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

Standard 8: Money settlements

A securities settlement facility should conduct its money settlements in central bank money where practical and available. If central bank money is not used, a securities settlement facility should minimise and strictly control the credit and liquidity risk arising from the use of commercial bank money.

8.1 A securities settlement facility should conduct its money settlements in central bank money, where practical and available, to avoid credit and liquidity risks.

ASX Settlement's money settlements are all settled in central bank money. Net payment obligations in ASX Settlement associated with securities transfers are settled between commercial settlement banks, known as payment providers, in a single multilateral batch across ESAs at the Bank, via RITS.

Similarly, Austraclear's AUD money settlements are all settled in central bank money. Payment obligations in Austraclear are settled on an RTGS basis across ESAs at the Bank, via RITS.

This includes money settlements initiated by ASX Collateral; while it is expected that most collateral substitutions will involve the exchange of one security for another on a DvD basis, cash may be used as a last resort to effect collateral substitution.

8.2 If central bank money is not used, a securities settlement facility should conduct its money settlements using a settlement asset with little or no credit or liquidity risk.

Money settlements in ASX Settlement and AUD money settlements in Austraclear are effected using central bank money.

Austraclear offers a foreign currency settlement service, which currently supports the settlement of payments in RMB and USD. Settlement of these payment transactions is effected in commercial bank money across the books of the Bank of China (Sydney branch) for RMB and JPMorgan Chase Bank, N.A. Sydney Branch for USD. Austraclear requires that a foreign currency settlement bank be prudentially supervised (i.e. licensed as an authorised deposit-taking institution (ADI)).

8.3 If a securities settlement facility settles in commercial bank money or its participants effect settlements using commercial settlement banks, it should monitor, manage and limit credit and liquidity risks arising from the commercial bank money settlement agents and commercial settlement banks. In particular, a securities settlement facility should establish and monitor adherence to strict criteria for commercial banks appropriate to their role in the settlement process, taking account of matters such as their regulation and supervision, creditworthiness, capitalisation, access to liquidity and operational reliability. A securities settlement facility should also monitor and manage the concentration of its and its participants' credit and liquidity exposures to commercial bank money settlement agents and settlement banks.

ASX Settlement

Participants in ASX Settlement use commercial bank payment providers to effect money settlements on their behalf. Payment providers must be approved by ASX Settlement and their provision of this service is governed by the terms of a standard deed. The terms of payment provider arrangements are covered by the CHESS Payment Interface Standard Payments Provider Deed, entered into by ASX Settlement, ASX Clear, AusPayNet and the relevant commercial bank. This deed sets out payment authorisation deadlines and other operational requirements for payment providers that act as commercial settlement banks for participants.

A payment provider must submit an application to ASX Settlement and meet the following criteria:

• be approved by the Australian Prudential Regulation Authority (APRA) as an ADI for the purpose of carrying out banking business within Australia
• be a member of RITS with an ESA
• have the operational capacity to make payments to participants and on behalf of participants
• have executed the standard client payment deed
• have the technical ability to connect to CHESS, and the technical and financial capacity to participate in DvP settlement.

ASX Settlement does not have a formal process to monitor that payment providers meet these criteria on an ongoing basis, other than to observe that they remain connected to CHESS and continue to meet payment obligations by the required cut-off times. In the event that a payment provider experienced operational difficulties or failed to meet cut-off times, ASX Settlement would investigate the matter through senior-level discussions with the affected payment provider.

Currently there are 11 payment providers. ASX periodically monitors the proportion of participants that use each payment provider, but this is not subject to frequent change. ASX has identified that two large Australian banks act as payment providers for a large share of participants; however, the average value of daily settlements involved is small relative to the financial and operational capacity of these banks.

The process of updating the deed involves negotiation with AusPayNet and payment providers, which could create delays in implementing changes to authorisation deadlines or other operational requirements required to support changes to the settlement process. ASX, working with AusPayNet, has established a framework for formally engaging payment providers on changes to settlement processes in response to regulatory or market-driven change. This is in the form of an AusPayNet standing sub-committee comprising representatives of the payment providers, with ASX acting as an ‘observer’. The role of the committee is to consider and provide feedback on proposed amendments to the Standard Payments Provider Deed, facilitate consultation with payment providers, and help to ensure that payment providers are notified of any upcoming developments.

Austraclear

Settlement of AUD payments is in central bank funds. Since not all Austraclear participants are eligible to hold an ESA, Austraclear rules provide for those participants to nominate a participating bank (an ESA holder that agrees to act on behalf of a participant as settlement agent). A participating bank in Austraclear must be approved by APRA as an ADI for the purpose of carrying out banking business within Australia, and be a member of RITS with an ESA. Participating banks must also satisfy Austraclear's general participation requirements, which cover matters such as operational capacity, financial standing, and business continuity arrangements (see SSF Standard 15).

Austraclear is not a party to arrangements between settlement participants and participating banks (which may also be Austraclear participants) and is not directly exposed to credit or liquidity risk. Under Austraclear Regulations, participating banks must meet the AUD money settlement obligations of any participant that they represent in central bank money. Participating banks do not receive title to any securities due from settlement. Title is delivered to the participant upon settlement in central bank money. Credit exposures, if any, between participants and participating banks are managed bilaterally on the same basis as any transactional banking arrangement.

Austraclear is similarly not directly exposed to credit or liquidity risks from Bank of China in respect of its settlement service for RMB payments. To act as a foreign currency settlement bank, a bank must be an ADI subject to regulation by APRA. In considering a bank's application to be a foreign currency settlement bank, Austraclear considers factors such as the bank's prudential regulation, operational reliability and capacity, business continuity management and business integrity and operations. Business continuity requirements are set out in the Austraclear Regulations. The Bank of China has been appointed the official RMB clearing bank for Australia by the People's Bank of China (PBoC), which affords it more direct access to RMB liquidity from the PBoC.

8.4 If a securities settlement facility conducts money settlements on its own books, it should minimise and strictly control its credit and liquidity risks.

ASX Settlement and Austraclear do not conduct money settlements on their own books.

8.5 A securities settlement facility's legal agreements with any commercial bank money settlement agents should state clearly when transfers on the books of the relevant commercial bank are expected to occur, that transfers are to be final when effected, and that funds received should be transferable as soon as possible, at a minimum by the end of the day and ideally intraday, in order to enable the securities settlement facility and its participants to manage credit and liquidity risks.

ASX Settlement does not conduct settlements via commercial bank money settlement agents. Participants' arrangements with payment providers are conducted under legal agreements between the parties involved. ASX Settlement does, however, maintain separate agreements with payment providers regarding operational requirements (see SSF Standard 8.3).

Austraclear does not use commercial bank money settlement agents for its AUD money settlement activities. Participants' arrangements with participating banks to access central bank money settlement are conducted under legal agreements between the parties involved; Austraclear is not a party to these agreements.

Austraclear's legal agreement with Bank of China acknowledges that the record of RMB transfers in Austraclear provides participants with a claim on Bank of China, notwithstanding that participants' accounts at Bank of China are updated only at the end of day. The transfer of these claims are final once participants' RMB cash records in Austraclear have been updated.