2012/13 Assessment of ASX Clearing and Settlement Facilities B2.2: Austraclear Standard 1: Legal Basis
A securities settlement facility should have a well-founded, clear, transparent and enforceable legal basis for each material aspect of its activities in all relevant jurisdictions.
Rating: Observed
Austraclear is a separate legal entity within the ASX Group that solely provides settlement and related depositary services (SSF Standard 1.1). Austraclear's legal basis is founded on clear and understandable rules that operate within the framework of relevant laws and regulations (SSF Standards 1.2, 1.3). The certainty of this legal basis in relevant jurisdictions is reinforced by supporting legislation, including Austraclear's protection as a real-time gross settlement (RTGS) system under the Payment Systems and Netting Act 1998 (PSNA), and is subject to periodic review by ASX Legal (SSF Standards 1.2, 1.5). Austraclear has publicly outlined the key features of its legal basis on its website, and from time to time, for information, provides legal opinions to participants or other stakeholders in respect of the legal basis of significant new services (SSF Standard 1.4). ASX has not identified any material risks arising from potential conflicts of law relating to the operations of Austraclear.
Based on this information, the Reserve Bank's assessment is that Austraclear has observed the requirements of SSF Standard 1 during the 2012/13 Assessment period. The legal basis of Austraclear is described in further detail under the following sub-standards.
1.1 A securities settlement facility should be a legal entity which is separate from other entities that may expose it to risks unrelated to those arising from its function as a securities settlement facility.
Austraclear is a wholly owned subsidiary of ASX Settlement Corporation Limited, which is itself a wholly owned subsidiary of ASX Limited. As a separate legal entity, Austraclear's securities settlement activities are separate from the activities conducted by ASX's other clearing and settlement (CS) facilities and the rest of the ASX Group, notwithstanding the sharing of operational resources across multiple entities within the group.
Austraclear's services are limited to settlement and related depositary services for debt securities, and settlement services for derivatives traded on the ASX 24 market and for margin payments in ASX Clear and ASX Clear (Futures), in accordance with the Austraclear Regulations and Procedures. Accordingly, Austraclear does not provide any services that have a distinct profile from, or pose additional risks to, its activity of operating an SSF.
ASX Collateral
ASX Collateral Management Services Pty Limited (ASX Collateral), a related legal entity within the ASX Group and a wholly owned subsidiary of ASX Operations Pty Limited, launched a centralised collateral management service (CCMS) in July 2013. Exchange of title to debt securities under management occurs in Austraclear. The Austraclear Regulations were amended in July to allow the offering of this service, and ASX Collateral is expected to be admitted as a Special Purpose Participant in September 2013.
1.2 The legal basis should provide a high degree of certainty for each material aspect of a securities settlement facility's activities in all relevant jurisdictions.
Legal basis
Austraclear's settlement arrangements for transactions entered into by its participants require a high degree of legal certainty. Key components of the legal framework under which the SSF operates are:
- Austraclear holds a CS facility licence, under Part 7.3 of the Corporations Act 2001. This licence is administered by the Australian Securities and Investments Commission (ASIC) in consultation with the Bank, with the Minister acting as ultimate decision-maker on licensing matters.
- The legal basis for Austraclear's operations is set out in the Austraclear Regulations and Procedures. Under section 822B of the Corporations Act, these Regulations have effect as a contract under seal between: Austraclear and each of its participants; each participant and each other participant; and each participant and each issuer. The Regulations and Procedures set out the rights and obligations of participants and Austraclear, including in the event of default or suspension.
- The finality of settlements undertaken by Austraclear is protected by its approval, and the approval of the Reserve Bank Information and Transfer System (RITS), as an RTGS system under Part 2 of the PSNA (see SSF Standard 1.5).
The legal basis of Austraclear's activities is reviewed by ASX Legal whenever there are material amendments to the Regulations or Procedures.
ASX Collateral
The legal basis for the operation of the CCMS in Austraclear and the status of ASX Collateral as a Special Purpose Participant is set out in the Austraclear Regulations. Legal arrangements between ASX Collateral and customers of the CCMS (which must be Full Participants) are set out in standard-form Collateral Management Service Agreements (CMSAs). ASX has obtained a legal opinion in relation to the use of CMSAs that has identified no material legal risks.
The Austraclear Regulations have been amended to provide for settlement instructions to be submitted to Austraclear by a Collateral Manager admitted as a Special Purpose Participant and acting as agent for its customers, which must be admitted as Full Participants.
The amendments to the Regulations also introduce new account types to hold securities given as collateral in the CCMS. The new account types are Transferred Collateral Accounts, which hold securities given as collateral by way of outright transfer (e.g. under a repurchase agreement), and Secured Collateral Accounts, which hold securities given as collateral by way of granting a security interest. Each of the new account types is controlled by the Collateral Manager – securities can only be transferred into or out of Transferred Collateral Accounts and Secured Collateral Accounts by the Collateral Manager appointed by the account holder (and in certain circumstances, by Austraclear). Securities held in a Transferred Collateral Account by a collateral receiver may, nevertheless, be re-used within the Collateral Management System (unless re-use has been restricted by agreement of the collateral giver and collateral receiver). Since this structure seeks to preserve contractual rights contained in bilateral Principal Agreements, CMSAs and Austraclear Regulations contemplate rights and obligations that may be triggered by an event of default under a Principal Agreement. Neither ASX Collateral nor Austraclear make any determination in that regard, but upon notification of an event of default, ASX Collateral would, in accordance with the CMSAs:
- in the case of a default by the collateral giver, act on instructions of the collateral receiver in respect of the relevant collateral
- in the case of a default by the collateral receiver, act on matched instructions of the collateral giver and the collateral receiver in respect of the relevant collateral.
As with any action that may take place under existing bilateral arrangements, Austraclear plays no part in the process. Nevertheless, the Austraclear Regulations provide an indemnity to Austraclear in respect of any loss or claim arising from actions taken under such circumstances.
In providing for the CCMS, a new routine method of settlement has been established in Austraclear: delivery-versus-delivery. Under this method, the completion of settlement of a collateral substitution is conditional on the delivery of both security legs of the substitution, thereby ensuring that principal risk is eliminated. This method of settlement did not require a change to Austraclear Regulations since settlement is defined in terms of the exchange of elements (which may be either cash or securities).
As a Special Purpose Participant of Austraclear, ASX Collateral is required to comply with requirements imposed on participants by the Regulations and Procedures. In addition, ASX Collateral is subject to specific requirements placed on Special Purpose Participants under the Austraclear Regulations, including in respect of operational resilience and the maintenance of documented step-in arrangements with the Bank.
The standard form CMSAs specify the nature of services that the Collateral Manager provides to users. For this purpose, ASX Collateral has obtained an Australian Financial Services Licence, permitting it to arrange dealings in securities. These agreements are between ASX Collateral and users of the collateral service; Austraclear is not a party to these contracts.
Rights and interests
The rights and interests of Austraclear, its participants and, where relevant, its participants' customers in securities deposited with Austraclear are defined in Austraclear's Regulations and Procedures (see SSF Standard 9).
1.3 A securities settlement facility should have rules, procedures and contracts that are clear, understandable and consistent with relevant laws and regulations.
Section 822A of the Corporations Act establishes a framework to prescribe the matters that must be dealt with by rules and those which may be considered under the procedures. Rule changes are subject to a disallowance process.
Austraclear's Regulations and Procedures are supplemented with explanatory material, published on ASX's public website and ASX's restricted participant website, to facilitate understanding by participants and prospective participants of the risks they face through participation in the system. Publicly available material includes high-level descriptions of Austraclear's operations and settlement process, the Austraclear system (including test system), business continuity arrangements, classes of Austraclear participant, technical documentation, and fees and charges.
There is a clear process for changing Austraclear's Regulations and Procedures. Proposed rule changes may be submitted informally to ASIC, which in consultation with the Bank will advise ASX of any regulatory concerns. Formal submission of the proposed changes to ASIC triggers a 28-day ‘disallowance’ period (referred to above), during which the Minister may choose to disallow the rule changes. The Minister considers a number of factors, including whether the proposed changes are consistent with the public interest. To assist the Minister in this process, ASIC provides detailed advice to the Minister, incorporating the views of the Bank as appropriate.
1.4 A securities settlement facility should be able to articulate the legal basis for its activities to the Reserve Bank and other relevant authorities, participants and, where relevant, participants' customers, in a clear and understandable way.
The legal basis for the activities of Austraclear and the facility's protection as an approved RTGS system under the PSNA – see also SSF Standard 1.5 – are described on the ASX public website in its Disclosure Framework document, which sets out in detail how each CS facility meets the requirements of the Principles (see SSF Standard 18.2).[1]
ASX Limited on behalf of each licensed entity within the ASX Group, including all CS facilities, submits an Annual Group Licence Report to ASIC and the Bank. This report sets out the legal basis for the CS facilities' activities under its licence obligations, and is used by ASIC in the preparation of ASIC's Market Assessment Report for the ASX Group.
For significant new services, Austraclear may seek independent legal opinions in respect of relevant aspects, or any implications that their introduction may have for the legal basis of existing functionality. These opinions may, in some circumstances, be shared with participants or other stakeholders for their information, particularly to demonstrate the legal efficacy of new Regulations.
1.5 A securities settlement facility should have rules, procedures and contracts that are enforceable in all relevant jurisdictions. There should be a high degree of certainty that actions taken by the securities settlement facility under such rules and procedures will not be voided, reversed or subject to stays, including in the event that the securities settlement facility enters into external administration or that one or more of its participants or a settlement bank defaults or is suspended.
Settlement finality
The finality of Austraclear's settlement process is protected by:
- its approval under Part 2 of the PSNA. This approval protects the finality of payments or securities settlements made through Austraclear in the event of a participant entering external administration (see SSF Standard 7.1).
- the approval of RITS as an RTGS system under Part 2 of the PSNA (see SSF Standard 8). This approval protects payments between participants that are ‘Participating Banks’ from being voided in the case of a Participating Bank entering external administration.
Enforceability of ASX rules while under external administration
ASX Legal has analysed the legal enforceability of Austraclear's Regulations upon the SSF's entry into external administration, and has identified no material legal risk to enforceability.
1.6 A securities settlement facility conducting business in multiple jurisdictions should identify and mitigate the risks arising from any potential conflicts of law across jurisdictions. A securities settlement facility should provide the Reserve Bank with a legal opinion that demonstrates the enforceability of its rules and addresses relevant conflicts of law across the jurisdictions in which it operates. This should be reviewed on a periodic basis or when material changes occur that may have an impact on the opinion, and updated where appropriate.
Although participants of Austraclear include subsidiaries and branches of entities that are based in foreign countries, the Regulations are governed by Australian law and require that all participants of Austraclear submit to the exclusive jurisdiction of New South Wales courts. ASX Legal's analysis of potential conflicts of law across jurisdictions has identified no material legal risk.
Footnote
Available at <http://www.asxgroup.com.au/media/pfmi_disclosure_framework.pdf>. [1]