Review of Settlement Practices for Australian Equities 5.2 Improving the functioning of the existing batch settlement model

While the recent settlement problems unsettled the equities market, existing settlement arrangements have generally served the Australian equities market well for more than a decade. Market participants value the efficiency inherent in the current batch process, not only in terms of its liquidity, but also in terms of its technical and operational functionality. Furthermore, the securities settlement system is well integrated with the central counterparty, which has strong risk management capabilities and extensive risk resources. Notwithstanding this, as illustrated by recent events, when settlement delays do occur, the consequences can be wide ranging.

The Bank has identified a number of refinements to the current system that are likely to improve its functioning and help to mitigate the impact of such events should they arise in the future. These include:

• the introduction of an explicit window for completion of settlement – perhaps 12.30 pm to 2.30 pm. This would inject a degree of certainty, while retaining valuable flexibility in the system to back-out trades in response to settlement failures;
• clarification of lines of communication and deadlines for decisions, including by settlement banks, so as to ensure that issues arising at the participant level are resolved expeditiously. One possibility here might be to apply a firm deadline by which settlement banks need to commit to meeting funding obligations arising in the batch settlement; and
• an amendment to the cut-off time for new settlement instructions. The current 10.30 am cut-off was introduced at a time when settlement banks faced a firm funding deadline of 11 am. This deadline no longer exists. Given the concentration in settlement-priming activity ahead of the cut-off, there may be a case for a later cut-off. This could ease some of the pressures, allowing more flexibility to deal with potential settlement fails.^[13]

The Reserve Bank recommends that ASX, together with market participants, give consideration to changes along these lines.

Footnote

Another potential change worth considering is the reopening of the system for a limited time for new instructions in the event that the batch is recalculated. This might allow other participants to take action to address swings in their net cash or securities positions as a result of the recalculation. [13]