2007/08 Assessment of Clearing and Settlement Facilities in Australia 5.3 ASX Settlement and Transfer Corporation (ASTC)


ASTC operates within a sound legal framework, based on its Settlement Rules which under Section 822B of the Corporations Act have effect as a contract under seal between ASTC and each of its participants, and between participants. Among other things, the rules set out the rights and obligations of ASTC and each of its participants, including in the event of default or suspension. During the 2006/07 assessment period, ASTC's netting arrangements were approved under Part 3 of the Payment Systems and Netting Act. This provides certainty for the netting process in the event of the insolvency of an ASTC participant or a payment provider.

ASTC's securities settlement system is CHESS. Settlement risk in CHESS is mitigated by the use of a Model 3 DVP mechanism, whereby settlement of securities transfers and associated cash payments occurs in a multilateral net batch at around noon each day, with interbank payments made across ES accounts at the Reserve Bank. Securities title is updated upon notification of funds settlement.

Assessment of Developments in 2007/08

In light of the financial difficulties experienced by a small number of ASX broker participants during the first half of 2008, the Reserve Bank has paid particular attention in this year's assessment to ASTC's participation requirements, ongoing monitoring processes, and settlement procedures.

Participant monitoring and settlement procedures

ASTC's participation requirements address financial and business integrity issues, as well as operational and technical matters. Performance bonds must be lodged with ASTC where an ASTC settlement participant is not also an ASX market participant or an ACH clearing participant, or is not subject to prudential supervision as an ADI. ASTC Settlement Rules also permit ASTC to impose restrictions on a participant's access to the CHESS system, perhaps in conjunction with sanctions applied at the trading or clearing level. ASTC also reserves the right to conduct onsite reviews where operational issues are detected.

The participant-monitoring function is split between ASX Clearing and Settlement Operations and ASX Markets Supervision. ASX Clearing and Settlement Operations monitors participants' activity within the system, including operational performance and timeliness of settlement, while ASX Markets Supervision is responsible for prudential risk management, compliance monitoring, investigations and enforcement.

Procedures were tested by the events of early 2008. The most significant of these for ASTC was the failure of one participant to meet its settlement obligations on 29 January. Although this was not strictly a default, the participant's difficulties triggered a market-wide delay in settlement until late in the afternoon. Batch settlement is typically completed at around noon each day, but on 29 January it was not completed until almost 4.30pm (i.e. 16:30 in Graph 9). Settlement was also delayed on 30 January, although not by as long as on the previous day. In addition to sanctions at the trading and clearing levels, ASTC imposed restrictions on the participant's inclusion in the daily CHESS settlement batch.

In response to the problems experienced in the settlement system, the Reserve Bank carried out a Review of Settlement Practices for Australian Equities, publishing its findings in May 2008.[1] The Reserve Bank is now working closely with ASX and market participants to examine how some of the recommendations in the review might be taken forward.

While the current batch arrangements in CHESS are operationally efficient and minimise participants' liquidity requirements, the events of late January illustrated how one participant's difficulties could delay settlement across the market as a whole. The review highlighted several features of current arrangements which warrant attention. In particular, although batch settlement typically takes place at around noon each day, there is no fixed time by which settlement must be completed and an apparent lack of clarity over timelines and decision points.

Also, the settlement delays were in part related to difficulties arising from the troubled participant's obligations in respect of securities lending transactions. These transactions are not novated to the central counterparty, ACH, but settle together with novated trades in the batch.[2] While securities lending is a critical feature of a well functioning equities market, these events revealed a lack of transparency around the extent of securities lending activity and its potential implications for the smooth functioning of the settlement process.

The Reserve Bank's review considered several possible modifications to settlement arrangements that might address the risks exposed by the events of late January.

First, the Reserve Bank examined the settlement model, concluding that a move to trade-by-trade (Model 1) DVP settlement would reduce the dependence of market-wide settlements on a single participant. However, neither ASX nor market participants are persuaded of the need to move to a new settlement model, citing in particular the high cost of transition. While the Reserve Bank acknowledges these costs, it continues to see a case for considering such a move over the medium term, although it does not see the matter as being so pressing as to require a change through regulation.

Second, the Reserve Bank suggested some possible modifications to existing batch settlement arrangements to increase their robustness. One such modification was the introduction of an explicit window for completion of settlement. If appropriately enforced, this would accelerate the back-out of a participant unable to meet its obligations at the specified time, thereby enabling other participants to proceed with settlement. By reducing the interdependence of individual participants' settlements, this would introduce some characteristics of Model 1 arrangements to the existing model. Other refinements for consideration included: the clarification of lines of communication and deadlines for decisions, including by settlement banks; and an amendment to the cut-off time for new settlement instructions, so as to allow more time prior to the batch for participants to ensure that securities and funds are in place. These, among other options, are currently under review by ASX and the Reserve Bank remains in close dialogue with ASX during this process.

Third, the Reserve Bank examined potential changes to arrangements for dealing with settlement fails. In particular, it was noted that a single failed settlement had the potential to trigger a chain of failures, which in the extreme could undermine the integrity of the market and potentially lead to instability. ASX was, in parallel, considering changes to the settlement fails regime administered by ASTC and published a media release on 26 May with details of prospective new arrangements.[3] These included the following:

  • an increase in the minimum and maximum penalties applied in respect of failed trades, with the floor increasing from $50 to $100; and the cap increasing from $2,000 to $5,000. These changes took effect from 1 September; and
  • ASTC is pursuing rule amendments that will require that any position remaining unsettled two days after the scheduled settlement date (i.e. on the fifth day after trade date) be closed out (i.e. the seller failing to deliver will be required to close out the position in the market).[4]

Separately, ASTC has also introduced a new benchmarking regime, under which participants' compliance units are provided with peer-group rankings of settlement fails performance. Early indications from ASX are that the combination of new measures is already leading to a reduction in the incidence of settlement fails.

Finally, given the circumstances leading to the events of late January, securities lending was an important focus in the Reserve Bank's review. In particular, the Reserve Bank concluded that the disclosure of outstanding securities lending positions would improve general understanding of potential settlement risks and ensure that all participants had access to relevant data, rather than just those directly involved in such transactions. The Reserve Bank is currently in dialogue with ASX, other regulators, and market participants to establish how best to capture information on securities lending activity within the settlement system. It is also considering a variation to the measures underpinning the Financial Stability Standard to require such disclosure.

Operational performance

ASTC's key system, CHESS, achieved a high level of operational reliability during the period, with just one short outage reported in August 2007. Capacity utilisation averaged 33 per cent during the assessment period, peaking at 62 per cent. Prior to early March 2008, the maximum daily trade count capacity in CHESS was 999,999; this has since been increased to 1.1 million trades. Appropriate testing was undertaken prior to implementation of the system enhancement. In addition, monthly connectivity and procedural tests were carried out throughout the period, with satisfactory results. A major business-continuity test simulating loss of the primary Sydney site was carried out for CHESS in November 2007. This also had a satisfactory outcome. Other enhancements to operational risk-management policies were implemented during the period, including in respect of pandemic response planning, fraud control and incident management.

New market operators

As noted in the assessment of ACH (Section 5.1), ASX has launched a project to establish how three prospective new trading platforms for ASX-listed securities will connect to ACH and ASTC. This is likely to be an important issue during the 2008/09 assessment period, with the Reserve Bank continuing to assess the implications of any new arrangements for the risk profile of ACH and settlement processes at ASTC.


It is the Reserve Bank's assessment that ASTC has complied with the Financial Stability Standard for Securities Settlement Facilities during the assessment period.

The events of late January have, however, highlighted how system-wide settlement can be severely disrupted by the failure of one participant to meet its obligations. In its Review of Settlement Practices for Australian Equities, the Reserve Bank considered a number of possible changes to strengthen the resilience of current settlement arrangements. These included:

  • modifications to improve the functioning of the existing batch settlement model: The Reserve Bank recommended that ASX consider addressing the risks revealed by the events of late January by moving to DVP Model 1 settlement over the medium term. However, neither ASX nor market participants are persuaded of the need to change the settlement model and, while it continues to see a case for such a move over the medium term, the Reserve Bank does not see a pressing need to force the change through regulation. In the meantime, the Reserve Bank encourages ASX to give further consideration to how the resilience of the existing settlement model might be strengthened, and in particular to the introduction of a firm deadline for completion of the batch settlement process. The Reserve Bank remains in close dialogue with ASX on this matter.
  • improving the transparency of securities lending activity: These events also highlighted the lack of transparency regarding securities lending. Given the interdependence of novated and non-novated trades in the batch settlement process, it is important that participants have access to information that would assist them in gauging potential settlement risks emanating from activity in the securities lending market. The Reserve Bank has been discussing with industry participants ways of improving disclosure of securities lending activity and is considering a variation to the ‘Understanding Risks’ measure of the Financial Stability Standard for Securities Settlement Facilities to require the collection and dissemination of these data.


The report is available at: <https://www.rba.gov.au/payments-and-infrastructure/financial-market-infrastructure/clearing-and-settlement-facilities/consultations/review-practices/> [1]

The average daily net value of non-novated securities transactions settled in ASTC during the 2007/08 assessment period was approximately $9 billion. The average daily net value of novated securities transactions settled was $4.5 billion (capturing settlement obligations both to and from ACH). The majority of non-novated transactions are related to the priming of clearing participants' accounts to meet novated settlement obligations (i.e. the transfer of securities to a clearing participant's account to facilitate settlement). [2]

<http://www.asx.com.au/about/pdf/mr260508_settlementrisk_new_measures.pdf> [3]

Having gauged the views of market participants, such a decentralised buy-in policy was preferred to an ASTC-operated borrowing or buy-in regime. [4]