Assessment of ASX Clearing and Settlement Facilities – September 2019 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 AUD payment obligations are settled via Austraclear; NZD payment obligations are settled via Payments NZ's High Value Clearing System. For ASX Clear, payment obligations other than those linked to settlement of securities transfers (e.g. margin payments) are settled via Austraclear. The respective interbank obligations arising from Austraclear and NZClear are settled on an RTGS basis across ESAs at the Bank, via RITS, and the RBNZ, via ESAS. The point at which settlements in Austraclear, RITS and ESAS are final is set out in the Austraclear and RITS Regulations, and the ESAS Terms and Conditions (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 payment 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 the Bank, Austraclear and RBNZ for settling AUD- and NZD-denominated collateral, respectively. The finality of settlements in these systems is defined in the Austraclear Regulations and ESAS Terms and Conditions, respectively. Collateral denominated in other currencies is settled indirectly via relationships with Clearstream and 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.

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 a 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 are settled in real-time and are final when they are credited or debited to ASXCC's ESAS account at RBNZ. ASX Clear (Futures) also accepts collateral in currencies that are not AUD or NZD. Transactions in these currencies are settled through ASXCC's accounts with Clearstream and commercial banks.

Cash obligations in other currencies are settled via arrangements with commercial banks. Settlement of these obligations is considered final once the payment is cleared in ASX's account with the commercial bank.

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 by 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).^[30]

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. Securities are lodged as collateral by way of transfer of ownership in ASX Clear (Futures). When securities are lodged as collateral at ASX Clear, ownership is retained in the name of the registered holder but subject to a security interest in favour of ASX Clear. The PSNA provides certain legal protections to the enforcement of security interests held by ASX Clear in accordance with its Operating Rules 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).

Extensions to cut-off times are permitted for participants with operating problems to complete processing. Any extension requires a participant to contact ASX prior to cut-off in order to request an extension. Participants of ASX Clear (Futures) receive periodic reminders of the process to request an extension from ASX Post-Trade Operations. The process governing the approval and duration of a request for an extension to ASX Clear operating hours is not set out in the ASX Clear Operating Rules or Procedures since any extension would only occur in extreme circumstances. ASX plans to amend the ASX Clear and ASX Clear (Futures) Operating Rules to clarify that changes to standard operating hours occur only on an exceptional basis and must be justified by the circumstances of any individual case.

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. [30]