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

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

Austraclear maintains three links to other FMIs:

ASX Clear, for funds transfers in relation to margin payments
ASX Clear (Futures), for AUD funds transfers in relation to margin payments, lodgement of AUD-denominated non-cash collateral, and settlement of 90-day bank bill futures
Clearstream, in relation to Euroentitlements managed in Austraclear.

There are no financial risks associated with these links but Austraclear is exposed to operational risks, which are managed in the context of the sound operational risk management practices of each FMI (SSF Standard 17.1). The legal basis of each link is supported by finality legislation, and link arrangements have been discussed with the Bank (SSF Standards 17.2, 17.3). Austraclear's link with Clearstream does not involve the extension of credit, provisional transfers of securities or the use of custodians (SSF Standards 17.4, 17.5, 17.6).

Based on this information, the Bank's assessment is that Austraclear has observed the requirements of SSF Standard 17 during the 2012/13 Assessment period. Austraclear'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

Austraclear maintains three links to other FMIs. 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.

There is a link with ASX Clear for funds transfers related to margin payments. Cash transfers are entered into Austraclear by ASX Clear, and then matched in Austraclear against the respective clearing participants' cash settlement instructions. Regular margin collections, which make up the majority of cash transfers in ASX Clear, are submitted to Austraclear by ASX Clear's margin and collateral systems, while intraday margin collections are entered manually.
There is a link with ASX Clear (Futures) for AUD funds transfers in relation to margin payments, lodgement of AUD-denominated non-cash collateral, and settlement of 90-day bank bill futures. As for ASX Clear, cash transfers are entered into Austraclear by ASX Clear (Futures), and then matched in Austraclear against the respective clearing participants' cash settlement instructions. Regular margin collections, which make up the majority of cash transfers, are submitted to Austraclear by ASX Clear (Futures)' margin and collateral systems, while intraday margin collections are entered manually. AUD-denominated non-cash collateral is lodged via a collateral lodgement form which needs to be received by ASX Clear (Futures) the day prior to the collateral being needed to cover margin, with the security being transferred to ASX Clear (Futures) via a free-of-payment trade in Austraclear. Settlement of 90-day bank bill futures takes place in Austraclear according to procedures set out in ASX 24's Operating Rules and Procedures. Sellers and buyers who are not full participants of Austraclear must appoint a full participant to act as their settlement agent.
There is a link with Clearstream, in relation to Euroentitlements managed in Austraclear (see SSF Standard 9.1). Austraclear is a participant in Clearstream. A participant that has a Eurobond holding in Clearstream can choose to lodge that security in Austraclear, by transfer to Austraclear's Clearstream account. Participants with Eurobond holdings in Euroclear may also transfer securities to Austraclear's Clearstream account via a separate link maintained between Euroclear and Clearstream. Once available in the Austraclear system, arrangements for sales and purchases of the security are as for other debt securities. Withdrawals of the Euroentitlements from the Austraclear system are processed in a similar way to deposits, with Austraclear on request transferring the securities from its account in Clearstream to the participant's account with either Clearstream or Euroclear.

Managing operational risk

All links are 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. Clearstream's operational risk management arrangements are overseen by the Central Bank of Luxembourg (Banque Centrale du Luxembourg), which performs periodic assessments of Clearstream against international standards, with an assessment against the Principles scheduled to be carried out in late 2013.

Managing financial risk

Austraclear does not assume any financial risks by virtue of its links to other FMIs.

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.

Austraclear's links to ASX Clear and ASX Clear (Futures) have their legal basis in the Regulations, Operating Rules and Procedures of the three facilities. The finality of settlements made via these links is protected by an approval of Austraclear under Part 2 of the PSNA (see SSF Standard 1.5).

Austraclear's link to Clearstream has a legal basis in a contract between the two FMIs, and the system rules of Clearstream's international central securities depository. As noted under SSF Standard 17.1, Clearstream is regulated by the Banque Centrale du Luxembourg in accordance with international standards.

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.

Austraclear has discussed its current link arrangements with the Bank. Austraclear 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.

Austraclear does not extend credit to Clearstream.

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.

Euroentitlements are not made available to participants in Austraclear until title has been confirmed by deposit in Austraclear's account at Clearstream. Provisional transfers of securities cannot arise under the link between the two 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.

Austraclear does not use custodians or other intermediaries in its link with Clearstream.