2015/16 Assessment of ASX Clearing and Settlement Facilities A2.1 ASX Settlement Standard 8: Money settlements

A securities settlement facility should conduct its money settlements in central bank money where practical and available. If central bank money is not used, a securities settlement facility should minimise and strictly control the credit and liquidity risk arising from the use of commercial bank money.

ASX Settlement conducts its money settlements across the ESAs of Payment Providers at the Bank, via RITS (SSF Standard 8.1). ASX Settlement does not conduct settlements across its own books or in commercial bank money (SSF Standards 8.2, 8.3, 8.4, 8.5). Payment Providers, which effect money settlements on behalf of participants, must be prudentially regulated and meet ASX Settlement's application criteria. The roles and responsibilities of commercial bank Payment Providers are governed by legal agreements between those banks, ASX Settlement, ASX Clear and APCA (SSF Standard 8.3).

ASX Settlement's money settlement arrangements are discussed in further detail under the following sub-standards.

8.1 A securities settlement facility should conduct its money settlements in central bank money, where practical and available, to avoid credit and liquidity risks.

ASX Settlement's money settlements are all settled in central bank money. Net payment obligations in ASX Settlement associated with securities transfers are settled between commercial settlement banks, known as Payment Providers, in a single multilateral batch across ESAs at the Bank, via RITS.

8.2 If central bank money is not used, a securities settlement facility should conduct its money settlements using a settlement asset with little or no credit or liquidity risk.

Money settlements in ASX Settlement are effected using central bank money.

8.3 If a securities settlement facility settles in commercial bank money or its participants effect settlements using commercial settlement banks, it should monitor, manage and limit credit and liquidity risks arising from the commercial bank money settlement agents and commercial settlement banks. In particular, a securities settlement facility should establish and monitor adherence to strict criteria for commercial banks appropriate to their role in the settlement process, taking account of matters such as their regulation and supervision, creditworthiness, capitalisation, access to liquidity and operational reliability. A securities settlement facility should also monitor and manage the concentration of its and its participants' credit and liquidity exposures to commercial bank money settlement agents and settlement banks.

Participants in ASX Settlement use commercial bank Payment Providers to effect money settlements on their behalf. Payment Providers must be approved by ASX Settlement and their provision of this service is governed by the terms of a standard deed. A Payment Provider must submit an application to ASX Settlement and meet the following criteria:

  • be approved by APRA as an ADI for the purpose of carrying out banking business within Australia
  • be a member of RITS with an ESA
  • have the operational capacity to make payments to participants and on behalf of participants
  • have executed the standard client payment deed
  • have the technical ability to connect to CHESS, and the technical and financial capacity to participate in DvP settlement.

ASX Settlement does not have a formal process to monitor that Payment Providers meet these criteria on an ongoing basis, other than to observe that they remain connected to CHESS and continue to meet payment obligations by the required cut-off times. In the event that a Payment Provider experienced operational difficulties or failed to meet cut-off times, ASX Settlement would investigate the matter through senior-level discussions with the affected Payment Provider.

Currently there are 11 Payment Providers. ASX periodically monitors the proportion of participants that use each Payment Provider, but this is not subject to frequent change. ASX has identified that two large Australian banks act as Payment Providers for a large share of participants; however, the average value of daily settlements involved is small relative to the financial and operational capacity of these banks.

The terms of Payment Provider arrangements are covered by the CHESS Payment Interface Standard Payments Provider Deed, entered into by ASX Settlement, ASX Clear, APCA and the relevant commercial bank. This deed sets out payment authorisation deadlines and other operational requirements for Payment Providers that act as commercial settlement banks for participants. Changes to the deed were implemented in 2014/15 to support the introduction of enhanced client protection arrangements (see Appendix A1.1, CCP Standard 13) and in 2015/16 to support the transition from a three-day to a two-day equities settlement cycle (see SSF Standard 10.2).

The process of updating the deed involves negotiation with APCA and Payment Providers, which could create delays in implementing changes to authorisation deadlines or other operational requirements required to support changes to the settlement process. ASX, working with APCA, has established a framework for formally engaging Payment Providers on changes to settlement processes in response to regulatory or market-driven change. This is in the form of an APCA standing sub-committee comprising representatives of the Payment Providers, with ASX acting as an ‘observer’. The role of the committee is to consider and provide feedback on proposed amendments to the Standard Payments Provider Deed, facilitate consultation with Payment Providers, and help to ensure that Payment Providers are notified of any upcoming developments.

8.4 If a securities settlement facility conducts money settlements on its own books, it should minimise and strictly control its credit and liquidity risks.

ASX Settlement does not conduct money settlements on its own books.

8.5 A securities settlement facility's legal agreements with any commercial bank money settlement agents should state clearly when transfers on the books of the relevant commercial bank are expected to occur, that transfers are to be final when effected, and that funds received should be transferable as soon as possible, at a minimum by the end of the day and ideally intraday, in order to enable the securities settlement facility and its participants to manage credit and liquidity risks.

ASX Settlement does not conduct settlements via commercial bank money settlement agents. Participants' arrangements with Payment Providers are conducted under legal agreements between the parties involved. ASX Settlement does, however, maintain separate agreements with Payment Providers regarding operational requirements (see SSF Standard 8.3).