2015/16 Assessment of ASX Clearing and Settlement Facilities A2.2 Austraclear Standard 8: Money settlements

A securities settlement facility should conduct its money settlements in central bank money where practical and available. If central bank money is not used, a securities settlement facility should minimise and strictly control the credit and liquidity risk arising from the use of commercial bank money.

Austraclear conducts its AUD money settlements across the ESAs of Participating Banks at the Bank, via RITS (SSF Standard 8.1). Participating Banks, which effect money settlements on their own behalf or on behalf of other participants, must be prudentially regulated and meet Austraclear's participation requirements (SSF Standard 8.3).

Austraclear offers a foreign currency settlement service, which currently supports the settlement of payments in Chinese RMB across the books of the Bank of China (Sydney branch) (SSF Standards 8.2, 8.3). Austraclear's Regulations and legal agreement with Bank of China state that payments through this service settle with finality in real time (SSF Standard 8.5).

Austraclear's money settlement arrangements are discussed in further detail under the following sub-standards.

8.1 A securities settlement facility should conduct its money settlements in central bank money, where practical and available, to avoid credit and liquidity risks.

Austraclear's AUD money settlements are all settled in central bank money. Payment obligations in Austraclear are settled on an RTGS basis across ESAs at the Bank, via RITS.

This includes money settlements initiated by ASX Collateral; while it is expected that most collateral substitutions will involve the exchange of one security for another on a DvD basis, cash may be used as a last resort to effect collateral substitution.

8.2 If central bank money is not used, a securities settlement facility should conduct its money settlements using a settlement asset with little or no credit or liquidity risk.

During the Assessment period, all AUD money settlements in Austraclear were effected using central bank money.

Austraclear offers a foreign currency settlement service, which currently supports the settlement of payments in RMB. Settlement of these payment transactions is effected in commercial bank money across the books of the Bank of China (Sydney branch). Austraclear requires that a foreign currency settlement bank be prudentially supervised (i.e. licensed as an ADI).

8.3 If a securities settlement facility settles in commercial bank money or its participants effect settlements using commercial settlement banks, it should monitor, manage and limit credit and liquidity risks arising from the commercial bank money settlement agents and commercial settlement banks. In particular, a securities settlement facility should establish and monitor adherence to strict criteria for commercial banks appropriate to their role in the settlement process, taking account of matters such as their regulation and supervision, creditworthiness, capitalisation, access to liquidity and operational reliability. A securities settlement facility should also monitor and manage the concentration of its and its participants' credit and liquidity exposures to commercial bank money settlement agents and settlement banks.

Settlement of AUD payments is in central bank funds. Since not all Austraclear participants are eligible to hold an ESA, Austraclear rules provide for those participants to nominate a Participating Bank (an ESA holder that agrees to act on behalf of a participant as settlement agent). A Participating Bank in Austraclear must be approved by APRA as an ADI for the purpose of carrying out banking business within Australia, and be a member of RITS with an ESA. Participating Banks must also satisfy Austraclear's general participation requirements, which cover matters such as operational capacity, financial standing, and business continuity arrangements (see SSF Standard 15).

Austraclear is not a party to arrangements between settlement participants and Participating Banks (which may also be Austraclear participants) and is not directly exposed to credit or liquidity risk. Under Austraclear Regulations, Participating Banks must meet the AUD money settlement obligations of any participant that they represent in central bank money. Participating Banks do not receive title to any securities due from settlement. Title is delivered to the participant upon settlement in central bank money. Credit exposures, if any, between participants and Participating Banks are managed bilaterally on the same basis as any transactional banking arrangement.

Austraclear is similarly not directly exposed to credit or liquidity risks from Bank of China in respect of its settlement service for RMB payments. To act as a foreign currency settlement bank, a bank must be an ADI subject to regulation by APRA. In considering a bank's application to be a foreign currency settlement bank, Austraclear considers factors such as the bank's prudential regulation, operational reliability and capacity, business continuity management and business integrity and operations. Business continuity requirements are set out in the Austraclear Regulations. In November 2014, Bank of China was appointed the official RMB clearing bank for Australia by the People's Bank of China (PBC), affording it more direct access to RMB liquidity from the PBC.

8.4 If a securities settlement facility conducts money settlements on its own books, it should minimise and strictly control its credit and liquidity risks.

Austraclear does not conduct money settlements on its own books.

8.5 A securities settlement facility's legal agreements with any commercial bank money settlement agents should state clearly when transfers on the books of the relevant commercial bank are expected to occur, that transfers are to be final when effected, and that funds received should be transferable as soon as possible, at a minimum by the end of the day and ideally intraday, in order to enable the securities settlement facility and its participants to manage credit and liquidity risks.

Austraclear does not use commercial bank money settlement agents for its AUD money settlement activities. Participants' arrangements with Participating Banks to access central bank money settlement are conducted under legal agreements between the parties involved; Austraclear is not a party to these agreements.

Austraclear's legal agreement with Bank of China acknowledges that the record of RMB transfers in Austraclear provides participants with a claim on Bank of China, notwithstanding that participants' accounts at Bank of China are updated only at the end of day. The transfer of these claims are final once participants' RMB cash records in Austraclear have been updated.