2011/12 Assessment of Clearing and Settlement Facilities in Australia 2. Clearing and Settlement in Australia
Two types of clearing and settlement (CS) facilities operate in Australia: central counterparties (CCPs) and securities settlement facilities (SSFs). Under the Corporations Act 2001, these facilities are required to hold a CS facility licence and to comply with the relevant Financial Stability Standard determined by the Reserve Bank (the Bank).
Central Counterparties
A CCP interposes itself as the legal counterparty to all purchases and sales via a process known as novation. This involves the replacement of the original contract with separate contracts between the buyer and the CCP, and between the seller and the CCP. These arrangements provide substantial benefits to participants in terms of counterparty risk management as well as greater opportunities for netting of obligations. At the same time, however, they result in a significant concentration of risk in the CCP. This risk can crystallise if a participant defaults on its obligations to the CCP, since the CCP must continue to meet its obligations to all of the non-defaulting participants. Accordingly, it is critical that the CCP has appropriate risk controls and other measures in place such that it could with a high degree of confidence accommodate a default without threatening the CCP's solvency, or significantly disrupting financial markets or the financial system more generally. It is also important that CCPs identify and properly control other risks associated with their operations in order to contribute to the stability of the Australian financial system. The objective of the Bank's Financial Stability Standard for Central Counterparties is to ensure that these outcomes are achieved.
The following licensed CCPs are required to comply with the Standard:
- ASX Clear Pty Limited (ASX Clear), which provides CCP services for a range of financial products traded on the ASX market, including cash equities and equity options.
- ASX Clear (Futures) Pty Limited (ASX Clear (Futures)), which provides CCP services for derivatives traded on the ASX 24 market, including futures and options on interest rate, equities, energy and commodity products.
Securities Settlement Facilities
An SSF provides for the final settlement of securities transactions. Settlement involves transfer of the title to the security, and transfer of cash. These functions are linked via appropriate delivery-versus-payment arrangements incorporated within the settlement process. Since SSFs are important financial market infrastructures that are critical to the smooth operation of the financial system, it is important that they 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 Bank's Financial Stability Standard for Securities Settlement Facilities is to ensure these outcomes are achieved.
The following licensed SSFs are required to comply with the Standard:
- ASX Settlement Pty Limited (ASX Settlement), which provides for the settlement of equities and other deliverable products traded on the ASX market.
- Austraclear Limited (Austraclear), which offers securities settlement services for trades in debt securities.
Although ASX Clear, ASX Clear (Futures), ASX Settlement and Austraclear are all part of a single corporate group – ASX Group – each facility holds an individual CS facility licence.