2012/13 Assessment of ASX Clearing and Settlement Facilities B1.1 ASX Clear

Standard 11: Exchange-of-value Settlements

If a central counterparty is involved in the settlement of transactions that comprise two linked obligations (for example, securities or foreign exchange transactions), it should eliminate principal risk by ensuring that the final settlement of one obligation is conditional upon the final settlement of the other.

Rating: Observed

ASX Clear eliminates principal risk in the settlement of cash equity transactions by ensuring that the transfer of securities occurs if and only if payment occurs (CCP Standard 11.1). In order to eliminate principal risk, ASX Clear employs the DvP model 3 settlement mechanism in ASX Settlement (CCP Standard 11.2).

Based on this information, the Bank's assessment is that ASX Clear has observed the requirements of CCP Standard 11 during the 2012/13 Assessment period. ASX Clear's arrangements for DvP settlement of linked obligations are discussed in further detail under the following sub-standards.

11.1 A central counterparty should eliminate principal risk associated with the settlement of any obligations involving two linked obligations by ensuring that the payment system or securities settlement facility employed operates in such a way 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.

ASX Clear eliminates principal risk by ensuring that settlement of all securities transactions takes place in ASX Settlement using a DvP model 3 settlement mechanism (see CCP Standard 11.2).

11.2 A central counterparty should eliminate principal risk associated with the settlement of linked obligations by ensuring that it employs an appropriate delivery versus payment (DvP), delivery versus delivery (DvD) or payment versus payment (PvP) settlement mechanism.

ASX Clear employs the DvP model 3 settlement mechanism in ASX Settlement to eliminate principal risk associated with its securities transactions. Under this arrangement, settlement of novated and non-novated transactions takes place in a daily batch process run by CHESS. All scheduled securities transfers are reduced to a single multilateral net transfer per line of stock for each participant. Payments associated with these transactions are similarly settled on a multilateral net basis, in RITS, contemporaneously with the securities transfers (see Appendix B2.1, SSF Standard 10.2 for a detailed description of ASX Settlement's settlement model).

The use of a DvP model 3 settlement mechanism is acceptable for ASX Clear given the relatively low average value of securities transactions involved. In 2012/13, the average value of individual gross settlement instructions in ASX Settlement for novated transactions cleared by ASX Clear was around $5,000. This compares with an average of $28.3 million for an individual DvP settlement instruction for debt securities in Austraclear. While, in its 2008 Review of Settlement Practices for Australian Equities, the Bank encouraged ASX to consider introducing a DvP model 1 settlement mechanism for cash equities over the medium term, the Bank accepts that neither ASX nor market participants are persuaded of the need to move to a new settlement model at this time. Furthermore, the Bank notes the actions taken by ASX since the 2008 review to further strengthen the resilience of the batch settlement process (see Appendix B2.1, SSF Standard 10.2).