2015/16 Assessment of ASX Clearing and Settlement Facilities A1.1 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.

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 the cash-leg of equities trades. Cash settlements of margin occur via Austraclear, with interbank obligations settled on an RTGS basis across ESAs at the Bank, via RITS. Settlement of the securities-leg of equities trades and lodgement of non-cash collateral takes place in ASX Settlement, with securities delivery obligations effected within CHESS and linked 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 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). ASX Clear's Operating Rules and Procedures define the point after which payment or transfer instructions submitted to ASX Clear may not be revoked (CCP Standard 8.3).

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 A2.2, SSF Standard 7.1). For payments and securities obligations settled through ASX Settlement, finality is supported by ASX Settlement's Operating Rules and Procedures and the approval of its netting arrangements under Part 3 of the PSNA (see CCP Standard 1.2). This approval protects ASX Settlement's netting arrangements for securities and payment obligations. Any interbank payments 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. With this approval, a payment executed in RITS at any time on the day on which a RITS participant enters external administration has the same standing as if the participant had gone into external administration on the next day. Accordingly, in the event of insolvency all transactions settled on the day of the insolvency are irrevocable and cannot be unwound.

In May 2016, The Resilience Act amended the PSNA to provide additional legal certainty for RTGS systems, such as Austraclear and RITS, and netting arrangements, such as those operated by ASX Settlement, that have been approved under the PSNA. These amendments facilitate the ongoing participation by institutions in ‘non-terminal’ external administration (e.g. statutory management) by clarifying that the protections under the PSNA continue to apply. The amendments also extend the netting protection to cover any transfer of property, to discharge a net obligation in netting arrangements governed by the rules of a CS facility. This will enhance the finality protections given to the settlement of transactions in ASX Settlement that were entered into by a participant prior to its entry into any form of external administration (see Standard 1.5).

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. ASX Clear is 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. 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 two hours. Participants may also meet margin obligations via securities that have been lodged from CHESS.

Delivery of securities

The settlement of equities trades novated by ASX Clear occurs in ASX Settlement. This involves the use of a 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 transactions novated by ASX Clear and non-novated transactions. The outcome of this process for ASX Settlement participants is 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 11.30 am on the day of settlement. This cut-off time was extended from 10.30 am as part of ASX's transition from a three-day to a two-day settlement cycle for cash equities in March 2016, in recognition of the potential impact of a shortened cycle on participant arrangements to process and pre-position securities for settlement (see Section 3.5.7).

Once participants' net delivery obligations have been determined, ASX Settlement confirms that sufficient securities are available in each participant's settlement account in CHESS. The transfer of securities within the system by participants 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). Immediately after cash settlement has been confirmed, ASX Settlement effects the net transfer of securities within CHESS. Settlement is usually completed by around 12.30 pm. 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 as long as the participant is not in default (see Appendix A2.1, SSF Standard 11). In the case of a failed settlement caused by a funds shortfall, ASX Clear will inject funds into the settlement batch or enter into an OTA with sellers of affected securities to facilitate timely settlement (see CCP Standard 7.3).

Options settlement

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, unless the account holder requests otherwise. When an options contract is exercised, performance obligations are allocated via a random process to a seller of a contract within the same series.

Settlement values for cash-settled derivatives are calculated according to contract specifications, generally on the last trading day. For example, for ASX/S&P 200 Index Options, ASX Clear calculates the final settlement price of the contract on the morning of the day of expiry, with resulting cash flows settled by 10.30 am on the first business day after expiry (the value date for this contract). These cash flows in Austraclear are settled with finality in real time, as are margin-related payments (see CCP Standard 8.1).

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.

The ASX Clear Operating Rules and Procedures define the point after which payment or transfer instructions may not be revoked. For derivatives and OTC equity transactions, this occurs once the instruction has been submitted to ASX Clear. In the case of cash equity trades, participants are able to request that a trade be removed from novation prior to the calculation of participants' net settlement obligations at the end of the transaction date.