Clearing and Settlement of Cash Equities in Australia

Settlement Performance

BACKGROUND

 

The clearing and settlement of equities performs a critical role in the operation of Australia’s financial markets, helping to reduce counterparty and systemic risk, and provide transaction efficiency and certainty for end investors.

Core processes that provide these benefits include novation, netting and settlement.

Novation

Through a contractual process known as novation, 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.  Novation is deemed to occur at the point of trade and performs two important functions:

  • it replaces the clearing participants’ credit exposures to other clearing participants by substituting the clearing house as the central counterparty; and
  • it enables the netting of settlement obligations.

Through novation, ASX Clear provides protection to non-defaulting clearing participants (and, indirectly, their clients) from the inability of a defaulting clearing participant to meet its obligations. 

A key metric for monitoring novation is the percentage of on and off market trading that is novated.

Prior to novation, CORE (for ASX) and the Trade Acceptance Service (for AMOs) perform verification functions for trades submitted to ASX Clear.  Following verification trades are registered for clearing.  If the verification conditions are not satisfied then trades are rejected and not submitted to CHESS.  Once a trade is registered it is novated.  Novation is deemed to have occurred at the point of trade.

Netting

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.

A key metric for monitoring netting is the percentage by which novated value is netted down for settlement.  This metric is termed “netting efficiency”.

Settlement

ASX's model for settlement maximises efficiency, while minimising the risk of settlement failure.  It does this by simultaneously transferring the legal ownership of shares and facilitating the transfer of money for those shares.  This is done through a Model 3 multilateral net batch settlement mechanism with irrevocable settlement finality at the end of the processing cycle.  The transfer of money occurs across the Exchange Settlement Accounts of payment providers in the RBA’s Information and Transfer System (RITS).

A key metric for monitoring settlement is the percentage of scheduled settlement that successfully settles (i.e. the opposite of the “fail rate”).  This metric is termed “settlement efficiency”.

Service availability

ASX’s critical processes of novation, netting and settlement and are supported in ASX’s core system CHESS.  It is critical for market operations, that CHESS remains stable and available for processing.  A key metric for monitoring systems availability is the percentage of systems uptime as measured against target availability times.  The business service availability target for CHESS is 99.80%.

For the March 2014 quarter, the average monthly system availability is 100% for CHESS.  The average monthly availability of CHESS has been 99.99% between November 2011 and March 2014. 

Trade Acceptance Service

ASX Clear’s Trade Acceptance Service (TAS) provides a mechanism for Chi-X to submit trades into the clearing house. The CHESS system performs the clearing and settlement functions.

The business service availability target for TAS is 99.80%.

For the current March 2014 quarter the average monthly system availability is 100% for the TAS.  The average monthly availability of the TAS has been 99.98% between November 2011 and March 2014.

REPORTING ON clearing and settlement service performance

The key metrics noted above on novation, netting efficiency and settlement efficiency for the current March 2014 and December 2013 quarter are reported in Attachment A.  They are also supported by charts demonstrating a longer reporting period in Attachment B.

ATTACHMENT A – SUMMARY METRICS RELATING TO THE PERFORMANCE OF ASX’S CLEARING AND SETTLEMENT SERVICES

March 2014 Quarter

December 2013 Quarter

System Availability (CHESS)

100%

100%

System Availability (TAS)

100%

100%

Total Trades Accepted (ASX)

46,770,262

43,971,842

Total Trades Accepted (AMOs)

9,979,893

10,113,292

Total Trades Rejected (ASX)

15

78

Total Trades Rejected (AMOs)

1

0

Daily Average Traded Value (On and Off Market)

$5.0 billion

$4.9 billion

Daily Average Cleared Value

$3.6 billion

$3.5 billion

Percentage Novated

71.8%

71.4%

Daily Average Cleared Value Post-Netting

$1.4 billion

$1.4 billion

Netting Efficiency

60.7%

60.0%

Daily Average Settled Value (Including Non-Novated)

$7.7 billion

$8.4 billion

Settlement Efficiency

99.9%

99.9%

ATTACHMENT B – PERFORMANCE OF ASX’S CLEARING AND SETTLEMENT SERVICES FROM JUNE 2011 TO MARCH 2014

NB this chart excludes rejections caused by two one-off incidents:  on 6 December 2011, 778 AMO trades were rejected due to a technical issue; and on 3 May 2013, 2202 ASX trades were rejected due to a participant issue.