2015/16 Assessment of ASX Clearing and Settlement Facilities A2.2 Austraclear Standard 10: Exchange-of-value settlement systems
If a securities settlement facility settles transactions that comprise the settlement of two linked obligations (for example, securities or foreign exchange transactions), it should eliminate principal risk by conditioning the final settlement of one obligation upon the final settlement of the other.
Austraclear eliminates principal risk in settlements involving the transfer of a security in exchange for cash or another security by ensuring that delivery occurs if and only if the associated payment is settled at the same time (SSF Standard 10.1). For the purchase of securities, Austraclear does this through the use of a DvP Model 1 settlement mechanism, which simultaneously settles linked payment and securities obligations on an item-by-item basis in real time. Collateral substitutions are performed on a DvD basis, whereby linked securities transactions settle simultaneously, including where a chain of substitutions are being performed (SSF Standard 10.2).
Austraclear's arrangements for exchange-of-value settlements are described in further detail under the following sub-standards.
10.1 A securities settlement facility that is an exchange-of-value settlement system should eliminate principal risk by ensuring that the final settlement of one obligation occurs if and only if the final settlement of the linked obligation also occurs, regardless of whether the securities settlement facility settles on a gross or net basis and when finality occurs.
Austraclear eliminates principal risk by ensuring that the settlement of securities delivery obligations occurs if and only if associated payment obligations are settled at the same time. It does so by settling securities transactions on a DvP Model 1 basis (see SSF Standard 10.2). Collateral substitutions instructed by ASX Collateral are settled on a DvD basis under the same arrangements as those for transfer of cash and securities. Where cash is used as a last resort, settlement is also on a DvP Model 1 basis.
By volume, DvP settlements accounted for around 43 per cent of total settlements during the Assessment period, one-way cash transfers accounted for around 41 per cent, and DvD transfers related to the ASX Collateral service accounted for around 16 per cent. There were also a small number of free-of-payment securities transfers, making up less than 1 per cent of the total volume of settlements. By value, DvP settlements predominate, accounting for 81 per cent of total transfers involving a cash payment leg in 2015/16.
10.2 A securities settlement facility that is an exchange-of-value settlement system should eliminate principal risk by linking the final settlement of one obligation to the final settlement of the other through an appropriate delivery versus payment (DvP), delivery versus delivery (DvD) or payment versus payment (PvP) settlement mechanism.
Settlement of securities transactions in Austraclear (including the opening and closing legs of tri-party repo trades submitted by ASX Collateral) is on a DvP Model 1 basis. This entails that: there is a simultaneous transfer of cash and securities obligations between the buyer and seller on a transaction-by-transaction basis in real time; final settlement occurs if and only if both of the linked transfers are completed successfully; and if one transfer fails, the linked transfer will be cancelled.
To facilitate DvP settlement, Austraclear has a link with RITS, Australia's RTGS payments system (see SSF Standard 8). The settlement mechanism involves three main steps:
- Step 1: Once a transaction has been submitted to Austraclear, Austraclear will seek to lock down the securities in the delivering participant's account, preventing these securities from being transferred.
- Step 2: Once the securities have been locked down, Austraclear will send a message to RITS requesting that the payment be effected across the ESAs of the relevant participants or Participating Banks (see SSF Standard 8.3).
- Step 3: Once RITS has sent a confirmation to Austraclear that the payment has been effected, Austraclear will immediately effect the transfer of securities.
In the case of collateral substitutions initiated by ASX Collateral, the settlement mechanism in Austraclear requires that finality is achieved only when both linked securities deliveries have been successfully completed – that is, settlement occurs on a DvD basis. The design of Austraclear's systems further provides for the grouping of linked transactions to accommodate chains of substitutions where collateral has been re-used.
While this design protects against principal risk, multiple substitutions in a long re-use chain may have implications for timely completion of transactions at the end of the day. To mitigate this risk and ensure that the potential for gridlock is no greater than under non-centralised collateral arrangements, participants engaging in the re-use of collateral may allow the use of cash as collateral of last resort. Substitutions involving the use of cash as collateral of last resort settle on a DvP Model 1 basis, consistent with the settlement of other transactions involving the exchange of securities for cash in Austraclear.