2012/13 Assessment of ASX Clearing and Settlement Facilities B2.2: Austraclear

Standard 9: Central Securities Depositories

A securities settlement facility operating a central securities depository should have appropriate rules and procedures to help ensure the integrity of securities issues and minimise and manage the risks associated with the safekeeping and transfer of securities. A securities settlement facility operating a central securities depository should maintain securities in an immobilised or dematerialised form for their transfer by book entry.

Rating: Observed

Austraclear acts as central securities depository for the securities that it settles. Austraclear employs a range of controls to ensure the integrity of these securities, which are subject to annual audit. Austraclear's Regulations and Procedures identify the interests held by participants in each type of security held within Austraclear, identify how these interests can be transferred within the facility, and provide that participants' securities are not subject to claims by Austraclear's creditors (SSF Standard 9.1). Austraclear does not allow overdrafts or debit balances in securities accounts within its system, and maintains paper securities in immobilised form, with other securities dematerialised (SSF Standards 9.2, 9.3). Austraclear's Regulations set out its obligations in providing safe keeping of participant assets, and Austraclear employs operational controls and insurance to mitigate custody risk (SSF Standard 9.4). Participant assets are segregated from Austraclear's own assets, and Austraclear supports the segregation of participant and client assets through optional sub-accounts (SSF Standard 9.5). Austraclear's provision of services to issuers is subject to operational risk controls (SSF Standard 9.6).

Based on this information, the Bank's assessment is that Austraclear has observed the requirements of SSF Standard 9 during the 2012/13 Assessment period. Austraclear's arrangements for its central securities depository activities are described in further detail under the following sub-standards.

9.1 A securities settlement facility operating a central securities depository should have appropriate rules, procedures and controls, including robust accounting practices, to safeguard the rights of securities issuers and holders, prevent the unauthorised creation or deletion of securities, and conduct periodic and at least daily reconciliation of securities issues it maintains.

Austraclear employs a range of controls to ensure the integrity of securities it holds. It maintains dual redundancy and a synchronous data update model which ensures that securities holding data are consistent across primary and backup data centres (see SSF Standard 14). Austraclear produces a daily report that reconciles opening and closing balances of holdings to transactions. This report is used to identify if a holding has not been accurately updated.

Annual audits of Austraclear's system controls are conducted by an external auditor and the resulting report is published on ASX's website. These audits encompass testing control objectives over transaction processing, change management, security protocols, data system operations and disaster recovery planning. The auditor's opinion is provided under the Australian Government Auditing and Standards Board standard ASAE 3402 – Assurance Report on Controls at a Service Organisation. ASX Internal Audit performs an additional risk-based audit of key Austraclear functions on a rolling 3-year cycle.

Austraclear requires both the pledgor and pledgee to match a securities pledge request within the system. This places a lock on those securities until the pledgee accepts a request from the pledgor to release the lock.

These rules and procedures should:

(a) identify the type of title or interest held by participants for particular securities, to the extent such title or interest is recognised by the facility's rules and procedures;

Austraclear's Regulations identify title for three different classes of securities: dematerialised securities; non-paper securities and euroentitlements; and paper securities.

• Dematerialised securities are electronic securities that are registered in the Austraclear system rather than externally. They include electronic certificates of deposit, electronic promissory notes and electronic bank-accepted bills of exchange. A dematerialised security is held by a participant as a ‘chose in action’. This legal structure imposes rights and obligations that replicate the rights and obligations of a negotiable instrument.
• Non-paper securities and euroentitlements are electronic securities that are not registered within the Austraclear system. Non-paper securities include Commonwealth Government securities (CGS), registrable state and semi-government securities, and corporate debt. Euroentitlements are claims to investment-grade AUD-denominated European securities that are deemed acceptable by Austraclear and are deposited in Austraclear's account at Clearstream In the case of non-paper securities and euroentitlements, Austraclear holds title for the participant as nominee, while the participant retains beneficial title.
• Paper securities are negotiable instruments and include some certificates of deposit, promissory notes and bills of exchange. Austraclear holds these securities for the participant as bailee. The participant retains legal and beneficial title (see SSF Standard 9.1(b)).

The Austraclear Rules and Procedures provide the legal and operational basis for the transfer of title or interests between participants, including the timing of transfers and the role of pledges (encumbrances). Securities pledged in Austraclear require both the pledgor and pledgee to match a pledge request within the system. This places a lock on those securities until the pledgee accepts a request from the pledgor to release the lock.

ASX Collateral

Under the standard Austraclear account structure, participants can pledge securities to collateralise an exposure created outside the system without the transfer of title, or to exchange securities under repurchase agreements with the transfer of title. These securities may then be used by the collateral receiver without encumbrance (as long as the collateral giver has agreed that they may be re-used, which is standard practice).

The new account structure introduced in July 2013 to support the CCMS includes new Collateral Accounts to hold securities that have been given as collateral by way of outright transfer (Transferred Collateral Accounts) or security interest (Secured Collateral Accounts). These new accounts are used only by users of the CCMS (who must be Full Participants) and are controlled by the Collateral Manager as their agent. A collateral receiver may re-use securities held by it in a Transferred Collateral Account (unless re-use has been restricted by agreement between the collateral giver and collateral receiver), but only within the CCMS and through the Collateral Manager as its agent. The collateral receiver may also instruct the Collateral Manager to transfer the securities to another account for sale or repo outside of the Collateral Management System, but only on condition that equivalent replacement securities are transferred into the Collateral Account.

Settlement instructions for the CCMS are generated by the optimisation service operated by Clearstream based on exposure details provided by customers through a web interface. The settlement instructions are given to Austraclear by the Collateral Manager who is responsible for account and collateral management on behalf of its customers. The accounts remain within Austraclear and transfer of title occurs across these accounts, rather than offshore.

(b) clearly identify the way in which the transfer of (or any other forms of dealing with) securities and related payments can be effected through the facility; and

The transfer of title to securities in the Austraclear system is effected by electronic book entry. Transfers of dematerialised securities are transfers of contractual rights within the Austraclear system. Non-paper securities are transferred through the passing of beneficial title from the seller to the buyer. Paper securities are transferred through updates to participants' security records. Austraclear also uses ‘ allonges’ which maintain the negotiability of paper securities. Austraclear retains legal title in the relevant registry. Settlement occurs via a DvP process in real time. The Austraclear Regulations and Procedures also provide for the transfer of securities free-of-payment, where required.

(c) ensure that, to the extent permissible by law, the creditors of the operator of the securities settlement facility have no claim over securities or other assets held, deposited or registered by participants in the facility.

In the event of Austraclear's insolvency, the rules and arrangements for title within Austraclear provide assurance that participants' securities would be immune from claims by Austraclear's creditors. Austraclear is not counterparty to any transactions settled in its system.

9.2 A securities settlement facility operating a central securities depository should prohibit overdrafts and debit balances in securities accounts.

Austraclear does not maintain cash accounts, removing the possibility of overdrafts or the extension of credit by Austraclear. All transactions are settled across the ESAs of Participating Banks.

Any instruction to move securities from a participant's securities account in Austraclear in excess of available securities remains in a ‘not ready’ status until sufficient securities are received into that account. If the instruction remains outstanding at the end of the day, it will move to a ‘failed’ status and automatically be removed from Austraclear. This removes the possibility of a debit balance in securities accounts.

9.3 A securities settlement facility operating a central securities depository should maintain securities in an immobilised or dematerialised form for their transfer by book entry. Where appropriate, a securities settlement facility operating a central securities depository should provide incentives to immobilise or dematerialise securities.

The securities maintained in Austraclear are either paper, non-paper or dematerialised (see SSF Standard 9.1(a)). Paper securities are immobilised and held by Austraclear as bailee for the holder.

9.4 A securities settlement facility operating a central securities depository should protect assets against custody risk through appropriate rules and procedures consistent with its legal framework.

Austraclear's Regulations require that Austraclear provide safe keeping for paper securities, and do all that is in its power to replace the security if it becomes lost, stolen, destroyed or damaged. If Austraclear is liable to a participant due to the loss or destruction of a paper security, it is only liable to indemnify the participant up to the face value of the security.

Austraclear has identified potential custody risks arising from negligence, misuse of assets, fraud, poor administration, or inadequate recordkeeping. Operational controls to mitigate these risks include segregation of duties, access restrictions and authorisation checks. Austraclear is covered by the ASX Group general and professional indemnity insurance policies for civil liabilities arising from its central securities depository activities. Where losses are the result of employee wrongdoing or a computer malfunction, Austraclear is covered by the ASX Group comprehensive crime policy. The Austraclear Rules also include specific warranties and indemnities limiting potential liabilities arising from custody risk.

9.5 A securities settlement facility operating a central securities depository should employ a robust system that ensures segregation between its own assets and the securities of its participants, and segregation among the securities of participants. Where supported by the legal framework, a securities settlement facility operating a central securities depository should also support operationally the segregation of securities belonging to a participant's customers on the participant's books and facilitate the transfer of customer holdings.

Austraclear segregates its own assets and securities from those of its participants. Participant holdings are legally and operationally segregated by participant accounts. Participants have the further option to segregate client holdings by adopting sub-accounts. Austraclear does not mandate the segregation of client holdings; however, this may be required by regulatory regimes governing participants.

9.6 A securities settlement facility operating a central securities depository should identify, measure, monitor and manage its risks from other activities that it may perform; additional tools may be necessary in order to address these risks.

Austraclear offers paying agent services to issuers of debt securities. This service is governed under a service agreement and documented terms and conditions, which are available on ASX's public website. The service is subject to the same operational risk framework that is applied across all ASX facilities (see SSF Standard 14). Austraclear's liability from this activity is limited under the service agreement. Austraclear does not provide a centralised securities lending facility or act as a principal in securities lending transactions.