24 July Broker Trades Message Specification. (November 2007) ASX Market Information. Information Solutions from the Source

Transcription

1 Issues Paper: Impact of Multiple Trade Execution Platforms for ASX Listed Securities on the Operations and Systems of ASTC Settlement Participants and Other Stakeholders Broker Trades Message Specification 24 July 2008 (November 2007) ASX Market Information Information Solutions from the Source

2 2008 ASX Limited ABN Purpose of the Document As foreshadowed in ASX Consultation Paper Access to Central Counterparty (CCP) and Securities Settlement Facility (SSF) CHESS Services No.1, ASX is undertaking a consultation process with Participants and other stakeholders to obtain information on the likely impact of clearing and settling trades from multiple trade execution platforms for ASXlisted securities. This consultation process commenced with the publication of the Issues Paper: Impact of Multiple Trade Execution Platforms for ASX Listed Securities on ACH Clearing Participant Operations and Systems on 11 April 2008, inviting Clearing Participants (CPs) to provide a first round of feedback on proposed CCP services for trades executed on a central limit order book (CLOB) operated by a trade-execution-only platform. Based on the feedback received from that paper, ASX is now able to provide more detail around the proposed processes and information flows between the aspirant trade-execution-only platforms and CHESS in respect of novated transactions, affecting both ACH and ASTC Participants (SPs). In addition, ASX has now received formal requests from aspirant market operators (AMOs), supported by further clarifications, for ASTC to provide settlement services through CHESS for non-novated transactions. Although some of the background and high level descriptions of the CCP service for CLOB transactions may reaffirm the proposal contained in the CP consultation document noted previously, ASX recommends that all interested parties review this document and provide feedback as appropriate. The intended audience for this paper extends to Settlement Participants (SPs) including CPs which also act as SPs, and other stakeholders such as security registrars, back-office system providers, custodians and information vendors. ASX encourages the participation of all stakeholders in this consultation process. This consultation paper: Provides contextual background; Outlines the high-level relationships that need to be established, for comment and to assist with SPs and stakeholders responses; Includes the proposed high-level process and the resulting CHESS message flows for the communication of trade information between trade-execution-only platforms, CHESS (for both ACH and ASTC) and Participants; Seeks further details on the means by which SPs and stakeholders may need to amend their operational processes and/or systems to cater for a multiple-trading platform environment based on the proposed approach outlined by ASX in this paper; and Requests SPs to identify areas in which additional or amended functionality or information may be required from ACH/ASTC and or in CHESS. ASX expects that it will need to seek further input from SPs, CPs and other stakeholders in order to refine the operational and systems solutions as the regulatory framework becomes clearer. This may take the form of further Information papers or follow-up meetings with stakeholders as required. Please provide your feedback in writing by 12 August, 2008 to Ms Anne Brown, Chief Risk Officer at anne.brown@asx.com.au. In your response, please indicate whether your comments are based on the assumption that your organisation will or will not be settling novated and/or non-novated trades from multiple trade-execution-only platforms or, where you are an affected stakeholder, please describe your role. For any queries on this document, please call Andrew McPherson, Manager Group Projects on July 2008 Page 2 of 11

3 2. Background ASX has received requests to engage in business and technical discussions on access to CCP and SSF CHESS Services from aspirant market licensees for trade-execution-only platforms for ASX listed securities. In response, on 19 March 2008, ASX issued a public consultation document entitled ASX Consultation Paper Access to Central Counterparty (CCP) and Securities Settlement Facility (SSF) CHESS Services No.1 (ASX Consultation Paper No.1). That document provides: Contextual background outlining the events initiating this consultation and the activities undertaken by ASX so far, including discussions with key regulators; Transparency regarding the process being undertaken by ASX to identify, assess and manage risks and issues involved in provision of such access in a manner that does not compromise the stability of ASX s clearing and settlement facilities or increase systemic risk in the wider financial system; An indicative framework and timetable within which ASX will determine the access regime and standards to be utilised. To ensure full acquaintance with the context and relevant issues prior to responding to this issues paper, Settlement Participants and Stakeholders are encouraged to read ASX Consultation Paper No. 1, a copy of which is available on the ASX website at the following address: ASX subsequently released an issues paper in respect of CCP services for trades executed on multiple trade-executiononly platforms, a copy of which is available using the following link: In addition, since that time, ASX has received a formal request from aspirant AMOs to use ASTC s CHESS batch to settle non-clob transactions. Based on this service extension and the feedback received from the first consultation paper, ASX is now:- Providing further detail on the proposed solution to the CCP service and; Introducing a new proposal for the settlement of non-novated transactions. ASX has been requested by certain aspirant AMOs to settle non-novated transactions in the CHESS batch ahead of a CLOB service. Detailed discussions on this service are still progressing. ASX will be exploring the possibility of providing temporary arrangements for these AMOs to facilitate such settlements and will consult with stakeholders when further details are available. 24 July 2008 Page 3 of 11

4 3. Clearing and Settlement Services Today ACH is the Central Counterparty (CCP) for trades performed on ASX s equity and related markets and is supported by ASTC which provides a Securities Settlement Facility (SSF). In addition, ASTC also facilitates the settlement of (non-novated) bilateral transactions between its SPs. CHESS is the system which enables ACH and ASTC to provide these clearing and settlement services to the market. CHESS facilitates the clearing of trades by disseminating 164 CHESS Notified Trade messages to CPs for trades accepted on behalf of ACH from ASX s Trading Platform ( ITS ). These trades are novated to ACH which acts as the CCP to the buyer and seller of the trades. CHESS then facilitates settlement of market trades by scheduling each novated Notified Trade (CHESS 164 message) for DvP settlement in the CHESS batch, typically on T+3. The settlement of these market trades may involve SPs that do not hold CP status, such as Custodians which hold securities or cash on behalf of investors and act as bilateral counterparties to their settlements. Where this is the case, these transactions are also scheduled for settlement in the CHESS batch when dual-entry CHESS 101 Settlement Instructions are matched. In extending CCP and SSF services to other trade-execution-only platforms, ACH and ASTC must ensure that the CCP s risk profile and the related operating risks to the current clearing and settlement process provided through CHESS are not adversely impacted. It should be noted that in developing its potential service provision, ASX is yet to obtain clarification from the aspirant market operators regarding the precise nature of trading to be undertaken on their trade-execution-only platforms. Accordingly, the details provided in the proceeding sections of this paper are based on information available to date and high level preliminary discussions with aspirant market operators Services for Non-CLOB Trades from ASTC and ACH Current Arrangements In certain instances, ACH and ASTC provide services for the ASX Market for trades from ASX s trading platform executed outside of the CLOB, namely crossings. Currently, trade crossings on the ASX Market are reported through ITS by Trading Participants (TPs) with the relevant condition code. Sections 17 and 18 of the ASX Market Rules and Chapter 6 of the ITS Reference Manual provides greater detail on trade crossings in the ASX Cash Equity Market. ACH however, refers to clearing crossings reported through ITS as involving the same CP on both sides of the trade sent to CHESS. In this instance, ACH and ASTC provide a trade processing, confirmation and registration service by disseminating a single 164 CHESS Notified Trade message to the CP. These trades are therefore not scheduled for settlement in the CHESS batch and ACH is not counterparty to the transaction. The Transaction IDs and the relevant condition codes are used by participants to reconcile against the trades and trigger back-office processes. Securities are then transferred as required through CHESS using normal procedures and processing involving single-entry and dual-entry free-of-payment transactions. However, in certain instances where multiple SPs are involved, these transactions can result in Dual Entry CHESS 101 Settlement Notifications which settle DvP in the CHESS batch with a Transaction Basis of M for Market. Trade crossings may involve different CPs on both sides of a trade - for example, where a participant has a 1 TP/2 CP Model such that a TP uses the services of more than one CP. In this instance, ACH does not treat the transaction as a clearing crossing as the trade is novated to ACH acting as the CCP to both CPs of the trade. These trades will be scheduled for batch settlement on T+3 following the dissemination of a 164 CHESS Notified Trade message to each CP. 24 July 2008 Page 4 of 11

5 Proposed Service Extension to Accommodate the Multiple Market Environment Following recent requests from aspirant AMOs, ASX is assessing how it can provide a service for non-clob trades from AMOs to be settled and, where appropriate, cleared. In order to oversee and maintain the integrity of the settlement batch, ASX needs to extend the current prior notification arrangements around such transactions to all trade-execution-only platforms. The transparency from receiving immediate notification of non-clob trades from the trade-execution-only platforms is required so that ASTC can continue to monitor the settlement batch composition and pro-actively manage any potential settlement batch issues. The importance of such capabilities has recently been emphasised by market-wide settlement delays associated with nonnovated transactions. Therefore, where a trade-execution-only platform reports clearing crossings as referred to by the clearing facility - i.e. where the same CP is on both sides of a TP s trade, these trades will be treated and processed by CHESS and Participants in the same manner as is currently performed, as outlined in Section That is, through the reporting of the trade by the trade-execution-only platform to CHESS, followed by the dissemination of a single CHESS Notified Trade message to the CP and subsequent transfer of securities, including in certain circumstances the use of Dual Entry CHESS 101 Settlement Notifications in the CHESS batch. The use of the Transaction Basis of M in these instances recognises that the trade-execution-only platform has a market operator licence and has been approved as a market operator by ACH and ASTC. 3.2 Trade Processing where Full CCP and SSF CHESS Services May Be Provided This section describes in greater detail how ACH and ASTC propose to act as a CCP/SSF for trade-execution-only platforms Overview of Responsibilities and Key Processes In order to facilitate feedback from Settlement Participants and Stakeholders, this section provides a high-level overview of the relationships that need to be established to enable ASX to provide access to Central Counterparty (CCP) and the Securities Settlement Facility (SSF) through ACH/ASTC for multiple trade-execution-only platforms. Figure 1 overleaf provides a diagrammatic representation of the key components of this process, with additional commentary provided on each component. The approach is designed to ensure that ACH s and ASTC s risk and operational standards are not degraded and thereby ensure continued compliance with the CCP s and SSF s obligations as Clearing and Settlement facility licensees. To clear the trades of a trade-execution-only platform through ACH, a Participant of a trade-execution-only platform must also become a CP of ACH and obtain the required permissions to clear trades from the specified platform. The same principle applies to third party clearing arrangements for Non-Clearing Participants of a trade-execution-only platform. Likewise, to settle trades of a trade-execution-only platform through ASTC, a Participant of a trade-execution-only platform must also become a SP of ASTC and obtain the required permissions to settle trades from the specified platform. 24 July 2008 Page 5 of 11

6 Figure 1 Overview of relationships to enable ACH and ASTC to clear and settle multiple trading platforms ASX (ITS) Trade- Execution- Only Platform A Trade- Execution- Only Platform B 1. Trades Confirmations and Rejections 2. Validation 3. Novation to CCP 4. Netting 5. Settlement ASTC/ACH (CHESS) 1. On execution of a trade, the trading platform will immediately supply real-time, trade-level settlement data to CHESS in relation to trades undertaken on the respective trading platform. The full technical solution for this process is under investigation but is likely to involve the trade-execution-only platform connecting to CHESS to register trades through a set of messages for CHESS to validate, accept and confirm or reject the trades back to the trading platform. This will provide a standard generic model for all trade-execution-only platforms to supply their real-time trade data to CHESS to process the data in a consistent manner, and furthermore enables a clearly visible audit-trail of the trade flow process for all parties involved. 2. On receipt, ACH will first validate the transaction to ensure that the format and information received is acceptable and that the security and its trade basis are ones on which ACH offers the CCP clearing service to the counterparties involved. Accepted trades and rejections will be sent back to the operator of the originating trading platform through new CHESS messages, with rejections being handled in accordance with the Rules of each Market Operator. 3. Having passed these validation checks, the eligible transactions will be immediately novated to ACH and be processed in accordance with the ASTC and ACH Rulebooks. Acting as the counterparty to each CP for these transactions, performance of these novated trades will be supported by ACH s financial resources in the event of a default by any Clearing Participant. 4. All novated trades, regardless of the source trading platform, will continue to be netted after the close of business two days prior to settlement in accordance with the existing CHESS procedure. Between the point of novation and this netting cycle, the source trading platform for each trade level settlement will be identifiable to CPs responsible for clearing the trades. 5. Finally, at the outset of these new arrangements, settlement will be undertaken (typically on T+3) using an unchanged, single daily batch settlement process 1. Subsequently, ASTC will advise the issuer of the 1 Note that recent market events and the subsequent reviews conducted by ASX and the RBA on settlement of the equity market may result in the medium to longer-term amendment of current CHESS settlement processes irrespective of the changes to accommodate the multiple trading platform environment. 24 July 2008 Page 6 of 11

7 appropriate amendment to the register, following the existing process. Settlements arising from trading on all trading platforms will be subject to the same CHESS settlement calendar and corporate action processing. Amendments to fee structures may also be required Key Components The rationale for the key characteristics of the approach is outlined below: 1. Terms of Trade : In order for the trading activity sourced from multiple trade-execution-only platforms to be novated and netted with settlements arising from other trading platforms, ACH will require that the terms of trade reflected in each Market Operator s Rulebook do not create an unacceptable increase to ACH s risk profile or its obligations as a Clearing & Settlement facility licensee. 2. Point of Novation: For trades occurring on other (non-asx) trade-execution-only platforms, novation will occur once the transaction has passed all the relevant validity checks. ACH intends to minimise the period between trade execution and novation to minimise bi-lateral counterparty risk exposure from trading on trade-executiononly platforms. In order to adequately risk manage ACH s exposures, trade-execution-only platforms will be required to send each trade immediately to CHESS after execution and ACH will only become counterparty to the trade via novation once the resulting trade has been validated. In practical terms, this means that for valid trades, the delay between trade execution and novation should be negligible. 3. Trade Validation and Processing: Upon receipt of a trade registration request (new message), the data will be validated in accordance with ACH and ASTC s acceptance criteria. As soon as it is accepted by ACH and ASTC, a confirmation message will be immediately sent to the trade-execution-only platform by CHESS. Messages will simultaneously be sent to the CPs designated to clear the trade, (current CHESS 164 Notified Trade message). This message will include the identification of the trade-execution-only platform and in effect provides the trade-level settlement outlined in point 4, in section 3.1, above. Trades that have not met ACH s validation criteria for novation will be rejected immediately back to the trade-execution-only platform for its Market Operator to deal with it in accordance with its Rulebook. 4. Trade Cancellation: Where a trade-execution-only platform wishes to cancel a trade previously sent to ACH, it would send a trade registration cancellation request (new message) to CHESS. Upon validation and subject to the terms of the ACH and ASTC Rulebooks and the Market Operator s own Rulebook, CHESS will send a trade registration cancellation acknowledgement (new message) back to the trade-only platform. Messages will be simultaneously sent to the CPs designated to clear the trade, (current CHESS 116 Cancelled Settlement Instruction message). This message will include the transaction reference relating to the original notified trade message for reconciliation purposes. 5. Trade Reconciliation: ASX expects that each trade-execution-only platform will be responsible for communicating data relating to trades conducted on its market. This may be similar to the current ASX Signal B service and may be used by the Market Operator and CPs to reconcile against the CHESS messages received from ACH for novated trades, and rejected trades (Market Operator only). 6. Settlement Batch: Upon novation of the trades to ACH, settlements resulting from trade-execution-only platforms will be netted with all other novated and non-novated transactions into the current single daily batch payment. In order to permit such netting, ACH will require inclusion of appropriate Rules within the Rulebooks of the proposed Market Operators seeking to participate in the settlement process to ensure that all settlements are legitimately fungible. These requirements will be standardised. 7. Settlement and Transfer Transactions: ASX does not currently envisage the need to make any changes to the CHESS dual-entry settlement and demand transfer (such as CHESS 101 and 005 messages) or single-entry demand transfer requests (such as CHESS 001, 003, 007 messages), or processes that underpin these transactions to incorporate any details of the originating trade location. This is based on the notion that once the trades have been accepted by ACH for novation, and confirmed to the trade-execution-only platform and CPs 24 July 2008 Page 7 of 11

8 with the trade-level settlement (164 Notified Trade), ACH or ASTC does not have any other specific purpose to differentiate the underlying settlement and transfer transactions. 3.3 Proposed CHESS Message Flows The diagrams below show the high level CHESS message flows (similar to the CHESS spider diagrams in the CHESS External Interface Specification Manual) proposed for CCP and Settlement Services to be provided by ACH and ASTC to trade-execution-only platforms as described in sections 3.3 above. Figure 1 Trade Registration by Trade Registration Request Trade Registration Acknowledgment CHESS 164 Notified Trade 164 Notified Trade CP1 CP Figure 2 Trade Registration Rejection Trade Registration Request CHESS 518 Rejected Transaction 24 July 2008 Page 8 of 11

9 Figure 3 Trade Registration Cancellation by Trade Registration Cancellation Request Trade Registration Cancellation Acknowledgment CHESS 116 Cancelled Settlement Instruction CP1 116 Cancelled Settlement Instruction Trade-Execution-Only Platform CP2 Figure 4 Crossing Registration by Trade Registration Request CHESS Trade Registration Acknowledgment 164 Notified Trade Trade-Execution-Only Platform CP1 24 July 2008 Page 9 of 11

10 4. Feedback Whilst CPs may have already responded to some of these questions, ASX reminds all stakeholders that responses are sought on all of the questions from reviewers of the document based on the additional detail provided in this paper. 4.1 Services for Non-CLOB Trades conducted by s 1. Where a trade-execution-only platform will be reporting clearing crossings to ACH (as defined in section 3.1.1), do CPs/SPs wish to raise any queries regarding ASX s intention to treat such transactions in the same manner as clearing crossings currently arising from the ASX market? 2. Are there any other aspects of Trade or Clearing Crossings, as referenced in Section 3.1 of this Paper, that CPs, SPs or other Stakeholders would like to raise or discuss further? 4.2 Trade Processing Where Full CCP and SSF CHESS Services May Be Provided a. In reference to Section 3.2.1, do Settlement Participants and Stakeholders agree with: 1. The overview of responsibilities and the associated processes as outlined? 2. The robustness of the underlying rationale? If there are any aspects that you wish to comment on, in relation to suggested amendments, please outline the reasoning and benefits of such a change. b. Settlement Participants and Stakeholders are asked to review Section 3 overall and respond to the following specific questions: 1. What specific changes do Settlement Participants or Stakeholders envisage to their business as a result of the proposed transition to a multi-trading platform environment? 2. What impact is this likely to have on your organisation? 3. Do you have any feedback on the proposed approach for Market Operators to send and receive new CHESS messages (trade registrations, confirmations, and rejections) and the subsequent notification of trades and cancellations by ACH to CPs through CHESS messages? (3.2 Key Components, 3.3 Proposed CHESS Message Flows above) 4. Do you have any feedback on the reconciliation process between the receipt of trade data from the tradeexecution-only platform and the trade notifications from CHESS? (3.2 Key Component, Point 5 above) 5. Do you have any feedback on CHESS not incorporating any details about the originating trade location in the dual-entry or single-sided transfer messages or processes? (3.2 Key Components, Point 7 above) 6. Are there any other indirect areas which might be impacted in an environment with multiple trading platforms, e.g. handling multiple price data for portfolio management? 7. Are there any further requirements of ACH and ASTC services that you believe will facilitate Participants and Stakeholders needs in a multiple-trading platform environment? 24 July 2008 Page 10 of 11

11 In answering these questions, please include in your consideration the following activities:- risk management operations; business operations; regulatory compliance; back office and other systems. 4.3 Implementation Considerations The extension of ACH and ASTC s clearing and settlement services to a multi-trading platform environment will require operational and systems development for CHESS, Participants, other Stakeholders and their systems. ASX wishes to ascertain the degree of impact on Participants and other Stakeholders and factors which may affect the scheduling of such activity. 1. Are there any factors of which ASX should be aware that will impact the systems development capability or timeframes of Participants and/or Stakeholders? Please consider the needs of any third-party system providers, information vendors and any organisation-wide, system development restrictions that may impact your schedules for example release window restrictions, production environment freezes etc 2. What priority does your organisation attach to the extension of ACH and ASTC clearing and settlement services to trade-execution-only platforms? 3. Are there any other implementation considerations that you think should be considered, e.g. preferred times of year for testing and/or go-live of system changes? 24 July 2008 Page 11 of 11