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

Standard 13: Custody and investment risks

A securities settlement facility should safeguard its own and its participants' assets and minimise the risk of loss on and delay in access to these assets. A securities settlement facility's investments should be in instruments with minimal credit, market and liquidity risks.

The Bank has concluded that SSF Standard 13 does not apply to ASX Settlement. ASX Settlement does not have any financial investments, and its participants do not lodge collateral or other assets with the SSF. $188 million of general business risk capital for both ASX Settlement and Austraclear is invested at the group level. Arrangements for the investment of those funds are discussed under SSF Standard 12.

Austraclear has funds from issued capital and retained earnings that are invested in cash or other high-quality liquid assets. The text below only relates to how Austraclear's arrangements for the investment of these funds align with SSF Standard 13.

13.1 A securities settlement facility should hold its own and its participants' assets at supervised and regulated entities that have robust accounting practices, safekeeping procedures and internal controls that fully protect these assets.

Austraclear has funds from issued capital and retained earnings that are invested in cash or other high-quality liquid assets; it does not use custodians to invest these funds.

ASX Collateral does not create custody risk for Austraclear. While the Collateral Manager has control over new collateral accounts for the purposes of submitting settlement instructions on behalf of service users, title of securities remains at all times with the service users.

Austraclear has custody of participants' securities deposited in the Austraclear system. For details of these custodial arrangements and arrangements to safeguard the integrity of securities held in Austraclear see SSF Standard 9. Austraclear does not hold other assets of participants.

13.2 A securities settlement facility should have prompt access to its assets and the assets provided by participants, when required.

Under the terms of the Austraclear Investment Mandate, funds held by Austraclear must be invested in highly rated and liquid assets with large Australian banks as issuers or counterparties (see SSF Standard 13.4). Austraclear does not use custodians to hold its assets or participants' assets. These arrangements aim to ensure that Austraclear has prompt access to its assets when required.

13.3 A securities settlement facility should evaluate and understand its exposures to its custodians, taking into account the full scope of its relationships with each.

Austraclear does not use custodians to hold its assets or the assets provided by participants.

13.4 A securities settlement facility's investment strategy should be consistent with its overall risk management strategy and fully disclosed to its participants, and investments should be secured by, or be claims on, high-quality obligors. These investments should allow for quick liquidation with little, if any, adverse price effect.

Austraclear is exposed to investment risk on funds from issued capital and retained earnings. These funds, currently around $10 million, are small relative to the total funds held by ASX Limited at the group level to cover general business risk. The Investment Mandate for Austraclear funds requires that liquidity be maintained so that it can meet its liabilities in a timely fashion. Investment products are limited to a small set of highly liquid and highly rated AUD-denominated products – cash, notice cash accounts, fixed term deposits, bank bills or negotiable certificates of deposit – with large Australian banks as issuers or counterparties. Hard limits are set on maximum instrument maturity (95 days for notice cash accounts, 185 days for fixed term deposits, bank bills and negotiable certificates of deposit) and the maximum weighted average maturity of the investment portfolio (60 days).