ASIC MARKET INTEGRITY RULES (ASX MARKET) AMENDMENT 2011 (NO. 2)

EXPLANATORY STATEMENT

Prepared by the Australian Securities and Investments Commission

Corporations Act 2001

The Australian Securities and Investments Commission (ASIC) makes the ASIC Market Integrity Rules (ASX Market) Amendment 2011 (No. 2) (the Amending Market Integrity Rules) under subsection 798G(1) of the Corporations Act 2001 (the Act).

Subsection 798G(1) of the Act provides that ASIC may, by legislative instrument, make rules that deal with:

(a)   the activities or conduct of licensed markets;

(b)   the activities or conduct of persons in relation to licensed markets;

(c)   the activities or conduct of persons in relation to financial products traded on licensed markets.

Subsection 798G(1) of the Act was inserted by Schedule 1 of the Corporations Amendment (Financial Market Supervision) Act 2010 (the Amending Act).

On 24 August 2009, the Australian Government announced that it had decided to transfer the responsibility for supervision of Australia's domestic licensed financial markets from market operators to ASIC. The Amending Act gave effect to this decision and received Royal Assent on 25 March 2010. The Amending Act commenced on 1 August 2010.

On 1 August 2010, ASIC made the ASIC Market Integrity Rules (ASX Market) 2010 (Market Integrity Rules). The Market Integrity Rules apply to the market (the Market) operated by ASX Limited (the Market Operator) under Australian Market Licence (Australian Stock Exchange Limited) 2002.

The main purpose of the Market Integrity Rules is to promote market integrity, protect investors and enable ASIC to perform the functions contemplated by the transfer of real-time supervision of the Market. The Market Integrity Rules made on 1 August 2010 were based on a subset of the ASX Operating Rules that were in existence prior to 1 August 2010.

When the Market Integrity Rules were made, it was agreed that the Market Operator would continue to maintain the capital requirements for participants (Market Participants) in the Market until 1 August 2011, at which time responsibility for those requirements would transfer to ASIC.

ASIC has adopted the capital requirements in the ASX Operating Rules that were in existence prior to 1 August 2011 (the pre-commencement ASX Operating Rules), in the Amending Market Integrity Rules.

The capital requirements in the Amending Market Integrity Rules will not apply to participants (Clearing Participants) in the licensed clearing and settlement facility operated by ASX Clear Pty Limited (ASX Clear), who will continue to be subject to the capital requirements in the ASX Clear Operating Rules.

The Amending Market Integrity Rules will commence the later of 1 August 2011 or the day after they are registered under the Legislative Instruments Act 2003 (the Commencement Date).

To ensure market certainty and minimise impact on participants on the Commencement Date, ASIC has, to the extent possible, maintained the substance of the pre-commencement ASX Operating Rules on which the Amending Market Integrity Rules are based.

Amendments were made to the drafting of those pre-commencement ASX Operating Rules to reflect the transfer of supervisory responsibility for those rules to ASIC, and to incorporate material from:

(a)    the Procedures, and Appendices to the Procedures, to the pre-commencement ASX Operating Rules;

(b)   the “Capital Requirements Guidance” issued by the Market Operator; and

(c)    the “Capital Liquidity Handbook” (the Handbook) issued by the Market Operator.

Details of the Amending Market Integrity Rules are contained in the Attachment.

Public consultation on the Amending Market Integrity Rules, along with amendments to the ASIC Market Integrity Rules (ASX 24 Market) 2010 to give effect to the transfer of capital requirements to ASIC in relation to the ASX 24 Market, was conducted in June 2011.

A number of submissions were received. There were no issues raised in the submissions in relation to the drafting of the Amending Market Integrity Rules.

Subsection 798G(1) of the Act provides that market integrity rules are legislative instruments for the purposes of the Legislative Instruments Act 2003.

Subsection 798G(2) of the Act provides that market integrity rules may include a penalty amount for a rule. A penalty amount must not exceed $1,000,000. The penalty amount set out below an Amending Market Integrity Rule is the penalty amount for that Amending Market Integrity Rule.

ATTACHMENT

CHAPTER 8 CAPITAL REQUIREMENTS

Part 8.1 Preliminary

Rule 8.1.1 – Definitions

Rule 8.1.1 provides definitions for terms used in Chapter 8. Rule 8.1.1 provides definitions for:

• “Approved Clearing Facility”;
•  “Capital Requirements”;
• “NTA Requirements”; and
• “Risk Based Capital Requirements”.

The definition of “Approved Clearing Facility” is sourced from pre-commencement ASX Operating Rule [7100] and Procedure [7100]. All other definitions in Rule 8.1.1 are sourced from pre-commencement ASX Operating Rule [8000].

Part 8.2 Application

Rule 8.2.1 Market Participant to comply with Risk Based Capital Requirements

Rule 8.2.1 provides that a Market Participant must at all times comply with the Risk Based Capital Requirements in Schedule 1A, unless:

(a)    the Market Participant is only a Principal Trader;

(b)   the Market Participant has elected to comply with the NTA Requirements in Schedule 1B; or

(c)    the Market Participant is a Clearing Participant of an Approved Clearing Facility and complies with the capital requirements under the Clearing Rules.

Rule 8.2.1 reflects pre-commencement ASX Operating Rule [8401].

Part 8.3 Participants with Trading Permission for Futures Market Transactions only

Rule 8.3.1 Market Participant may elect to comply with NTA Requirements

Rule 8.3.1 provides that a Market Participant with Trading Permission for Futures Market Transactions only must elect to comply with either the Risk Based Capital Requirements in Schedule 1A or the NTA Requirements in Schedule 1B. The election must be made by notifying ASIC in writing of the Capital Requirements the Market Participant has elected to comply with, within 1 Business Day after the Market Participant is granted Trading Permission for Futures Market

Transactions only. A Market Participant must at all times comply with the Capital Requirements with which it has elected to comply and may only change the election in accordance with Rule 8.3.2 or 8.3.3.

Rule 8.3.1 reflects pre-commencement ASX Operating Rule [8410].

8.3.2 Consent to change to other requirements

Rule 8.3.2 provides that a Market Participant with Trading Permission for Futures Market Transactions only and to which the NTA Requirements in Schedule 1B or the Risk Based Capital Requirements in Schedule 1A apply is not entitled to change to the other requirements without the prior written consent of ASIC.

Rule 8.3.2 reflects pre-commencement ASX Operating Rule [8411].

8.3.3 Notification of change to Trading Permission

Rule 8.3.3 provides that a Trading Participant which is entitled to comply with the NTA Requirements under Rule 8.3.1 must comply with the Risk Based Capital Requirements in Schedule 1A if it is granted Trading Permission for Products other than Futures Market Transactions (unless the Trading Participant is only a Principal Trader in respect of the other Products).The Trading Participant must notify ASIC in writing within 1 Business Day after the Trading Participant is granted Trading Permission for other Products.

Rule 8.3.3 reflects pre-commencement ASX Operating Rule [8412].

CHAPTER 9 ACCOUNTS AND AUDIT

Part 9.1 Application of Rules

Rule 9.1.1 – Principal Traders and Clearing Participants

Rule 9.1.1 provides that Chapter 9 does not apply to:

(a)   a Market Participant that is only approved as a Principal Trader;

(b)   a Market Participant that is a Clearing Participant of an Approved Clearing Facility and complies with the capital requirements under the Clearing Rules.

Rule 9.1.1 reflects pre-commencement ASX Operating Rule [8501].

Part 9.2 Risk Based Capital Requirements—Reporting

Rule 9.2.1 Risk Based Capital Requirements—Ad hoc Return on Request by ASIC

Rule 9.2.1 provides that a Market Participant that is required to comply with the Risk Based Capital Requirements in Schedule 1A must, if requested to do so by ASIC, provide ASIC with an “Ad Hoc” or “Summary” return (as set out in Forms 1 and 2 in Schedule 1C to the Rules), within the time specified by ASIC in the request.

Rule 9.2.1 reflects pre-commencement ASX Operating Rule S1A.3.2. Form 1 in Schedule 1C to the Rules reflects the “Ad Hoc” return prescribed by ASX under pre-commencement ASX Operating Rule S1A.3.2 and Form 2 in Schedule 1C to the Rules reflects the “Summary” return prescribed by ASX under pre-commencement ASX Operating Rule S1A.3.2.

Rule 9.2.2 Core Capital or Liquid Capital below minimum

Subrule 9.2.2(1) provides that a Market Participant that is required to comply with the Risk Based Capital Requirements in Schedule 1A must notify ASIC immediately if its:

(a)    Core Capital is at any time less than the minimum amount required by paragraph S1A.2.1(b) (i.e. $100,000); or

(b)   Liquid Capital divided by its Total Risk Requirement is equal to or falls below 1.2.

Subrule 9.2.2(2) provides that a Market Participant must provide ASIC with an “Ad Hoc” or “Summary” return (as set out in Forms 1 and 2 in Schedule 1C to the Rules), disclosing the amount of its Liquid Margin:

(a)   no later than one Business Day after notifying ASIC under subrule 9.2.2(1); and

(b)   from then on, either:

(i)            by 10am on the first Business Day of each week, showing the financial position of the Market Participant on the last Business Day of the prior week, for so long as the  amount referred to in paragraph 9.2.2(1)(b) is equal to or less than 1.2 but greater than 1.1; and

(ii)            by 10am on each Business Day, showing the financial position of the Market Participant on the prior Business Day, for so long as the amount referred to in paragraph 9.2.2(1)(b) is 1.1 or less.

Subrule 9.2.2(3) provides that the returns must be authorised by one director or partner of the Market Participant.

Rule 9.2.2 reflects pre-commencement ASX Operating Rule S1A.2.2. Form 1 in Schedule 1C to the Rules reflects the “Ad Hoc” return prescribed under pre-commencement ASX Operating Rule S1A.2.2 and Form 2 in Schedule 1C to the Rules reflects the “Summary” return prescribed under pre-commencement ASX Operating Rule S1A.2.2.

Rule 9.2.3 Monthly Return

Rule 9.2.3 provides that a Market Participant that is required to comply with the Risk Based Capital Requirements in Schedule 1A must prepare and deliver to ASIC within 10 Business Days of the end of each calendar month, a “Monthly” return” (as set out in Part 1 of Form 3A in Schedule 1C for a corporation and Part 1 of Form 3B in Schedule 1C for a partnership). The return must be accompanied by a declaration (as set out in Part 2 of Form 3A in Schedule 1C for a corporation and Part 2 of Form 3B in Schedule 1C for a partnership).

Rule 9.2.3 reflects pre-commencement ASX Operating Rule S1A.2.10. Forms 3A and 3B in Schedule 1C to the Rules reflect the “Monthly” returns for corporations and partnerships prescribed under pre-commencement ASX Operating Rules S1A.2.10 and S1A.3.1.

9.2.4 Audited Annual Return

Subrule 9.2.4(1) provides that a Market Participant that is required to comply with the Risk Based Capital Requirements in Schedule 1A must prepare and deliver to ASIC within 3 months (for a corporation) or 2 months (for a partnership) following the end of the Market Participant’s financial year:

• an “Annual Audited Return” (as set out in Part 1 of Form 4A in Schedule 1C for a corporation and Part 1 of Form 4B in Schedule 1C for a partnership);
• a declaration to the Annual Audited Return (as set out in Part 2 of Form 4A in Schedule 1C for a corporation and Part 2 of Form 4B in Schedule 1C for a partnership);
• an auditors’ report on the Annual Audited Return (as set out in Form 5 in Schedule 1C);
• a “Key Risks and Internal Systems statement” (as set out in Form 6 in Schedule 1C);
• the Market Participants’ statutory accounts and group structure chart.

Subrule 9.2.4(2) provides that if the financial year end of the Market Participant is other than 30 June, the Market Participant must notify ASIC of its financial year end.

Rule 9.2.4 reflects pre-commencement ASX Operating Rule and Procedure [8510] and pre-commencement ASX Operating Rule S1A.2.10. Forms 4A and 4B reflect the “Annual Audited” returns for corporations and partnerships prescribed under pre-commencement ASX Operating Rules S1A.2.10 and S1A.3.1. Form 5 reflects the “Pro Forma Auditor’s Report on Financial Information” set out in pre-commencement ASX Operating Rule Appendix 8510(B)-1. Form 6 reflects the “Attestation by Directors/Partners to ASX – Key Risks and Internal Systems” set out in pre-commencement ASX Operating Rule Appendix 8510(B)-2.

9.2.5 Partnership Statutory Declaration

Rule 9.2.5 provides that a Market Participant that is a partnership must give to ASIC, within 10 Business Days after the end of June and December each year, for each partner of the Market Participant, a declaration (the “Partnership Statutory Declaration”) in the form set out in Form 7 in Schedule 1C to the Rules, signed by the partner to which the Partnership Statutory Declaration relates and witnessed in accordance with the instructions included on the Partnership Statutory Declaration.

Rule 9.2.5 reflects pre-commencement ASX Operating Rule S1A.2.10. Form 7 in Schedule 1C to the Rules reflects the “Partnership Statutory Declaration” prescribed under pre-commencement ASX Operating Rules S1A.2.10 and S1A.3.1.

Part 9.3 NTA Requirements—Reporting

Rule 9.3.1 Ad Hoc Return or Summary Return on Request by ASIC

Rule 9.3.1 provides that a Market Participant that is required to comply with the NTA Requirements in Schedule 1B  must, if requested to do so by ASIC, provide ASIC with an “Ad Hoc” or “Summary” return (as set out in Forms 8 and 9 in Schedule 1C) by the time specified by ASIC. The return must be authorised by one director of the Market Participant.

Rule 9.3.1 reflects pre-commencement ASX Operating Rule S1B.6.2. Forms 8 and 9 in Schedule 1C to the Rules reflect the “Ad Hoc” and “Summary” returns prescribed under pre-commencement ASX Operating Rule S1B.6.2.

Rule 9.3.2 NTA below minimum amount

Rule 9.3.2 provides that a Market Participant that is required to comply with the NTA Requirements in Schedule 1B must immediately notify ASIC if its NTA falls below the minimum amount required by Rule S1B.3.1.

Rule 9.3.2 reflects pre-commencement ASX Operating Rule S1B.5.1.

Rule 9.3.3 NTA changes

Rule 9.3.3 provides that a Market Participant that is required to comply with the NTA Requirements in Schedule 1B must immediately notify ASIC in each of the following circumstances:

(a)    if the Market Participant’s NTA is less than 150% of the minimum amount required by Rule S1B.3.1; and

(b)   having notified ASIC under paragraph (a), the Market Participant’s NTA has then decreased by more than 20% since the amount last notified to ASIC under Rule 9.3.3.

Rule 9.3.3 reflects pre-commencement ASX Operating Rule S1B.5.2.

Rule 9.3.4 ASIC may require additional returns

Subrule 9.3.4(1) provides that a Market Participant who has given a notice under Rule 9.3.2 or 9.3.3 must, unless advised otherwise by ASIC, prepare and lodge with ASIC a “Summary” return (as set out in Form 9 in Schedule 1C) within one Business Day of giving the notice and, at the option of ASIC, an “Ad Hoc” or “Summary” return (as set out in Forms 8 and 9 in Schedule 1C) from the time of giving the notice:

(a)    by 10am on each Monday, prepared as at the close of business the previous Friday, for so long as the NTA is less than 150% of the minimum amount required by Rule S1B.3.1 but greater than or equal to 120%of the minimum amount required by Rule S1B.3.1; and

(b)   by 10am on each Business Day, for so long as the NTA is less than 120% of the minimum amount required by Rule S1B.3.1.

Subrule 9.3.4(2) provides that an Ad Hoc Return or Summary Return lodged under subrule (1) must be authorised by one director of the Market Participant.

Rule 9.3.4 reflects pre-commencement ASX Operating Rules S1B.6.3 and S1B.6.4. Forms 8 and 9 in Schedule 1C to the Rules reflect the “Ad Hoc” and “Summary” returns prescribed under pre-commencement ASX Operating Rules S1B.6.2, S1B.6.3 and S1B.6.4.

Rule 9.3.5 Monthly Return

Rule 9.3.5 provides that a Market Participant that is required to comply with the NTA Requirements in Schedule 1B must prepare and deliver to ASIC within 10 Business Days of the end of each calendar month, a “Monthly” return (as set out in Part 1 of Form 10 in Schedule 1C). The “Monthly” return must be accompanied by a declaration (as set out in Part 2 of Form 10 in Schedule 1C).

Rule 9.3.5 reflects pre-commencement ASX Operating Rules S1B.6.2 and S1B.6.4. Form 10 in Schedule 1C to the Rules reflects the “Monthly” return prescribed under pre-commencement ASX Operating Rule S1B.6.2 and S1B.6.4.

Rule 9.3.6 Audited Annual NTA Return

Subrule 9.3.6(1) provides that a Market Participant that is required to comply with the NTA Requirements in Schedule 1B must prepare and deliver to ASIC, within 3 months following the end of the Market Participant’s financial year:

• an “Annual Audited Return (as set out in Part 1 of Form 11 in Schedule 1C);
• a declaration to the “Annual Audited Return” (as set out in Part 2 of Form 11 in Schedule 1C);
• an auditor’s report on the “Annual Audited Return” (as set out in Form 5 in Schedule 1C);
• a “Key Risks and Internal Systems Statement” (as set out in Form 6 in Schedule 1C);
• the Market Participant’s statutory accounts and group structure chart.

Subrule 9.3.6(2) provides that, if the financial year end of the Market Participant is other than 30 June, the Market Participant must notify ASIC of its financial year end.

Rule 9.3.6 reflects pre-commencement ASX Operating Rule and Procedure [8510] and pre-commencement ASX Operating Rules S1B.6.2 and S1B.6.4. Form 11 reflects the “Annual Audited” return prescribed under pre-commencement ASX Operating Rules S1B.6.2 and S1B.6.4. Form 5 reflects the “Pro Forma Auditor’s Report on Financial Information” set out in pre-commencement ASX Operating Rule Appendix 8510(B)-1. Form 6 reflects the “Attestation by Directors/Partners to ASX – Key Risks and Internal Systems” set out in pre-commencement ASX Operating Rule Appendix 8510(B)-2.

Part 9.4 General

Rule 9.4.1 Alternate Director

Rule 9.4.1 provides that where a Market Participant has appointed an alternate director in accordance with section 201K of the Corporations Act and the constitution of the Market Participant, the alternate director may authorise or sign the Forms referred to in Parts 9.2 and 9.3 of the Rules only if the Market Participant has provided ASIC with:

(a)    the details of the appointment of the alternate director; and

(b)   a statement that the Market Participant’s constitution permits the appointment of the alternate director.

Rule 9.4.1 is sourced from the Capital Liquidity Handbook, Section 4, page 1716.

Rule 9.4.2 Use of Return Lodgement and Monitoring System

 Unless otherwise directed by ASIC, a Market Participant may comply with the following provisions:

(a)    Rule 9.2.1 (Ad Hoc or Summary Return on Request);

(b)   subrule 9.2.2(2) (Ad Hoc or Summary Return where Core Capital or Liquid Capital below minimum);

(c)    Rule 9.2.3 (Monthly Return);

(d)   paragraphs 9.2.4(1)(d) to (g) (Annual Audited Return);

(e)    Rule 9.3.1 (Ad Hoc or Summary NTA Return on Request);

(f)    Rule 9.3.4 (Ad Hoc or Summary NTA Return where Core Capital or Liquid Capital below minimum);

(g)   Rule 9.3.5 (Monthly NTA return);

(h)   paragraphs 9.3.6(1)(b) and (c) (Annual NTA Return),

by submitting the information required to be delivered to ASIC under those provisions to the electronic Return Lodgement and Monitoring system maintained by the Market Operator.

Rule 9.4.2 has been introduced to minimise the impact on Market Participants at the time of transition of the capital requirements to ASIC, by maintaining their arrangements for submitting returns in accordance with the pre-commencement ASX Operating Rules.

Part 9.5 Scope of audits

Rule 9.5.1 Market Participant to assist auditor

Rule 9.5.1 provides that a Market Participant must give its auditor access to its premises and Employees and all records, documents, explanations and other information required by the auditor in respect of any audit conducted under Part 9.2 or 9.3 of the Rules. A Market Participant must:

(a)    not impose any limitation on the extent of any audit required under Part 9.2 or 9.3; and

(b)   permit and direct the auditor to notify ASIC immediately if any limitation is imposed on the auditor, or if the auditor is hindered or delayed in the performance of the auditor’s duties.

The records of each of the Market Participant’s nominee companies must be included in the audit.

Rule 9.5.1 reflects pre-commencement ASX Operating Rule [8520].

CHAPTER 10: FUTURES MARKET TRANSACTIONS

Part 10.A Interpretation

Rule 10.A.1 Definitions

Rule 10.A.1 provides definitions for terms used in Chapter 10. Rule 10.A.1 provides definitions for:

• “Alternative Clearing Facility”; and
• “Clearing Agreement”.

The definition of “Alternative Clearing Facility” is sourced from pre-commencement ASX Operating Rule [7100]. The definition of “Clearing Agreement” has been introduced for the purposes of Rule 10.3.2.

Part 10.1 Payment by client

Rule 10.1.1 Application

Rule 10.1.1 provides that Rules 10.1.2 to 10.1.7 apply only where the Market Participant is regarded as the client of a Clearing Participant and holds positions in Futures Market Transactions on an omnibus basis for its own clients.

Rule 10.1.1 reflects pre-commencement ASX Operating Rule [8610].

Rule 10.1.2 Initial Margin

Subrule 10.1.2(1) provides that where a Market Participant is required to pay an amount of Initial Margin to a Clearing Participant (or to a participant of an Alternative Clearing Facility) in respect of

positions the Market Participant holds for the benefit of one or more of its clients, the Market Participant must, in turn, call a corresponding amount from the relevant client or clients.

Subrule 10.1.2(2) provides that, subject to Rule 10.1.4, the call must be made in sufficient time to ensure that the Market Participant is placed in funds before the Market Participant is obliged to pay the corresponding amount to the Clearing Participant, (or, if applicable, the participant of an Alternative Clearing Facility).

Subrule 10.1.2(3) provides that a Market Participant that is required to comply with Part 10.1 in relation to a client must have in place arrangements with that client that also entitle the Market Participant, at any time, to ask the client to pay any additional amount which the Market Participant considers appropriate to manage the risk to which the Market Participant is exposed.

Rule 10.1.2 reflects pre-commencement ASX Operating Rule [8611].

Rule 10.1.3 Close out, settlement or daily settlement of Open Contracts

Subrule 10.1.3(1) provides that a Market Participant that is required to comply with Part 10.1 in relation to a client must have in place arrangements with that client that entitle the Market

Participant to call from the client an amount sufficient to cover amounts which the Market Participant has been required to pay to its Clearing Participant pursuant to the close out, settlement or daily settlement of Open Contracts under the Clearing Rules (or to a participant of an Alternative Clearing Facility under the rules of that facility).

Subrule 10.1.3(2) provides that, subject to Rule 10.1.4, if, at any time, the net amount of those amounts payable by the client under subrule (1) exceeds 25% of the amount of Initial Margin called under Rule 10.1.2, the Market Participant must call that amount.

Subrule 10.1.3(3) provides that Rule 10.1.3 does not prevent the Market Participant from calling the amount at an earlier time or from calling an additional amount which it considers appropriate to manage the risk to which it is exposed.

Rule 10.1.3 reflects pre-commencement ASX Operating Rule [8612].

Rule 10.1.4 Exception

Rule 10.1.4 provides that a Market Participant is not required to make a call under Rule 10.1.2 or Rule 10.1.3 if:

(a)    (in the case of a call under Rule 10.1.3 in relation to settlement amounts generated as a result of close outs, contract settlement or daily settlement of Open Contracts) the amount of the call at that time is less than $1000;

(b)   the client has already paid that amount to the relevant Market Participant; or

(c)    the client has provided security for that amount to the relevant Market Participant (or to an Approved Clearing Facility on behalf of the Clearing Participant or an Alternative Clearing Facility, if applicable, on behalf of a participant) which is acceptable to the relevant Market Participant.

Rule 10.1.4 reflects pre-commencement ASX Operating Rule and Procedure [8613].

Rule 10.1.5 Arrangements with client-Payment and security

A Market Participant that is required to comply with Part 10.1 in relation to a client must have in place arrangements with the client that require the client to, by the time specified in the relevant Client Agreement:

(a)    pay to the Market Participant any amounts which the Market Participant asks the client to pay under Rule 10.1.2 or Rule 10.1.3; or

(b)   provide security for the amounts referred to in paragraph (a) which is acceptable to the Market Participant.

Rule 10.1.5 reflects pre-commencement ASX Operating Rule [8614].

Rule 10.1.6 Arrangements with client-Default timing

Rule 10.1.6 provides that if no time is agreed between the Market Participant and the client for the purpose of Rule 10.1.5, the Market Participant must have in place arrangements with the client that require the client to meet its obligations under Rule 10.1.5 within 24 hours after the request for  payment.

Rule 10.1.6 reflects pre-commencement ASX Operating Rule [8615].

Rule 10.1.7 Arrangements with client-Maximum time

Rule 10.1.7 provides that the time agreed between the Market Participant and its client for the purpose of Rule 10.1.5 must not be later than 48 hours after the request for payment.

Rule 10.1.7 reflects pre-commencement ASX Operating Rule [8616].

Part 10.2 Death of client and other circumstances

Rule 10.2.1 Application

Rule 10.2.1 provides that Rules 10.2.2 to 10.2.6 apply only where the Market Participant is regarded as the client of a Clearing Participant and holds positions in Futures Market Contracts on an omnibus basis for its own clients.

Rule 10.2.1 reflects pre-commencement ASX Operating Rule [8620].

Rule 10.2.2 Death of client-Where legal representative unable to be identified

Rule 10.2.2 provides that if a Market Participant becomes aware of the death of a client and, after reasonable enquiry, the Market Participant does not know the identity of the legal representative of the client, the Market Participant may exercise the powers under Rule 10.2.5 where the Market Participant had in place arrangements with the Client as required by that Rule.

Rule 10.2.2 reflects pre-commencement ASX Operating Rule [8621].

Rule 10.2.3 Death of client-Where no undertaking by legal representative

Rule 10.2.3 provides that if:

(a)    a Market Participant becomes aware of the death of a client;

(b)   the Market Participant knows the identity of the legal representative who has been appointed to the client’s estate; and

(c)    the legal representative does not, after being requested by the Market Participant, undertake to meet the client’s obligations in respect of one or more Open Contracts for the benefit of the client’s estate,

the Market Participant may exercise the powers under Rule 10.2.5 in respect of those Open Contracts for which the undertaking referred to in paragraph (c) is not given by the legal representative and where the Market Participant has in place arrangements with the Client as required by that Rule.

Rule 10.2.3 reflects pre-commencement ASX Operating Rule [8622].

Rule 10.2.4 Other circumstances-Where client unable to be contacted

Rule 10.2.4 provides that if the Market Participant, after reasonable enquiry, has been unable to contact a client to obtain instructions in respect of the exercise of any rights or the performance of any obligations in connection with an Open Contract, the Market Participant may exercise the powers under Rule 10.2.5 where the Market Participant has in place arrangements with the Client as required by that Rule.

Rule 10.2.4 reflects pre-commencement ASX Operating Rule [8623].

Rule 10.2.5 Death of client and other circumstances-Prior arrangements with client

Rule 10.2.5 provides that a Market Participant that is required to comply with Part 10.2 in relation to a client must have in place arrangements with that client such that if Rules 10.2.2, 10.2.3 or  10.2.4 apply, the Market Participant may, without giving prior notice to the client or the legal representative (as the case may be), take any action, or refrain from taking action, which it considers reasonable in the circumstances in connection with Open Contracts held for the benefit of the relevant client or the estate of the client (as the case may be) and, without limitation, the Market Participant may:

(a)    enter into, or cause to be entered into, one or more Futures Market Transactions to effect the close out of one or more Open Contracts;

(b)   exercise one or more Options Market Contracts; or

(c)    exercise, or cause to be exercised, any other rights conferred by the Rules or the Client Agreement or perform any other obligations arising under the Rules or the Client Agreement in respect of those Open Contracts,

and the client or the estate of the client (as the case may be) will be required to account to the Market Participant as if those actions were taken on the instructions of the client and, without limitation, will be liable for any deficiency and is entitled to any surplus which may result.

Rule 10.2.5 reflects pre-commencement ASX Operating Rule [8624].

Rule 10.2.6 Records

Rule 10.2.6 provides that a Market Participant must keep records in writing containing full particulars of all enquiries made and action taken under Rules 10.2.1 to 10.2.5.

Rule 10.2.6 reflects pre-commencement ASX Operating Rule [8625].

Part 10.3 Default by a client

Rule 10.3.1 Application

Rule 10.3.1 provides that Rule 10.3.2 applies only where the Market Participant is regarded as the client of a Clearing Participant and holds positions in Futures Markets Contracts on an omnibus basis for its own clients.

Rule 10.3.1 reflects pre-commencement ASX Operating Rule [8630].

Rule 10.3.2 Default by a client-Prior arrangements with client

Rule 10.3.2 provides that a Market Participant that is required to comply with Part 10.3 in relation to a client must have in place arrangements with that client such that if:

(a)    a client fails to pay, or provide security for, amounts payable to the Market Participant under Rule 10.1.2 or Rule 10.1.3;

(b)   a client fails to discharge any obligation in connection with the settlement of an Open Contract in accordance with its terms; or

(c)    any other event occurs which the Market Participant and the client have agreed entitles the Market Participant to take action in respect of the client,

the Market Participant may exercise any rights which the Market Participant has under these Rules, the Client Agreement, the Clearing Agreement or otherwise, and such that the client will be required to account to the Market Participant for any deficiency and will be entitled to any surplus which may result from the exercise of those rights.

Rule 10.3.2 reflects pre-commencement ASX Operating Rule [8631].

SCHEDULE 1A: CAPITAL LIQUIDITY REQUIREMENTS

Part S1A.1 Definitions and Interpretation

Rule S1A.1.1 Definitions and Interpretation

Rule S1A.1.1 provides definitions of terms used in Schedule 1A and in Chapter 9. Rule S1A.1.1 includes definitions for:

• “Approved Deposit Taking Institution”;
• “Approved Institution”;
• “Approved Subordinated Debt”;
• “Approved Subordinated Loan Deed”;
• “ASX Clear”;
• “ASX Clear Operating Rules”;
• “ASX Settlement”;
• “ASX Settlement Operating Rules”;
• “Bankruptcy”;
• “CFD”;
• “Classical ETF”;
• “Client Balance”;
• “Core Capital”;
• “Counterparty”;
• “Counterparty Risk Requirement”;
• “Debt Derivative”;
• “Debt Equivalent”;
• “Debt Instrument”;
• “Debt Net Position”
• “Derivative”;
• “Equity”;
• “Equity Derivative”;
• “Equity Equivalent”
• “Equity Net Position”
• “Excluded Asset”;
• “Excluded Liability”;
• “Family Trust”;
• “Financial Asset Revaluation Reserves”;
• “Financial Instrument”;
• “Foreign Exchange Derivative”;
• “Foreign Exchange Equivalent”;
• “Forward Rate Agreement”;
• “Free Delivery”;
• “Fund Manager”;
• “Future”;
• “Government Debt Instrument”;
• “Group of Connected Persons”;
• “Hybrid ETF”;
• “Immediate Family”;
• “In the Money”;
• “Large Exposure Risk Requirement”;
• “Liquid”;
• “Liquid Capital”;
• “Liquid Margin”;
• “Market Spot Exchange Rate;
• “Non-Standard Risk Requirement”;
• “OECD”;
• “Operational Risk Requirement”;
• “Option”;
• “OTC Derivative”;
• “Other Managed Fund”;
• “Position Risk Factors”;
• “Position Risk Requirement”;
• “Positive Credit Exposure;
• “Preference Share”;
• “Primary Margin Requirement”;
• “Qualifying Debt Instruments”;
• “Recognised Market Index”;
• “Related/Associated Person”;
• “Related/Associated Person Balance”;
• “Securities Lending and Borrowing”;
• “Substantial holder”;
• “Swap”;
• “Total Risk Requirement”;
• “Trading Day”;
• “Underwriting”; and
• “Underwriting Risk Requirement”.

The definitions in Rule S1A.1.1 are sourced from pre-commencement ASX Operating Rule S1A.1.1, with the following amendments:

(a)   the change to paragraph (c) of the definition of “Approved Institution” is sourced from the Capital Liquidity Handbook, Section 3, Tab C, pages 686 and 687;

(b)   definitions of “ASX Clear”, “ASX Clear Operating Rules”, “ASX Settlement” and “ASX Settlement Operating Rules” have been inserted for the purpose of certainty;

(c)   the definition of “CFD” has been inserted for the purpose of certainty;

(d)   the definition of “Classical ETF” is sourced from the Capital Liquidity Handbook, Section 3, Tab E.I, page 953;

(e)   the note to the definition of “Counterparty Risk Requirement” is sourced from the Capital Liquidity Handbook, Section 3, Tab C, page 519;

(f)    the changes to paragraph (e) of the definition of “Debt Instrument” are sourced from the Capital Liquidity Handbook, Section 3, Tab E.I, pages 955 to 957;

(g)   the changes to paragraph (d) of the definition of “Equity” are sourced from the Capital Liquidity Handbook, Section 3, Tab E.I, pages 955 to 957;

(h)   the changes to paragraph (d) of the definition of “Equity Derivative” are sourced from the Capital Liquidity Handbook, Section 3, Tab E.I, page 953;

(i)     the changes to paragraph (g) of the definition of “Equity Derivative” are sourced from ASX Circular 611/07 Exchange traded contracts for difference—Capital liquidity requirements under ASX Market Rule S1A issued on 22 October 2007 (where an exchange traded CFD over an Equity or a basket or index product based on Equities have been prescribed as “Equity Derivatives”);

(j)     the changes to paragraphs (g) and (i) of the definition of “Excluded Asset” are sourced from the Capital Liquidity Handbook, Section 3, Tab B, page 415 to 417 (the change to subparagraph (e)(iii) to refer to a “person licensed to trade or clear Futures or Options” is included for consistency with changes to paragraph (b) of the definition of “Related/Associated Person Balance”);

(k)   the “Excluded Asset” prescribed by ASX under paragraph (l) of the definition of “Excluded Asset” and set out in the Capital Liquidity Handbook, Section 3, Tab B on page 419 is reflected in Rule S1A.2.4A;

(l)     the changes to paragraph (d) of the definition of “Foreign Exchange Derivative” are sourced from ASX Circular 611/07 Exchange traded contracts for difference—Capital liquidity requirements under ASX Market Rule S1A issued on 22 October 2007 (where an exchange traded CFD over an exchange rate or foreign currency has been prescribed as a “Foreign Exchange Derivative”);

(m) the changes to the definition of “Free Delivery” are sourced from the Capital Liquidity Handbook, Section 3, Tab C, page 581;

(n)   the definition of “Fund Manager” is sourced from the Capital Liquidity Handbook, Section 3, Tab C, page 513 (for the purposes of determining who the Market Participant’s “Counterparty” is when dealing with a Fund Manager) and page 687 (for the purposes of the prescribed “Approved Institution” under paragraph (c) of the definition of “Approved Institution”);

(o)   the definition of “Hybrid ETF” is sourced from the Capital Liquidity Handbook, Section 3, Tab E.I, page 955;

(p)   the changes to the definition of “Liquid” are sourced from the Capital Liquidity Handbook, Section 3, Tab B, page 417 and 813;

(q)   the definition of “OECD” has been inserted for the purposes of clarity;

(r)    the definition of “Other Managed Fund” is sourced from the Capital Liquidity Handbook, Section 3, Tab E.I, page 957; and

(s)    the changes to paragraph (b) and (d) of the definition of “Related/Associated Person Balance” are sourced from the Capital Liquidity Handbook, Section 3, Tab A, page 330.

Rule S1A.1.2 Interpretation

Rule S1A.1.2 sets out interpretation provisions for the purposes of Schedule 1A.

Subrule S1A.1.2(1) reflects elements of pre-commencement ASX Operating Rule S1A.1.2.

Part S1A.2 Obligations of Market Participants

Rule S1A.2.1 Core Capital, Liquid Capital and Total Risk Requirement

Rule S1A.2.1 provides that a Market Participant must ensure that its:

(a)    Liquid Capital is at all times greater than its Total Risk Requirement; and

(b)   Core Capital is at all times not less than $100,000.

A Market Participant may satisfy the minimum Core Capital requirement in paragraph S1A.2.1(b) in accordance with, and subject to, subrule S1A.2.4(8), which provides for a Market Participant to include certain amounts owing under an approved subordination arrangement in its Core Capital with ASIC’s approval.

Rule S1A.2.1 reflects pre-commencement ASX Operating Rule S1A.2.1.

Rule S1A.2.3 Risk Requirements and Risk Amounts

Obligation to calculate an Operational Risk Requirement and operational risk amount

Subrule S1A.2.3(1) provides that a Market Participant must calculate:

(a)    its Operational Risk Requirement; and

(b)   an operational risk amount, as the sum of:

(i)            the amount of $100,000; and

(ii)            8% of the sum of the Market Participant’s Counterparty Risk Requirement, Position Risk Requirement and Underwriting Risk Requirement.

Obligation to calculate a Counterparty Risk Requirement and counterparty risk amount

Subrule S1A.2.3(2) provides that a Market Participant must calculate in accordance with Annexure 1:

(a)   its Counterparty Risk Requirement; and

(b)   a counterparty risk amount for each of its Positive Credit Exposures to a Counterparty for  transactions in Financial Instruments referred in Annexure 1, except those transactions which relate to Excluded Assets.

Obligation to calculate a Large Exposure Risk Requirement and a large exposure risk amount

Subrule S1A.2.3(3) provides that  Market Participant must calculate in accordance with Annexure 2:

(a)    its Large Exposure Risk Requirement; and

(b)   its large exposure risk amount for each:

(i)            Counterparty; and

(ii)            Equity Net Position and Debt Net Position relative to Liquid Capital and relative to an issue or issuer.

Obligation to calculate Position Risk Requirement and position risk amounts

Subrule S1A.2.3(4) provides that a Market Participant must calculate in accordance with Annexure 3:

(a)    its Position Risk Requirement;

(b)   a position risk amount for all positions in Financial Instruments, except those positions which are Excluded Assets; and

(c)    a position risk amount for other assets and liabilities which are denominated in a currency other than Australian dollars except for those assets which are Excluded Assets.

Obligation to calculate Underwriting Risk Requirement and underwriting risk amounts

Subrule S1A.2.3(5) provides that  Market Participant must calculate in accordance with Annexure 4:

(a)    its Underwriting Risk Requirement; and

(b)   an underwriting risk amount for each Underwriting.

Obligation to calculate Non-Standard Risk Requirement

Subrule S1A.2.3(6) provides that a Market Participant must calculate a Non-Standard Risk Requirement in accordance with Rule S1A.2.9.

Rule S1A.2.3 reflects pre-commencement ASX Operatng Rule S1A.2.3.

Rule S1A.2.3A Authorisation

Rule S1A.2.3A provides for authorisation by ASIC of a Market Participant for each of the risk calculation methods it uses for the purposes of Rule S1A.2.3. A Market Participant will only be authorised to use a risk calculation method after having satisfactorily demonstrated its ability to calculate risk amounts under that method.

Rule S1A.2.3A reflects pre-commencement ASX Operating Rule S1A.1.2(2) and the Capital Liquidity Handbook, Section 3, Tab A, page 351.

Rule S1A.2.4 Approved Subordinated Debt

Inclusion of amounts owing under a subordination arrangement in Liquid Capital

Subrule S1A.2.4(1) provides that a Market Participant entering into a subordination arrangement may only include an amount owing under such an arrangement in its Liquid Capital if:

(a)    the subordination arrangement has the prior approval of ASIC under subrules S1A.2.4(2) and (3); and

(b)   the amount is notified to and approved by ASIC prior to being drawn down under the subordination arrangement and complies with subrule S1A.2.4(4) where relevant.

Approval of subordination arrangements by ASIC

Subrule S1A.2.4(2) provides that ASIC will not approve a subordination arrangement unless in the opinion of ASIC:

(a)    subject to subrule S1A.2.4(6), the amount owing to the lender under the subordination arrangement will not be repaid until all other debts which the Market Participant owes to any other persons are repaid in full; and

(b)   the obligation to pay any amount owing under the subordination arrangement is suspended if S1A.2.1 (minimum Core Capital and Liquid Capital) is no longer complied with.

Subrule S1A.2.4(3) provides that ASIC will not approve a subordination arrangement unless the Market Participant has executed an Approved Subordinated Loan Deed in respect of the subordination arrangement. The minimum terms of the Approved Subordinated Loan Deed are set out in Rule S1A.1.1.

Approved subordination arrangement where change in composition of partnership

Subrule S1A.2.4(4) provides that if a Market Participant is a partnership has entered into an approved subordination arrangement under subrules S1A.2.4(2) and (3) and there is a change in the composition of the Market Participant, then an amount owing under the previously approved subordination arrangement must not be included in its Liquid Capital unless ASIC is of the opinion that this arrangement has been renewed or amended so as to ensure that all partners after the change in composition are bound by it.

Market Participant must comply with terms of Approved Subordinated Loan Deed

Subrule S1A.2.4(5) provides that a Market Participant must comply with the terms of the Approved Subordinated Loan Deed and any associated agreement to which it, ASIC, and the lender are parties and must ensure the lender’s compliance with these documents.

ASIC approval required for repayment of amount owing under an approved subordination arrangement

Subrule S1A.2.4(6) provides that Prior to its Bankruptcy, a Market Participant may repay an amount owing under an approved subordination arrangement only with the prior approval of ASIC. Subrule S1A.2.4(7) provides that ASIC will not withhold its approval under subrule S1A.2.4(6) if in the opinion of ASIC:

(a)    the Market Participant’s Liquid Capital divided by its Total Risk Requirement is capable of continuing to be greater than 1.2 on repayment; and

(b)   the Market Participant’s Core Capital is capable of continuing to be equal to or greater than the amount required under Rule S1A.2.1 when Approved Subordinated Debt is included under subrule S1A.2.4(8).

Subrule S1A.2.4(9) provides for matters that ASIC may consider  in forming an opinion as to whether a Market Participant is capable of continuing to meet the requirements in paragraphs S1A.2.4(7)(a) and (b).

Market Participant may not include Approved Subordinated Debt in its Core Capital

Subrule S1A.2.4(8) provides that, if a Market Participant does not hold sufficient Core Capital under paragraph S1A.2.1(b), then it may with the prior approval of ASIC include amounts owing under an approved subordination arrangement in calculating Core Capital for a 6 month period commencing on the date that the Market Participant first does not hold sufficient Core Capital.

Subrules S1A.2.4(1) to (8) reflect pre-commencement ASX Operating Rule S1A.2.4. Subrule S1A.2.4(9) is sourced from the Capital Liquidity Handbook, Section 5, page 1815.

Rule S1A.2.4A Excluded Assets

Netting of offsetting asset and liability

S1A.2.4A(1) provides for the netting of an asset due from one entity with an offsetting liability payable to another entity, so that only the net amount (if the net amount is positive) is reported as an Excluded Asset.

Subrule S1A.2.4A(2) provides that the Market Participant may only net an asset with a liability and report the net amount as an Excluded Asset under subrule S1A.2.4A(1) if the Market Participant:

(a)    has obtained written authorisation from ASIC for the purposes of the Rule;

(b)   has a documented, legally binding contract or agreement with the Counterparty to the liability that specifies that the liability cannot be enforced unless the asset is realised;

(c)    reports the asset, liability and net amount in its “Monthly” return in accordance with the requirements of the Rule.

Subrules S1A.2.4A(1) and (2) reflect the “Excluded Asset” prescribed by ASX under paragraph (l) of the definition of “Excluded Asset” and set out in the Capital Liquidity Handbook, Section 3, Tab B, page 419.

Excluded Assets

Subrule S1A.2.4A(3) provides that a Market Participant must treat Underwriting fees, fees due for managing a client portfolio, corporate advisory fees and other sundry debtors as Excluded Assets if they remain outstanding for greater than 30 calendar days.

Subrule S1A.2.4A(3) is sourced from the Capital Liquidity Handbook, Section 3, Tab C, page 524.

Rule S1A.2.5 Redeemable Preference Shares

Rule S1A.2.5 provides that a Market Participant must not redeem any redeemable Preference Shares issued by it in whole or in part without the prior written approval of ASIC. ASIC will not withhold its approval if in the opinion of ASIC the Market Participant’s Liquid Capital divided by its Total Risk Requirement is capable of continuing to be greater than 1.2 on redemption.  ASIC may take certain matters into consideration in forming an opinion as to whether a Market Participant is capable of continuing to meet the requirement.

Rule S1A.2.5 reflects pre-commencement ASX Operating Rule S1A.2.5 and the Capital Liquidity Handbook, Section 3, Tab B, page 433 and Section 5, page 1815.

Rule S1A.2.6 Guarantees and Indemnities

Market Participant may only give guarantee or indemnity in certain circumstances

Subrule S1A.2.6(1) provides that a Market Participant may only give a guarantee or indemnity:

(a)    for the purposes of these Rules, the ASX Operating Rules, the ASX Clear Operating Rules or the ASX Settlement Operating Rules;

(b)   in the ordinary course of the conduct of its securities or derivatives business;

(c)    outside the ordinary course of its securities or derivatives business if a maximum liability is specified in the guarantee or indemnity at the time it is entered into; or

(d)   to settle legal proceedings that have been threatened or issued against it,

and must not give a cross-guarantee.

Subrule S1A.2.6(2) provides for the meaning of the expression “ordinary course of the conduct of its securities or derivatives business” for the purposes of subrule S1A.2.6(1).

Subrule S1A.2.6(1) reflects pre-commencement ASX Operating Rule S1A.2.6. Subrule S1A.2.6(2) is sourced from the Capital Liquidity Handbook, Section 3, Tab B, pages 434 to 435.

Market Participant that is a member of a consolidated tax group

Subrule S1A.2.6(3) provides that a Market Participant that is a member of a consolidated group within the meaning of section 703-5 of the Income Tax Assessment Act 1997 must, when it first becomes a member of that group, report certain information in its next “Monthly” return and any changes to these details must be reported in subsequent “Monthly” returns.

Subrule S1A.2.6(3) is sourced from the Capital Liquidity Handbook, Section 3, Tab B, pages 435 to 437.

Rule S1A.2.7 Records and Accounts

Requirement to maintain records and working papers

Subrule S1A.2.7(1) provides that a Market Participant must maintain records and working papers in sufficient detail to show continuous compliance with Rule S1A.2.1 for seven years. Subrule S1A.2.7(2) provides that these records and working papers must, at a minimum:

(a)    show the nature of the outstanding transactions and commitments for which the Market Participant was liable;

(b)   disclose the financial position of the Market Participant at any point in time;

(c)    detail and support the calculations required to quantify the Total Risk Requirement and demonstrate that the Market Participant was complying with the Risk Based Capital Requirements;

(d)   permit the Market Participant to prepare a return required by these Rules using those records if so requested; and

(e)    permit the Market Participant to reproduce a calculation of its Liquid Capital or Total Risk Requirement at the close of business on each day in the seven year period.

Accounts

Subrule S1A.2.7(3) provides that a Market Participant must prepare its accounts and returns in accordance with accounting standards which are generally accepted in Australia unless ASIC approves otherwise.

Subrule S1A.2.7(4) provides that a Market Participant must take any amounts arising from the marking-to-market of principal positions in Financial Instruments to the Market Participant’s profit and loss account immediately and include those amounts in the Market Participant’s overall accounting for taxation.

Subrule S1A.2.7(5) provides that a Market Participant must record a transaction in its accounts on the date on which it enters into an irrevocable commitment to carry out the transaction.  Generally, this would mean transaction/execution date and not settlement date.

Subrules S1A.2.7(1), (3) and (5) reflect pre-commencement ASX Operating Rule S1A.7.7(1).

Subrules S1A.2.7(2) and (4) are sourced from the Capital Liquidity Handbook, Section 3, Tab B, pages 438 to 439.

Rule S1A.2.8 Valuations and Foreign Currencies

Valuation

Paragraph S1A.2.8(1)(a) provides that a Market Participant must mark to market each of its principal positions in Financial Instruments unless Schedule 1A provides otherwise, at least once every Business Day.

Paragraph S1A.2.8(1)(b) provides for the manner in which the Market Participant must mark to market each of its principal positions in Financial Instruments. Under subparagraph S1A.2.8(1)(b)(i), a position must be valued at its closing market price (for a long position, the current bid price and for a short position, the current offer price) or at the last price, closing price or mid price.  Paragraphs S1A.2.8(1)(b)(ii) to (iv) provide for alternative approaches to valuing Options or rights positions and Swaps or Forward Rate Agreements.

Subrule S1A.2.8(1) reflects pre-commencement ASX Operating Rule S1A.2.8(1). The changes to subparagraph S1A.2.8(1)(b)(i), new subparagraph S1A.2.8(1)(b)(iii) and new subrule S1A.2.8(2) are sourced from the Capital Liquidity Handbook, Section 3, Tab B, page 442.

Foreign currencies

Subrule S1A.2.8(3) provides that if a Market Participant holds a Financial Instrument denominated in a foreign currency then it:

(a)    must calculate a risk amount for each risk type in that foreign currency; and

(b)   convert the risk amount in paragraph (a) to Australian dollars at the Market Spot Exchange Rate, in all cases other than where the Market Participant is calculating risk amounts for the purposes of Parts A3.18 to A3.22 of Annexure 3 or where Schedule 1A expressly provides otherwise.

Subrule S1A.2.8(3) reflects pre-commencement ASX Operating Rule S1A.2.8(2).

Rule S1A.2.9 Unusual or Non-Standard Exposures

Rule S1A.2.9 provides that, if a Market Participant has an exposure arising from a transaction which is not specifically described in Schedule 1A or is not in a form which readily fits within Schedule 1A,

the risk requirement of a Market Participant in relation to an that exposure is the full market value of the transaction unless ASIC approves otherwise.

Rule S1A.2.9 reflects pre-commencement ASX Operating Rule S1A.2.9.

Rule S1A.2.9A Margin lending facilities

Rule S1A.2.9A provides that where a Market Participant offers margin lending facilities to clients:

(a)    the risk requirement for the exposure with respect to margin calls is:

(i)            equal to 100% of the margin call that the Market Participant makes on a client, where that margin call has either not been paid by the client, or sufficient of the underlying securities have not been sold by the Market Participant to cover the margin call; and

(ii)            applies from the time the margin payment was due; and

(b)   where the client’s actual gearing level exceeds the maximum permitted gearing level by more than 5%, the full amount needed to bring the loan balance back to the maximum permitted gearing level must be taken as the risk requirement for the exposure immediately, regardless of whether the Market Participant has made a margin call on the client.

Rule S1A.2.9A is sourced from the Capital Liquidity Handbook, Section 3, Tab B, page 444.

Rule S1A.2.9B Hybrid ETFs

Rule S1A.2.9B provides that where a Market Participant holds a principal position in a Hybrid ETF that contains a material percentage of assets other than physical Equity securities, physical Debt Instruments or property, the Market Participant must treat the position as a non-standard exposure and the risk requirement must be the full market value of the Hybrid ETF unless ASIC approves otherwise.

Rule S1A.2.9B is sourced from the Capital Liquidity Handbook, Section 3, Tab E.I, page 956.

Rule S1A.2.9C Other Managed Funds

Rule S1A.2.9C provides that where a Market Participant has a principal position in an Other Managed Fund that contains a material percentage of assets other than physical Equity securities, physical Debt Instruments or property, the Market Participant must treat the principal position as a non-standard exposure and the risk requirement must be the full market value of the Other Managed Fund unless ASIC approves otherwise.

Rule S1A.2.9C is sourced from the Capital Liquidity Handbook, Section 3, Tab E.I, page 957.

Rule S1A.2.10 Underwriting Registers

Rule S1A.2.10 provides that a Market Participant must maintain a register of its Underwritings which records:

(a)    the date of commencement, crystallisation and termination of each Underwriting and the parties to each Underwriting;

(b)   the identity, number and price of the Equities or Debt Instruments the subject of each Underwriting;

(c)    the amount underwritten by the Market Participant under each Underwriting; and

(d)   any reduction in the amount underwritten under each Underwriting due to an amount being:

(i)            sub-underwritten; or

(ii)            received under a client placement,

and the date that this reduction occurs.

Rule S1A.2.10 reflects pre-commencement ASX Operating Rule S1A.2.10(2). Pre-commencement ASX Operating Rule S1A.2.10(1) has been incorporated into Part 9.2 of the Rules.

SCHEDULE 1B: NTA REQUIREMENTS

Part S1B.1 Interpretation

Rule S1B.1.1 Definitions

Rule S1B.1.1 provides definitions for terms used in Schedule 1B. Rule S1B.1.1 provides definitions for:

• “Approved Subordinated Debt”;
• “Approved Subordinated Loan Deed”;
• “Bankruptcy”.

Rule S1B.1.1 reflects pre-commencement ASX Operating Rule S1B.1.

Rule S1B.1.2 Application

Rule S1B.1.2 provides that Schedule 1B applies to a Market Participant that has elected to comply with the NTA Requirements under Rules 8.3.1 to 8.3.3.

Rule S1B.1.2 is a new rule and is included for the purposes of certainty.

Part S1B.2 Meaning and calculation of Net Tangible Assets (NTA)

Rule S1B.2.1 Calculating a Market Participant's NTA

Rule S1B.2.1 provides that, in Schedule 1B, the “NTA” of a Market Participant is calculated as the sum of the values of the assets (both non-current and current) owned by the Market Participant less the sum of any liabilities (secured and unsecured) attaching to those assets or to the Market Participant.

Rule S1B.2.1 reflects pre-commencement ASX Operating Rule S1B.2.1.

Rule S1B.2.2 Excluding items from calculation

Rule S1B.2.2 provides that, in calculating the values of the assets for the purposes of Rule S1B.2.1 any value attributable to the following must be excluded:

(a)        any future tax benefit, goodwill, patent, trademark, participation rights granted by the Market Operator or a Related Body Corporate, and any preliminary expense;

(b)       any debt owed to the Market Participant which is disputed or may otherwise be regarded as doubtful; and

(c)        any asset which is not capable of being realised within 12 months on a going concern basis.

Rule S1B.2.2 reflects pre-commencement ASX Operating Rule S1B.2.2.

Rule S1B.2.3 Calculating liabilities

Rule S1B.2.3 provides that, in calculating the sum of the liabilities for the purposes of Rule S1B.2.1:

(a)        the sum must include a provision for the Market Participant’s estimated liability for income tax and long service leave; and

(b)       the sum must exclude Approved Subordinated Debt.

Rule S1B.2.3 reflects pre-commencement ASX Operating Rule S1B.2.3.

Part S1B.3 Minimum NTA requirement

Rule S1B.3.1 Minimum NTA

Rule S1B.3.1 provides that a Market Participant must have at all times an NTA of at least $1,000,000.

Rule S1B.3.1 reflects pre-commencement ASX Operating Rule S1B.3.

Note: There is no Part S1B.4 or S1B.5.

Part S1B.6 Records, accounts and returns

Rule S1B.6.1 Market Participant must maintain records

Rule S1B.6.1 provides that, without limiting the Market Participant’s obligations under Part 9.3, a Market Participant must maintain records and working papers in sufficient detail to show continuous compliance with Schedule 1B for at least 7 years.

Rule S1B.6.1 reflects pre-commencement ASX Operating Rule S1B.6.1.

Note: There is no Part S1B.7.

Part S1B.8 Approved subordinated debt

Rule S1B.8.1 Circumstances in which amounts owing under a subordination arrangement may be excluded from a Market Participant's liabilities

Subrule S1B.8.1(1) provides that a Market Participant entering into a subordination arrangement may only exclude an amount owing under such an arrangement from the sum of its liabilities for the purposes of calculating its NTA if:

(a)        the subordination arrangement has the prior approval of ASIC under Rule S1B.8.2; and

(b)       the amount is notified to and approved by ASIC prior to being drawn down under the subordination arrangement.

Subrule S1B.8.1(2) provides that ASIC will not approve an amount under paragraph S1B.8.1(1)(b) if the Market Participant does not have at least $250,000 in paid-up capital.

Subrule S1B.8.1(3) provides that the maximum amount that ASIC will approve under paragraph (1)(b) is two times the amount of shareholders equity excluding Approved Subordinated Debt.

Rule S1B.8.1 reflects pre-commencement ASX Operating Rule S1B.8.1.

Rule S1B.8.2 Circumstances in which ASIC will not approve a subordination arrangement

Rule S1B.8.2 provides that ASIC will not approve a subordination arrangement unless in the opinion of ASIC:

(a)        subject to Rule S1B.8.5, the amount owing to the lender under the subordination arrangement will not be repaid until all other debts which the Market Participant owes to any other persons are repaid in full; and

(b)       the obligation to pay any amount owing under the subordination arrangement is suspended if Rule S1B.3.1 is no longer complied with.

Rule S1B.8.2 reflects pre-commencement ASX Operating Rule S1B.8.2.

Rule S1B.8.3 Execution of Approved Subordination Loan Deed

Rule S1B.8.3 provides that ASIC will not approve a subordination arrangement unless the Market Participant has executed an Approved Subordinated Loan Deed in respect of the subordination arrangement.

Rule S1B.8.3 reflects pre-commencement ASX Operating Rule S1B.8.3.

Rule S1B.8.4 Market Participant obligations

Rule S1B.8.4 provides that a Market Participant must comply with the terms of the Approved Subordinated Loan Deed and any associated agreement and must ensure the lender's compliance with these documents.

Rule S1B.8.4 reflects pre-commencement ASX Operating Rule S1B.8.4.

Rule S1B.8.5 Repayment of Amounts owing under an approved subordination arrangement

Rule S1B.8.5 provides that, prior to its Bankruptcy, a Market Participant may repay an amount owing under an approved subordination arrangement only with the prior approval of ASIC.

Rule S1B.8.5 reflects pre-commencement ASX Operating Rule S1B.8.5.

Rule S1B.8.6 Circumstances in which ASIC will not withhold its approval for repayment

Rule S1B.8.6 provides that ASIC will not withhold approval under Rule S1B.8.5 if in the opinion of ASIC the Market Participant's NTA is capable of continuing, on repayment, to be greater than 150% of the minimum required under Rule S1B.3.1.

Rule S1B.8.6 reflects pre-commencement ASX Operating Rule S1B.8.6.

ANNEXURE 1 TO SCHEDULE 1A: COUNTERPARTY RISK REQUIREMENT

Part A1.1. Counterparty risk requirement

The principle of the counterparty risk requirement is that where a client or Counterparty owes the Market Participant money, the Market Participant must hold capital against the financial loss that the Market Participant would incur in the event that the client or Counterparty were to default on their obligations. This principle applies to all markets the Market Participant transacts business in.

Rule A1.1.1 Nature of counterparty risk amount

Subrule A1.1.1(1) provides that, for each type of counterparty risk that gives rise to a Positive Credit Exposure, a counterparty risk amount:

(a)        must be calculated in accordance with the methods set out in Annexure 1; and

(b)       may be reduced by a counterparty risk weighting in accordance with Part A1.8 of Annexure 1.

Subrule A1.1.1(1) reflects Clause 1.1 of Annexure 1 to Schedule 1A of the pre-commencement ASX Operating Rules.

Subrule A1.1.1(2) provides that, for the purposes of the Non-margined Financial Instruments method, a Positive Credit Exposure exists on a Client Balance regardless of whether the Client Balance is positive (i.e. the client or Counterparty has net purchased securities) or negative (i.e. the client or Counterparty has net sold securities). In the case of net sold securities, a Positive Credit Exposure arises from the obligation of a client or Counterparty to deliver securities that have been sold.

Subrule A1.1.1(2) is sourced from the Capital Liquidity Handbook, Section 3, Tab C, page 518.

Rule A1.1.1A Treatment: Classical ETFs

Primary Market Subscription for/Redemption of Units

Subrule A1.1.1A(1) provides that, subject to subrule A1.1.1A(2), a Market Participant is not required to calculate a counterparty risk amount under Annexure 1 in relation to a subscription for or redemption of a unit in a Classical ETF.

Subrule A1.1.1A(2) provides that, in the event of default in the settlement of a primary market transaction in Classical ETFs:

(a)        in the case of a subscription for Classical ETF units, where the Market Participant transfers underlying securities and does not receive the corresponding Classical ETF units or some other cash consideration; or

(b)       in the case of a redemption, where the Market Participant transfers Classical ETF units and does not receive the corresponding underlying securities, or some other cash consideration,

a counterparty risk amount must be calculated under the Free Delivery method from the time those assets or cash were due to be settled.

Secondary market

Subrule A1.1.1A(3) provides that a Market Participant is required to calculate a counterparty risk amount under Annexure 1 for all secondary market transactions in Classical ETF units.

Rule A1.1.1A is sourced from the Capital Liquidity Handbook, Section 3, Tab C, pages 521 and 581.

Rule A1.1.1B Treatment: Hybrid ETFs

Primary Market Subscription for/Redemption of Units

Subrule A1.1.1B(1) provides that, subject to subrule A1.1.1B(2), a Market Participant is not required to calculate a counterparty risk amount under Annexure 1 in relation to a subscription for or redemption of a unit in a Hybrid ETF.

Subrule A1.1.1B(2) provides that, in the event of a default in the settlement of a primary market transaction in Hybrid ETFs:

(a)        in the case of a subscription for Hybrid ETF units, where the Market Participant transfers cash and does not receive the corresponding Hybrid ETF units; or

(b)       in the case of a redemption, where the Market Participant transfers Hybrid ETF units and does not receive the corresponding cash,

a counterparty risk amount must be calculated under the Free Delivery Method from the time those assets or cash were due to be settled.

Secondary Market

Subrule A1.1.1B(3) provides that a Market Participant is required to calculate a counterparty risk amount under Annexure 1 for all secondary market transactions in Hybrid ETF units.

Rule A1.1.1B is sourced from the Capital Liquidity Handbook, Section 3, Tab C, page 522.

Rule A1.1.1C Treatment: Other Managed Funds

Rule A1.1.1C provides that a Market Participant is not required to calculate a counterparty risk amount under this Annexure in relation to a subscription for or redemption of a unit in an Other Managed Fund.

Rule A1.1.1C is sourced from the Capital Liquidity Handbook, Section 3, Tab C, page 522.

Part A1.2 Methods

Rule A1.2.1 Overview and Table A1.1 Method for measuring counterparty risk: Transaction type

Rule A1.2.1 provides that there are separate methods for measuring counterparty risk amounts for each of the transaction types set out in Table A1.1 (Non-Margined Financial Instruments, Free Delivery, Securities Lending and Borrowing, Margined Financial Instrument, OTC Derivative or Warrant held as principal and Sub-Underwritten Position).

Rule A1.2.1 and Table A1.1 reflect Clause 1.2 of Annexure 1 of Schedule 1A to the pre-commencement ASX Operating Rules.

Rule A1.2.2 Non-margined Financial Instruments method

The principle of the Non-margined Financial Instruments method is that the Market Participant must calculate a counterparty risk amount for those non-margined securities transactions in which a Market Participant acts as agent for a client or, in certain circumstances, as principal for itself and where a Client Balance arises.

Trades remaining unsettled for ≤ 10 Business Days

Counterparty risk amount

Subrule A1.2.2(1) provides that, for unsettled trades in Financial Instruments which are not margined and not covered by one of the other methods in Annexure 1, the counterparty risk amount is 3% of the Client Balance, where this balance does not include trades which remain unsettled with the Counterparty for greater than 10 Business Days following the transaction date and regardless of whether the Counterparty is issuer or participant sponsored.

Subrule A1.2.2(1) reflects the first paragraph of Clause 2(a) of Annexure 1 to Schedule 1A of the pre-commencement ASX Operating Rules.

Market Participant may reduce Client Balance

Subrule A1.2.2(2) provides that a Market Participant may reduce the Client Balance by the amount of Financial Instruments held by the Market Participant on behalf of the Counterparty if they specifically relate to the sale trades pending settlement with the market, or by the amount of collateral held by the Market Participant on behalf of the specific Counterparty. The collateral must be Liquid, unrelated to a particular or specific transaction (i.e. not the securities underlying the Counterparty’s purchase), under the control of the market participant and valued at the mark to market value. The collateral arrangement must be evidenced in writing by a legally binding agreement and the Market Participant may only apply the collateral in accordance with the collateral agreement.

Subrule A1.2.2(2) reflects the second paragraph of Clause 2(a) of Annexure 1 to Schedule 1A of the pre-commencement ASX Operating Rules and the Capital Liquidity Handbook, Section 3, Tab C, pages 555 and 556.

Subrule A1.2.2(5) provides for specific circumstances in which the Market Participant may reduce the Client Balance with respect to money held in a cash management or trust account, or scrip held in a participant sponsored account.

Subrule A1.2.2(5) is sourced from the Capital Liquidity Handbook, Section 3, Tab C, page 552.

Trades remaining unsettled for > 10 Business Days

Counterparty risk amount

Subrule A1.2.2(3) provides that, for unsettled trades in Financial Instruments which are not margined and not covered by one of the other methods in Annexure 1, the counterparty risk amount for trades remaining unsettled for greater than 10 Business Days following the transaction date is at the choice of the Market Participant:

(a)        either:

(i)         3% of the contract value; or

(ii)       the excess of:

(A)       the contract value over the market value of each Financial Instrument in the case of a client purchase; and

(B)       the market value of each Financial Instrument over the contract value in the case of a client sale,

whichever is the greater; or

(b)       100% of the contract value for a client purchase or 100% of the market value for a client sale.

Subrule A1.2.2(3) reflects the first paragraph of Clause 2(b) of Annexure 1 to Schedule 1A of the pre-commencement ASX Operating Rules.

Market Participant may reduce the contract values and excesses

Subrule A1.2.2(4) provides that a Market Participant may reduce the contract values and the excesses by the amount of collateral held by the Market Participant on behalf of the Counterparty. The collateral must be Liquid, unrelated to a particular or specific transaction (i.e. not the securities underlying the Counterparty’s purchase), under the control of the Market Participant and valued at the mark to market value. The collateral arrangement must be evidenced in writing by a legally binding agreement and the Market Participant may only apply such collateral in accordance with the collateral agreement.

Subrule A1.2.2(4) reflects the second paragraph of Clause 2(b) of Annexure 1 to Schedule 1A of the pre-commencement ASX Operating Rules and the Capital Liquidity Handbook, Section 3, Tab C, pages 555 to 556.

Securities subject to trading halt

Subrule A1.2.2(6) provides that, for the purposes of subrule A1.2.2(3), where the security underlying a trade that remains unsettled for greater than 10 Business Days becomes subject to a trading halt, the last market value is acceptable in calculating the counterparty risk amount. Where the security becomes subject to a suspension, the market value should be taken as nil on the basis that the security is not Liquid.

Subrule A1.2.2(6) is sourced from the Capital Liquidity Handbook, Section 3, Tab C,  page 551.

Amounts held in Market Participant’s trust and/or segregated account

Subrule A1.2.2(7) provides that a Market Participant need not include credit amounts included in a Client Balance where such amounts represent an amount of cash held in the Market Participant’s trust and/or segregated account.

Subrule A1.2.2(7) reflects the Clause 2(c) of Annexure 1 to Schedule 1A of the pre-commencement ASX Operating Rules.

Counterparty risk amounts not required to be treated or disclosed as Excluded Assets

Subrule A1.2.2(8) provides that, without limitation, a Market Participant that has calculated a counterparty risk amount for an unsettled trade under the Non-Margined Financial Instruments method is not required to treat or disclose any amounts calculated as Excluded Assets.

Subrule A1.2.2(8) is sourced from the Capital Liquidity Handbook, Section 3, Tab C, page 550.

Method does not apply to OTC Derivatives but does apply to warrants

Subrule A1.2.2(9) provides that this method does not apply to OTC Derivatives but does apply to warrants which also may be covered by the method in Rule A1.2.6.

Subrule A1.2.2(9) reflects the Clause 2(d) of Annexure 1 to Schedule 1A of the pre-commencement ASX Operating Rules.

Circumstances in which Market Participant must calculate a counterparty risk amount under this method

Subrule A1.2.2(10) provides for circumstances in which a Market Participant must calculate a counterparty risk amount under the Non-Margined Financial Instruments method. The transactions set out in subrule A1.2.2(10) are transactions that are normally associated with client business.

Subrule A1.2.2(10) is sourced from the Capital Liquidity Handbook, pages 515 to 517 and 542 to 549.

Determining the Market Participant’s Counterparty when dealing with a Fund Manager

Subrule A1.2.2(11) provides that for the purposes of determining a Client Balance when dealing with a Fund Manager, the Market Participant’s Counterparty is determined as follows:

(a)        if the Market Participant is immediately provided with the underlying client details by the Fund Manager, or if the Market Participant has a standing instruction for the underlying client details to be provided, the Market Participant must treat the underlying client as the Counterparty;

(b)       if the Market Participant books trades directly to the Fund Manager or its nominee company and the Fund /manager does not provide details of the underlying client, the Market Participant is entitled to treat the Fund Manager as the Counterparty.

Subrule A1.2.2(11) is sourced from the Capital Liquidity Handbook pages 514 and 550.

Rule A1.2.3 Free Delivery method

The principle of the Free Delivery method is that where a Market Participant has made a Free Delivery the Market Participant is required to hold a greater amount of capital than is required under the Non-Margined Financial Instruments method.

A Free Delivery occurs where:

(a)    in the case of a client purchase, the Market Participant has delivered the stock to the client or Counterparty but the client or Counterparty has not yet paid the Market Participant (or has only partially paid the Market Participant) or;

(b)   in the case of a client sale, the Market Participant has paid the client or Counterparty (in whole or in part) but the client or Counterparty has not yet provided any of the stock (or has only provided some of the stock).

Counterparty risk amount

Subrule A1.2.3(1) provides that, for a Free Delivery in a Financial Instrument, the counterparty risk amount for the Counterparty is:

(a)        8% of that part of the contract value subject to a Free Delivery, where payment or delivery of the Financial Instrument which is the subject of a Free Delivery remains outstanding for less than 2 Business Days following the settlement date; and

(b)       100% of that part of the contract value subject to a Free Delivery, where payment or delivery of the Financial Instrument remains outstanding for greater than 2 Business Days following the settlement date,

where “settlement date” means the date that the Market Participant makes the Free Delivery (that is, the day that the Market Participant settles with the client or Counterparty) and not the market settlement date.

Subrule A1.2.3(1) reflects paragraphs (a) and (b) of Clause 3 of Annexure 1 to Schedule 1A of the pre-commencement ASX Operating Rules and the Capital Liquidity Handbook, Section 3, Tab C, page 583.

Market participant may reduce the contact value

Subrule A1.2.3(2) provides that a Market Participant may reduce the contract value by the amount of collateral held by the Market Participant on behalf of the Counterparty. The collateral must be Liquid, unrelated to a particular or specific transaction (i.e. not the securities underlying the Counterparty’s purchase), under the control of the Market Participant and valued at the mark to market value. The collateral arrangement must be evidenced in writing by a legally binding agreement and the Market Participant may only apply such collateral in accordance with the collateral agreement.

Subrule A1.2.3(2) reflects the second paragraph of Clause 3 of Annexure 1 to Schedule 1A of the pre-commencement ASX Operating Rules and the Capital Liquidity Handbook, Section 3, Tab C, pages 583 and 584.

Subrule A1.2.3(3) provides that, for the purposes of valuing the collateral, if the security lodged as collateral is subject to a trading halt, the last market value may be used. If the security lodged as collateral is subject to a suspension, the market value should be taken as nil on the basis that the security is not Liquid.

Subrule A1.2.3(3) is sourced from the Capital Liquidity Handbook, Section 3, Tab C, page 584.

Circumstances in which Market Participant must calculate a counterparty risk amount under this method

Subrule A1.2.3(4) provides that the Market Participant must calculate a counterparty risk amount under the Free Delivery method where the Market Participant has applied for stock, allocation interest units or instalment receipts on behalf of clients and the stock, allocation interest units or instalment receipts are registered into the client’s issuer or participant sponsored account prior to the client paying, from the time the Market Participant pays the issuer or issuer’s agent until the time the client pays the Market Participant.

Subrule A1.2.3(4) is sourced from the Capital Liquidity Handbook, Section 3, Tab C, pages 547 and 548.

Partial Free Delivery

Subrule A1.2.3(5) provides that where a Market Participant makes a partial Free Delivery as set out in the Rule, only the part of the contract value that the Market Participant has settled with the client or Counterparty but which the client or Counterparty has not yet settled with the Participant is included in the calculation under the Free Delivery method while the part of the contract value that the Market Participant has not yet settled with the client or Counterparty continues to form part of the Client Balance and continues to be subject to a counterparty risk amount under the Non-Margined Financial Instruments method.

Subrule A1.2.3(5) is sourced from the Capital Liquidity Handbook, Section 3, Tab C, pages 581 and 582.

Rule A1.2.4 Securities Lending and Borrowing method

The principle of this method is that where Securities Lending and Borrowing arrangements require the Market Participant to give the Counterparty securities with a market value, or cash, in excess of the market value of securities, or cash, received by the Market Participant from the Counterparty, this method requires the Market Participant to hold capital against that excess.

Meaning of counterparty exposure

Subrule A1.2.4(1) provides that, for the purposes of this Rule, counterparty exposure means the amount by which the market value of Equity or Debt Instruments or cash given by the Market Participant to the Counterparty exceeds the market value of Equity or Debt Instruments or cash received by the Market Participant from the Counterparty.

Subrule A1.2.4(1) reflects the first paragraph of Clause 4 of Annexure 1 to Schedule 1A of the pre-commencement ASX Operating Rules.

Netting of Counterparty exposures

Subrule A1.2.4(2) provides that the Counterparty exposure may be calculated on a net basis where the relevant transactions are subject to a written agreement that supports netting across different transactions.

Subrule A1.2.4(2) reflects the second paragraph of Clause 4 of Annexure 1 to Schedule 1A of the pre-commencement ASX Operating Rules.

Counterparty risk amount

Paragraph A1.2.4(3)(a) provides that, for a Securities Lending and Borrowing transaction, the counterparty risk amount for a Counterparty from the transaction date is zero, if across all Counterparties to Securities Lending and Borrowing transactions, the sum of each positive counterparty exposure is less than or equal to $10,000.

Paragraph A1.2.4(3)(b) provides for two different calculations of the counterparty risk amount where the Securities Lending and Borrowing is subject to a written agreement that supports netting across different transactions, depending on whether the value of the counterparty exposure is less than or equal to, or greater than, 15% of the market value of the Equity or Debt Instruments or cash received by the Market Participant from the Counterparty.

Paragraph A1.2.4(3)(c) provides that, for a Securities Lending and Borrowing transaction, the counterparty risk amount for a Counterparty from the transaction date is 100% of the counterparty exposure, if paragraphs A1.2.4(3)(a) and (b) do not apply, or if paragraph A1.2.4(3)(b) does apply but the Market Participant elects to calculate the amount under paragraph A1.2.4(3)(c).

Subrule A1.2.4(3) reflects the third paragraph of Clause 4 of Annexure 1 to Schedule 1A of the pre-commencement ASX Operating Rules and the Capital Liquidity Handbook, Section 3, Tab C, page 603.

Securities subject to a trading halt or suspension

Subrule A1.2.4(4) provides that, for the purposes of the Securities Lending and Borrowing method, in determining the market value of securities given or received by the Market Participant, if the securities are subject to a trading halt, the last market value may be used. If the securities are subject to a suspension, the market value should be taken as nil on the basis that the security is not Liquid.

Subrule A1.2.4(4) is sourced from the Capital Liquidity Handbook, Section 3, Tab C, page 603.

Rule A1.2.5 Margined Financial Instruments method

The principle of the Margined Financial Instruments method that where amounts are owed to the Market Participant by clients in respect of transactions in margined instruments for both end of day and intra-day margin calls, the Market Participant is required to hold capital equal to those amounts.

Counterparty risk amount

Subrule A1.2.5(1) provides that, for trades in Financial Instruments which are margined, the counterparty risk amount for a Counterparty:

(a)        is the full value of the outstanding settlement amount, premium, deposit or margin call that the Counterparty is required to pay to the Market Participant, regardless of whether or not the Market Participant is required to pay that amount to an exchange, clearing house or other entity;

(b)       is the full value of the outstanding settlement amount, premium, deposit or margin call that is due from an entity with respect to client or house trades cleared by that entity;

(c)        commences at the time that amounts are normally scheduled for payment to the relevant exchange or clearing house.

Subrule A1.2.5(1) reflects the first paragraph of Clause 5 of Annexure 1 to Schedule 1A of the pre-commencement ASX Operating Rules.

Market Participant may reduce the unpaid settlement amount, premium, deposit or margin call

Subrule A1.2.5(2) provides that a Market Participant may reduce the unpaid settlement amount, premium, deposit or margin call by the amount of cash paid by the Counterparty or collateral held by the Market Participant on behalf of the Counterparty. The collateral must be Liquid, unrelated to a particular or specific transaction (and different to any cash or collateral paid to the relevant exchange or clearing house in respect to specific transactions), under the control of the Market Participant and valued at the mark to market value. The collateral arrangement must be evidenced in writing by a legally binding agreement and the Market Participant may only apply such collateral in accordance with the collateral agreement.

Subrule A1.2.5(2) reflects the second paragraph of Clause 5 of Annexure 1 to Schedule 1A of the pre-commencement ASX Operating Rules and the Capital Liquidity Handbook, Section 3, Tab C, pages 622 to 623.

Timing of calculation of risk amount

Subrule A1.2.5(3) provides that for the purposes of paragraph A1.2.5(1)(a):

(a)        the obligation to calculate a risk amount for amounts owing from “normal agency clients” excluding other participants in the relevant market will be deemed to be from the time that amounts are normally scheduled for payment to the relevant exchange or clearing house, regardless of whether the Market Participant actually has to make a payment to the exchange or clearing house; and

(b)       the obligation to calculate a risk amount for amounts owing from other participants in the relevant market will be deemed to be from the close of business on the day the payment is due to be received.

Subrule A1.2.5(3) is sourced from the Capital Liquidity Handbook, Section 3, Tab C, pages 621 and 622.

Market Participant trading as principal

Subrule A1.2.5(4) provides that for the purposes of paragraph A1.2.5(1)(b), where a Market Participant undertakes a trade as principal in an exchange traded Derivatives and does not clear its own trades, the Market Participant must calculate a counterparty risk amount on its clearer under this method that will equal the amount owed to the Market Participant by the clearer and will apply from close of business on the day the payment is due until the clearer has paid.

Subrule A1.2.5(4) is sourced from the Capital Liquidity Handbook, Section 3, Tab C, page 515.

Securities subject to a trading halt or suspension

Subrule A1.2.5(5) provides that for the purposes of reducing the unpaid settlement amount, premium, deposit or margin call, if the security lodged as collateral is subject to a trading halt, the last market value may be used. If the security is subject to a suspension, the market value should be taken as nil on the basis that the security is not Liquid.

Subrule A1.2.5(5) is sourced from the Capital Liquidity Handbook, Section 3, Tab C, page 624.

Rule A1.2.6 OTC Derivatives and Warrants executed as principal method

The principle of the OTC Derivatives and warrants method is that a capital charge applies from the transaction date on all OTC Derivative transactions and all purchased warrant transactions which are executed by the Market Participant as principal.

Counterparty risk amount

Subrule A1.2.6(1) provides that for an OTC Derivative or warrant held as principal, the counterparty risk amount for a Counterparty is:

(a)        zero, for a written Option position where the premium due has been received in full;

(b)       100% of the premium for a written Option position where the premium due has not been received, from the time the Option is dealt until the premium is paid; and

(c)        otherwise, 8% of the aggregate of the credit equivalent amount which is calculated as the sum of:

(i)         a current credit exposure being the mark to market valuation of all contracts with a Positive Credit Exposure; and

(ii)       a potential credit exposure being the product of the absolute value of a contract’s nominal, notional or actual principal amount and the applicable potential credit exposure factor specified in Table A5.2.2 in Annexure 5.

Subrule A1.2.6(6) provides that for the purposes of subrule A1.2.6(1), “as principal” includes where the Market Participant enters into an off market facilitation role whereby the Market Participant “purchases” the Derivatives contract from client A and “sells” it to client B and neither client A nor B are aware of the identity of the other.

Subrule A1.2.6(1) reflects the first paragraph of Clause 6 of Annexure 1 to Schedule 1A of the pre-commencement ASX Operating Rules and the Capital Liquidity Handbook, Section 3, Tab C, page 642. Subrule A1.2.6(6) is sourced from the Capital Liquidity Handbook, Section 3, Tab C, page 641.

Collateral arrangements

Subrule A1.2.6(2) provides that a Market Participant may reduce the premium or credit equivalent amount by the amount of collateral held by the Market Participant on behalf of the Counterparty. The collateral must be Liquid, unrelated to a particular or specific transaction, under the control of the Market Participant and valued at the mark to market value. The collateral arrangement must be evidenced in writing by a legally binding agreement and the Market Participant may only apply such collateral in accordance with the collateral agreement.

Subrule A1.2.6(3) provides that, in determining the market value of securities lodged as collateral by the Market Participant, if the securities are subject to a trading halt, the last market value may be used. If the securities are subject to a suspension, the market value should be taken as nil on the basis that the security is not Liquid.

Subrules A1.2.6(2) and (3) reflect the second paragraph of Clause 6 of Annexure 1 to Schedule 1A of the pre-commencement ASX Operating Rules and the Capital Liquidity Handbook, Section 3, Tab C, pages 644 and 645.

Calculation  of current credit exposure – netting and mark to market valuation

Subrule A1.2.6(4) makes provision, for the purposes of calculating a current credit exposure under subparagraph A1.2.6(1)(c)(i),  for netting of positive and negative current credit exposures on transactions of the same type with the same Counterparty. Subrule A1.2.6(4) also provides for the meaning of “mark to market valuation” of an OTC Derivative or warrant, including where a warrant is subject to a trading halt, for the purposes of calculating a current credit exposure under subparagraph A1.2.6(1)(c)(i).

Calculation of potential credit exposure – netting and mark to notional face value

Subrule A1.2.6(5) provides that for the purposes of calculating a potential credit exposure under subparagraph A1.2.6(1)(c)(ii):

(a)        a potential credit exposure must be calculated on every transaction, including those transactions with a negative or zero current credit exposure;

(b)       the potential credit exposures must not be netted; and

(c)        in the case of an equity Option or warrant, the notional face value is the underlying number of shares multiplied by the strike price.

Subrule A1.2.6(5) is sourced from the Capital Liquidity Handbook, Section 3, Tab C, page 643.

Transactions to which this method applies

Subrule A1.2.6(7) provides for specific OTC Derivatives and warrants transactions for which a Market Participant must calculate a counterparty risk amount under the OTC Derivatives and warrants executed as principal method.

Subrule A1.2.6(7) is sourced from the Capital Liquidity Handbook, Section 3, Tab C, pages 643 and 644.

Rule A1.2.7 Sub Underwritten Positions method

There is no Sub Underwritten Positions method at this time. Refer to Annexure 4 for further details.

Rule A1.2.8 Counterparty risk weighting

Market Participant may choose to apply counterparty risk weighting

Subrule A1.2.8(1) provides that a Market Participant may choose to calculate its counterparty risk amount in relation to a Counterparty as the counterparty risk amount calculated in accordance with Parts A1.2 to A1.7 multiplied by the counterparty risk weighting applicable for that Counterparty specified in Table A5.2.1 in Annexure 5.

Subrule A1.2.8(1) reflects Clause 8(a) of Annexure 1 to Schedule 1A of the pre-commencement ASX Operating Rules.

Market Participant must apply counterparty risk weighting consistently

Subrule A1.2.8(2) provides that a Market Participant can only calculate its counterparty risk amount for a Counterparty in accordance with subrule A1.2.8(1) if it calculates the counterparty risk amount in this manner for that Counterparty consistently across all methods within Annexure 1.

Subrule A1.2.8(2) reflects Clause 8(b) of Annexure 1 to Schedule 1A of the pre-commencement ASX Operating Rules.

Counterparty risk amount for Approved Institutions

Subrule A1.2.8(3) provides that, for the purposes of calculating the counterparty risk amount in relation to a Counterparty that the Market Participant has classified as an Approved Institution under paragraph (a) of the definition of Approved Institution and that is a subsidiary or member of a group of companies or funds, the Market Participant may only apply the counterparty risk weighting for Approved Institutions specified in Table A5.2.1 in Annexure 5 to that counterparty risk amount where the requirements of paragraph (a) of the definition are met in relation to the individual subsidiary or member of the group (that is, the individual subsidiary or member must have net assets greater than $30 million) and the Market Participant has a copy of the individual subsidiary or members’ balance sheet that demonstrates that the individual subsidiary or member meets the requirements of paragraph (a). The Market Participant must reconfirm the classification of the Counterparty as an Approved Institution on an annual basis.

Subrule A1.2.8(3) is sourced from the Capital Liquidity Handbook, Section 3, Tab C, pages 685 and 686.

Subrule A1.2.8(4) provides that, for the purposes of calculating the counterparty risk amount in relation to a Counterparty that the Market Participant has classified as an Approved Institution under paragraph (b) of the definition of Approved Institution, the Market Participant may only apply the counterparty risk weighting for Approved Institutions specified in Table A5.2.1 in Annexure 5 to that counterparty risk amount where the Market Participant has records demonstrating that the Counterparty is in fact regulated by a Recognised non-European Union Regulator or a Recognised European Union Regulator as specified in Tables A5.3.1 and A5.3.2 in Annexure 5 and that the Counterparty’s ordinary business is the purchase and sale of Financial Instruments. The Market Participant must reconfirm the classification of the Counterparty as an Approved Institution on an annual basis.

Subrule A1.2.8(4) is sourced from the Capital Liquidity Handbook, Section 3, Tab C, page 686.

Subrule A1.2.8(5) provides that, were:

(a)        an exposure to a Counterparty has been guaranteed by an Approved Deposit Taking Institution; and

(b)       the guarantee referred to in paragraph (a) is provided in writing to the Market Participant performing the counterparty risk calculation and provides for direct, explicit, irrevocable and unequivocal recourse to the guarantor,

a counterparty risk weighting of 20% may be applied to the part of the exposure that is covered by the guarantee (the remainder, if any, must be weighted according to the risk weighting of the Counterparty).

Subrule A1.2.8(6) provides that subrule A1.2.8(5) does not apply to indirect guarantees (for example, a guarantee of a guarantee) and letters of comfort.

Subrule A1.2.8(5) and (6) are sourced from sourced from the Capital Liquidity Handbook, Section 3, Tab C, pages 683 and 684.

ANNEXURE 2 TO SCHEDULE 1A: LARGE EXPOSURE RISK REQUIREMENT

The principle of the Large Exposure Risk Requirement is that a Market Participant is required to hold additional capital where the Market Participant has a large counterparty exposure or a large principal position in securities issued by a single issuer relative to its Liquid Capital or relative to the total value of securities on issue.

Part A2.1 Counterparty large exposure risk requirement

The principle of the Counterparty Large Exposure Risk Requirement is that additional capital is required where a Market Participant has an exposure to a Counterparty (being the aggregate of exposures to persons forming part of a Group of Connected Persons) that is large relative to the Market Participant’s capital and is with respect to an unsettled transaction that has passed its normal settlement date.

Rule A2.1.1 Nature of counterparty large exposure risk amount

Rule A2.1.1 provides that the counterparty large exposure risk amount is the absolute sum of the individual counterparty large exposure risk amounts calculated using the method of calculation set out in Annexure 2.

Rule A2.1.1 reflects Clause 1.1 of Annexure 2 to Schedule 1A of the pre-commencement ASX Operating Rules.

Rule A2.1.2 Method and Table A2.1: Aggregate exposure to Counterparty by transaction type

Counterparty large exposure risk amount

Subrule A2.1.2(1) provides that the counterparty large exposure amount is zero, if there are no exposures to a Counterparty in respect of transactions at the times specified in Table A2.1 or if the  aggregate exposures to a Counterparty in respect of transactions at the times specified in Table A2.1 are less than or equal to 10% of the Market Participant’s Liquid Capital.

If there are aggregate exposures to a Counterparty in respect of transactions referred to in column 1 of Table A2.1 at the times specified in column 3 of Table A2.1 and these aggregate exposures are greater than 10% of the Market Participant’s Liquid Capital, the counterparty large exposure amount is 100% of the counterparty risk amount for the exposure calculated in accordance with Annexure 1.

Table A2.1 sets out the transaction types and time of exposure for the purposes of subrule A2.1.2(1).

Subrules A2.1.2(1) and (2) reflect Clause 1.2(a) of Annexure 2 to Schedule 1A of the pre-commencement ASX Operating Rules and the Capital Liquidity Handbook, Section 3, Tab C, page 725.

Maximum loss

Subrule A2.1.2(2) provides that the counterparty large exposure risk amount calculated in respect of a transaction cannot exceed the maximum loss for that transaction. Subrule A2.1.2(3) sets out, for the purposes of subrule A2.1.2(2), the maximum loss for certain kinds of transactions.

Subrule A2.1.2(2) reflects Clause 1.2(b) of Annexure 2 to Schedule 1A of the pre-commencement ASX Operating Rules. Subrule A2.1.2(3) is sourced from the Capital Liquidity Handbook, Section 3, Tab D, pages 723 to 726.

Aggregate exposures

Subrule A2.1.2(4) provides that, to calculate aggregate exposures to a Counterparty, a Market Participant must:

(a)        aggregate exposures to persons forming part of a Group Of Connected Persons; and

(b)       not include exposures other than Positive Credit Exposures specified in Table A2.1.

Subrule A2.1.2(4) reflects Clause 1.2(c) of Annexure 2 to Schedule 1A of the pre-commencement ASX Operating Rules.

Part A2.2 Issuer large exposure risk requirement

The principle of the issuer Large Exposure Risk Requirement is that a Market Participant is required to hold additional capital where the Market Participant has an exposure to an individual issuer that is large relative to the Participant’s capital or with respect to the value of the relevant securities on issue.

Rule A2.2.1 Nature of an issuer large exposure risk amount

Rule A2.2.1 provides that the issuer large exposure risk amount is the absolute sum of the individual issuer large exposure risk amounts calculated from the transaction date using the method of calculation set out in this Annexure 2.

Rule A2.2.1 reflects Clause 2.1 of Annexure 2 to Schedule 1A to the pre-commencement ASX Operating Rules.

Rule A2.2.2  Overview

Issuer large exposure risk amount

Subrule A2.2.2(1) provides that the issuer large exposure risk amount for an issuer is subject to two tests, measuring the net position relative to Liquid Capital and relative to the issuer.

Method for calculating issuer large exposure amounts for exposures

Subrule A2.2.2(2) provides that, in calculating the issuer large exposure amounts for exposures to:

(a)        equity positions, the method set out in Rule A2.3.1 applies;

(b)       debt positions, the method set out in Rule A2.3.2 applies; and

(c)        both equity positions and debt positions where no risk amount arises under Rule A2.3.1 or Rule A2.3.2, the method set out in Rule A2.3.3 applies.

Tables summarising methods for calculating issuer large exposure amounts

Subrule A2.2.2(3) provides that the methods referred to in subrule A2.2.2(2) are summarised in Tables A2.2, A2.3 and A2.4.

Table A2.2 summarises the method in Rule A2.3.1 for calculating issuer large exposure risk amounts for exposures to equity positions. Table A2.3 summarises the method in Rule A2.3.2 for calculating issuer large exposure risk amounts for exposures to debt positions. Table A2.4 summarises the method in Rule A2.3.3 for calculating issuer large exposure risk amounts for exposures to debt and equity positions.

Rule A2.2.2 and Tables A2.2, A2.3 and A2.4 reflect Clause 2.2 of Annexure 2 to Schedule 1A of the pre-commencement ASX Operating Rules.

Rule A2.2.3 Application

Instruments in relation to which an issuer large exposure risk amount does not arise

Subrule A2.2.3(1) provides for certain instruments in relation to which an issuer large exposure risk amount does not arise.

Subrule A2.2.3(1) reflects Clause 2.3(a) of Annexure 2 of Schedule 1A to the pre-commencement ASX Operating Rules.

Calculation of issuer large exposure risk amount

Subrule A2.2.3(2) provides for the treatment of certain instruments as exposures to certain issuers at a particular value, for the purposes of the issuer large exposure risk amount.

Subrule A2.2.3(2) reflects Clause 2.3(b) of Annexure 2 of Schedule 1A to the pre-commencement ASX Operating Rules and the Capital Liquidity Handbook, Section 3, Tab D, page 746.

Application to positions in Hybrid ETFs or Other Managed Funds

Subrule A2.2.3(3) provides that, where a Market Participant has positions in Hybrid ETFs or Other Managed Funds, only the test against Liquid Capital (under subrule A2.3.1(2), A2.3.2(3) or A2.3.3(2)) needs to be applied to those positions. The test against Liquid Capital must be applied separately for each different Hybrid ETF or Other Managed Fund issued by the same issuer.

Subrule A2.2.3(3) is sourced from the Capital Liquidity Handbook, Section 3, Tab D, page 746, 762 and  763.

Application to positions in bank bills

Subrule A2.2.3(4) provides that a Market Participant may calculate its issuer large exposure risk requirement for its position in bank bills using the face value of the bills where the Market Participant holds bank bills as a passive investment (that is, is not an active trader in bank bills) and has calculated the position risk amount under the Equity position risk standard method using the face value of the bills.

Subrule A2.2.3(4) is sourced from the Capital Liquidity Handbook, Section 3, Tab E.II, page 1011.

Offset of delta weighted value

Subrule A2.2.3(5) provides that a delta weighted value under paragraph (2)(d) may be offset against the corresponding underlying instrument in calculating an Equity Net Position or Debt Net Position under Rules A2.3.1, A2.3.2 and A2.3.3.

Subrule A2.2.3(5) reflects Clause 2.3(c) of Annexure 2 of Schedule 1A to the pre-commencement ASX Operating Rules.

Part A2.3 Methods

Rule A2.3.1 Equity method

The principle of the Equity method is that Market Participant is required to calculate an issuer large exposure risk amount where the Market Participant has an Equity-based principal position that is deemed to be large relative to the Participant’s Liquid Capital or to the market value of the security on issue.

Equity method - Issuer large exposure risk amount

Subrule A2.3.1(1) provides that a Market Participant’s issuer large exposure risk amount in relation to an issuer is the greater of the following amounts:

(a)        the risk amount calculated by comparing the Equity Net Position to Liquid Capital under subrule A2.3.1(2); and

(b)       the risk amount/s calculated by comparing the Equity Net Position to the issue/s under subrule A2.3.1(3).

Equity method – Exposure to issuer relative to Liquid Capital

Subrule A2.3.1(2) provides that if the absolute value of an Equity Net Position to an Issuer is greater than 25% of the Market Participant’s Liquid Capital the risk amount is 12% for each single Equity in a Recognised Market Index and 16 % for any other single Equity, of the amount in excess of 25% of Liquid Capital.

Equity method – Exposure to an Individual Issue relative to total amount on issue

Subrule A2.3.1(3) provides that, if the absolute value of an Equity Net Position to an Individual Issue/s is greater than 5% of that issue, the risk amount/s is 12% for each single Equity in a Recognised Market Index and 16% for any other single Equity, of the amount in excess of 5% of the issue/s.

Subrules A2.3.1(1) to (3) reflect Clause 3 of Annexure 2 to Schedule 1A of the pre-commencement ASX Operating Rules.

Meaning of “Issuer” and Equity Net position to a particular Issuer

Subrule A2.3.1(4) provides for the meaning of “Issuer” for the purposes of subrule A2.3.1(2). The Equity Net Position to a particular Issuer is the aggregate of all Equity Net Positions for different issues of securities issued by that Issuer where the Equity Net Positions relate to particular underlying instruments issued by a single Issuer (for example, ordinary shares, Preference Shares). Equity Net Positions for different instruments issued by a single Issuer must not be offset when calculating the total Equity Net Position to that issuer.

Subrule A2.3.2(4) is sourced from the Capital Liquidity Handbook, Section 3, Tab D, pages 761 and 762.

Meaning of “Individual Issue”

Subrule A2.3.1(5) provides that, for the purposes of subrule A2.3.1(3), the instruments in column 1 of Table A2.5 are considered to comprise the “Individual Issue” for a particular Equity product referred to in column 2 of Table A2.5.

Subrule A2.3.1(5) and Table A2.5 are sourced from the Capital Liquidity Handbook, Section 3, Tab D, pages 763 and 764.

Rule A2.3.2 Debt method

The principle of the Debt method is that the Market Participant is required to calculate an issuer large exposure risk amount where the Market Participant has a Debt-based principal position that is deemed to be large relative to the Market Participant’s Liquid Capital or to the value of each individual series on issue.

Debt method – Issuer large exposure risk amount

Subrule A2.3.2(1) provides that a Market Participant’s issuer large exposure risk amount in relation to an issuer is the greater of the following amounts:

(a)        the risk amount calculated by comparing the Debt Net Position to Liquid Capital under subrule A2.3.2(3); and

(b)       the risk amount/s calculated by comparing the Debt Net Position to the issue/s under subrule A2.3.2(4).

Debt method-Meaning of “individual issue”, offsetting of long and short positions, large exposure

Subrule A2.3.2(2) provides that, in calculating the issuer large exposure risk amount under the debt method:

(a)        an individual issue refers to an individual series or tranche of an individual series issued by an individual issuer;

(b)       long and short positions may be offset across series for the purposes of determining large exposure to an issuer; and

(c)        a large exposure to an individual issuer is the sum of all series issued by that issuer.

Debt method-Exposure to Issuer Relative to Liquid Capital

Subrule A2.3.2(3) provides that, if the absolute value of a Debt Net Position to an issuer is greater than 25% of the Market Participant’s Liquid Capital, the risk amount is:

(a)        the relevant standard method Position Risk Factor specified in Table A5.1.2 in Annexure 5 multiplied by the amount in excess of 25%; and

(b)       if more than one series is held, the Position Risk Factor for the longest dated instrument should be applied to the excess over 25%.

Debt method-Exposure to Series Relative to Total Amount on Issue

Subrule A2.3.2(4) provides that, if the absolute value of a Debt Net Position to an individual issue/s is greater than 10% of that issue, the risk amount/s is:

(a)        the relevant standard method Position Risk Factor specified in Table A5.1.2 in Annexure 5 multiplied by the excess over 10%; and

(b)       if more than one series is held, the risk amount is the aggregate of the risk amounts calculated under subparagraph (i) for each individual series.

Rule A2.3.2 reflects Clause 4 of Annexure 2 to Schedule 1A of the pre-commencement ASX Operating Rules.

Rule A2.3.3 Equity and Debt method

The principle of this method is that a Market Participant may have Equity Net Position/s and Debt Net Position/s in securities issued by a particular issuer that individually do not represent a large exposure, that may be large relative to Liquid Capital when considered in aggregate (i.e. greater than 25% of Liquid Capital).

Equity and debt method-Exposure to Issuer Relative to Liquid Capital

Subrule A2.3.3(1) provides that a Market Participant’s issuer large exposure risk amount in relation to an issuer is based on the absolute sum of the Equity Net Positions and Debt Net Positions.

Equity and debt method-Position Risk Factors

Subrule A2.3.3(2) provides that if the absolute sum of the Equity Net Positions and Debt Net Positions is greater than 25% of a Market Participant’s Liquid Capital, then the risk amount is the relevant standard method Position Risk Factor specified in Table A5.1.1 or Table A5.1.2 in Annexure 5 multiplied by the excess over 25%. The Position Risk Factors are selected according to whether the Equity Net Positions or Equity Debt Positions represent the greatest proportion of the aggregate Net Position or are held in equal proportions.

Rule A2.3.3 reflects Clause 5 of Annexure 2 to Schedule 1A of the pre-commencement ASX Operating Rules.

ANNEXURE 3 TO SCHEDULE 1A: POSITION RISK REQUIREMENT

The principle of the Position Risk Requirement is that a Market Participant is required to hold additional capital where the Market Participant has principal or proprietary positions in Financial Instruments, as those positions are exposed to market risk (that is, the risk of financial loss arising from an adverse movement in the market rates and prices used to value the Financial Instruments).

Part A3.1 Equity position risk amount

Annexure 3 sets out various methods that Market Participants may use in calculating position risk amounts with respect to principal positions in Equity securities and Equity Derivatives. The absolute sum of the position risk amounts calculated for Equity-based principal positions is a component of the overall Position Risk Requirement calculation.

Rule A3.1.1 Nature of equity position risk amount

Rule A3.1.1 provides that the equity position risk amount in relation to a Market Participant’s equity positions is the absolute sum of the individual position risk amounts for equity positions calculated for each country using the methods of calculation set out in Annexure 3.

Rule A3.1.1 reflects Clause 1.1 of Annexure 3 to Schedule 1A of the pre-commencement ASX Operating Rules.

Rule A3.1.2 Overview of methods

Standard method and building block method are the two main methods

Subrule A3.1.1(1) provides that the standard method and building block method are the two main methods for measuring the equity position risk amount. They are supplemented by other methods, the use of which largely depends on the Financial Instruments in which principal positions are taken.

Methods to be used based on nature of positions

Subrule A3.1.1(2) provides that in calculating the equity position risk amount, the methods set out in Table A3.1 must be used. Table A3.1 sets out the methods that should be used depending on the Financial Instruments in which principal positions are taken.

Right over an equity must be treated as an Option position

Subrule A3.1.1(3) provides that, for the purposes of Parts A3.1 to A3.9 of Annexure 3, a right over an equity must be treated as an Option position.

Rule A3.1.1 and Table A3.1 reflect Clause 1.2 of Annexure 3 to Schedule 1A of the pre-commencement ASX Operating Rules.

 Rule A3.1.2A Equity Position risk amount

Market Participant must calculate position risk amount in certain circumstances

Rule A3.1.2A provides that, without limitation, a Market Participant must calculate a position risk amount under Annexure 3 in relation to transactions of the kind set out in the Rule.

Paragraphs A3.1.2A(a) to (e) are sourced from the Capital Liquidity Handbook, Section 3, Tab E.I, pages 824 to 826. Paragraph A3.1.2A(f) is sourced from the Capital Liquidity Handbook, Section 3, Tab C, page 548.

 Rule A3.1.2B Treatment—Securities subject to a trading halt or suspension

Rule A3.1.2B provides that where a Market Participant holds a principal position in a security that is subject to a trading halt, the position does not have to be treated as an Excluded Asset (where the position otherwise  meets the definition of Liquid) and a position risk amount must be calculated. If the security is subject to a suspension, the position must be treated as an Excluded Asset on the basis that the security is not Liquid.

Rule A3.1.2B is sourced from the Capital Liquidity Handbook, Section 3, Tab E.I, Part 1, page 824.

Rule A3.1.2C Treatment—Classical ETFs

Rule A3.1.2C provides that a Market Participant must take the following into account when calculating a position risk amount for a principal position in Classical ETF units:

(a)        there is no difference between the primary market and secondary market for the purposes of calculating position risk amounts;

(b)       principal positions in Classical ETFs commence at T0 and the underlying risk variable is the market price of the Classical ETF unit;

(c)        the Equity Equivalent of the Classical ETF is set out in Rule A3.8.5;

(d)       the Position Risk Factors to be applied are set out in Table A5.1.1 in Annexure 5; and

(e)        if the Market Participant is unlikely to be able to liquidate its position in a Classical ETF within 30 days, taking into account factors including the size of its position and the volume of that Classical ETF traded in the market, it must treat the position as an Excluded Asset and exclude the market value of that position from Liquid Capital.

Rule A3.1.2C is sourced from the Capital Liquidity Handbook, Section 3, Tab E.I, pages 954 and 955.

Rule A3.1.2D Treatment—Hybrid ETFs

Rules A3.1.2D provides that a Market Participant must take the following into account when calculating a position risk amount for a principal position in units in a Hybrid ETF classified as Equities:

(a)        there is no difference between the primary market and secondary market for the purposes of calculating position risk amounts;

(b)       principal positions in Hybrid ETFs commence at T0 and the underlying risk variable is the market price of the Hybrid ETF unit;

(c)        a Hybrid ETF cannot be broken down into any notional positions in the underlying;

(d)       the Position Risk Factors to be applied are set out in Table A5.1.1. in Annexure 5;

(e)        if the Market Participant is unlikely to be able to liquidate its position in a Hybrid ETF within 30 days, taking into account factors including the size of its position and the volume of that Hybrid ETF traded in the market, it must treat the position as an Excluded Asset and exclude the market value of that position from Liquid Capital.

Rule A3.1.2D is sourced from the Capital Liquidity Handbook, Section 3, Tab E.I, page 956.

Rule A3.1.2E Treatment—Other Managed Funds

Rule A3.1.2E provides that a Market Participant must take the following into account when calculating a position risk amount for a principal position in units Other Managed Fund classified as Equities:

(a)        principal positions in Other Managed Funds commence at T0 and the underlying risk variable is the market price of the Other Managed Fund unit;

(b)       the Other Managed Fund cannot be broken down into any notional positions in the underlying;

(c)        the Position Risk Factors to be applied are set out in Table A5.1.1. in Annexure 5;

(d)       if the Market Participant is unlikely to be able to liquidate its position in an Other Managed Fund within 30 days, taking into account factors including the size of its position relative to the size of the fund, it must treat the position as an Excluded Asset and exclude the market value of that position from Liquid Capital;

(e)        if a daily price cannot be obtained and/or if the numbers of units on issue cannot be determined on a daily basis, the position must be treated as an Excluded Asset as it would not be possible to value the investment in accordance with the requirements of Rule S1A.2.8.

Rule A3.1.2E is sourced from the Capital Liquidity Handbook, Section 3, Tab E.I, pages 958 and 959.

Rule A3.1.2F Exchange traded CFDs

Rule A3.1.2F provides that a Market Participant must take the following into account when calculating a position risk amount for a principal position in an exchange traded CFD classified as an Equity Derivative:

(a)        principal positions in exchange traded CFDs commence at T0;

(b)       the Position Risk Factors to be applied are set out in Table A5.1.1. in Annexure 5;

(c)        if the Market Participant is unlikely to be able to liquidate its position in an exchange traded CFD within 30 days, taking into account factors including the size of its position and the volume of that exchange traded CFD traded in the market, it must treat that exchange traded CFD as an Excluded Asset and exclude the market value of that position from Liquid Capital.

Rule A3.1.2F is sourced from ASX Circular 611/07 Exchange traded contracts for difference—Capital liquidity requirements under ASX Market Rule S1A issued on 22 October 2007.

Part A3.2 Standard method—Equity position risk

Rule A3.2.1 Application

Positions that may be included in the standard method

Subrule A3.2.1(1) provides that physical Equity positions may be included in the standard method.

Subrule A3.2.1(2) provides that Equity Derivative positions other than Options may be included in the standard method if the positions are converted to Equity Equivalents according to Part A3.8.

Subrule A3.2.1(3) provides that Equity Derivative positions which are Options may be included in the standard method only if they are purchased positions or if they are written positions which are exchange traded and subject to daily margin requirements and the purchased or written positions are:

(a)        In the Money by at least the relevant standard method Position Risk Factor for the underlying position specified in Table A5.1.1, Annexure 5; and

(b)       converted to Equity Equivalents according to Part A3.8,

otherwise, the Options must be treated under one of the option methods set out in Parts A3.4, A3.5 and A3.6.

Rule A3.2.1 reflects Clause 2.1 of Annexure 3 to Schedule 1A to the pre-commencement ASX Operating Rules.

Rule A3.2.2 Method

Position risk amount: Equity position risk standard method

Rule A3.2.2 provides that the position risk amount for equity positions to which the standard method is applied is the absolute sum of the product of individual Equity Net Positions at the mark to market value and the applicable Position Risk Factor specified in Table A5.1.1 in Annexure 5.

Rule A3.2.2 reflects Clause 2.2 of Annexure 3.

Part A3.3 Building block method––Equity position risk

Rule A3.3.1 Application

Positions that may be included in the building block method

Subrule A3.3.1(1) provides that Physical Equity and Equity Derivative positions may be included in the building block method if there are at least 5 long or 5 short Equity Net Positions in the one country and which are included in Recognised Market Indexes.

Subrule A3.3.1(2) provides that Equity Derivative positions other than Options may be included in the building block method if the positions are converted to Equity Equivalents according to Part A3.8.

Subrule A3.3.1(3) provides that Equity Derivative positions which are Options may be included in the building block method only if they are purchased positions or if they are written positions which are exchange traded and subject to daily margin requirements and the purchased or written positions are:

(a)        In the Money by at least the relevant standard method Position Risk Factor for the underlying position specified in Table A5.1.1, Annexure 5; and

(b)       converted to Equity Equivalents according to Part A3.8,

otherwise, the Options must be treated under one of the option methods set out in Parts A3.4, A3.5 and A3.6.

Rule A3.3.1 reflects Clause 3.1 of Annexure 3 to Schedule 1A of the pre-commencement ASX Operating Rules.

Rule A3.3.2 Method

Position risk amount: Equity position risk building block method

Subrule A3.3.2(1) provides that the position risk amount for equity positions to which the building block method is applied is the aggregate of a specific risk and a general risk amount for each Equity Net Position at the mark to market value.

Specific risk measures the market risk on the position associated with factors that are specific to the issuer of the underlying Equity security and that are unlikely to impact the general market, while general risk measures the market risk on the position associated with the general volatility in Equity market prices.

Specific risk amount

Subrule A3.3.2(2) provides that the specific risk amount is calculated as the aggregate of each Equity Net Position, multiplied by the relevant specific risk Position Risk Factor specified in Table A5.1.1 in Annexure 5. The aggregate is calculated by reference to the absolute value of each Equity Net Position.

General risk amount

Subrule A3.3.2(3) provides that the general risk amount is calculated by multiplying each Equity Net Position by the relevant general risk Position Risk Factor specified in Table A5.1.1 in Annexure 5 and then aggregating the results of these calculations. In aggregating these calculations, positive and negative signs (that is, long and short positions respectively) may be offset in determining the aggregate number. The absolute value of this aggregate number is the general risk amount.

Rule A3.3.2 reflects Clause 3.2 of Annexure 3 to Schedule 1A of the pre-commencement ASX Operating Rules.

Part A3.4 Contingent loss matrix method—Equity position risk

The contingent loss matrix method involves preparing a matrix that shows the gains and losses on an option portfolio (a portfolio that contains Options, other Equity Derivatives or physical positions in a particular underlying security or index or basket of securities) that would arise if certain adjustments were made to the underlying market prices and volatility.

Rule A3.4.1 Application

Positions that may be included in the contingent loss matrix method

Subrule A3.4.1(1) provides that Equity Derivative positions which are Options together with physical Equity and other Equity Derivative positions may be included in the contingent loss matrix method but only if used in conjunction with an option pricing model approved by ASIC and only if the Market Participant is able to mark to market the physical Equities and Equity Derivative positions.

Subrule A3.4.1(1) reflects Clause 4.1(a) of Annexure 3 to Schedule 1A of the pre-commencement ASX Operating Rules and the Capital Liquidity Handbook, Section 3, Tab E.I, page  862.

Market Participant must provide ASIC with details of option pricing model

Subrule A3.4.1(2) provides that a Market Participant that applies to ASIC to be authorised to use the contingent loss matrix method must provide ASIC with certain information about its proposed pricing model and the Market Participant’s ability to automate the calculation of the contingent loss matrix.

Subrule A3.4.1(2) is sourced from the Capital Liquidity Handbook, Section 3, Tab E.I, page  863.

Use of method 1 or method 2

Subrule A3.4.1(3) provides that a Market Participant applying the contingent loss matrix method may use method 2 as set out in Rule A3.4.3 if there are 5 long or 5 short Equity Net Positions which are included in Recognised Market Indexes in any one country, otherwise it must use method 1 as set out in Rule A3.4.2.

Subrule A3.4.1(3) reflects Clause 4.1(c) of Annexure 3 to Schedule 1A of the pre-commencement ASX Operating Rules and the Capital Liquidity Handbook, Section 3, Tab E.I, page 866.

Rule A3.4.2 Method 1

Position risk amount calculated in one step for each underlying

Rule A3.4.2 sets out Method 1. Method 1 calculates the risk amount in one step for each underlying in a manner similar to the standard method.

The position risk amount for equity positions to which Method 1 is applied is the greatest loss arising from simultaneous prescribed movements in the closing market price of the underlying position and the option implied volatility.

A separate matrix must be constructed for each option portfolio and associated hedges in each country.

Changes in value of option portfolio to be analysed in fixed range

Changes in the value of the option portfolio must be analysed over a fixed range of changes above and below the current market price of the underlying position and implied option volatility.

The Position Risk Factors prescribed for the standard method for Equities as set out in Table A5.1.1 in Annexure 5 are used to adjust the current market price of the underlying equity security at 7 equally spaced intervals. The intervals represent no change to the current market price, 3 equally

spaced cumulative increases to the current market price and 3 equally spaced cumulative decreases to the current market price.

The current market Option volatility is to be adjusted by the prescribed Position Risk Factor from Table A5.1.1 in Annexure 5 in a similar manner, except that the relevant implied volatility Position Risk Factor is to be divided into 3 equally spaced volatility shift intervals (including the current market implied volatility), with no intermediate adjustments.

The absolute value of the aggregate of the greatest loss for each matrix is the position risk amount.

Rule A3.4.2 reflects Clause 4.2 of Annexure 3 to Schedule 1A of the pre-commencement ASX Operating Rules.

Rule A3.4.3 Method 2

Position risk amount calculated as aggregate of specific and general risk amounts

Rule A3.4.3 sets out Method 2. Method 2 calculates the risk amount as the aggregate of a specific risk and a general risk amount for each underlying in a manner similar to the building block method.

As noted above, specific risk measures the market risk on the position associated with factors that are specific to the issuer of the underlying Equity security and that are unlikely to impact the general market, while general risk measures the market risk on the position associated with the general volatility in Equity market prices.

The specific risk amount is calculated as the aggregate of the delta weighted value of the underlying instrument calculated by the option pricing model approved by ASIC, multiplied by the relevant specific risk Position Risk Factor specified in Table A5.1.1 of Annexure 5.

The general risk amount is calculated in the manner described in Method 1, replacing the Position Risk Factors for the standard method with the Position Risk Factors for the building block method, and the position risk amount with the general risk amount which is the absolute value of the greatest loss in a single country matrix.

A single country matrix is constructed by superimposing each separate matrix (for each option portfolio and associated hedges in each country) so that the values in the corresponding matrix elements are netted to form a single value for each element.

Rule A3.4.3 reflects Clause 4.3 of Annexure 3 to Schedule 1A of the pre-commencement ASX Operating Rules.

Part A3.5 Margin method—Equity position risk

Rule A3.5.1 Application

Rule A3.5.1 provides that Equity Derivative positions which are exchange traded and have a positive Primary Margin Requirement must be included in the margin method if the Market Participant:

(a)        has not been approved by ASIC to use the contingent loss matrix method; and

(b)       is not permitted to use any of the other Methods set out in Rule A3.1.2 of this Annexure 3.

Rule A3.5.1 reflects Clause 5.1 of Annexure 3 to Schedule 1A of the pre-commencement ASX Operating Rules.

Rule A3.5.2 Method

Rule A3.5.2 provides that the position risk amount for Equity Derivative positions under the margin method is 100% of the Primary Margin Requirement for those Equity Derivative positions as determined by the relevant exchange or clearing house multiplied by 4.

Rule A3.5.2 reflects Clause 5.2 of Annexure 3 to Schedule 1A of the pre-commencement ASX Operating Rules.

Part A3.6 Basic method—Equity position risk

Rule A3.6.1 Application

Rule A3.6.1 provides that Equity Derivative positions which are purchased (long) or written (short) Options may be included in the basic method.

Rule A3.6.1 reflects Clause 6.1 of Annexure 3 to Schedule 1A of the pre-commencement ASX Operating Rules.

Rule A3.6.2 Method

Purchased Option

Subrule A3.6.2(1) provides that the position risk amount for a purchased Option is the lesser of:

(a)        the mark to market value of the underlying equity position multiplied by the standard method Position Risk Factor for the underlying position specified in Table A5.1.1, Annexure 5; and

(b)       the mark to market value of the Option.

Subrule A3.6.2(1) reflects Clause 6.2(a) of Annexure 3 to Schedule 1A of the pre-commencement ASX Operating Rules and the Capital Liquidity Handbook, Section 3, Tab E.1, page 911.

Written Option

Subrule A3.6.2(2) provides that the position risk amount for a written Option is the mark to market value of the underlying equity position multiplied by the standard method Position Risk Factor for the underlying position specified in Table A5.1.1, Annexure 5 reduced by:

(a)        any excess of the exercise value over the current market value of the underlying position in the case of a call Option, but limited to nil if it would otherwise be negative; or

(b)       any excess of the current market value of the underlying position over the exercise value in the case of a put Option, but limited to nil if it would otherwise be negative.

Subrule A3.6.2(2) reflects Clause 6.2(b) of Annexure 3 to Schedule 1A of the pre-commencement ASX Operating Rules.

Part A3.7 Arbitrage method––Equity position risk

A3.7.1 Application

Rule A3.7.1 provides that Equity Derivative positions arising as a result of Futures arbitrage strategies may be included in the arbitrage method if the Market Participant has a position in:

(a)        two Futures over similar indexes; or

(b)       a Future over a broadly based index and a position in a matching physical basket,

and if the requirements set out in Rule A3.7.2 and A3.7.3 are satisfied.

Rule A3.7.1 reflects Clause 7.1 of Annexure 3 to Schedule 1A of the pre-commencement ASX Operating Rules.

Rule A3.7.2 Method—similar indexes

Subrule A3.7.2(1) provides that a Market Participant’s position risk amount for a position in two Futures over similar indexes is 2% of the Equity Equivalent of one of the Futures over an index position at the mark to market value but only if the Market Participant:

(a)        has an opposite position in a Future over the same index at a different date or in a different market; or

(b)       has an opposite position in a Future at the same date in a different but similar index (where two indexes are similar if they contain sufficient common components that account for at least 70% of each index).

The position risk amount for the opposite Future position is nil.

Subrule A3.7.2(1) reflects Clause 7.2 of Annexure 3 to Schedule 1A of the pre-commencement ASX Operating Rules.

Subrule A3.7.2(2) provides that, for the purposes of subrule (1), if the market value of each side of the arbitrage Futures position is different, the Market Participant must use the side that results in the higher position risk.

Subrule A3.7.2(2) is sourced from the Capital Liquidity Handbook, Section 3, Tab E.I, page 922.

Rule A3.7.3 Method—a broadly based index and a matching basket of the stocks from that index

Rule A3.7.3 provides that a Market Participant may calculate the position risk amount for a Future over an index and a position in a matching physical basket under one of two possible methodologies.

The first method involves disaggregating the position in the Future over an index into the notional physical positions and then calculating the position risk amount for these notional positions and the physical basket in accordance with the standard method or building block method for equity positions.

The second method involves calculating the position risk amount on the position in the Future over an index. The second method can only be used if the arbitrage trades have been specifically entered into to profit from pricing anomalies between the Futures and the physical markets. The arbitrage position must be separately monitored over the life of the arbitrage. The mark to market value of the physical basket must be greater than 80% and less than 120% of the mark to market value of the notional position in the Future over the index and the sum of the index weights of the individual positions in the required physical basket is greater than 70% of the Future over the index, where the required physical basket is calculated in accordance with the Rule.

Rule A3.7.3 reflects Clause 7.3 of Annexure 3 to Schedule 1A of the pre-commencement ASX Operating Rules and the Capital Liquidity Handbook, Section 3, Tab E.1, page 922.

Part A3.8 Calculation of Equity Equivalent positions––Equity position risk

Rule A3.8.1 Swaps

Subrule A3.8.1(1) provides that the Equity Equivalent for a Swap is two notional positions, one for each leg of the Swap under which:

(a)        there is a notional long position in an Equity or Equity Derivative on the leg of the Swap on which an amount is received; and

(b)       there is a notional short position in an Equity or Equity Derivative on the leg of the Swap on which an amount is paid.

If one of the legs of the Swap provides for payment or receipt based on some reference to a Debt Instrument or Debt Derivative, the position risk amount for that leg of the Swap should be assessed in accordance with Part A3.2 of Annexure 3.

Subrule A3.8.1(1) reflects Clause 8.1 of Annexure 3 to Schedule 1A of the pre-commencement ASX Operating Rules.

Subrule A3.8.1(2) provides, for the purposes of subrule A3.8.1(1), the notional position is the mark to market value of the Equity positions underlying the Swap (the number of shares underlying the Swap multiplied by the current market price of those shares).

Subrule A3.8.1(2) is sourced from the Capital Liquidity Handbook, Section 3, Tab E.1, page 941.

Rule A3.8.2 Options

Rules A3.8.2 provides that the Equity Equivalent for an Option is:

(a)        for purchased call Options and written put Options, a long position at the mark to market value of the underlying equity position, or in the case of an Option on an index or physical basket the mark to market value of either the index, basket, or the notional position in the underlying; or

(b)       for purchased put Options and written call Options, a short position at the mark to market value of the underlying equity position, or in the case of an Option on an index or physical basket, the mark to market value of either the index, basket, or the notional position in the underlying.

Rule A3.8.2 reflects Clause 8.2 of Annexure 3 to Schedule 1A of the pre-commencement ASX Operating Rules.

Rule A3.8.3 Futures and forward contracts

Rule A3.8.3 provides that the Equity Equivalent:

(a)        for a Future and forward contract over a single Equity, is the mark to market value of the underlying;

(b)       for a Future and a forward contract over an index or a physical basket, is the mark to market value of either the index, basket, or the notional position in the underlying.

Rule A3.8.3 reflects Clause 8.3 of Annexure 3 to Schedule 1A of the pre-commencement ASX Operating Rules.

Rule A3.8.4 Convertible notes

Subrule A3.8.4(1) provides that the Equity Equivalent of a convertible note, is either:

(a)        if the Market Participant:

(i)         does not use the contingent loss matrix method;

(ii)       the premium is in the money by less than 10%, where premium in this context means the mark to market value of the convertible note less the mark to market value of the underlying Equity, expressed as a percentage of the mark to market value of the underlying Equity; and

(iii)     there are less than 30 days to the conversion date;

the mark to market value of the underlying Equity; or

(b)       if the Market Participant uses the contingent loss matrix method, as calculated according to that method,

but otherwise the convertible note (or, in the case of a convertible note which is evaluated in accordance with the procedure stated in paragraph (b) the debt component of the convertible note) must be treated as a debt position in accordance with Debt Equivalent requirements.

Subrule A3.8.4(1) reflects Clause 8.4 of Annexure 3 to Schedule 1A of the pre-commencement ASX Operating Rules.

Subrule A3.8.4(2) provides that, for the purposes of subrule A3.8.4(1), the market value of the Equity is the value of the note if it is immediately converted to Equity at current market prices (that is, conversion ratio times the number of notes times the current price of the issuer’s Equity per share).

Subrule A3.8.1(2) is sourced from the Capital Liquidity Handbook, Section 3, Tab E.1, page 942.

Rule A3.8.5 Other positions—Classical ETFs

Rule A3.8.5 provides that the Equity Equivalent of a Classical ETF is:

(a)        the mark to market value of the classical ETF; or

(b)       the mark to market value of the notional position in the underlying,

and any cash component of the Classical ETF should be treated as if it was a position in an Equity.

Rule A3.8.5 is sourced from the Capital Liquidity Handbook, Section 3, Tab E.I, page 943.

Rule A3.8.5A Other positions—Exchange traded CFDs

Subrule A3.8.5A(1) provides that the Equity Equivalent for an exchange traded CFD over a single Equity, is the mark to market value of the underlying.

Subrule A3.8.5A(2) provides that the Equity Equivalent for an exchange traded CFD over an index or a physical basket, is the mark to market value of either the index, basket or the notional position in the underlying.

Rule A3.8.5A is sourced from ASX Circular 611/07 Exchange traded contracts for difference—Capital liquidity requirements under ASX Market Rule S1A issued on 22 October 2007.

Part A3.9 Calculation of equity net positions––Equity position risk

Rule A3.9.1 Equity net positions

Subrule A3.9.1(1) provides that the equity net positions are either the long or short positions resulting from offsetting equity positions and Equity Equivalents.

A Market Participant may net a long position against a short position only where the positions are in the same actual instrument. This includes Equity Equivalent positions calculated in accordance with Part A3.8. A position in a depository receipt may be treated as if it were the same position in the corresponding instrument and at the same value if the conditions set out in the Rule are met (otherwise it must be valued at the current exchange rate). Instalment receipts may be treated as if they are positions in the corresponding instrument.

A Market Participant that does not use the contingent loss matrix method for Options may only offset an Option position if it is In the Money by at least the standard method Position Risk Factor specified in Table A5.1.1 in Annexure 5 applicable to the underlying position.

Subrule A3.9.1(1) reflects Clause 9.1 of Annexure 3 to Schedule 1A of the pre-commencement ASX Operating Rules.

Securities Lending and Borrowing, Dual/multiple listed stocks and Stocks Subject to Merger

Subrule A3.9.1(2) provides that a Market Participant must not offset Securities Lending and Borrowing transactions against underlying long and short Equity net positions. The Market Participant must treat any securities that have been lent out under a Securities Lending and Borrowing arrangement or that have been sold under a repurchase agreement as a principal position. Subrule A3.9.1(2) also provides  that a Market Participant may only offset positions in dual/multiple listed stocks and stocks subject to a merger in certain circumstances.

Subrule A3.9.1(2) is sourced from the Capital Liquidity Handbook, Section 3, Tab E.I, pages 951 and 952.

Part A3.10 Debt position risk amount

Annexure 3 sets out various methods that Market Participants may use in calculating position risk amounts with respect to principal positions in Debt Instruments and Debt Derivatives. The absolute sum of the position risk amounts calculated for Debt-based principal positions is a component of the overall Position Risk Requirement calculation.

Rule A3.10.1 Nature of debt position risk amount

Rule A3.10.1 provides that the debt position risk amount in relation to a Market Participant’s debt positions is the absolute sum of the individual position risk amounts calculated for debt positions for each currency using the methods of calculation set out in Annexure 3.

Rule A3.10.1 reflects Clause 10.1 of Annexure 3 of Schedule 1A to the pre-commencement ASX Operating Rules.

Rule A3.10.2 Overview of methods

Subrule A3.10.2(1) provides that the standard method and building block method are the two main methods for measuring the debt position risk amount. They are supplemented by other methods, the use of which largely depends on the Financial Instruments in which principal positions are taken.

Subrule A3.10.2(2) provides that, in calculating the debt position risk amount, the methods set out in Table A3.2 must be used. Table A3.2 sets out that method that must be used depending on the Financial Instruments in which principal positions are taken.

Rule A3.10.2 and Table A3.2 reflect Clause 10.2 of Schedule 1A to the pre-commencement ASX Operating Rules.

Rule A3.10.2A Treatment—Hybrid ETFs

Rule A3.10.2A provides that a Market Participant must take the following into account when calculating a position risk amount for a principal position in units in Hybrid ETFs classified as Debt Instruments:

(a)        there is no difference between the primary market and secondary market for the purposes of calculating position risk amounts;

(b)       principal positions in Hybrid ETFs commence at T0 and the underlying risk variable is the market price of the Hybrid ETF unit;

(c)        a Hybrid ETF cannot be broken down into any notional positions in the underlying; and

(d)       the Position Risk Factors to be applied are set out in Rule A5.1.2A;

(e)        if the Market Participant is unlikely to be able to liquidate its position in a Hybrid ETF within 30 days, taking into account factors including the size of its position and the volume of that Hybrid ETF traded in the market, it must treat the position as an Excluded Asset and exclude the market value of that position from Liquid Capital.

Rule A3.10.2A is sourced from the Capital Liquidity Handbook, Section 3, Tab E.II, pages 1125 and 1126 .

Rule A3.10.2B Treatment—Other Managed Funds

Rule A3.10.2B provides that a Market Participant must take the following into account when calculating a position risk amount for a principal position in units in Other Managed Funds classified as Debt Instruments:

(a)        principal positions in Other Managed Funds commence at T0 and the underlying risk variable is the market price of the Other Managed Fund unit;

(b)       the Other Managed Fund cannot be broken down into any notional positions in the underlying;

(c)        the Position Risk Factors to be applied are set out in Rule A5.1.2B;

(d)       if the Market Participant is unlikely to be able to liquidate its position in an Other Managed Fund within 30 days, taking into account factors including the size of its position relative to the size of the fund, it must treat the position as an Excluded Asset and exclude the market value of that position from Liquid Capital;

(e)        if a daily price cannot be obtained and/or if the number of units on issue cannot be determined on a daily basis, the position must be treated as an Excluded Asset on the basis that it would not be possible to value the investment in accordance with the requirements of Rule S1A.2.8.

Rule A3.10.2B is sourced from the Capital Liquidity Handbook, Section 3, Tab E.II, pages 1126 and 1127.

Rule A3.10.2C TreatmentCash management trusts

Rule A3.10.2C provides that, for the purposes of the calculation of a position risk amount, an investment in a cash management trust, even if offered by an Approved Deposit Taking Institution or its subsidiary:

(a)        is not a deposit with the Approved Deposit Taking Institution where it is not capital guaranteed and is subject to investment risk;

(b)       where the cash management trust meets the definition of a Hybrid ETF or Other Managed Fund, may be treated accordingly; and

(c)        where the cash management trust does not meet the definition of a Hybrid ETF or Other Managed Fund, must be treated as an Excluded Asset.

Rule  A3.10.2C is sourced from the Capital Liquidity Handbook, Section 3, Tab E.II, page 1004.

Rule A3.10.2D Securities Subject to Trading Halts or Suspension

Rule A3.10.2D provides that, if a Participant holds a principal position in a listed debt security that is subject to a trading halt, the position does not have to be treated as an Excluded Asset (where the position otherwise meets the definition of Liquid) and a debt position risk amount must be calculated. If the listed debt security is subject to a suspension, the position must be treated as an Excluded Asset on the basis that the security is not Liquid.

Rule A3.10.2D is sourced from the Capital Liquidity Handbook, Section 3, Tab E.II, page 1003.

Rule A3.10.2E Treatment—Underwriting

Rule A3.10.2E provides that where a Market Participant Underwrites an issue of debt securities, the Market Participant is not required to calculate a position risk amount on its exposure until the closing date for applications is reached. The Market Participant must treat any shortfall in applications as at the closing date as a principal position and calculate a position risk amount on its exposure will need to be calculated from this time. For the purposes of calculating a position risk amount under paragraph (b), must use the “cost” or “subscription” price as the market value of the securities prior to their issue.

Rule A3.10.2E is sourced from the Capital Liquidity Handbook, Section 3, Tab E.II, page 1004.

Part A3.11 Standard method—Debt position risk

Rule A3.11.1 Application

Rule A3.11.1 provides that only physical Debt Instrument positions may be included in the standard method.

Rule A3.11.1 reflects Clause 11.1 of Annexure 3 to Schedule 1A to the pre-commencement ASX Operating Rules.

Rule A3.11.2 Method

Subrule A3.11.2(1) provides that subject to subrule  A3.11.2(3), the position risk amount for debt positions to which the standard method is applied is the absolute sum of the product of individual Debt Net Positions at the mark to market value and the applicable Position Risk Factor specified in Table A5.1.2, Annexure 5.

Subrule A3.11.2(1) reflects Clause 11.2 of Annexure 3 to Schedule 1A to the pre-commencement ASX Operating Rules.

Subrule A3.11.2(2) sets out principles for determining the applicable Position Risk Factor for the purposes of the standard method.

Subrule A3.11.2(2) is sourced from the Capital Liquidity Handbook, Section 3, Tab E.II, page 1011.

Alternative approach for bank bills

Subrule A3.11.2(3) provides that where a Market Participant holds bank bills as a passive investment (that is, is not an active trader in bank bills), the Market Participant may calculate the position risk amount under the standard method as the face value of the bills multiplied by the applicable Position Risk Factor specified in Table A5.1.2 in Annexure 5.

Subrule A3.11.2(3) is sourced from the Capital Liquidity Handbook, Section 3, Tab E.II, page 1011.

PartA3.12 Building block method—Debt position risk

Rule A3.12.1 Application

Subrule A3.12.1(1) provides that Physical Debt Instrument positions may be included in the building block method.

Subrule A3.12.1(2) provides that Debt Derivative positions other than Options may be included in the building block method if the positions are converted to Debt Equivalents according to Part A3.16.

Subrule A3.12.1(3) provides that Debt Derivative positions which are Options may be included in the building block method only if they are purchased positions or if they are written positions which are exchange traded and subject to daily margin requirements and the purchased or written positions are:

(a)        In the Money by at least the relevant standard method Position Risk Factor for the underlying position specified in Table A5.1.2, Annexure 5; and

(b)       converted to Debt Equivalents according to Part A3.16,

otherwise, the Options must be treated under one of the option methods referred to in Parts A3.13, A3.14 and A3.15.

Subrules A3.12.1(1) to (3) reflect Clause 12.1 of Annexure 3 to Schedule 1A of the pre-commencement ASX Operating Rules.

Subrule A3.12.1(4) sets out principles for determining the applicable Position Risk Factor for the purposes of this method.

Subrule A3.12.1(4) is sourced from the Capital Liquidity Handbook, Section 3, Tab E.II, page 1011.

Rule A3.12.2 Method

Position risk amount

Subrule A3.12.2(1) provides that the position risk amount for debt positions to which the building block method is applied is the aggregate of a specific risk and a general risk amount for the Debt Net Position at the mark to market value.

Specific risk measures the market risk on the position associated with factors that are specific to the issuer of the underlying Debt Instrument and that are unlikely to impact the general market. General risk measures the market risk on the position associated with general volatility in interest rates.

Specific risk

Subrule A3.12.2(2) provides that the specific risk amount is calculated as the aggregate of each Debt Net Position, multiplied by the relevant specific risk Position Risk Factor specified in Table A5.1.3, Annexure 5. The aggregate is calculated by reference to the absolute value of each Debt Net Position.

Generally, all instruments that have a specific underlying issuer are subject to a specific risk amount.

General risk

Subrule A3.12.2(3) provides that the general risk amount is calculated in accordance with:

(a)        the maturity method under Rule A3.12.3; or

(b)       the duration method under Rule A3.12.4.

The absolute value of this aggregate number is the general risk amount.

Subrules A3.12.2(1) to (3) reflect Clause 12.2 of Annexure 3 to Schedule 1A of the pre-commencement ASX Operating Rules.

Subrule A3.12.2(4) provides that for, the purposes of subrule (2), where Futures or forwards comprise a range of deliverable instruments with different issuers, a Market Participant is only required to calculate a specific risk amount under this method on long positions in the Futures or forward contract. However, the Market Participant is not required to calculate a specific risk amount under this method on its long positions in Futures on 90 day bank bills traded on Australian Securities Exchange Limited.

Subrule A3.12.2(4) is sourced from the Capital Liquidity Handbook, Section 3, Tab E.II, Part 2, pages 1024 to 1025.

Rule A3.12.3 General risk amount—maturity method

Rule A3.12.3 sets out the maturity method for calculating the general risk amount.

Under the maturity method, Debt Net Positions are allocated to the appropriate time band specified in Table A5.1.2 in Annexure 5 (where fixed rate instruments are allocated according to the residual term to maturity and floating rate instruments according to the residual term to the next repricing date).

The position risk amount is the sum of a series of calculations that measure price risk, basis risk and gap risk on the positions by offsetting between the time bands.

The overall general risk amount under the maturity method is the absolute sum of the individual steps as follows:

(a)        the net position amount (NPA);

(b)       the time band amount (TBA);

(c)        the zone amount (ZA);

(d)       the adjacent zone amount (AZA); and

(e)        the non-adjacent zone amount (NAZA).

Rule A3.12.3 reflects pre-commencement Clause 12.3 of Annexure 3.

Rule A3.12.4 General risk amount—duration method

Rule A3.12.4 provides that the calculation of the general risk amount under the duration method is identical to that for the maturity method, with some limited exceptions. ASIC must first approve a Market Participant’s use of the duration method.

Rule A3.12.4 reflects Clause 12.4 of Annexure 3 to Schedule 1A of the pre-commencement ASX Operating Rules and the Capital Liquidity Handbook, Section 3, Tab E.II, page 1028.

Part A3.13 Contingent loss matrix method—Debt position risk

The contingent loss matrix method involves preparing a matrix that shows the gains and losses on an option portfolio (a portfolio that contains Options, other Debt Derivatives or physical positions in a particular underlying Debt Instrument) that would arise if certain adjustments were made to the underlying market prices and volatility.

Rule A3.13.1 Application

Subrule A3.13.1(1) provides that Debt Derivative positions which are Options together with physical Debt Instruments and other Debt Derivatives may be included in the contingent loss matrix method but only if used in conjunction with an option pricing model approved by ASIC and only if the Market Participant is able to mark to market the physical Debt Instruments and Debt Derivative positions.

Subrule A3.13.1(1) reflects Clause 13.1(a) of Annexure 3 to Schedule 1A of the pre-commencement ASX Operating Rules.

Subrule A3.13.1(2) provides that a Market Participant that applies to ASIC to be authorised to use the contingent loss matrix method must provide ASIC with certain information about its proposed pricing model and the Market Participant’s ability to automate the calculation of the contingent loss matrix.

Subrule A3.13.1(2) is sourced from the Capital Liquidity Handbook, Section 3, Tab E.II, page 1054.

Subrule A3.13.1(3) provides that, for the purposes of subrule (1), Physical Debt Instruments and other Debt Derivatives may only be included in the contingent loss matrix method if they are part of a portfolio that contains the Option position and are hedged by, or are hedging the Option position.

Subrule A3.13.1(3) is sourced from the Capital Liquidity Handbook, Section 3, Tab E.II, page 1053 and 1054.

Subrule A3.13.1(4) provides, for the purposes of subrule A3.13.3(5), how particular financial products are allocated to the matrix.

Subrule A3.13.1(4) is sourced from the Capital Liquidity Handbook, Section 3, Tab E.II, pages 1054 to 1057.

Subrule A3.13.1(5) provides, where Futures or forwards comprise a range of deliverable instruments with different issuers, a Market Participant is only required to calculate a specific risk amount under this method on long positions in the Futures or forward contract. However, a Market Participant is not required to calculate a specific risk amount under this method on its long positions in Futures on 90 day bank bills traded on Australian Securities Exchange Limited.

Subrule A3.13.1(5) is sourced from the Capital Liquidity Handbook, Section 3, Tab C, page 1058.

Subrule A3.13.1(6) provides that a Market Participant applying the contingent loss matrix method must use method 2 as set out in Rule A3.13.3.

Subrule A3.13.1(6) reflects Clause 13.1(c) of Annexure 3 to Schedule 1A of the pre-commencement ASX Operating Rules.

Rule A3.13.3 Method 2—maturity method

Rule A3.13.3 sets out Method 2. Method 2 calculates the risk amount as the aggregate of a specific risk, a general risk and a volatility risk amount for each underlying in a manner similar to the building block method—maturity method.