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

Standard 10: Exchange-of-value Settlement Systems

If a securities settlement facility settles transactions that comprise the settlement of two linked obligations (for example, securities or foreign exchange transactions), it should eliminate principal risk by conditioning the final settlement of one obligation upon the final settlement of the other.

Rating: Observed

Austraclear eliminates principal risk in settlements involving the transfer of a security in exchange for cash or another security by ensuring that delivery occurs if and only if payment can be settled at the same time (SSF Standard 10.1). For the purchase of securities, Austraclear does this through the use of a DvP model 1 settlement mechanism, which simultaneously settles linked payment and securities obligations on an item-by-item basis in real time. Collateral substitutions are performed on a DvD basis, whereby linked securities transactions settle simultaneously, including where a chain of substitutions are being performed (SSF Standard 10.2).

Based on this information, the Bank's assessment is that Austraclear has observed the requirements of SSF Standard 10 during the 2012/13 Assessment period. Austraclear's arrangements for achieving exchange-of-value settlements are described in further detail under the following sub-standards.

10.1 A securities settlement facility that is an exchange-of-value settlement system should eliminate principal risk by ensuring 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.

Austraclear eliminates principal risk via settling its securities transactions on a DvP model 1 basis (see SSF Standard 10.2). This ensures that payment and securities obligations are settled if and only if both obligations can be settled simultaneously. Collateral substitutions instructed by ASX Collateral are settled on a DvD basis under the same arrangements as for transfer of cash and securities. Where cash is used as a last resort, settlement is on a DvP model 1 basis.

10.2 A securities settlement facility that is an exchange-of-value settlement system should eliminate principal risk by linking the final settlement of one obligation to the final settlement of the other through an appropriate delivery versus payment (DvP), delivery versus delivery (DvD) or payment versus payment (PvP) settlement mechanism.

Settlement of securities transactions in Austraclear is on a DvP model 1 basis. This entails that: there is a simultaneous transfer of cash and securities obligations between the buyer and seller on an item-by-item basis in real time; final settlement occurs if and only if both of the linked transfers are completed successfully; and if one transfer fails, the linked transfer will also be cancelled.

ASX Collateral

Substitution of collateral under the collateral management service launched in July 2013 is effected in such a way as to eliminate principal risk in the settlement process. Settlement instructions submitted to Austraclear by ASX Collateral are executed on an individual gross basis (as for securities transactions). In the case of collateral substitutions, the settlement mechanism requires that finality is achieved only when both linked securities deliveries have been successfully completed – that is, settlement occurs on a DvD basis. The system design further provides for the grouping of linked transactions to accommodate chains of substitutions where collateral has been re-used.

While this design protects against principal risk, multiple substitutions in a long re-use chain may have implications for timely completion of transactions at the end of the day. To mitigate this risk, and ensure that the potential for gridlock is no greater than under current non-centralised collateral arrangements, participants engaging in the re-use of collateral may allow cash as collateral of last resort. Substitutions involving the use of cash as collateral of last resort settle on a DvP model 1 basis, consistent with the settlement of other transactions exchanging securities for cash in Austraclear.