAN At its simplest form, SPAN considers how the value of an entire portfolio of options and futures will respond to changes in underlying prices and volatilities based on pre-determined 'Price Scan Range - PSR‘ and 'Volatility Scan Range - VSR' parameters set by the clearinghouse. The pre-determined parameters (PSR and VSR) feeding into the scenarios are derived from statistical analysis of movements in historical price and average implied volatility respectively. In calculating the profit or loss a portfolio will make, SPAN uses 16 'what if' scenarios where prices and volatilities are altered to varying degrees. The risk array representing the maximum likely loss is used in deriving the initial margin requirement

Derivatives Initial Margins - SPAN ASXCL SPAN Scenarios Total Derivatives Margin on ASXCL consists of Derivatives Initial Margin and Premium Margin. Premium Margin is the present market value of the option contract’s position at close of business. Represents the amount that would be required to close-out the option positions.

Cash Market Margins On ASXCL, novated Cash Equity settlement obligations attract a cash market margin (CMM) obligation. Calculated based on a CPs net settlement obligation across the T+3 settlement cycle The total Cash Market Margin (CMM) obligation comprises : Risk Margin Historic VaR calculation for securities within the S&P/ASX All Ordinaries fulfilling price history requirements. Flat Rate component for Warrants, Interest Rate Securities and less liquid equities Mark-to-Market Revaluation of a CPs unsettled novated positions using the closing price from the previous day Clearing Participant A’s novated unsettled transactions

Cash Market Margins The following documentation provides an overview on the application of the Value at Risk margining utilised: http://www.asx.com.au/documents/clearing/Cash_Market_Margining_FAQ_April_2013.pdf https://www.asxonline.com/intradoc-gi/groups/derivatives/documents/communications/asx_036602.pdf

Cash Market Margins – Historical VaR Historical VaR / flat rate risk margin covers any future losses that may be incurred when closing out the portfolio in the event of a default Future losses are determined by looking at historical returns for each security over an observed period to capture plausible market movements. Stocks fulfilling price history requirements and residing in the All Ordinaries are subject to a historical simulation VaR based on 2 years of 1-day price moves at a 99% confidence interval, plus an add-on (currently 30%).

Cash Market Margins – Flat Rate Securities Securities that currently that attract a Flat Rate are cash equities which are in the All Ordinaries index and fail to meet price history requirements, cash equities falling outside the All Ordinaries index, and certain products (e.g. warrants and interest rate products). The confidence interval and holding period used for determining the Flat Rate on these securities depends on product type and whether the security belongs to the All Ordinaries Index. ASX Clear notifies the market of Flat Rates for any applicable securities, on a periodic basis. A sample of Flat Rates and their confidence interval/holding period is provided below:

Cash Market Margins – Flat Rate Securities A sample of Flat Rates and their confidence interval/holding period is provided below:

3. Intraday Margin Calls

Intraday Margin Intraday Margin Threshold Intraday margining re-establishes margin cover held by the Clearing House in circumstances where a Clearing Participant’s (CPs) margin cover has eroded due to intraday market volatility and position activity. Intraday Margin Threshold Re-Calculation of Margin Requirement Intraday Prices Intraday Positions

Intraday Margin Runs ASX Clear ERM will initiate an intraday margin run when the S&P/ASX 200 index moves up or down by 1% or more. Calculations apply real time collateral holdings / valuations and cash lodged (or assumed to be lodged) following the morning settlements. Intraday margins are (generally) called when a Clearing Participant’s margin shortfall is greater than $100,000 and the shortfall has eroded its previous initial margin previously posted by 40% or more.

4. Additional Initial Margins (AIMS)

Capital Stress Test Model (CST) Capital Stress Test quantifies the potential losses to the clearing house in closing out a defaulting clearing party’s portfolio during extreme but plausible market volatility. ERM use CST to: Measure Risk: Evaluate where exposures arise from and assess their potential size Monitor Risk: Reporting and monitoring ASX’s Capital against CPs and their credit ratings (using CP STELs) Mitigate Risk: Call Additional Initial Margins (AIMs); Develop policies to manage risk Stress testing is undertaken on both ASX Clear using separate Capital Stress Testing (CST) model TRIGGER: CPs are called to lodge stress test related AIMs on days when their model result exceeds their Stress Test Exposure Limit (STEL);

CST Model ASXCL Scenarios ASXCL undertakes daily stress testing of Clearing Participant portfolios, across the cash equity and derivatives markets under a range of scenarios. 103 different scenarios which are a combination of market wide, sector wide and stock specific scenarios. Both Price and Volatility shifts are considered in the different scenarios.

CBPL Model Overview The Capital Based Position Limit (CBPL) is a risk-based Central Counterparty (CCP) protection to ensure that the CCP is protected against Clearing Participants running large positions relative to the size of their organisations. A CP’s CBPL Usage is defined as the ratio of CBPL Initial Margin to Liquid Capital. TRIGGER ASX Clear: If a CP’s CBPL Usage exceed 3.0, the CP will be required to lodge CBPL AIMs. The value of AIMs will be sufficient to reduce CBPL Usage to a level below the threshold (currently 90% of the 3.0 threshold i.e. 2.7); Return of the CBPL AIMs can be achieved by: an increase in Capital (including drawdown of Approved Subordinated Debt), or a reduction in CBPL Initial Margin resulting from a sustained reduction in open positions.

5. Summary

Summary Risk Overview Initial Margins Intraday Margins AIMs - Capital Stress Test Model (CST) AIMS - Capital Based Position Limit (CBPL)