2015/16 Assessment of ASX Clearing and Settlement Facilities A2.2 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.

Austraclear is a separate legal entity within the ASX Group that solely provides settlement and related depository 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 an RTGS system under the 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, may provide 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 (SSF Standard 1.6).In May 2016, Parliament passed the Resilience Act, which, among other things, amends the PSNA to provide additional legal certainty for RTGS systems that have been approved under the PSNA, including Austraclear (SSF Standard 1.5).

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 CS facilities and the rest of the ASX Group, notwithstanding the sharing of operational resources across multiple entities within the group.

Austraclear provides settlement services and related depository services for debt securities, and settlement services for derivatives traded on the ASX 24 market and for payments to meet margin obligations arising in ASX Clear and ASX Clear (Futures), in accordance with the Austraclear Regulations and Procedures. 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, acts as a Special Purpose Participant in Austraclear. ASX Collateral operates a centralised collateral management service (CCMS) under which exchange of title to debt securities occurs in Austraclear.

Austraclear also offers settlement services for foreign currency payments, currently covering payments denominated in RMB (see SSF Standard 8). The foreign currency settlement service is designed to operate independently from Austraclear's AUD services. Austraclear's ancillary services do not have a distinct profile from, or pose additional risks to, its activity of operating an SSF.

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 ASIC in consultation with the Bank. The Minister acts as ultimate decision-maker on licensing matters, although this responsibility has been delegated to authorised ASIC officers since April 2016.
  • Austraclear has defined 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 Participating Bank and foreign currency settlement bank. 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 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. One such review occurred for Austraclear during the Assessment period.

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. The standard form Service Agreements specify the nature of services that the Collateral Manager provides to users. These agreements are between ASX Collateral and users of the collateral service; Austraclear is not a party to these contracts.

The Austraclear Regulations 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.

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 in the Regulations and those that may instead be considered under the Procedures. Operating Rule changes are subject to a Ministerial disallowance process, although the Minister's role in this process has been delegated to authorised ASIC officers since April 2016.[1]

Austraclear's Regulations and Procedures are published on the ASX public website and the Customer Portal, ASX's restricted participant website. These documents are supplemented with explanatory material to support participants' (and prospective participants') understanding of the risks they face through participation in the system. In addition to the Regulations and Procedures, 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 participants, 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. In consultation with the Bank, ASIC considers the changes and advises ASX of any regulatory concerns. Once such concerns are satisfactorily addressed, ASIC invites formal submission of the proposed Operating Rule changes, which triggers a 28-day ‘disallowance’ period (referred to above), during which the Minister may choose to disallow the Operating Rule changes. The Minister or delegate must consider a number of factors when deceding whether to disallow Operating Rule changes, including whether the proposed changes are consistent with the public interest.[2] In addition, the Minister or delegate must ensure that there has been adequate consultation with the Bank when deciding whether to disallow Operating Rule changes, and consider any advice and recommendations from the Bank and ASIC staff. If changes to the Regulations are not disallowed by the Minister or delegate, they are notified to participants via the ASX website.

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's public website in its Disclosure Framework document, which sets out in detail how each CS facility meets the requirements of each Principle within the PFMI developed by CPMI and IOSCO (see SSF Standard 18.4).[3]

On behalf of each licensed entity within the ASX Group, including all CS facilities, ASX Limited submits an Annual Group Licence Report to ASIC and the Bank. This report sets out the legal basis for the CS facilities' activities under their licence obligations, and is used by ASIC in the preparation of ASIC's Market Assessment Report for the ASX Group.

Austraclear may seek independent legal opinions on relevant legal matters relating to significant new services, including 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 that new Regulations will have the intended legal effect. For example, in assessing the legal basis of its foreign currency settlement service, ASX sought external legal advice regarding the extension of finality protections under Part 2 of the PSNA to transactions settled under the new service.

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, which is established in the Austraclear Regulations, is protected by:

  • its approval as an RTGS system 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 from being voided in the case of a Participating Bank entering external administration.

In May 2016, the Resilience Act amended the PSNA to provide additional legal certainty for RTGS systems that have been approved under the PSNA, such as Austraclear and RITS. The amendments facilitate the ongoing participation by institutions in ‘non-terminal’ external administration (e.g. statutory management) by clarifying that the protections under the PSNA continue to apply.

Enforceability of rules under external administration

ASX Legal has analysed the legal enforceability of Austraclear's Regulations should the SSF enter 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 Austraclear's operations are based in Australia, participants of Austraclear include subsidiaries and branches of entities that are domiciled in foreign countries. Austraclear's Regulations are governed by Australian law and require that all of its participants 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 risks.

Footnotes

While the Minister has delegated responsibility for certain decisions under Chapter 7 of the Corporations Act to authorised ASIC officers, the Minister may still exercise the powers delegated by ‘calling up’ the matter. [1]

For more information see ‘Guidelines for the Exercise of Powers Delegated to ASIC under Chapter 7 of the Corporations Act 2001’, available at: <http://treasury.gov.au/~/media/Treasury/Publications%20and% 20Media/Publications/2016/Guidelines%20for%20the%20exercise%20of%20powers%20delegated%20to%20ASIC/ Downloads/PDF/Guidelines_ASIC_ch7.ashx>. [2]

Available at <http://www.asx.com.au/documents/asx-compliance/pfmi-disclosure-framework.pdf>. Prior to 1 September 2014, CPMI was known as the Committee on Payment and Settlement Systems (CPSS). [3]