Review of Settlement Practices for Australian Equities – May 2008 3. The Events of 29 and 30 January

On 29 January, settlement was not completed until after 4.30 pm, more than 4 hours later than usual. On the following day, settlement was again delayed, on this occasion until 2.30 pm. These delays occurred at a time of considerable volatility in the stock market and had a negative effect on investor sentiment. Settlement delays of this length are unusual, though not unprecedented. For instance, on 8 October 1999, settlement was not completed until T+4, due to an operational problem on the intended settlement day.^[7]

The settlement delays of late January resulted from the inability of a single participant (Tricom) to meet its payment obligations. The Bank's understanding of the broad sequence of events is summarised below.

At the start of the day on 29 January, Tricom had been projected to be a net-receiver of funds in the batch. New off-market settlement instructions were then submitted ahead of the 10.30 am cut-off, leaving Tricom with a net payment obligation. After this cut-off, the settlement algorithm in CHESS identified that Tricom did not have sufficient securities in place to meet all of its scheduled delivery obligations. As a result, ASX, as per standard process, rescheduled several off-market transactions within the batch to the next business day. Tricom was therefore no longer obliged to deliver the affected lines of stock, but since the funds due in respect of these deliveries would no longer be forthcoming, the size of its net funding requirement for the day increased further.

Given the scale of the new funding requirement, Tricom's settlement bank declined to provide the necessary funding for Tricom to meet its obligation. This required that the settlement batch be recalculated, in line with ASX's documented procedures. This was done by removing a number of off-market transactions from the batch under which Tricom was due to receive securities and pay cash. These transactions were then re-scheduled for settlement the next business day, leaving Tricom a small net receiver of funds.^[8] Settlement could then be completed. Similar issues arose on 30 January, although on that occasion Tricom's settlement bank ultimately agreed to fund the position.

Footnotes

There are also occasional instances of less severe settlement delay. In addition to the delays of 29 and 30 January, there have been seven days since the beginning of 2007 on which settlement has not been completed until after 12.45 pm. On each occasion settlement occurred by 2.00 pm. [7]

Should a participant be unable to settle its scheduled obligations in the batch (due to a shortfall of either securities or funds), ASTC settlement rules allow for the transactions of the affected participant to be backed out. These transactions are then rescheduled for settlement on the next settlement day. The precise nature of the back-out process depends upon whether or not the failing participant is in default. If the participant is in default, ACH, as part of it's default management strategy, may inject liquidity in respect of novated trades. The back-out algorithm seeks to remove as few settlements from the batch as possible, maximising settlement values and volumes, while minimising spillovers to other participants and minimising the potential injection of liquidity from ACH required in a default scenario. Non-novated trades are generally backed out first. [8]