The clearing of executed trades performs a critical role in the operation of Australia’s financial markets. ASX’s clearing services help reduce counterparty and systemic risk, and provide transaction efficiency and certainty for end investors.
The clearing process is largely invisible, but the benefits are shared by all financial market users.
Backed by significant capital and collateral, and overseen by Australian regulators, ASX’s clearing infrastructure supports the world-class reputation of Australia's financial markets.
ASX Clear services are provided to clearing participants, who are typically brokers or clearing and custody service providers. The two key benefits to clearing participants are netting efficiencies and counterparty credit protection.
ASX Clear is approved as a ‘netting market’ for the purposes of the Payment Systems and Netting Act. This enables the netting of settlement obligations in each individual equity, providing greater market efficiency at the time of settlement and reducing participant transaction and funding costs.
The left-hand diagram below depicts participant A’s trading activity in a single stock. At a gross level, participant A has sold $100 of shares to, and bought $50 of shares from, participant B. Participant A has also sold $30 of shares to, and bought $50 of shares from, participant C. Post novation, participant A’s trades with participants B and C are replaced with trades between participant A and ASX Clear. Post netting, this becomes a net sale of shares for $30 from participant A to ASX Clear (right-hand diagram).
Counterparty credit protection
Through novation, ASX Clear provides protection to non-defaulting clearing participants (and, indirectly, their clients) from a defaulting clearing participant which does not meet its obligations. Different arrangements apply for different categories of financial product transactions.
Clients, typically investors, must be fully informed and satisfied with the creditworthiness and performance risk of their clearing participant. ASX Clear does not interpose itself between a clearing participant and its clients.
Novation does not change the exposure that clients have if their own clearing participant defaults and cannot meet its obligations to them.