2012/13 Assessment of ASX Clearing and Settlement Facilities B2.1 ASX Settlement

Standard 17: FMI Links

A securities settlement facility that establishes a link with one or more FMIs should identify, monitor and manage link-related risks.

Rating: Observed

ASX Settlement maintains a link to one other FMI – ASX Clear, for the settlement of novated securities transactions.

There are no financial risks associated with this link, but ASX Settlement is exposed to operational risks, which are managed in the context of ASX's group-wide framework for operational risk management (SSF Standard 17.1). The legal basis of the link is supported by finality legislation, and link arrangements have been discussed with the Bank (SSF Standards 17.2, 17.3). ASX Settlement does not maintain links with any other central securities depositories (SSF Standards 17.4, 17.5, 17.6).

Based on this information, the Bank's assessment is that ASX Settlement has observed the requirements of SSF Standard 17 during the 2012/13 Assessment period. ASX Settlement's management of link-related risks is described in further detail under the following sub-standards.

17.1 Before entering into a link arrangement, and on an ongoing basis once the link is established, a securities settlement facility should identify, monitor and manage all potential sources of risk arising from the link arrangement. Link arrangements should be designed such that the securities settlement facility is able to comply with these SSF Standards.

Identifying link-related risks

ASX Settlement maintains one link to another FMI – ASX Clear. A link for the purposes of this standard is any connection that is made to another FMI according to a set of contractual and operational arrangements, regardless of the complexity or otherwise of the link and whether it is directly with the FMI or through an intermediary. ASX Settlement maintains a link with ASX Clear for the settlement of securities transactions, including DvP settlement of novated securities trades and the lodgement of non-cash collateral. Instructions relating to these transactions are entered into CHESS, which operates across both ASX Clear and ASX Settlement.

Managing operational risk

The link to ASX Clear is subject to the same operational risk management framework that applies for all the ASX CS facilities, which addresses operational risks associated with software, infrastructure or network failures and manual processing errors. Incident reports are prepared for each significant technical or operational incident, with an assessment of mitigating actions to reduce the risk of reoccurrence. In addition, six-monthly risk profile assessments are prepared and presented to the Audit and Risk Committee, and an independent system-controls audit is conducted annually.

Managing financial risk

ASX Settlement does not assume any financial risks by virtue of its link to ASX Clear.

17.2 A link should have a well-founded legal basis, in all relevant jurisdictions, that supports its design and provides adequate protection to the securities settlement facility and other FMIs involved in the link.

ASX Settlement's link to ASX Clear has its legal basis in the Operating Rules and Procedures of both facilities. The finality of settlements made via these links is protected by an approval of ASX Settlement under Part 3 of the PSNA (see SSF Standard 1.5).

17.3 Where relevant to its operations in Australia, a securities settlement facility should consult with the Reserve Bank prior to entering into a link arrangement with another FMI.

ASX Settlement has discussed its current link arrangements with the Bank. ASX Settlement did not enter into any new link arrangements during the Assessment period.

17.4 A securities settlement facility operating a central securities depository that links to another central securities depository should measure, monitor and manage the credit and liquidity risks arising from such links. Any credit extended to the linked central securities depository should be covered fully with high-quality collateral and be subject to limits.

ASX Settlement does not operate any links to other central securities depositories.

17.5 Provisional transfers of securities between a securities settlement facility operating a central securities depository and another central securities depository should be prohibited or, at a minimum, the retransfer of provisionally transferred securities should be prohibited prior to the transfer becoming final.

ASX Settlement does not operate any links to other central securities depositories.

17.6 A securities settlement facility operating an investor central securities depository that uses an intermediary to operate a link with an issuer central securities depository should measure, monitor and manage the additional risks (including custody, credit, legal and operational risks) arising from the use of the intermediary.

ASX Settlement does not operate any links to other central securities depositories.