In the dynamic world of financial markets, the importance of robust and efficient clearing and settlement systems cannot be overstated. The proper functioning of these systems is crucial to ensure the smooth and secure transfer of assets and funds in the post-trade phase. In Australia, ASX Settlement plays a pivotal role in this landscape, operating the securities settlement facility for cash equities and warrants traded on the ASX market. In this article, we delve into the key aspects of ASX Settlement, its legal framework, operational performance, and recent developments.
Legal Framework: ASX Settlement's Strong Foundation
ASX Settlement operates within a sound legal framework, primarily governed by its Operating Rules and Procedures, known as the ASTC Settlement Rules before August 2010. These rules are more than just guidelines; they constitute a legally binding contract under seal between ASX Settlement and each of its participants. This contractual arrangement sets out the rights and obligations of ASX Settlement and each participant, including provisions for addressing defaults or suspensions. Additionally, ASX Settlement's netting arrangements are approved under Part 3 of the Payment Systems and Netting Act, providing a safety net in case of insolvency.
One of the fundamental elements of ASX Settlement's securities settlement system is the Clearing House Electronic Subregister System (CHESS). This system mitigates settlement risk through a Model 3 Delivery versus Payment (DVP) mechanism. Under this model, securities transfers and associated cash payments are executed in a multilateral net batch around noon each day. Interbank cash payments are facilitated through the Reserve Bank's real-time gross settlement (RTGS) system, RITS. This meticulous process ensures that securities title is updated only upon confirmation of cash settlement from RITS.
ASX Settlement's Response to 2008 Disruption
The financial markets were not immune to the global turmoil in 2008, and this included a disruption to the equity settlement process. In response to this significant event, the Reserve Bank conducted a review of settlement practices for Australian equities, providing recommendations for improvements. ASX Settlement, in collaboration with industry participants, announced a series of enhancements to its settlement arrangements.
These enhancements included:
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Earlier Deadline for Settlement Obligations: In case of payment failures, ASX may impose an earlier deadline for the back-out of settlement obligations. This change aims to expedite the back-out of troubled participants' obligations, reducing settlement delays and market uncertainty.
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Facilitation of Same-Day Settlement: ASX Settlement sought rules-based powers to require and facilitate the intraday settlement of certain backed-out settlement obligations. This measure was deemed necessary to avoid further disruption to the settlement process.
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Removal of ASX Clear Derivatives Margins from CHESS Batch: This change ensures that ASX Clear's risk management arrangements are no longer dependent on the completion of settlement in the cash equity market.
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Amendment to LEPO Expiry Settlement Process: Addressing potential principal risks related to LEPO expiry settlement.
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Development of Standards for Payment Providers: The possibility of pre-agreed settlement limits for payment providers was considered, but ASX Settlement decided to work towards raising minimum standards for payment providers instead.
Over the assessment period, ASX implemented several of these enhancements, such as the removal of ASX Clear derivatives margins from the CHESS batch. ASX also clarified aspects of the CHESS batch settlement processing cycle in a participant bulletin. This bulletin outlined the obligations of ASX Settlement and payment providers during the settlement cycle and provided a timeline for payment providers to confirm or reject their willingness to fund settlement participants' obligations.
Transparency in Securities Lending
The disruption to equity settlement in 2008 was partly linked to a participant's inability to meet obligations arising from securities lending transactions. To enhance transparency in the securities lending market, the Reserve Bank recommended the implementation of a securities-lending disclosure regime. ASX completed the implementation of this regime during the assessment period.
Key features of the disclosure regime include:
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Real-time Tagging: Tagging of all securities loan-related settlement instructions submitted to CHESS. This data offers visibility of loan-related transactions and allows for effective monitoring of settlement performance.
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Daily Reporting: Daily reporting of settlement participants' outstanding on-loan and borrowed positions, by security. This data provides insight into outstanding loans subject to recall and allows the identification of chains of loans.
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Quarterly Reporting: Quarterly reporting of the aggregate number of shares committed to lending programs by settlement participants.
ASX started publishing daily reports containing aggregated data on tagged transactions and outstanding securities-lending positions. However, it's important to note that reporting is compulsory only for settlement participants in ASX Settlement, which leaves gaps in the regime's coverage. The Reserve Bank is actively working with ASX and industry participants to address this issue and ensure comprehensive reporting.
Operational Performance and Business Continuity
ASX Settlement's CHESS system achieved a high level of operational reliability during the assessment period, with virtually 100% availability over the year. Capacity utilization was well within targets, averaging 24%, with a peak at 50%. This not only met the minimum availability target but also left ample capacity headroom over peak utilization.
ASX conducts business continuity tests of its key systems over two-year cycles. The testing program for 2010 and 2011 was finalized, and CHESS had a successful test in September 2009. ASX has also updated its Business Continuity Management Policy in line with international best practice, providing added assurance of system resilience.
Trade Acceptance Service (TAS)
In anticipation of alternative market operators (AMOs) entering the Australian market, ASX announced the creation of a Trade Acceptance Service (TAS). TAS allows trades executed on AMOs' platforms to be cleared and settled through ASX Clear and ASX Settlement, offering increased market flexibility.
In Conclusion
ASX Settlement plays a vital role in the Australian financial landscape, ensuring the efficient and secure settlement of cash equities and warrants traded on the ASX market. With a robust legal framework, ongoing enhancements, and a commitment to transparency, ASX Settlement is well-prepared to meet the challenges of an ever-evolving financial ecosystem. The collaboration between ASX Settlement, regulators, and industry participants ensures that the Australian clearing and settlement infrastructure remains at the forefront of financial market innovation and stability.
