2015/16 Assessment of ASX Clearing and Settlement Facilities A2.2 Austraclear Standard 7: Settlement finality

A securities settlement facility should provide clear and certain final settlement, at a minimum by the end of the value date. Where necessary or preferable, a securities settlement facility should provide final settlement intraday or in real time.

Austraclear defines the point at which settlement is final in its Regulations, and finality is protected by its approval under Part 2 of the PSNA. The finality of interbank obligations arising from its settlements is protected by the approval of RITS under the same legislation (SSF Standard 7.1). Final settlement of securities transactions occurs on a DvP (or equivalent simultaneous exchange of assets) Model 1 basis in real time (SSF Standard 7.2). Austraclear defines clear cut-off times for the cancellation of payment or transfer instructions (SSF Standard 7.3).

Austraclear's arrangements for ensuring finality of settlements are described in further detail under the following sub-standards.

7.1 A securities settlement facility's rules and procedures should clearly define the point at which settlement is final.

The point at which settlement is final is defined in the Austraclear Regulations. In the case of transactions involving the transfer of a security, settlement is final when Austraclear has made the appropriate amendments to the security records of the participants involved in the transaction. In the case of transactions involving an AUD cash payment, the cash element of the transaction is settled and may not be unwound when a message is received from RITS that the cash transfer has been effected. Upon receipt of the RITS confirmation, Austraclear will update the cash record of the participant. The cash record is a record of the day's flow of debits and credits against each participant's nominated account that allows participants to limit the amount of their funds made available for settlement of transactions.[8]

For foreign currency cash payments, the transaction is settled and may not be unwound once Austraclear has received settlement instructions from the paying participant that satisfy cash record limit checks with its participating bank. Participants receive a claim on the foreign currency settlement bank upon updating of their cash record in that currency (see SSF Standard 8.5).

The finality of Austraclear's settlement process (including for foreign currency cash payments) is supported by its approval as an RTGS system under Part 2 of the PSNA (see SSF Standard 1.2). In addition, the payments between participants that are ‘Participating Banks’ are protected by virtue of the approval of RITS under Part 2 of the PSNA. With this approval, a payment executed in RITS at any time on the day on which a RITS participant enters external administration has the same standing as if the participant had gone into external administration on the next day. Accordingly, in the event of insolvency all transactions settled on the day of the insolvency are irrevocable and cannot be unwound.

In May 2016, the Resilience Act amended the PSNA to provide additional legal certainty for RTGS systems, such as Austraclear and RITS, that have been approved under the PSNA. 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.

Since the protection of the PSNA covers any exchange of assets, it extends to delivery-versus-delivery (DvD) settlement of substitutions generated by ASX Collateral. The point of finality in the case of collateral substitutions is identical to other obligations settled in Austraclear.

7.2 The securities settlement facility should complete final settlement no later than the end of the value date, and preferably intraday or in real time, to reduce settlement risk. A securities settlement facility should consider adopting real-time gross settlement (RTGS) or multiple batch processing during the settlement day.

Settlement of securities transactions in Austraclear occurs on a DvP (or equivalent simultaneous exchange of assets) Model 1 basis. This involves the simultaneous exchange of assets (cash and securities) between the buyer and seller on an item-by-item basis in real time (see SSF Standard 10). Austraclear additionally provides for one-way cash transfers between participants, which are also settled on an item-by-item basis. Although settlements occur in real time, transactions may be held pending during the settlement day (the value date) due to insufficient funds or securities. However, all settlements must occur by the end of the settlement day. Any instructions not settled at the end of the day are automatically moved to a ‘failed’ status and removed from Austraclear. To the extent that participants to a ‘failed’ transaction intend to complete settlement, these transactions must be resubmitted to Austraclear. ‘Failed’ transactions are not automatically restored on the following day. Austraclear's Regulations establish the basis for settlement of transactions entered into the system.

7.3 A securities settlement facility should clearly define the point after which unsettled payments, transfer instructions or other obligations may not be revoked by a participant.

The cut-off times for cancelling payment or transfer instructions are in line with the daily Austraclear cycle. Some cut-off times vary according to whether participants are engaged in evening settlement operations in RITS. Key cut-off times are:

  • 1.00 pm for automated re-generation of corporate action instructions (e.g. maturity and coupon payments to bond holders) if amendments are required. However, manual corrections can be processed after this time.
  • 4.28 pm for the cancellation of DvP and cash transactions by participants that do not engage in evening operations.
  • 6.32 pm AEST (8.32 pm AEDT) for the cancellation of transactions by participants engaging in evening operations.
  • 7:00 pm AEST (9:00pm AEDT) for foreign currency transactions by participants.

No transaction can be cancelled once it is at ‘payment pending’ status in Austraclear, which occurs following matching of instructions from both participants involved in the transaction or, in the case of foreign currency payments, once the transaction has passed cash record limit checks. In all cases, the above deadlines can be extended at the discretion of Austraclear, with extension of the last two deadlines requiring the Bank's approval due to the implications for RITS.

Footnote

The cash record starts at zero at the beginning of the day and records debit and credit cash movements through the day. A total debit limit may be set on the cash record by the participant. When a settlement instruction has been matched, the cash leg of each transaction is tested against the debit limit. If the debit limit is not exceeded, the transaction will be sent to RITS for settlement; otherwise, the transaction will remain in a pending state until sufficient funds are available (i.e. through another transaction that delivers cash or through the participant increasing the limit). [8]