2006/07 Assessment of Clearing and Settlement Facilities in Australia 5.3 ASX Settlement and Transfer Corporation (ASTC)

It is the Bank's assessment that ASX Settlement and Transfer Corporation complied with the Financial Stability Standard for Securities Settlement Facilities in the nine months to June 2007.

Background on ASTC arrangements

ASTC operates within a sound legal framework, based on its Settlement Rules which under s822B of the Corporations Act have effect as a contract under seal between ASTC and each of its participants, and between each participant and each other participant. Among other things, the Settlement Rules specify the rights and obligations of ASTC and each of its participants, including in the event of default or suspension. During the assessment period the ASTC's netting arrangements were approved under Part 3 of the Payment Systems and Netting Act. This provides certainty for the netting process in the event of the insolvency of an ASTC participant or a payment provider (See Attachment 2).

ASTC addresses settlement risk by the use of a model 3 delivery-versus-payment (DVP) mechanism, whereby settlement of payments occurs in a multilateral net batch, with interbank payment made across Exchange Settlement accounts at the Reserve Bank. Securities title is updated upon notification of funds settlement. Securities accounts are prevented from facilitating transfer prior to funds settlement so that one leg of a settlement cannot proceed without the other.

Developments during the assessment period

As discussed above, ASTC sought to improve the legal certainty of the netting that takes place within its facility during the assessment period by gaining approval of its arrangements under the Payment Systems and Netting Act.

Each day ASTC calculates settlement obligations between its participants arising from financial market transactions. This involves the calculation of net settlement positions in funds and equity securities for each participant. The net payment positions between ASTC's participants give rise to interbank payment obligations. ASTC also calculates net interbank obligations between ‘payment providers’ acting on behalf of ASTC's participants. Payment providers settle those obligations across Exchange Settlement accounts held at the Reserve Bank.

ASTC applied to the Bank for these netting procedures to be approved under Part 3 of the Payment Systems and Netting Act. An approval protects the net amounts calculated in a multilateral netting arrangement in the event of legal challenge should a party to the arrangement enter external administration. Given the importance of legally robust clearing and settlement arrangements to the financial markets which ASTC serves, the Bank issued an approval on 1 May 2007.

ASTC's systems were highly operationally reliable during the course of the assessment period, with no outages recorded. ASTC upgraded the capacity of its main system (CHESS) in December 2006, to a target of 1,000,000 daily transactions. A system limit which constrains the number of instruments that can be lodged within CHESS has also been identified and was upgraded subsequent to the assessment period.

ASTC has arrangements in place to allow the timely recovery of operations in the event of a contingency. ASTC has tested its ability to operate its production systems from its back-up site during the assessment period. An additional step of utilising back-up systems as the production system for a day's processing was taken in November 2007, subsequent to the assessment period.

Assessment

It is the Bank's assessment that ASTC has complied with the Financial Stability Standard for Securities Settlement Facilities during the assessment period. The approval of its netting arrangements further strengthens its legal framework. The detailed assessment provided in the attachment indicates how ASTC has met the various measures that the Bank has set out as the minimum it considers relevant for meeting the standard.