Assessment of ASX Clearing and Settlement Facilities – September 2019 Appendix C2. Financial Stability Standards for Securities Settlement Facilities

Standard 7: Settlement finality

A securities settlement facility should provide clear and certain final settlement, at a minimum by the end of the value date. Where necessary or preferable, a securities settlement facility should provide final settlement intraday or in real time.

7.1 A securities settlement facility's rules and procedures should clearly define the point at which settlement is final.

The point at which settlement is final in ASX Settlement is set out in its Operating Rules and Procedures. Settlement in ASX Settlement occurs on a DvP Model 3 basis, whereby cash payments and securities transfers are settled simultaneously in a single daily multilateral net batch. 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. Settlement of securities transfers is final once ASX Settlement has recorded the transfers of securities in the settlement accounts of participants. The point of settlement of the interbank payment obligations is set out in the RITS Regulations. Under these regulations, the settlement of a payment in RITS is final and irrevocable when the Exchange Settlement Accounts (ESAs) of the paying and receiving RITS members are simultaneously debited and credited.

Participants are also able to initiate free-of-payment transfers of securities, as well as lodge equity collateral, in ASX Settlement. The point at which these transfers and lodgements are final is also set out in the ASX Settlement Operating Rules and Procedures.

The point at which settlement in Austraclear is final is defined in its Regulations. In the case of transactions involving the transfer of a security, settlement is final when Austraclear has made the appropriate amendments to the security records of the participants involved in the transaction. In the case of transactions involving an AUD cash payment, the interbank cash element of the transaction is settled and may not be unwound when a message is received from RITS that the cash transfer has been effected. The point of settlement of the interbank payments obligations in RITS is set out in its Regulations. Upon receipt of the RITS confirmation, Austraclear will update the cash record of the participant. The cash record is a record of the day's flow of debits and credits against each participant's nominated account that allows participants to limit the amount of their funds made available for settlement of transactions.^[13]

For foreign currency cash payments in Austraclear (currently for the settlement of Renminbi or USD payments), the transaction is settled and may not be unwound once Austraclear has received settlement instructions from the paying participant that satisfy cash record limit checks with its participating bank. Participants receive a claim on the foreign currency settlement bank upon updating of their cash record in that currency (see SSF Standard 8.5).

Settlement finality in Austraclear and RITS, as well as the legal certainty of netting in ASX Settlement is supported by certain statutory protections in the PSNA (see SSF Standard 1.5).

7.2 The securities settlement facility should complete final settlement no later than the end of the value date, and preferably intraday or in real time, to reduce settlement risk. A securities settlement facility should consider adopting real-time gross settlement (RTGS) or multiple batch processing during the settlement day.

ASX Settlement uses a DvP Model 3 mechanism with settlement in a multilateral net batch.^[14] Participants are encouraged to submit transactions promptly and are required to have securities in their settlement account by 11.30 am on the day of settlement sufficient to meet their obligations in the batch. Due to the netting efficiencies inherent in settling on a DvP Model 3 basis via a single batch, ASX Settlement currently has no plans to increase the frequency of batch settlement beyond once per day.

Once participants' net delivery obligations have been determined, ASX Settlement confirms that sufficient securities are available in each participant's settlement account in CHESS. If there is a securities shortfall, ASX removes transactions from the multilateral net batch via the CHESS back-out algorithm and reschedules the transactions for settlement on the next day as long as the participant is not in default (see SSF Standard 11). The transfer of securities designated for settlement by participants within the system is then restricted until the settlement process has been completed. Net cash payment obligations are forwarded for settlement in RITS across payment providers' ESAs. Immediately after cash settlement has been confirmed, ASX Settlement effects the net transfer of securities within CHESS. Settlement is usually completed by around 12.30 pm and participants are notified of the settlement (in part or in full) of each batch instruction and the net movement of securities and cash. In the case of a failed settlement caused by a funds shortfall, ASX Clear will inject funds into the settlement batch or enter into an OTA with sellers of affected securities to facilitate timely settlement of novated obligations (see Appendix C.1, CCP Standard 7.3).

Settlement of securities transactions in Austraclear occurs on a DvP (or equivalent simultaneous exchange of assets) Model 1 basis. This involves the simultaneous exchange of assets (cash and securities) between the buyer and seller on an item-by-item basis in real time (see SSF Standard 10). Austraclear additionally provides for one-way cash transfers between participants and securities transfers that are free of payment; these transfers are also settled on an item-by-item basis. Participants are encouraged to undertake deal entry as soon as possible and settlements occur in real time, although transactions may be held pending during the settlement day (the value date) due to insufficient funds or securities. However, all settlements must occur by the end of the settlement day. Any instructions not settled at the end of the day are automatically moved to a ‘failed’ status and removed from Austraclear. To the extent that participants to a ‘failed’ transaction intend to complete settlement, these transactions must be resubmitted to Austraclear. ‘Failed’ transactions are not automatically restored on the following day. Participants are able to view the settlement of transactions on a real-time basis via the Austraclear graphical user interface. Austraclear's Regulations establish the basis for settlement of transactions entered into the system.

7.3 A securities settlement facility should clearly define the point after which unsettled payments, transfer instructions or other obligations may not be revoked by a participant.

ASX Settlement's participants have until settlement cut-off (typically 11.30 am) on the day of settlement to remove payment or transfer instructions from the settlement batch. Extensions are permitted at the discretion of ASX Settlement for participants with operating problems to complete processing. The criteria ASX Settlement will consider when an extension to DvP settlement cut-off is requested are set out in a market notice.^[15]

At Austraclear, the cut-off times for cancelling payment or transfer instructions are in line with the daily Austraclear cycle. Some cut-off times vary according to whether participants are engaged in evening settlement operations in RITS. Key cut-off times are:

• 1.00 pm for automated re-generation of corporate action instructions (e.g. maturity and coupon payments to bond holders) if amendments are required. However, manual corrections can be processed after this time
• 4.28 pm for matching of DvP and cash transactions by participants that do not engage in evening operations
• 5.17 pm for the cancelling of outstanding DvP and cash transactions by participants engaging in evening operations
• 6.32 pm AEST (8.32 pm AEDT) for the cancelling of all outstanding transactions by participants engaging in evening operations
• 7.00 pm AEST (9.00 pm AEDT) for foreign currency transactions by participants.

No transaction can be cancelled once it is at ‘payment pending’ status in Austraclear, which occurs following matching of instructions from both participants involved in the transaction or, in the case of foreign currency payments, once the transaction has passed cash record limit checks. In all cases, the above deadlines can be extended at the discretion of Austraclear, with extension of the middle three deadlines requiring the Bank's approval due to the implications for RITS.

ASX plans to amend the ASX Settlement Operating Rules and Austraclear Regulations 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.

Footnotes

The cash record starts at zero at the beginning of the day and records debit and credit cash movements through the day. A total debit limit may be set on the cash record by the participant. When a settlement instruction has been matched, the cash leg of each transaction is tested against the debit limit. If the debit limit is not exceeded, the transaction will be sent to RITS for settlement; otherwise, the transaction will remain in a pending state until sufficient funds are available (i.e. through another transaction that delivers cash or through the participant increasing the limit). [13]

ASX Settlement has also developed the functionality to settle securities transactions on a DvP Model 1 basis (by individual line of stock) via its CHESS RTGS service. The functionality is not currently used by any settlement participants. [14]

Available at <https://asxonline.com/content/dam/asxonline/public/notices/2016/feb/asx_046848.pdf>. [15]