2009/10 Assessment of Clearing and Settlement Facilities in Australia 2. Clearing and Settlement in Australia

Two types of CS facilities operate in Australia: central counterparties and securities settlement facilities. Under the Corporations Act, these facilities are required to hold a CS facility licence and to comply with the relevant FSS determined by the Reserve Bank.

Central Counterparties

A central counterparty interposes itself as the legal counterparty to all purchases and sales undertaken on a market via a process known as novation. This process involves the replacement of the original contract by separate contracts between the buyer and the central counterparty and between the seller and the central counterparty. These arrangements provide significant benefits in terms of counterparty risk management as well as greater opportunities for netting of obligations. At the same time, they result in a significant concentration of risk in the central counterparty. This risk can crystallise if a participant defaults on its obligations to the central counterparty, in which case the central counterparty must continue to meet its obligations to the defaulter's original counterparties. Accordingly, it is important that the central counterparty has appropriate risk controls and other measures in place to provide confidence that, in all but the most extreme circumstances, such a default can be accommodated without threatening its solvency or significantly disrupting financial markets or the financial system more generally. It is also important that central counterparties identify and properly control other risks associated with their operation in order to contribute to the stability of the Australian financial system. The objective of the Reserve Bank's Financial Stability Standard for Central Counterparties is to ensure that these outcomes are achieved.

The following licensed central counterparties are required to comply with the Standard:

• ASX Clear – provides central counterparty services for a range of financial products traded on the ASX market, including cash equities, pooled investment products, warrants, certain interest-rate products and equity- and commodity-related derivatives; and
• ASX Clear (Futures) – provides central counterparty services for derivatives traded on the ASX 24 market (formerly the SFE market), including futures and options on interest rate, equity, energy and commodity products.^[1]

Securities Settlement Facilities

A securities settlement facility provides for the final settlement of transactions undertaken on securities markets. Settlement involves transfer of the title to the security and transfer of cash consideration. These functions are linked via delivery-versus-payment (DVP) arrangements established within the settlement process. As an important financial market infrastructure key to the smooth operation of the financial system, it is important that securities settlement facilities identify and properly control risks associated with their operation in order to contribute to the stability of the Australian financial system. The objective of the Reserve Bank's Financial Stability Standard for Securities Settlement Facilities is to ensure these outcomes are achieved.

The following licensed securities settlement facilities are required to comply with the Standard:

• ASX Settlement – provides for the settlement of equities and warrants traded on the ASX market; and
• Austraclear – offers securities settlement services for over-the-counter (OTC) trades in debt securities.

Although ASX Clear, ASX Clear (Futures), ASX Settlement and Austraclear are all part of a single corporate group, ASX, each facility holds an individual CS facility licence.

Footnote

The SFE market was renamed with effect from August 2010. [1]