Clearing and Settlement of Cash Equities in Australia

Clearing

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.

Clearing house

The clearing of equity transactions is performed by the clearing house, ASX Clear. ASX Clear is a licenced facility under the Corporations Act that acts as a central counterparty (CCP) for the trading of shares, warrants and exchange-traded funds.

As the central counterparty, ASX Clear becomes the seller to every buyer and the buyer to every seller, making it liable for completing all cleared transactions on the relevant market.  This occurs through a contractual process known as novation, in accordance with the operating rules of ASX Clear.

Novation

Under novation the original market contract between the trading participant representing the buyer and the trading participant representing the seller is discharged and replaced with two new contracts: one between ASX Clear and the clearing participant representing the buyer, and the other between ASX Clear and the clearing participant representing the seller.  In this way ASX Clear becomes the counterparty assuming the credit risk. 

A trading participant is a broker authorised to trade on ASX's market, typically for a client, while a clearing participant is typically a broker authorised to clear trades through ASX's clearing house.

Regulation

ASX Clear is a licensed clearing and settlement facility under the Corporations Act overseen by ASIC and must comply with the Financial Stability Standard (FSS) for Central Counterparties published by the Reserve Bank of Australia. In addition, as a licensee, it must:

  • do all other things necessary to reduce systemic risk to the extent that it is reasonably practicable to do so
  • do all things necessary to ensure that the facility’s services are provided in a fair and effective way
  • have adequate arrangements for supervising the facility.

The ASX Clear Operating Rules form the contract between ASX Clear and its clearing participants.

ASX Clear provides clearing arrangements to Approved Market Operators (AMOs) – a licensed market operator like Chi-X, for example - by accepting trades from those venues for clearing on the same basis as those executed directly on ASX.

Legal terms of service are in place between ASX Clear and AMOs to ensure the highest level of operational and technical standards. To learn more view the Access section.

ASX Clear financial resources

ASX Clear has financial resources available to it to meet shortfalls arising from the default of the clearing participant with the largest exposures under extreme but plausible market price movement scenarios. This is done through a number of measures including daily stress testing of the amount and liquidity of those resources.

ASX Clear currently maintains $550 million of fixed financial resources. Currently, clearing participants are not required to provide capital commitments to the clearing house.

View more detail of the structure and default management arrangements for both ASX Clear and ASX Clear (Futures): Clearing Participant Default - an Overview (PDF 132 KB)

Risk monitoring of clearing participants

ASX Clear can impose a number of supervisory measures on clearing participants to monitor their risk exposures and maintain financial stability. These include:

  • minimum capital requirements for clearing participants, which are monitored through financial returns
  • end of day and, at times of high market volatility, intraday margining of clearing participants’ market positions
  • additional margining of clearing participants where projected shortfalls that would arise from closing their positions in stressed market conditions or the absolute size of their positions or margins exceed pre-determined acceptable levels.

Trade through to settlement

Trades executed on ASX Trade, or the trading platform of an AMO, are submitted to ASX Clear for registration.

Once accepted by ASX Clear, by way of novation, each cash market trade is replaced with a cash market CCP transaction between each participant and ASX Clear.

Where the cash market trade is cleared on both sides by the same clearing participant, there is no need for novation and the participant receives notification of the trade, for their information only.

On the evening of T+1, ASX Clear nets all cash CCP transactions to create one net receipt/delivery per line of stock and one net cash payment/receipt per clearing participant. Generally, where a stock is undergoing a corporate event, the netting facility is turned off and the gross transaction is retained through to the settlement cycle.

The resultant transactions of ASX Clear are submitted to ASX Settlement for settlement in the CHESS batch on the morning of T+3.

This diagram illustrates the trade through to settlement process.