Clearing and Settlement

I was fortunate to get an extensive year long training and certified on the VISA Payments machinery, specifically on "Clearing and Settlement" systems (BASE II) back in 2002/03. This training instilled in me the life long curiosity and wonder at payments machinery, the trillion dollar industry, the innovations in that space and how they evolve so rapidly. Clearing and settlement processes are crucial for the efficient functioning of financial markets.

I was curious about how the clearing and settlement worked in Australia and today's article tend to briefly touch on some of the key mechanisms and vehicles and the types of transactions they manage.

First and foremost what's the difference between "Clearing" and "Settlement" !

Clearing refers to the process of reconciling purchase and sale transactions, ensuring that the buyer and seller agree on the terms of the trade. This involves the matching of trade details, netting of obligations, and calculation of final settlement positions.

Settlement is the actual exchange of assets and payments. It is the fulfillment of the contractual obligations agreed upon during the clearing phase, which can involve the transfer of securities or cash.

So let's look at what are the key Clearing and Settlement Vehicles that powers Australian economy.

Australia's financial system relies on several key vehicles to facilitate clearing and settlement. These vehicles cater to different types of financial transactions, from equities to derivatives and payments.

1. ASX Clear and ASX Clear (Futures)

ASX Clear and ASX Clear (Futures) are central counterparties (CCPs) operated by the Australian Securities Exchange (ASX). They provide clearing services for a variety of financial products.

- ASX Clear handles the clearing of cash equities, warrants, and equity-related derivatives.

- ASX Clear (Futures) focuses on the clearing of exchange-traded derivatives, including futures and options.

Example Transactions:

- The purchase of shares in a listed company on the ASX.

- Trading of stock options and index futures.

2. CHESS (Clearing House Electronic Subregister System)

CHESS is the settlement system operated by ASX for the electronic transfer of equity securities. It plays a dual role in both clearing and settlement.

Example Transactions:

- Settling trades in shares listed on the ASX, where CHESS handles the delivery of securities against payment (DvP).

3. Austraclear

Austraclear, also operated by ASX, provides clearing and settlement services for debt securities and other over-the-counter (OTC) financial products.

Example Transactions:

- Settlement of government bonds, corporate bonds, and other fixed-income securities.

- Repos (repurchase agreements) and other money market instruments.

4. RITS (Reserve Bank Information and Transfer System)

RITS is the real-time gross settlement (RTGS) system operated by the Reserve Bank of Australia (RBA). It is used for the settlement of high-value payments and interbank transfers.

Example Transactions:

- Interbank transfers, where funds are moved between banks on behalf of customers or the banks themselves.

- High-value corporate payments and time-critical transactions.

5. BPAY and the New Payments Platform (NPP)

BPAY and NPP are crucial for the clearing and settlement of retail and commercial payments.

- BPAY is an electronic bill payment service enabling customers to pay bills via their internet or mobile banking.

- NPP is a modern payments platform allowing real-time payments between participating Australian banks.

Example Transactions:

- Utility bill payments through BPAY.

- Instant payments to friends or businesses using the NPP.

Australia's clearing and settlement landscape is robust, with specialized vehicles ensuring the smooth operation of various types of financial transactions. From high-value interbank transfers via RITS to the trading of equities and derivatives through ASX Clear, each vehicle plays a pivotal role in maintaining the stability and efficiency of the financial system. Understanding these mechanisms is essential as they underpin the integrity and reliability of Australia's financial markets.