Financial Stability Standards for Securities Settlement Facilities – June 2024 Glossary
Unless the contrary intention appears, the terms in the guidance to the Financial Stability Standards for Securities Settlement Facilities (SSF Standards) have the meanings provided for in this Glossary. Wordings or terms used in this Glossary importing the singular shall include the plural and vice versa where the context requires.
Note: This Glossary is based largely on the glossary to the Principles, and the CPSS Glossary of Terms Used in Payments and Settlement Systems, added to and amended by the Reserve Bank as appropriate.[48]
| Term | Definition |
|---|---|
| affiliate | This term means ‘associated entity’ as defined in section 50AAA of the Corporations Act 2001. |
| backtesting | A comparison of previously observed outcomes with expected outcomes derived from the use of margin models. |
| batch settlement | The settlement of groups of payments, transfer instructions or other obligations together at one or more discrete, often pre-specified times during the processing day. |
| beneficial owner | A person or entity that is entitled to receive some or all of the rights deriving from ownership of a security or financial instrument (for example, income, voting rights and power to transfer). In some cases the beneficial owner of a security or financial instrument may not be the legal owner of the security or instrument. |
| book entry | The transfer of securities and other financial assets which does not involve the physical movement of paper documents or certificates (for example, the electronic transfer of securities). |
| business continuity | A state of uninterrupted business operations. This term also refers to all of the organisational, technical and staffing measures used to ensure the continuation of operations following a disruption to a service, including in the event of a wide-scale or major disruption. |
| central bank money | A liability of a central bank, in this case in the form of deposits held at the central bank, which can be used for settlement purposes. |
| central counterparty | An entity that interposes itself between counterparties to contracts traded in one or more financial markets, becoming the buyer to every seller and the seller to every buyer, and thereby ensuring the performance of open contracts. |
| central securities depository | An entity that provides securities accounts, central safekeeping services and asset services, which may include the administration of corporate actions and redemptions, and plays an important role in helping to ensure the integrity of securities issues (that is, ensure that securities are not accidentally or fraudulently created or destroyed or their details changed). |
| choice of law | A contractual provision by which parties choose the law that will govern their contract or relationship. Choice of law may also refer to the question of what law should govern in the case of a conflict of laws. |
| clearing | The process of transmitting, reconciling and, in some cases, confirming transactions prior to settlement, potentially including the netting of transactions and the establishment of final positions for settlement. For the clearing of futures and options, this term also refers to the daily balancing of profits and losses and the daily calculation of collateral requirements. |
| collateral | An asset or third-party commitment that is used by a collateral provider to secure an obligation vis-à-vis a collateral taker. |
| commercial bank money | A liability of a commercial bank, in the form of deposits held at the commercial bank, which can be used for settlement purposes. |
| conflict of laws | An inconsistency or difference in the laws of jurisdictions that have a potential interest in a transaction. |
| counterparty | A party to a trade. |
| credit risk | The risk that a counterparty, whether a participant or other entity, will be unable to meet fully its financial obligations when due, or at any time in the future. |
| critical service provider | A related entity or third party that provides services to a securities settlement facility that are integral to the safe and effective provision of its core services as a securities settlement facility. |
| current exposure | The loss that a securities settlement facility (or in some cases, its participants) would face immediately if a participant were to default. Current exposure is technically defined as the larger of zero or the market value (or replacement cost) of a transaction or portfolio of transactions within a netting set with a counterparty that would be lost upon the default of the counterparty. |
| custody risk | The risk of loss on assets held in custody in the event of a custodian's (or sub-custodian's) insolvency, negligence, fraud, poor administration or inadequate recordkeeping. |
| default | An event stipulated in an agreement as constituting a breach or default. Generally, such events relate to a failure to complete a transfer of funds or securities in accordance with the terms and rules of the system in question. |
| deferred net settlement (DNS) | A net settlement mechanism that settles on a net basis at the end of a predefined settlement cycle. |
| delivery versus delivery (DvD) | A securities settlement mechanism that links two securities transfers in such a way as to ensure that delivery of one security occurs if and only if the corresponding delivery of the other security occurs. |
| delivery versus payment (DvP) | A securities settlement mechanism that links a securities transfer and a funds transfer in such a way as to ensure that delivery occurs if and only if the corresponding payment occurs. |
| dematerialisation | The elimination of physical certificates or documents of title that represent ownership of securities so that securities exist only as accounting records. |
| Exchange Settlement Account | An account held at the Reserve Bank which is used for the final settlement of obligations between Exchange Settlement Account holders. |
| external administration | This term has the meaning given by section 5 of the Payment Systems and Netting Act 1998. |
| failover | The process of switching over to a standby system in the event of an operational disruption. |
| final settlement | The irrevocable and unconditional transfer of an asset or financial instrument, or the discharge of an obligation by the securities settlement facility or its participants in accordance with the terms of the underlying contract. Final settlement is a legally defined moment. |
| financial market infrastructure (FMI) | A multilateral system among participating institutions, including the operator of the system, used for the purposes of clearing, settling or recording payments, securities, derivatives or other financial transactions. Examples of FMIs include central counterparties, securities settlement facilities, securities settlement systems, central securities depositories, payment systems and trade repositories. |
| general business risk | Any potential impairment of a securities settlement facility's financial position (as a business concern) as a consequence of a decline in its revenues or an increase in its expenses, such that expenses exceed revenues and result in a loss that must be charged against capital. |
| governance | The set of relationships between a securities settlement facility's owners, board of directors (or equivalent), management and other relevant parties, including participants, authorities and other stakeholders (such as participants' customers, other interdependent FMIs and the broader market). |
| haircut | A risk control measure applied to underlying assets whereby the value of those underlying assets is calculated as the market value of the assets reduced by a certain percentage (the ‘haircut’). Haircuts are applied by a collateral taker in order to protect itself from losses resulting from declines in the market value of a security in the event that it needs to liquidate that collateral. |
| immobilisation | The act of concentrating the location of securities in a depository and transferring ownership by book entry. |
| investment risk | The risk of loss faced by a securities settlement facility when it invests its own or its participants' resources, such as collateral. |
| investor central securities depository | A term used in the context of central securities depository links. An investor central securities depository – or a third party acting on behalf of the investor central securities depository – opens an account in another central securities depository (the issuer central securities depository) so as to enable the cross-system settlement of securities transactions. |
| issuer central securities depository | A central securities depository in which securities are issued (or immobilised). The issuer central securities depository opens accounts allowing investors (in a direct holding system) and intermediaries (including investor central securities depositories) to hold these securities. |
| large-value payment system | A funds transfer system that typically handles large-value and high-priority payments. |
| legal risk | The risk of the unexpected application of a law or regulation, usually resulting in a loss. |
| linked FMI | An FMI that is connected with one or more other FMIs, either directly or through an intermediary, according to a set of contractual and operational arrangements between the FMIs involved in the link. |
| liquidity risk | The risk that a counterparty, whether a participant or other entity, will have insufficient funds to meet its financial obligations as and when expected, although it may be able to do so in the future. |
| mark to market | The practice of revaluing securities and financial instruments using current market prices. |
| money settlement agent | The entity whose assets are used to settle the ultimate payment obligations arising from securities transfers within a securities settlement facility, or other clearing and settlement activities. Accounts with the money settlement agent are held by settlement banks, which may act on their own behalf and/or offer payment services to participants that do not have accounts with the money settlement agent. |
| money settlement asset | An asset which carries little or no credit or liquidity risk and is used to settle payment obligations arising from trades in financial products. |
| multilateral net batch | The settlement of groups of payments, transfer instructions or other obligations together at a discrete, often pre-specified time, where these obligations have been offset among multiple participants. |
| netting | The offsetting of obligations between or among participants in the netting arrangement, thereby reducing the number and value of payments or deliveries needed to settle a set of transactions. |
| operational risk | The risk that deficiencies in information systems or internal processes, human errors, management failures or disruptions from external events will result in the reduction, deterioration or breakdown of services provided by a securities settlement facility. |
| payment system | A set of instruments, procedures and rules for the transfer of funds between or among participants; the system includes the participants and the entity operating the arrangement. |
| payment versus payment (PvP) | A settlement mechanism that ensures that the final transfer of a payment in one currency occurs if and only if the final transfer of a payment in another currency or currencies takes place. |
| physical delivery | The delivery of an asset, such as an instrument or commodity, in physical form. |
| potential future exposure | Any potential credit exposure that a securities settlement facility could face at a future point in time. Potential future exposure is technically defined as the maximum exposure estimated to occur at a future point in time at a high level of statistical confidence. Potential future exposure arises from potential fluctuations in the market value of a participant's open positions between the time they are incurred or reset to the current market price, and the time they are liquidated or effectively hedged. |
| prefunded default arrangements | Financial resources of a securities settlement facility that are contributed to the securities settlement facility on an ongoing basis prior to, and available in the event of, a participant default. Examples include assets contributed by participants for the purpose of covering losses or liquidity pressures resulting from participant defaults, and capital of the securities settlement facility. |
| principal risk | The risk that a counterparty will lose the full value involved in a transaction, for example, the risk that a seller of a financial asset will irrevocably deliver the asset, but not receive payment. |
| procyclicality | Changes in risk management requirements or practices that are positively correlated with business or credit cycle fluctuations and that may cause or exacerbate financial instability. |
| real-time gross settlement (RTGS) | The real-time settlement of payments, transfer instructions or other obligations individually on a transaction-by-transaction basis. |
| reconciliation | A procedure to verify that two sets of records issued by two different entities match. |
| related body | A ‘related body corporate’ as defined in section 9 of the Corporations Act 2001. |
| replacement cost | The unrealised gain on the unsettled contract or the cost of replacing the original contract at market prices that may be changing rapidly during periods of stress. |
| repurchase agreement (repo) | A contract to sell and subsequently repurchase securities at a specified date and price. |
| securities | Any financial product (within the meaning given in the Corporations Act 2001) of a kind in relation to which obligations are prescribed under the Corporations Regulations 2001 for the purposes of section 768A(1)(b) of the Corporations Act. |
| securities registrar | An entity that provides the service of preparing and recording accurate, current and complete securities registers for securities issuers. |
| securities settlement facility | A clearing and settlement facility that enables its participants to transfer title to or other interests in securities, typically in return for payment. A securities settlement facility may also operate a central securities depository. |
| segregation | A method of protecting customer collateral and contractual positions by holding or accounting for them separately from those of the direct participant (such as a carrying firm or broker). |
| settlement bank | The entity that maintains accounts with the money settlement agent in order to settle payment obligations arising from securities transfers, both on its own behalf and for other market participants. |
| settlement risk | The general term used to designate the risk that settlement in a funds or securities transfer system will not take place as expected. This risk may comprise both credit and liquidity risk. |
| specific wrong- way risk |
The risk that an exposure to a counterparty is highly likely to increase when the creditworthiness of that counterparty is deteriorating. |
| stress testing | The estimation of credit and liquidity exposures that would result from the realisation of extreme price changes. |
| systemic risk | The risk that the inability of one or more participants to perform as expected will cause other participants to be unable to meet their obligations when due. |
| systemically important | A securities settlement facility is systemically important if its distress or disorderly failure, because of its size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity. In assessing the systemic importance of a securities settlement facility in Australia, the Reserve Bank will take into account relevant factors including: the size of the securities settlement facility in Australia; the availability of substitutes for the securities settlement facility's services in Australia; the nature and complexity of the products settled by the securities settlement facility; and the degree of interconnectedness with other parts of the Australian financial system. |
| unwinding | The process used to recalculate obligations in some net settlement systems where transfers between the accounts of participants are provisional until all of them have finally discharged their settlement obligations. If a particular participant fails to settle, some or all of the provisional transfers involving that participant are deleted from the system and the settlement obligations of the remaining participants are recalculated. |
| value date | The day on which the payment, transfer instruction or other obligation is due and the associated funds and securities are typically available to the receiving participant. |
| zero-hour rule | A provision in the insolvency law of some countries whereby the transactions conducted by an insolvent institution after midnight on the date the institution is declared insolvent are automatically ineffective or revocable by operation of law. |
Footnote
A Glossary of Terms Used in Payments and Settlement Systems is available at <http://www.bis.org/publ/cpss00b.pdf>. [48]