2012/13 Assessment of ASX Clearing and Settlement Facilities B2.1 ASX Settlement

Standard 1: Legal Basis

A securities settlement facility should have a well-founded, clear, transparent and enforceable legal basis for each material aspect of its activities in all relevant jurisdictions.

Rating: Observed

ASX Settlement is a legal entity within the ASX Group that solely provides settlement services (SSF Standard 1.1). ASX Settlement's legal basis is founded on clear and understandable rules that operate within the framework of relevant laws and regulations (SSF Standards 1.2, 1.3). The certainty of this legal basis in relevant jurisdictions is reinforced by supporting legislation, including ASX Settlement's protection as an approved netting arrangement under the Payment Systems and Netting Act 1998 (PSNA), and is subject to periodic review by ASX Legal (SSF Standards 1.2, 1.5). ASX Settlement has publicly outlined the key features of its legal basis on its website, and from time to time, for information, may provide legal opinions to participants or other stakeholders in respect of the legal basis of significant new services (SSF Standard 1.4). ASX has not identified any material risks arising from potential conflicts of law relating to the operations of ASX Settlement.

Based on this information, the Bank's assessment is that ASX Settlement has observed the requirements of SSF Standard 1 during the 2012/13 Assessment period. The legal basis of ASX Settlement is described in further detail under the following sub-standards.

1.1 A securities settlement facility should be a legal entity which is separate from other entities that may expose it to risks unrelated to those arising from its function as a securities settlement facility.

ASX Settlement is a wholly owned subsidiary of ASX Settlement Corporation Limited, which is itself a wholly owned subsidiary of ASX Limited. As a separate legal entity, ASX Settlement's securities settlement activities are separate from the activities conducted by ASX's other clearing and settlement (CS) facilities and the rest of the ASX Group, notwithstanding the sharing of operational resources across multiple entities within the group.

ASX Settlement's services are limited to settlement services for the ASX market and other AMOs, such as Chi-X, through the Trade Acceptance Service, and a DvP service for a small number of transactions undertaken on ALMOs through the Settlement Facilitation Service. Accordingly, ASX Settlement does not provide any services that have a distinct profile from, or pose additional risks to, its activity of operating a SSF.

1.2 The legal basis should provide a high degree of certainty for each material aspect of a securities settlement facility's activities in all relevant jurisdictions.

Legal basis

ASX Settlement's settlement and netting arrangements for transactions entered into by its participants require a high degree of legal certainty. Key components of the legal framework under which the SSF operates are:

  • ASX Settlement holds a CS facility licence, under Part 7.3 of the Corporations Act 2001. This licence is administered by the Australian Securities and Investments Commission (ASIC) in consultation with the Bank, with the Minister acting as ultimate decision-maker on licensing matters.
  • ASX Settlement has defined Operating Rules and Procedures. Under section 822B of the Corporations Act, these Operating Rules and Procedures have effect as a contract under seal between: ASX Settlement and each of its participants; each participant and each other participant; and each participant and each issuer. The Operating Rules and Procedures set out the rights and obligations of participants and ASX Settlement, including in the event of default or suspension.
  • The netting arrangements contained in ASX Settlement's Operating Rules are protected as an ‘approved netting arrangement’ under Part 3 of the PSNA, and the finality of money settlements is supported by the approval of the Reserve Bank Information and Transfer System (RITS) as a real-time gross settlement (RTGS) system under Part 2 of the PSNA (see SSF Standard 1.5).
  • ASX Settlement is a ‘prescribed CS facility’ for the purposes of Part 7.11, Division 4, of the Corporations Act. Section 1074D of the Corporations Act protects the validity of the transfer of a financial product effected through a prescribed CS facility in accordance with that facility's Operating Rules. Section 10 of the ASX Settlement Operating Rules specifies when transactions are taken to be settled.

The legal basis of ASX Settlement's activities is reviewed by ASX Legal whenever there are material amendments to the Operating Rules or Procedures.

Rights and interests

The rights and interests of ASX Settlement, its participants and, where relevant, its participants' customers in securities held in the Clearing House Electronic Sub-register System (CHESS) are defined in ASX Settlement's Operating Rules and Procedures (see SSF Standard 9).

1.3 A securities settlement facility should have rules, procedures and contracts that are clear, understandable and consistent with relevant laws and regulations.

Section 822A of the Corporations Act establishes a framework to prescribe the matters that must be dealt with by rules and those which may be considered under the procedures. Rule changes are subject to a disallowance process.

ASX Settlement's Operating Rules and Procedures are supplemented with explanatory material, published on ASX's public website and ASX's restricted participant website, to facilitate understanding by participants and prospective participants of the risks they face through participation in the system. Publicly available material includes high-level descriptions of ASX Settlement's operations and settlement process, business continuity arrangements and the default management framework (as it applies to participants that also participate in ASX Clear). Participants have access to additional manuals, reports and explanatory notes covering such topics as the application process for new participants, compliance, technical operational details and fees.

There is a clear process for changing ASX Settlement's Operating Rules and Procedures. Proposed rule changes may be submitted informally to ASIC, which in consultation with the Bank will advise ASX of any regulatory concerns. Formal submission of the proposed changes to ASIC triggers a 28-day ‘disallowance’ period (referred to above), during which the Minister may choose to disallow the rule changes. The Minister considers a number of factors, including whether the proposed changes are consistent with the public interest. To assist the Minister in this process, ASIC provides detailed advice to the Minister, incorporating the views of the Bank as appropriate.

1.4 A securities settlement facility should be able to articulate the legal basis for its activities to the Reserve Bank and other relevant authorities, participants and, where relevant, participants' customers, in a clear and understandable way.

The legal basis for the activities of ASX Settlement and the facility's protection as an approved netting arrangement under the PSNA – see also SSF Standard 1.5 – are described on the ASX public website in its Disclosure Framework document, which sets out in detail how each CS facility meets the requirements of the Principles (see SSF Standard 18.2).[1]

ASX Limited on behalf of each licensed entity within the ASX Group, including all CS facilities, submits an Annual Group Licence Report to ASIC and the Bank. This report sets out the legal basis for the CS facilities' activities under its licence obligations, and is used by ASIC in the preparation of ASIC's Market Assessment Report for the ASX Group.

For significant new services, ASX Settlement may seek independent legal opinions in respect of relevant aspects, or any implications that their introduction may have for the legal basis of existing functionality. These opinions may, in some circumstances, be shared with participants or other stakeholders for their information, particularly to demonstrate the legal efficacy of new Operating Rules.

1.5 A securities settlement facility should have rules, procedures and contracts that are enforceable in all relevant jurisdictions. There should be a high degree of certainty that actions taken by the securities settlement facility under such rules and procedures will not be voided, reversed or subject to stays, including in the event that the securities settlement facility enters into external administration or that one or more of its participants or a settlement bank defaults or is suspended.

Settlement finality

The finality of ASX Settlement's settlement process is protected by:

  • its approval under Part 3 of the PSNA. This approval protects the finality of settlements made in ASX Settlement's multilateral net batch in the event of a participant entering external administration (see SSF Standard 7.1).
  • the approval of RITS as an RTGS system under Part 2 of the PSNA (see SSF Standard 8). This approval protects payments from being voided in the case of a Payment Provider entering external administration.
  • its designation as a ‘prescribed CS facility’ for the purposes of Part 7.11, Division 4 of the Corporations Act, in relation to the transfer of financial products effected through the settlement facility.

Enforceability of ASX rules while under external administration

ASX Legal has analysed the legal enforceability of ASX Settlement's Operating Rules upon the SSF's entry into external administration, and has identified no material legal risk to enforceability.

1.6 A securities settlement facility conducting business in multiple jurisdictions should identify and mitigate the risks arising from any potential conflicts of law across jurisdictions. A securities settlement facility should provide the Reserve Bank with a legal opinion that demonstrates the enforceability of its rules and addresses relevant conflicts of law across the jurisdictions in which it operates. This should be reviewed on a periodic basis or when material changes occur that may have an impact on the opinion, and updated where appropriate.

Although participants of ASX Settlement include subsidiaries and branches of entities that are based in foreign countries, the Operating Rules are governed by Australian law and require that all participants of ASX Settlement submit to the exclusive jurisdiction of New South Wales courts. ASX Legal's analysis of potential conflicts of law across jurisdictions has identified no material legal risks.


Available at <http://www.asxgroup.com.au/media/pfmi_disclosure_framework.pdf>. [1]