Assessment of ASX Clearing and Settlement Facilities – September 2019 Appendix C1. Financial Stability Standards for Central Counterparties

Standard 11: Exchange-of-value settlements

If a central counterparty is involved in the settlement of transactions that comprise two linked obligations (for example, securities or foreign exchange transactions), it should eliminate principal risk by ensuring that the final settlement of one obligation is conditional upon the final settlement of the other.

11.1 A central counterparty should eliminate principal risk associated with the settlement of any obligations involving two linked obligations by ensuring that the payment system or securities settlement facility employed operates in such a way that the final settlement of one obligation occurs if and only if the final settlement of the linked obligation also occurs, regardless of whether the securities settlement facility settles on a gross or net basis and when finality occurs.

ASX Clear eliminates principal risk by ensuring that settlement of all securities transactions takes place in ASX Settlement using a DvP Model 3 settlement mechanism (see CCP Standard 11.2).

For ASX Clear (Futures), in those cases where settlement of derivatives contracts involves the transfer of a security or physical asset with a corresponding transfer of cash, the CCP's arrangements ensure that delivery occurs if and only if payment occurs. For 90-day bank bill futures, ASX Clear (Futures) utilises the standard DvP Model 1 settlement process in Austraclear; that is, sellers deliver and receive payment for their bills, and buyers pay for and take delivery of the bills as a single exchange of value (see Appendix C.2, SSF Standard 10). For grain contracts, delivery is via commodity warehouses, with ASX Clear (Futures) retaining title documentation until payment has been made.

11.2 A central counterparty should eliminate principal risk associated with the settlement of linked obligations by ensuring that it employs an appropriate delivery versus payment (DvP), delivery versus delivery (DvD) or payment versus payment (PvP) settlement mechanism.

ASX Clear employs the DvP Model 3 settlement mechanism in ASX Settlement to eliminate principal risk associated with its securities transactions. Under this arrangement, settlement of novated and non-novated transactions takes place in a daily batch process run in CHESS. All scheduled securities transfers are reduced to a single multilateral net transfer per line of stock for each participant. Payments associated with these transactions are similarly settled on a multilateral net basis in RITS, contemporaneously with the securities transfers (see Appendix C.2, SSF Standard 10.2 for a detailed description of ASX Settlement's settlement model).

The use of a DvP Model 3 settlement mechanism is acceptable for ASX Clear given the relatively low average value of securities transactions involved. In the assessment period, the average value of individual gross settlement instructions in ASX Settlement for novated transactions cleared by ASX Clear was around $2,950. This compares with an average of $40.3 million for an individual DvP settlement instruction for debt securities in Austraclear. The value of Australian Government securities cleared by ASX Clear and settled within the CHESS batch remains very low compared with values settled within Austraclear (see Appendix C.2, SSF Standard 10.2).

Settlement of ASX Clear (Futures) derivatives transactions that involve securities transfers occurs on a DvP Model 1 basis in Austraclear. This involves the simultaneous transfer of cash and securities obligations between the buyer and seller on a transaction-by-transaction basis through the settlement cycle.