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

Standard 15: Access and participation requirements

A securities settlement facility should have objective, risk-based and publicly disclosed criteria for participation, which permit fair and open access.

15.1 A securities settlement facility should allow for fair and open access to its services, including by direct and, where relevant, indirect participants and other FMIs, based on reasonable risk-related participation requirements.

ASX Settlement and Austraclear have objective and transparent participation requirements, which are publicly available and form part of ASX Settlement's Operating Rules and Procedures and Austraclear's Regulations and Procedures, respectively.

ASX Settlement has also issued formal guidance to assist applicants' and participants' understanding of the participation requirements. This includes guidance on: the admission process and criteria; notification obligations; offshoring and outsourcing arrangements; and business continuity requirements.

ASX Settlement and Austraclear have an internal policy and supporting standards that summarise the minimum requirements placed on participants under the relevant SSF's rules and procedures (see SSF Standard 15.2), and document the responsibilities of the CS Boards, the Risk Committee and relevant executives for ensuring these requirements are met and periodically reviewed. Each of the SSFs' rules and procedures provide for an appeals process should an application for participation be rejected or a participant's access be terminated.

Under the Code of Practice, ASX has committed to providing transparent and non-discriminatory terms of access to ASX Settlement's cash equity settlement services, including to participants, AMOs and ALMOs.

The CCMS's access to Austraclear is via a non-exclusive ‘Special Purpose Participant (Collateral Manager)’ category of participation. There are no provisions in the Austraclear Regulations that prevent fair and open access to other entities that may seek to offer their services as a Collateral Manager. LCH Ltd, a UK-based CCP licensed as a CS facility in Australia, is a Special Purpose (Exchange) Participant in Austraclear.

At the end of June 2019, ASX Settlement had 83 participants. A further 8 participants were active as temporary specialist settlement participants set up to effect corporate actions. Austraclear had 930 participants at the end of the assessment period.

15.2 A securities settlement facility's participation requirements should be justified in terms of the safety of the securities settlement facility and the markets it serves, be tailored to and commensurate with the securities settlement facility's specific risks, and be publicly disclosed. Subject to maintaining acceptable risk control standards, a securities settlement facility should endeavour to set requirements that have the least restrictive impact on access that circumstances permit.

The participation requirements of both ASX SSFs are designed to promote the safety and integrity of the SSF.

ASX Settlement

A settlement participant must post a settlement bond of $500,000, unless it: is subject to prudential supervision as an ADI; is required to comply with financial requirements under the operating rules of an approved clearing facility or an AMO; is a CS facility that complies with the FSS; or only acts as a Participant Bidder in a takeover. In addition, a sponsoring participant (i.e. a participant that also acts in ASX Settlement on behalf of non-participants) that is not covered by the National Guarantee Fund compensation arrangements (under the Corporations Act) must post a sponsorship bond of $500,000.

Settlement and sponsorship bonds must be issued by an Australian bank or appropriately regulated insurance company. Funds held under a settlement bond may be drawn upon by ASX Settlement when deemed appropriate under the ASX Settlement rules. In a similar vein, funds held under a sponsorship bond would be drawn upon to meet any losses suffered by ASX Settlement, an issuer, or a holder sponsored by an ASX Settlement participant arising from a breach of the Operating Rules or other offence committed by the participant.

Under the ASX Settlement Operating Rules and Procedures, a potential participant must satisfy ASX Settlement that it has the resources and processes in place to comply with its obligations as a participant. For these purposes, ‘resources’ include financial, technological and human resources, and ‘processes’ include management supervision, training, compliance, risk management, business continuity and disaster recovery processes.

Austraclear

Under the Regulations and Procedures, Austraclear must be satisfied that a potential participant has (or will have) the relevant managerial, operational and financial capacity and appropriate complementary business continuity arrangements in place to enable it to meet its ongoing obligations as a participant.

The Austraclear Regulations also set out specific participation requirements for Collateral Managers. These include detailed operational reliability and business continuity requirements, which reflect the potential critical functionality of such infrastructure. In addition to the standard participant requirements outlined above, an applicant for special purpose participation as a Collateral Manager is required to have an Australian Financial Services Licence covering the activities that it will conduct as a Collateral Manager. Additional requirements that apply to participants that are Foreign Currency Settlement Banks in Austraclear are described under SSF Standard 8.3.

15.3 A securities settlement facility should monitor compliance with its participation requirements on an ongoing basis and have clearly defined and publicly disclosed procedures for facilitating the suspension and orderly exit of a participant that breaches, or no longer meets, the participation requirements.

ASX Settlement's and Austraclear's arrangements for monitoring and enforcing compliance with their respective operating rules and regulations are published on the ASX public website. Under these arrangements, the ASX SSFs have wide-ranging powers to sanction their participants in order to preserve the integrity of the SSFs.

• ASX Settlement may restrict, suspend or terminate a participant's access to the facility in the event of non-compliance, which includes failure to comply with participation requirements (see SSF Standard 11.1).
• Austraclear may suspend or terminate a participant's authority to settle transactions in the event of a default (see SSF Standard 11.1), or in the event of a breach of the Regulations and Procedures that may have an adverse effect on the SSF.

The action taken by the ASX SSFs in the event of a breach will depend on a number of factors, including the participant's history of compliance and whether the breach implies negligence, incompetence or dishonesty. Where a breach has been identified and the participant has taken appropriate steps to rectify it, the ASX SSFs will typically continue to monitor the participant closely for a period of time. Significant breaches are also referred to ASIC and, depending on the nature of the breach, may be investigated by ASX Compliance to determine whether formal disciplinary action is required.

In addition, ASX Settlement levies fees on participants that fail to meet securities delivery obligations on the scheduled settlement date (see SSF Standard 10.2). The fee is 0.1 per cent of the value of the settlement obligation that is in shortfall, but with a daily minimum and maximum fee of $100 and $5,000, respectively. Participants are also required to close out any positions remaining unsettled two business days after the scheduled settlement date (i.e. on the fourth business day after the trade date). ASX Settlement also routinely benchmarks participants' settlement performance. Under this regime, a participant receives a ranking of its settlement performance (based on the value of its trades that have failed to settle) against its market group peers. In addition, under its Operating Rules, ASX Settlement is able to impose monetary penalties of up to $1 million on participants that it deems to be in violation of the Operating Rules.