2012/13 Assessment of ASX Clearing and Settlement Facilities B1.1 ASX Clear

Standard 8: Settlement Finality

A central counterparty should ensure clear and certain final settlement, at a minimum by the end of the value date. Where necessary or preferable, a central counterparty should facilitate final settlement intraday or in real time.

Rating: Observed

ASX Clear's settlements involve AUD cash payments between participants and the CCP for the purposes of margin payments and other derivative related payments such as options premia and the settlement of cash securities trades. Cash settlements of margin occur via Austraclear, with interbank obligations settled on a real-time gross settlement (RTGS) basis across ESAs at the Bank, via RITS. Settlement of securities trades and lodgement of non-cash collateral takes place in ASX Settlement, with securities delivery obligations effected within CHESS and interbank cash obligations also settled via RITS on an RTGS basis.

ASX Clear defines the point at which settlement is final through contract specifications set out in its Operating Rules and Procedures, and those of ASX. The finality of its money settlements is further defined in the Austraclear Regulations and ASX Settlement Operating Rules, supported by the PSNA (CCP Standard 8.1). Contract specifications set out in ASX Clear's and ASX's Operating Rules and Procedures also specify procedures and timetables for final settlement (CCP Standard 8.2). Participants are not able to submit payment or transfer instructions in ASX Clear that may be revoked (CCP Standard 8.3).

Based on this information, the Bank's assessment is that ASX Clear has observed the requirements of CCP Standard 8 during the 2012/13 Assessment period. ASX Clear's arrangements for ensuring finality of these settlements are described in further detail under the following sub-standards.

8.1 A central counterparty's rules and procedures should clearly define the point at which settlement is final.

The settlement of obligations in ASX Clear is final according to the terms of ASX Clear's and ASX's Operating Rules and Procedures, which set out the means of settlement. For payments settled in Austraclear, settlement is final according to Austraclear's Regulations and Procedures and its approval under Part 2 of the PSNA. This approval protects the finality of payments made in the event of a participant entering external administration (see Appendix B2.2, SSF Standard 7.1). For payments and securities obligations settled through ASX Settlement, finality is supported both by ASX Settlement's Operating Rules and Procedures and its approval under Part 3 of the PSNA. This approval protects ASX Settlement's netting arrangements for securities and payment obligations. Any interbank transactions arising from settlements in either Austraclear or ASX Settlement are settled in real time across ESAs held with the Bank. Payments within this system are also final and irrevocable; this is supported by the approval of RITS under Part 2 of the PSNA.

8.2 A central counterparty should ensure final settlement no later than the end of the value date, and preferably intraday or in real time, to reduce settlement risk.

The settlement of obligations in ASX Clear is governed by ASX Clear's and ASX's Operating Rules and Procedures. These specify that securities-related obligations use the settlement facility provided by ASX Settlement, while other (e.g. margin) payments to and from the CCP must use the facility provided by Austraclear. In each case, ASX Clear calculates bilateral net positions between itself and its clearing participants that reflect both cash payment and securities obligations. The relevant netting arrangements are outlined in the ASX Clear Operating Rules and Procedures and are protected as a netting market under Part 5 of the PSNA.

Margin payments

Participants settle routine margin payments via cash transfers in Austraclear, which settle in real time via RITS, or via the lodgement of securities in CHESS. Daily margin payments are due by 10.30 am each day, and are settled using ASXCC's ESA. Intraday margin requirements are calculated and notified to participants following significant market movements (see CCP Standard 6.4) and must be settled within the notified time frame, which is generally 2 hours.

Delivery of securities

ASX Settlement's settlement process involves the use of a delivery-versus-payment (DvP) model 3 mechanism, whereby cash payments and securities transfers are settled simultaneously in a single daily multilateral net batch (see CCP Standard 11). Within this batch ASX Settlement nets both novated transactions cleared by ASX Clear and non-novated transactions from outside the CCP. As the outcome of this process, ASX Settlement participants face a net cash settlement obligation to or from ASX Settlement and a net securities settlement obligation for each line of stock.

Participants are required to have sufficient securities in their settlement account by 10.30 am on the day of settlement. Once participants' net delivery obligations have been determined, ASX Settlement confirms that sufficient securities are available in each participant's securities account in CHESS. The transfer of securities within the system is then restricted until the settlement process has been completed. Net cash payment obligations are forwarded for settlement in RITS across Payment Providers' ESAs (see CCP Standard 9). Once cash settlement has been confirmed, ASX Settlement effects the net transfer of securities within CHESS and settlement is usually completed by around 11.30 am.

Failed settlements are removed from the multilateral net batch via the CHESS back-out algorithm (for a securities shortfall), and rescheduled for settlement on the next day (see Appendix B2.1, SSF Standard 11).

Options delivery

Payments to settle up-front premium amounts for equity options occur via Austraclear, and are due by 10.30 am on the day following a trade. Following the exercise of an equity option contract, obligations are settled in the same manner as cash securities transactions. Any contract which is in the money on the day of its expiry is automatically exercised where the account is set to auto-exercise. When an options contract is exercised, performance obligations are allocated via a random process to a seller of a contract within the same series.

8.3 A central counterparty should clearly define the point after which unsettled payments, transfer instructions or other obligations may not be revoked by a participant.

Participants are not able to submit payment or transfer instructions in ASX Clear that may be revoked.