2015/16 Assessment of ASX Clearing and Settlement Facilities A2.2 Austraclear Standard 11: Participant default rules and procedures

A securities settlement facility should have effective and clearly defined rules and procedures to manage a participant default. These rules and procedures should be designed to ensure that the securities settlement facility can take timely action to contain losses and liquidity pressures and continue to meet its obligations.

Austraclear has powers under its Regulations and Procedures to manage a participant default, and has documented procedures setting out how to manage a default, including in respect of special purpose participants that are collateral managers. Powers available to Austraclear include powers to suspend or terminate the participant status of a defaulted participant (SSF Standards 11.1, 11.2). Participants are also required to report events of insolvency or expected insolvency to the SSF. Austraclear sets out its default management powers in its Regulations and Procedures (SSF Standard 11.3). Since Austraclear is not exposed to financial loss in the event of a participant default, its handling of a default situation is largely procedural in nature (SSF Standard 11.4). Austraclear's default management arrangements are designed for the particular characteristics of its activities, and take into account potential impacts on relevant markets (SSF Standard 11.5).

Austraclear's default management arrangements are described in further detail in Section 4 and under the following sub-standards.

11.1 A securities settlement facility should have default rules and procedures that enable the securities settlement facility to continue to meet its obligations in the event of a participant default and that address the replenishment of resources following a default. A securities settlement facility should ensure that financial and other obligations created for non-defaulting participants in the event of a participant default are proportional to the scale and nature of individual participants' activities.

The default of a participant in Austraclear does not require the SSF to meet obligations on its behalf; nor does it create additional obligations for non-defaulting participants (a participant may be impacted by the default of another participant if it has outstanding unsettled bilateral transactions with the defaulted participant, but these exposures would not be generated within Austraclear). Steps taken by Austraclear to manage a participant default are therefore largely procedural in nature.

Participant defaults are dealt with under Austraclear Regulations 3.9 to 3.14 and under the ASX Enforcement and Appeals Rulebook. Under the Regulations, Austraclear may suspend or terminate a participant or Participating Bank that has become subject to an ‘insolvency event’ – which includes the entry or likely entry into insolvency or external administration – or otherwise fails to comply with the Regulations.

The Regulations form part of ASX's SSF DMF, a collection of internal and public documents that set out the guiding policies and procedures for managing a settlement participant default. The DMF includes an SSF Default Management Policy and associated Standards, which are applicable to both Austraclear and ASX Settlement. Austraclear also maintains an internal checklist setting out actions to be taken by relevant business units within ASX in managing a participant default. The default of an Austraclear participant would be managed by the PIRC. The PIRC is chaired by the GE, Operations, and is made up of senior staff from the operational, risk management, compliance and legal units.

In the event that a default involved a user of ASX Collateral, the intent of default rules and procedures would be to preserve contractual default arrangements set out in Principal Agreements that govern the terms of the collateralised trade. These arrangements entitle the collateral receiver to treat collateral held as owned on an outright basis, and include clauses permitting either counterparty to terminate a future obligation to return collateral or cash where the other counterparty has suffered an event of default.

Upon notification of a default under a Principal Agreement, ASX Collateral would act as the collateral receiver's agent and, upon instructions from the collateral receiver, instruct Austraclear to transfer collateral held from the receiver's Collateral Account to its Source Account or Austraclear trading account.

Nothing in the arrangements requires ASX Collateral to enquire into the validity of any matters in connection with Principal Agreements, including in relation to actions taken in a default event. Any dispute over actions taken would be a matter for parties to the Principal Agreement. ASX Collateral is not a party to the Principal Agreement and its role as agent is strictly limited. Equally, Austraclear is not party to the Principal Agreement; Austraclear's role in the process would be to act on the instructions of ASX Collateral. Furthermore, the Austraclear Regulations provide an indemnity to Austraclear against any loss or claim arising from its actions in accordance with instructions from ASX Collateral.

11.2 A securities settlement facility should be well prepared to implement its default rules and procedures, including any appropriate discretionary procedures provided for in its rules. This requires that the securities settlement facility should:

1. require its participants to inform it immediately if they:
   1. become subject to, or aware of the likelihood of external administration, or have reasonable grounds for suspecting that they will become subject to external administration; or
   2. have breached, or are likely to breach, a risk control requirement of the securities settlement facility; and
2. allow for the cancellation or suspension of a participant or commercial settlement bank from the securities settlement facility:
   1. if the participant or commercial settlement bank is in external administration; or
   2. if there is a reasonable suspicion that the participant or commercial settlement bank may become subject to external administration; and
3. allow participant users of a commercial settlement bank which becomes subject to external administration, or which is reasonably likely to become subject to external administration, to quickly nominate a new commercial settlement bank.

Austraclear's Regulations and Procedures provide for the termination or suspension of a participant or Participating Bank that becomes subject to external administration, or where there is a reasonable suspicion that this may occur. A participant or a Participating Bank is also required to notify Austraclear if it becomes subject to external administration or where it reasonably suspects that this may occur. Similar powers and requirements apply to Foreign Currency Settlement Banks.

There is no restriction within the Austraclear Regulations and Procedures on a participant changing its Participating Bank, including in the case where that Participating Bank is insolvent.

11.3 A securities settlement facility should publicly disclose key aspects of its default rules and procedures. Where a securities settlement facility settles via a multilateral net batch, arrangements for dealing with any unsettled trades of a defaulting participant that are not guaranteed by a central counterparty, such as reconstituting the multilateral net batch excluding the settlement obligations of the defaulting participant, should be clear to all its participants and should be capable of being executed in a timely manner.

Austraclear's Regulations and Procedures are published on the ASX public website. These include a requirement for a participant to give notice of insolvency or the reasonable possibility of insolvency and the right of Austraclear to suspend or terminate participant status in a default event. Austraclear also intends to publish a Guidance Note on the suspension and termination of Austraclear participants in the coming Assessment period.

11.4 A securities settlement facility should involve its participants and other stakeholders in the testing and review of the securities settlement facility's default procedures. Such testing and review should be conducted at least annually and following material changes to the rules and procedures to ensure that they are practical and effective.

ASX conducts regular in-house default management ‘fire drills’ to test default procedures as they would apply to participants across one or more of the ASX CS facilities. These fire drills focus on the more complex scenario of a clearing participant default, and only relate to Austraclear in that they involve the declaration of default if the clearing participant also participates in Austraclear. Other procedural steps related to a default of an Austraclear participant are not covered, but these are carried out in practice from time to time to a greater degree than for the other ASX facilities that have a narrower participation base (see below). Since neither Austraclear nor its participants are exposed to financial obligations created by the default of a participant in respect of Austraclear transactions, the management of a settlement-only participant default situation is generally procedural in nature. Austraclear has periodically needed to employ its default management procedures, including to respond to the appointment of external administrators to a number of participants during the Assessment period. Since the participant provided agency settlement services for other Austraclear participants, Austraclear's management of the default included facilitating a transition to alternative arrangements for participants reliant on these agency services for settlement.

11.5 A securities settlement facility should demonstrate that its default management procedures take appropriate account of interests in relevant jurisdictions and, in particular, any implications for pricing, liquidity and stability in relevant financial markets.

The vast majority of settlements in Austraclear are AUD-denominated (including Euro entitlements) and Austraclear's operations are conducted domestically. Austraclear also offers a foreign currency settlement service, currently covering payments denominated in RMB, although the value of payments settled using this service is currently very low. Key participants generally have a significant domestic presence and Participating Banks must be domestically licensed ADIs with an ESA at the Bank. As Austraclear's default management procedures do not place financial obligations on participants, there would be expected to be minimal potential impacts on market pricing, liquidity and stability stemming from execution of these procedures.