Assessment of ASX Clearing and Settlement Facilities Appendix C1. Financial Stability Standards for Central Counterparties

Standard 8: Settlement finality

A central counterparty should ensure clear and certain final settlement, at a minimum by the end of the value date. Where necessary or preferable, a central counterparty should facilitate final settlement intraday or in real time.

8.1 A central counterparty's rules and procedures should clearly define the point at which settlement is final.

The settlement of obligations arising in ASX Clear and ASX Clear (Futures) is governed by the CCPs' Operating Rules and Procedures, and those of ASX (for ASX Clear) and ASX 24 (for ASX Clear (Futures)).

For ASX Clear (Futures), all payment obligations are settled in Austraclear. For ASX Clear, payment obligations other than those linked to settlement of securities transfers (e.g. margin payments) are settled in Austraclear. The interbank obligations arising in Austraclear are settled on a real-time gross settlement (RTGS) basis across ESAs at the Bank, via RITS. The point at which settlements in Austraclear and RITS are final is set out in the Austraclear and RITS Regulations, respectively (see Appendix C.2, SSF Standard 7.1).

Securities settlements arising from cash equity trades novated by ASX Clear are required to be settled in ASX Settlement. Settlement occurs on a DvP Model 3 basis, whereby cash payments and securities transfers are settled simultaneously in a single daily multilateral net batch (see CCP Standard 11). Within this batch, ASX Settlement nets both transactions novated by ASX Clear and non-novated transactions. The securities leg of equities trades takes place in ASX Settlement and the linked interbank cash obligations settles via RITS on a multilateral net basis. The lodgement of non-cash collateral also occurs in ASX Settlement. The point at which these securities settlements are final is set out in the ASX Settlement Operating Rules and Procedures. The point of settlement of the interbank payments obligations is set out in the RITS Regulations (see Appendix C.2, SSF Standard 7.1).

The settlement of derivatives contracts cleared by ASX Clear (Futures) in some cases involves the transfer of a security or physical asset, with a corresponding transfer of cash. For each type of security or asset, ASX Clear (Futures)' arrangements ensure that delivery occurs if, and only if, payment occurs. For 90-day bank bill futures, ASX Clear (Futures) requires that the standard DvP Model 1 settlement process in Austraclear is utilised (see Appendix C.2, SSF Standard 10.2). For grain contracts, delivery is via commodity warehouses, with ASX Clear (Futures) retaining title documentation until payment has been made (see CCP Standard 10.2).

ASX Clear (Futures) also accepts as collateral for initial margin certain highly liquid debt securities, such as Australian Government securities, and cash collateral in NZD and a small number of other foreign currencies. ASX Clear (Futures) has accounts at Austraclear and NZClear, an SSF owned and operated by the RBNZ, for settling AUD- and NZD-denominated collateral, respectively. The finality of settlements in these systems is defined in the Austraclear regulations and NZClear rules, respectively. Collateral denominated in other currencies is settled indirectly via relationships with commercial banks.

8.2 A central counterparty should ensure final settlement no later than the end of the value date, and preferably intraday or in real time, to reduce settlement risk.

Settlement of almost all obligations to or from the ASX CCPs are final intraday on the day that the obligations fall due. The exception is settlements that are denominated in a currency other than AUD or NZD; these obligations are settled via arrangements with commercial banks.

Cash settlements

In Austraclear, payments are settled in real-time and are final when they are credited or debited to ASXCC's ESA (see Appendix C.2, SSF Standard 7). The legal certainty of the finality of transactions settled in Austraclear and RITS is supported by each of these facilities being approved as an RTGS system under Part 2 of the PSNA. With this approval, a transaction settled in Austraclear or RITS at any time on the day on which a participant enters external administration has the same standing as if the participant had gone into external administration on the next day (in the case of a winding up) or as if the participant had not gone into external administration (in the case of other forms of external administration). Accordingly, in the event of insolvency all transactions settled on the day of the insolvency are irrevocable and cannot be unwound simply because of the event of external administration (i.e. they are protected from the ‘zero-hour’ rule).

NZD payments in NZClear are settled in real-time and are final when they are credited or debited to the account of ASXCC's settlement bank in the Exchange Settlement Account System (ESAS). The NZClear settlement system has been declared a ‘designated settlement system’ for the purposes of Part 5C of the Reserve Bank of New Zealand Act 1989 (NZ), which gives legislative backing to the finality of settlements effected in accordance with the rules of the system. ASX Clear (Futures) also accepts collateral in currencies that are not AUD or NZD. Transactions in these currencies are settled via arrangements with commercial banks.

Cash obligations in other currencies are settled via arrangements with commercial banks.

Securities settlement

The settlement of equities trades novated by ASX Clear occurs in ASX Settlement. This involves the use of a DvP Model 3 mechanism and settlement in a multilateral net batch, with the interbank cash leg settling across ESAs in RITS (see Appendix C.2, SSF Standard 10). Settlement is usually completed with finality by around 12.30 pm. Failed settlements are removed from the multilateral net batch via the CHESS back-out algorithm (for a securities shortfall), and rescheduled for settlement on the next day as long as the participant is not in default (see Appendix C.2, SSF Standard 11). In the case of a failed settlement caused by a funds shortfall for a cleared trade, ASX Clear will inject funds into the settlement batch or enter into an OTA with sellers of affected securities to facilitate timely settlement (see CCP Standard 7.3).

The only contract which requires the delivery of securities in ASX Clear (Futures) is the 90-day bank accepted bill future. Trading in this contract ceases on noon of the last trading day, with settlement occurring 3.00 pm on the day after the last trading day (the value date for this contract). Settlement occurs on a DvP Model 1 basis with the securities-leg settled in Austraclear and the interbank cash leg in RITS (see CCP Standard 11.1).^[37]

The multilateral netting of securities and payments obligations in ASX Settlement is supported by ASX Settlement's approval under Part 3 of the PSNA as an approved netting arrangement. This approval ensures that netting in accordance with ASX Settlement's Rules and Procedures is legally certain, even in the event that a participant had gone into external administration on the next day (in the case of a winding up) or as if the participant had not gone into external administration (in the case of other forms of external administration). Any interbank transactions arising from these settlements are settled in real time in RITS, across ESAs held with the Bank. Finality of funds transfers in RITS is supported by the approval of RITS under Part 2 of the PSNA.

ASX Clear (Futures) and ASX Clear accept AUD-denominated securities as collateral via Austraclear and ASX Settlement, respectively. When securities are lodged as collateral, the CCPs are given a security interest in them. The PSNA provides certain legal protections to the enforcement of security interests held by the CCP in the event of a participant default (see also CCP Standard 1.5).

Physical delivery

With regard to contracts which require physical delivery, ASX Clear (Futures)' arrangements for delivery are described under CCP Standard 10. The details of final settlement of deliverable contracts vary according to the contract specifications. ASX Clear (Futures) monitors and enforces compliance with delivery procedures. To mitigate its own settlement risk, ASX Clear (Futures) also has procedures in place to ensure that margin of matched participants is not released until ASX can confirm that both participants have fulfilled their obligations.

8.3 A central counterparty should clearly define the point after which unsettled payments, transfer instructions or other obligations may not be revoked by a participant.

The ASX Clear Operating Rules and Procedures define the point after which payment or transfer instructions may not be revoked. For derivatives and OTC equity transactions, this occurs once the instruction has been submitted to ASX Clear. In the case of cash equity trades, participants are able to request that a trade be removed from novation prior to the calculation of participants' net settlement obligations at the end of the transaction date.

Participants are not able to revoke a payment or transfer instruction once it has been submitted to ASX Clear (Futures).

Footnote

The seller is required to enter the 90-day bank bill into Austraclear by 10.00 am. This must be matched by the buyer by 11.00 am and settled by 3.00 pm. [37]