2015/16 Assessment of ASX Clearing and Settlement Facilities A2.2 Austraclear Standard 17: FMI links

A securities settlement facility that establishes a link with one or more FMIs should identify, monitor and manage link-related risks.

Austraclear maintains four links to other FMIs:

  • ASX Clear, for funds transfers in relation to margin payments
  • ASX Clear (Futures), for AUD funds transfers in relation to margin payments, lodgement of AUD-denominated non-cash collateral and settlement of 90-day bank bill futures
  • LCH.C Ltd, for the management of LCH.C Ltd's AUD liquidity requirements
  • Clearstream, in relation to Euro entitlements managed in Austraclear.

There are no direct financial risks associated with these links but Austraclear is exposed to operational risks. These are managed in the context of the operational risk management practices of each FMI (SSF Standard 17.1). The legal basis of each link is supported by finality legislation and contractual arrangements, including the Regulations, Operating Rules and Procedures of the linked facilities (SSF Standard 17.2). All link arrangements have been discussed with the Bank (SSF Standard 17.3). Austraclear's link with Clearstream does not involve the extension of credit, provisional transfers of securities or the use of custodians (SSF Standards 17.4, 17.5, 17.6).

Austraclear's management of link-related risks is described in further detail under the following sub-standards.

17.1 Before entering into a link arrangement, and on an ongoing basis once the link is established, a securities settlement facility should identify, monitor and manage all potential sources of risk arising from the link arrangement. Link arrangements should be designed such that the securities settlement facility is able to comply with these SSF Standards.

Identifying link-related risks

Austraclear maintains links with four other FMIs. A link for the purposes of this standard is any connection that is made to another FMI according to a set of contractual and operational arrangements, irrespective of the complexity of the link and whether it is made directly with the FMI or through an intermediary.[13]

  • ASX Clear. This link supports AUD funds transfers related to margin payments. Cash transfers are entered into Austraclear by ASX Clear and then matched in Austraclear against the respective clearing participants' cash settlement instructions. Regular margin collections and intraday margin calls, which make up the majority of cash transfers in ASX Clear, are submitted automatically to Austraclear by ASX Clear's margin and collateral systems.
  • ASX Clear (Futures). This link supports AUD funds transfers in relation to margin payments, lodgement of AUD-denominated non-cash collateral, and settlement of 90-day bank bill futures. Like for ASX Clear, cash transfers are entered into Austraclear by ASX Clear (Futures), and then matched in Austraclear against the respective clearing participants' cash settlement instructions. Regular margin collections and intraday margin calls, which make up the majority of cash transfers, are submitted automatically to Austraclear by ASX Clear (Futures)' margin and collateral systems. AUD-denominated non-cash collateral is lodged via a collateral lodgement form. This needs to be received by ASX Clear (Futures) the day prior to the collateral being needed to cover margin, with the security being transferred to ASX Clear (Futures) via a free-of-payment trade in Austraclear. Settlement of 90-day bank bill futures takes place in Austraclear according to procedures set out in ASX 24's Operating Rules and Procedures. Sellers and buyers who are not full participants of Austraclear must appoint a full participant to act as their settlement agent.
  • LCH.C Ltd. LCH.C Ltd, a UK-based CCP licensed as a CS facility in Australia, is a Special Purpose Participant in Austraclear. This link enables LCH.C Ltd to manage its AUD liquidity requirements. LCH.C Ltd holds securities eligible for repo with the Bank in its Austraclear account to cover its estimated AUD liquidity needs (on a business as usual basis as well as to cover stressed liquidity exposures). On a daily basis, LCH.C Ltd draws on this pool of assets to generate intraday liquidity in its ESA with the Bank. Since April 2016, LCH.C Ltd has also allowed its clearing participants to meet margin obligations by lodging eligible AUD-denominated securities to its Austraclear account.
  • Clearstream. This link relates to Euro entitlements managed in Austraclear (see SSF Standard 9.1). Austraclear is a participant in Clearstream. A participant that has a Eurobond holding in Clearstream may choose to lodge that security in Austraclear by transferring it to Austraclear's Clearstream account. Participants with Eurobond holdings in Euroclear may also transfer securities to Austraclear's Clearstream account via a separate link maintained between Euroclear and Clearstream. Once available in the Austraclear system, arrangements for sales and purchases of the security are as for other debt securities. Withdrawals of Euro entitlements from the Austraclear system are processed in a similar way to deposits, with Austraclear transferring the securities from its account in Clearstream to the participant's account with either Clearstream or Euroclear on request.

Managing operational risk

Links with ASX Clear and ASX Clear (Futures) are subject to the same operational risk management framework that applies to all of the ASX CS facilities (see SSF Standard 14). This addresses operational risks associated with software, infrastructure or network failures and manual processing errors. An incident report is required for any significant technical or operational incident, including an assessment of mitigating actions to reduce the risk of reoccurrence. In addition, six-monthly risk profile assessments are prepared and presented to the Audit and Risk Committee, and an independent system-controls audit is conducted annually.

Operational risks arising from the link with LCH.C Ltd are managed on the same basis as operational interdependencies with participants more broadly (see SSF Standard 14). Austraclear is exposed to limited operational risk from this link, since a disruption to LCH.C Ltd's operations would impact only those participants with outstanding unsettled transactions with LCH.C Ltd. LCH.C Ltd's operational risk management arrangements are overseen by the Bank, as well as its primary supervisory authority, the Bank of England. The Bank also considers the interdependencies created between Austraclear and LCH.C Ltd in its ongoing oversight and supervision of LCH.C Ltd.

Clearstream's operational risk management arrangements are overseen by BCL, which performs periodic assessments of Clearstream against applicable standards (see SSF Standard 14.9).

Managing financial risk

Austraclear does not assume any direct financial risks from its links to other FMIs.

17.2 A link should have a well-founded legal basis, in all relevant jurisdictions, that supports its design and provides adequate protection to the securities settlement facility and other FMIs involved in the link.

Austraclear's links to ASX Clear, ASX Clear (Futures) and LCH.C Ltd have their legal basis in the Regulations, Operating Rules and Procedures of each facility. The finality of transactions settled in Austraclear, including transactions submitted via these links, is supported by the approval of Austraclear under Part 2 of the PSNA (see SSF Standard 1.5).

Austraclear's link to Clearstream has a legal basis in a contract between the two FMIs, and the system rules of Clearstream's international central securities depository. As noted under SSF Standard 17.1, Clearstream is regulated by BCL in accordance with international standards.

17.3 Where relevant to its operations in Australia, a securities settlement facility should consult with the Reserve Bank prior to entering into a link arrangement with another FMI.

Austraclear has discussed its current link arrangements with the Bank. Austraclear did not enter into any new link arrangements during the Assessment period.

17.4 A securities settlement facility operating a central securities depository that links to another central securities depository should measure, monitor and manage the credit and liquidity risks arising from such links. Any credit extended to the linked central securities depository should be covered fully with high-quality collateral and be subject to limits.

Austraclear does not extend credit to Clearstream.

17.5 Provisional transfers of securities between a securities settlement facility operating a central securities depository and another central securities depository should be prohibited or, at a minimum, the retransfer of provisionally transferred securities should be prohibited prior to the transfer becoming final.

Euro entitlements are not made available to participants in Austraclear until title has been confirmed by deposit in Austraclear's account at Clearstream. Provisional transfers of securities cannot arise under the link between the two central securities depositories.

17.6 A securities settlement facility operating an investor central securities depository that uses an intermediary to operate a link with an issuer central securities depository should measure, monitor and manage the additional risks (including custody, credit, legal and operational risks) arising from the use of the intermediary.

Austraclear does not use custodians or other intermediaries in its link with Clearstream.

Footnote

Links to payment systems are addressed in SSF Standard 8. [13]