2008/09 Assessment of Clearing and Settlement Facilities in Australia 2. Clearing and Settlement in Australia

Two types of CS facilities operate in Australia: central counterparties and securities settlement facilities. Under the Corporations Act, these facilities are required to hold a CS facility licence and are required to comply with the relevant Financial Stability Standards.

Central Counterparties

A central counterparty interposes itself as the legal counterparty to all purchases and sales undertaken on a market via a process known as novation. This process involves the replacement of the original contract by separate contracts between the buyer and the central counterparty and between the seller and the central counterparty.[1] These arrangements provide significant benefits in terms of counterparty risk management as well as greater opportunities for netting of obligations. At the same time, they necessarily result in a significant concentration of risk in the central counterparty. This risk can crystallise if a participant defaults on its obligations to the central counterparty, in which case the central counterparty must continue to meet its obligations to the defaulter's original counterparties. The central counterparty must therefore have appropriate risk controls and other measures in place to provide confidence that, in all but the most extreme circumstances, such a default can be accommodated without threatening its solvency or significantly disrupting financial markets or the financial system more generally.

The following licensed central counterparties are required to comply with the Financial Stability Standard for Central Counterparties:

  • ACH – provides central counterparty services for a range of financial products traded on the ASX market, including equities, warrants and equity-related derivatives; and
  • SFECC – provides central counterparty services for derivatives traded on the Sydney Futures Exchange (SFE) market, including futures and options on interest rate, equity, energy and commodity products.

Securities Settlement Facilities

A securities settlement facility provides for the final settlement of transactions undertaken on securities markets. Settlement involves transfer of the title to the security and transfer of cash consideration. These functions are linked via DVP arrangements established within the settlement process.

The following licensed securities settlement facilities are required to comply with the Financial Stability Standard for Securities Settlement Facilities:[2]

  • ASTC – provides for the settlement of equities and warrants traded on the ASX market; and
  • Austraclear – offers securities settlement services for over-the-counter (OTC) trades in debt securities.

Although ACH, SFECC, ASTC and Austraclear are all part of a single corporate group, ASX, each facility holds an individual CS facility licence.

Footnotes

Typically, a central counterparty deals only with the small number of direct central counterparty participants. Most buyers and sellers must appoint a central counterparty participant to act on their behalf. The central counterparty will therefore have a contract with the participant acting on behalf of the buyer and the participant acting on behalf of the seller, rather than directly with the buyer and seller. [1]

A third securities settlement facility – operated by IMB Limited – falls outside the application of the Financial Stability Standards due to its small size and the low likelihood of it affecting the overall stability of the Australian financial system. [2]