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

Standard 17: FMI links

A securities settlement facility that establishes a link with one or more FMIs should identify, monitor and manage link-related risks.

17.1 Before entering into a link arrangement, and on an ongoing basis once the link is established, a securities settlement facility should identify, monitor and manage all potential sources of risk arising from the link arrangement. Link arrangements should be designed such that the securities settlement facility is able to comply with these SSF Standards.

Identifying link-related risks

For the purposes of this standard, a link is any connection that is made to another FMI (other than a payment system) according to a set of contractual and operational arrangements, irrespective of the complexity of the link and whether it is made directly with the FMI or through an intermediary.^[21]

ASX Settlement maintains such a link to ASX Clear. This link supports settlement of securities transactions, including DvP settlement of novated securities trades and the lodgement of non-cash collateral. Instructions relating to these transactions are entered into CHESS, which supports the functioning of both ASX Clear and ASX Settlement.

Other than the link to RITS to settle payments, Austraclear maintains links with three other FMIs:

• ASX Clear. This link supports AUD funds transfers related to margin payments. Cash transfers are entered into Austraclear by ASX Clear and then matched in Austraclear against the respective clearing participants' cash settlement instructions. Regular margin collections and intraday margin calls, which make up the majority of cash transfers in ASX Clear, are submitted automatically to Austraclear by ASX Clear's margin and collateral systems.

• ASX Clear (Futures). This link supports AUD funds transfers in relation to margin payments, lodgement of AUD-denominated non-cash collateral, and settlement of 90-day bank bill futures. Like for ASX Clear, cash transfers are entered into Austraclear by ASX Clear (Futures), and then matched in Austraclear against the respective clearing participants' cash settlement instructions. Regular margin collections and intraday margin calls, which make up the majority of cash transfers, are submitted automatically to Austraclear by ASX Clear (Futures)' margin and collateral systems. AUD-denominated non-cash collateral is lodged via a collateral lodgement form. This needs to be received by ASX Clear (Futures) the day prior to the collateral being needed to cover margin, with the security being transferred to ASX Clear (Futures) via a free-of-payment trade in Austraclear.

  Settlement of 90-day bank bill futures takes place in Austraclear according to procedures set out in ASX 24's Operating Rules and Procedures. Sellers and buyers who are not full participants of Austraclear must appoint a full participant to act as their settlement agent.

• Clearstream. This link relates to Euro entitlements managed in Austraclear (see SSF Standard 9.1). Austraclear is a participant in Clearstream. A participant that has a Eurobond holding in Clearstream may choose to lodge that security in Austraclear by transferring it to Austraclear's Clearstream account. Participants with Eurobond holdings in Euroclear may also transfer securities to Austraclear's Clearstream account via a separate link maintained between Euroclear and Clearstream. Once available in the Austraclear system, arrangements for sales and purchases of the security are as for other debt securities. Withdrawals of Euro entitlements from the Austraclear system are processed in a similar way to deposits, with Austraclear transferring the securities from its account in Clearstream to the participant's account with either Clearstream or Euroclear on request.

There are also arrangements where other FMIs access Austraclear as a participant.

Managing operational risk

ASX Settlement's and Austraclear's links with ASX Clear and ASX Clear (Futures) (where relevant) are subject to the same operational risk management framework that applies to all of the ASX CS facilities (see SSF Standard 14). This addresses operational risks associated with software, infrastructure or network failures and manual processing errors. An incident report is required for any significant technical or operational incident, including an assessment of mitigating actions to reduce the risk of reoccurrence. In addition, six-monthly risk profile assessments are prepared and presented to the Audit and Risk Committee, and an independent system-controls audit is conducted annually.

Clearstream's operational risk management arrangements are overseen by the BCL and supervised by the CSSF, which perform periodic assessments of Clearstream against applicable standards (see SSF Standard 14.9).

Managing financial risk

ASX Settlement and Austraclear do not assume any direct financial risks from their links to other FMIs.

17.2 A link should have a well-founded legal basis, in all relevant jurisdictions, that supports its design and provides adequate protection to the securities settlement facility and other FMIs involved in the link.

ASX Settlement's link to ASX Clear has its legal basis in the operating rules and procedures of both facilities. The finality of settlements in ASX Settlement is supported by the approval of its netting arrangements under Part 3 of the PSNA (see SSF Standard 1.5).

Austraclear's links to ASX Clear and ASX Clear (Futures) have their legal basis in the regulations, operating rules and procedures of each facility. The finality of transactions settled in Austraclear, including transactions submitted via these links, is supported by the approval of Austraclear under Part 2 of the PSNA (see SSF Standard 1.5).

Austraclear's link to Clearstream has a legal basis in a contract between the two FMIs, and the system rules of Clearstream's international central securities depository. As noted under SSF Standard 17.1, Clearstream has a banking license in accordance with the law of 5 April 1993 on the financial sector. Clearstream is also currently seeking authorisation as required under Regulation (EU) No 909/2014 of the European Parliament and of the Council of 23 July 2014 (CSDR). The CSSF is the competent authority for Luxembourg under the CSDR.

17.3 Where relevant to its operations in Australia, a securities settlement facility should consult with the Reserve Bank prior to entering into a link arrangement with another FMI.

ASX Settlement and Austraclear have discussed their current link arrangements with the Bank. ASX Settlement and Austraclear did not enter into any new link arrangements during the assessment period.

17.4 A securities settlement facility operating a central securities depository that links to another central securities depository should measure, monitor and manage the credit and liquidity risks arising from such links. Any credit extended to the linked central securities depository should be covered fully with high-quality collateral and be subject to limits.

ASX Settlement does not operate any links to other central securities depositories.

Austraclear does not extend credit to Clearstream.

17.5 Provisional transfers of securities between a securities settlement facility operating a central securities depository and another central securities depository should be prohibited or, at a minimum, the retransfer of provisionally transferred securities should be prohibited prior to the transfer becoming final.

ASX Settlement does not operate any links to other central securities depositories.

Euro entitlements are not made available to participants in Austraclear until title has been confirmed by deposit in Austraclear's account at Clearstream. Provisional transfers of securities cannot arise under the link between the two central securities depositories.

17.6 A securities settlement facility operating an investor central securities depository that uses an intermediary to operate a link with an issuer central securities depository should measure, monitor and manage the additional risks (including custody, credit, legal and operational risks) arising from the use of the intermediary.

ASX Settlement does not operate any links to other central securities depositories.

Austraclear does not use custodians or other intermediaries in its link with Clearstream.

Footnote

Links to payment systems are addressed in SSF Standard 8. [21]