2015/16 Assessment of ASX Clearing and Settlement Facilities A2.1 ASX Settlement Standard 9: Central securities depositories

A securities settlement facility operating a central securities depository should have appropriate rules and procedures to help ensure the integrity of securities issues and minimise and manage the risks associated with the safekeeping and transfer of securities. A securities settlement facility operating a central securities depository should maintain securities in an immobilised or dematerialised form for their transfer by book entry.

ASX Settlement operates a central securities depository that maintains a record of securities holdings and movements for ASX-quoted securities, and securities listed by AMOs and ALMOs, through the CHESS sub-register. Securities registries maintain a separate record of holdings on behalf of issuers, using information on securities movements provided by CHESS. ASX Settlement employs a range of controls designed to ensure the integrity of these securities. These controls are subject to annual audit. ASX Settlement's Operating Rules and Procedures identify participants' interests in each type of security held within ASX Settlement, identify how these interests can be transferred within the facility, and provide that participants' securities would not be subject to claims by creditors in the event that ASX Settlement entered external administration (SSF Standard 9.1).

ASX Settlement does not allow overdrafts or debit balances in securities accounts within its system, and all securities (or interests in securities) are held in a dematerialised form (SSF Standards 9.2, 9.3). ASX Settlement's Operating Rules set out its obligations in providing safekeeping of participant assets, and ASX Settlement employs operational controls and insurance to mitigate custody risk (SSF Standard 9.4). Participant assets are segregated from ASX Settlement's own assets, and ASX Settlement supports the segregation of participant and client assets through the use of identifiers for securities holders (SSF Standard 9.5). ASX Settlement does not provide any ancillary services that could pose a risk to its central securities depository function (SSF Standard 9.6).

ASX Settlement's arrangements for its central securities depository activities are described in further detail under the following sub-standards.

9.1 A securities settlement facility operating a central securities depository should have appropriate rules, procedures and controls, including robust accounting practices, to safeguard the rights of securities issuers and holders, prevent the unauthorised creation or deletion of securities, and conduct periodic and at least daily reconciliation of securities issues it maintains.

ASX Settlement employs a range of controls designed to ensure the integrity of securities held in CHESS. It maintains dual redundancy and a synchronous data update model which ensures that securities holding data are consistent across primary and backup data centres (see SSF Standard 14). A monthly statement is sent to securities holders to report changes in their holdings of securities on the CHESS sub-register, and issuer registries are sent daily information on the movement of securities to enable them to accurately maintain company registers.

Annual audits of CHESS system controls are conducted by an external auditor, with the resulting report published on the ASX website. These audits assess controls over transaction processing, as well as change management, security protocols, technology operations and disaster recovery planning. The auditor's opinion is provided under the Australian Government Auditing and Standards Board standard ASAE 3402 – Assurance Report on Controls at a Service Organisation. Due to the coverage of these external audits, ASX Internal Audit perform additional risk-based audits of key ASX Settlement functions on an as needs basis.

These rules and procedures should:

(a) identify the type of title or interest held by participants for particular securities, to the extent such title or interest is recognised by the facility's rules and procedures;

Securities are dematerialised (electronic) and held in CHESS. Title is held in the name of clients of ASX Settlement participants. Encumbrances are recorded by placing a holding lock on securities that have been pledged for collateral against margin obligations to ASX Clear, are subject to participation in a buy-back or takeover, or are subject to actions such as court orders or bankruptcy proceedings. Sub-positions of securities pledged as collateral to ASX Clear are reconciled against records in DCS at least annually.

A CHESS sub-register forms part of the issuer's primary securities register. Maintenance and reconciliation of the complete register is the responsibility of the issuer or its appointed agent. Most ASX Settlement participants settle across a centralised settlement account and subsequently allocate securities to end-clients in the CHESS sub-register. As part of its end-of-day processes, CHESS reports net movements on each sub-register to the holder of the issuer's complete register (i.e. generally a share registry). Settlement participants utilise the centralised account under ‘trust’ provisions and are obliged to give irrevocable legal title to an end-client as long as that client has met all relevant conditions in respect of the settlement.

For securities that cannot be directly held in a dematerialised form in CHESS (e.g. Australian Government securities), ASX Settlement utilises the CHESS Depository Interest (CDI) structure. Under this structure, the security is held in a separate securities depository, in which legal title is recorded, but a beneficial interest known as a CDI is created and maintained in CHESS. Holders of CDIs have beneficial, but not legal, ownership of the underlying security. Legal title is held by a related entity of ASX Settlement, CHESS Depository Nominees Pty Limited, or another nominee as appointed by the issuer.

(b) clearly identify the way in which the transfer of (or any other forms of dealing with) securities and related payments can be effected through the facility; and

The transfer of title to securities in CHESS is given effect by electronic book entry. Settlement occurs via a DvP Model 3 process in a daily scheduled batch settlement cycle (see SSF Standard 10). The ASX Settlement Operating Rules and Procedures also provide for the free-of-payment transfer of securities, where required.

(c) ensure that, to the extent permissible by law, the creditors of the operator of the securities settlement facility have no claim over securities or other assets held, deposited or registered by participants in the facility.

In the event of ASX Settlement's insolvency, the rules and arrangements for title within ASX Settlement provide a high degree of assurance that participants' securities would be immune from claims by ASX Settlement's creditors. ASX Settlement is not the legal owner of any participant or client assets; these assets are recorded in CHESS in the name of the participant, sponsored client or, in the case of CDIs, a nominee entity on behalf of the beneficial owner.

9.2 A securities settlement facility operating a central securities depository should prohibit overdrafts and debit balances in securities accounts.

Participants do not maintain cash accounts with ASX Settlement, removing the possibility of overdrafts or the extension of credit. CHESS does not allow the movement of securities from a holding that exceeds the available securities in the holding, preventing any potential debit balance in securities accounts.

9.3 A securities settlement facility operating a central securities depository should maintain securities in an immobilised or dematerialised form for their transfer by book entry. Where appropriate, a securities settlement facility operating a central securities depository should provide incentives to immobilise or dematerialise securities.

Securities held in CHESS are dematerialised; securities underlying a CDI are immobilised and held by a nominee on behalf of the beneficial owner (see SSF Standard 9.1).

9.4 A securities settlement facility operating a central securities depository should protect assets against custody risk through appropriate rules and procedures consistent with its legal framework.

ASX Settlement has identified potential custody risks arising from negligence, misuse of assets, fraud, poor administration, or inadequate recordkeeping. Operational controls to mitigate these risks include segregation of duties, access restrictions and authorisation checks. ASX Settlement's Operating Rules allow ASX Settlement to give advice to a participant or issuer to correct an error that it has caused. If ASX Settlement causes an error in its securities holdings, it is responsible for correcting that error.

ASX Settlement is covered by the ASX Group general and professional indemnity insurance policy for civil liabilities arising from its central securities depository activities. Where losses are the result of employee wrongdoing or a computer manipulation, ASX Settlement is covered by the ASX Group comprehensive Crime Policy.

9.5 A securities settlement facility operating a central securities depository should employ a robust system that ensures segregation between its own assets and the securities of its participants, and segregation among the securities of participants. Where supported by the legal framework, a securities settlement facility operating a central securities depository should also support operationally the segregation of securities belonging to a participant's customers on the participant's books and facilitate the transfer of customer holdings.

ASX Settlement is not the legal owner of any participant or client assets; these assets are recorded in CHESS in the name of the participant, sponsored client or, in the case of CDIs, a nominee entity on behalf of the beneficial owner. CHESS provides an account structure that is designed to ensure the legal and operational segregation of participants' securities in CHESS and the segregation of clients' securities from those of participants. Under this account structure, securities are held against a unique Holder Identification Number for each client or participant.

However, during the settlement cycle there is a period in which securities have to be transferred into a separate ‘entrepot’ settlement account with no operational segregation between participant and client securities (reflecting the account structure at ASX Clear – see Appendix A1.1, CCP Standard 13; see also SSF Standard 10.2). Prior to transfer to the settlement account, client securities may be temporarily placed in an ‘accumulation’ account in the name of the participant. Even if this were to occur, the client remains the beneficial owner of securities in the accumulation account until the point of transfer to the settlement account. Participants are also required to fund any transfer of securities beneficially owned by clients into their settlement account, by depositing the net sale proceeds into the client trust account concurrent with the CHESS batch settlement process. In combination, these arrangements aim to ensure that clients remain beneficially in possession of their securities or corresponding funds for all but a brief window during the settlement period (see SSF Standard 10.2 and Appendix A1.1, CCP Standard 13).

9.6 A securities settlement facility operating a central securities depository should identify, measure, monitor and manage its risks from other activities that it may perform; additional tools may be necessary in order to address these risks.

ASX Settlement does not perform any ancillary activities that may pose a risk to the operation of its central securities depository function. It does not provide a centralised securities lending facility or act as a principal in securities lending transactions.