ASIC RG 211 — ASIC Regulatory Guide – RG 211 Clearing and settlement facilities: Australian and overseas operators

Page 1 REGULATORY GUIDE 211 Clearing and settlement facilities: Australian and overseas operators December 2012 About this guide This guide tells you  when you need an Australian clearing and settlement (CS) facility licence and how to apply for one, whether you are an Australian or overseas operator;  our approach to advising the Minister about an exemption from holding a CS facility licence; and  what you should do after you have been granted a licence. Note 1: From 27 July 2020, applications for relief should be submitted through the ASIC Regulatory Portal. For more information, see how you apply for relief. Note 2: This guide does not reflect amendments to the Corporations Act introduced by the Treasury Laws Amendments (Financial Market Infrastructure and Other Measures) Act 2024, which received the Royal Assent on 17 September 2024. This guide will be reviewed and updated in due course. For more information, please visit our FMI reform implementation page. Page 2 REGULATORY GUIDE 211: Clearing and settlement facilities: Australian and overseas operators © Australian Securities and Investments Commission December 2012 Page 2 About ASIC regulatory documents In administering legislation ASIC issues the following types of regulatory documents. Consultation papers: seek feedback from stakeholders on matters ASIC is considering, such as proposed relief or proposed regulatory guidance. Regulatory guides: give guidance to regulated entities by:  explaining when and how ASIC will exercise specific powers under legislation (primarily the Corporations Act)  explaining how ASIC interprets the law  describing the principles underlying ASIC’s approach  giving practical guidance (e.g. describing the steps of a process such as applying for a licence or giving practical examples of how regulated entities may decide to meet their obligations). Information sheets: provide concise guidance on a specific process or compliance issue or an overview of detailed guidance. Reports: describe ASIC compliance or relief activity or the results of a research project. Document history This guide was issued in December 2012 and is based on legislation and regulations as at the date of issue. Note 1 on the front page was inserted in July 2020 and Note 2 was inserted in November 2024. Previous version:  Superseded Regulatory Guide 211, issued 20 April 2010 Disclaimer This guide does not constitute legal advice. We encourage you to seek your own professional advice to find out how the Corporations Act and other applicable laws apply to you, as it is your responsibility to determine your licensee obligations. Examples in this guide are purely for illustration; they are not exhaustive and are not intended to impose or imply particular rules or requirements. Page 3 REGULATORY GUIDE 211: Clearing and settlement facilities: Australian and overseas operators © Australian Securities and Investments Commission December 2012 Page 3 Contents A Overview: Operating a CS facility in Australia ...................................4 Why are CS facilities regulated? .............................................................4 Who regulates CS facilities? ....................................................................7 When do you need a CS facility licence? ................................................9 Are you eligible for a CS facility licence exemption? ...............................9 Applying for a CS facility licence or an exemption...................................9 Examples of facilities and our regulatory approach to them ..................10 Continuing obligations if you have a CS facility licence ........................10 B Do you need a CS facility licence? ....................................................11 When do you need a CS facility licence? ..............................................11 Deciding whether your operation is a CS facility ...................................13 Definition of CS facility ...........................................................................16 Considering key terms ...........................................................................16 Do you operate the facility? ...................................................................18 Is your CS facility operating ‘in Australia’? ............................................19 Systemically important with a strong domestic connection ...................20 What type of CS facility licence do you need? ......................................22 How many CS facility licences do you need? ........................................23 C Can you get a CS facility licence exemption? ..................................24 When CS facility licence exemption may be granted ............................24 D CS facility licence—overseas operators ...........................................30 Our policy ...............................................................................................30 Underlying principles .............................................................................31 Implications for foreign participants .......................................................41 E Applying for a CS facility licence .......................................................42 Advising the Minister about your application .........................................42 What to include in your application ........................................................44 Processing time for a CS facility licence application .............................45 F Licensee obligations, annual reporting and assessment ...............47 Licensee obligations ..............................................................................47 Implementing and monitoring plans .......................................................58 Reporting and assessment ....................................................................59 Appendix 1: Examples of facilities ............................................................63 Appendix 2: CPSS–IOSCO Principles for financial market infrastructure .......................................................................................70 Key terms .....................................................................................................74 Related information .....................................................................................76 Page 4 REGULATORY GUIDE 211: Clearing and settlement facilities: Australian and overseas operators © Australian Securities and Investments Commission December 2012 Page 4 A Overview: Operating a CS facility in Australia Key points The purposes of regulating CS facilities are to: maintain financial system stability; reduce systemic risk; ensure clearing and settlement services are provided in a fair and effective way; and protect market users and CS facility users. The Minister has primary responsibility for licensing CS facilities operating in Australia and for granting exemptions from the requirement to hold a CS facility licence. ASIC and the Reserve Bank of Australia (RBA) are responsible for advising the Minister on applications for CS facility licences and ensuring that operators comply with their licensee obligations in Pt 7.3 of the Corporations Act 2001 (Corporations Act). The Department of Treasury advises the Minister on clearing and settlement policy. You must have a CS facility licence if you operate a CS facility in Australia unless the Minister has exempted you. You can apply to the Minister, through ASIC, for a CS facility licence or an exemption from the requirement to hold a CS facility licence. If you are granted a CS facility licence, you should assess your compliance with your licensee obligations and report annually to ASIC. ASIC and the RBA will assess and report at least annually to the Minister on your compliance. Why are CS facilities regulated? RG 211.1 The purposes of regulating CS facilities under the Corporations Act are to: (a) maintain financial system stability; (b) reduce systemic risk; (c) ensure clearing and settlement services are provided in a fair and effective way; and (d) protect investors dealing in financial products and users of CS facilities. RG 211.2 We believe that these purposes are met when the desired regulatory outcomes relevant to each CS facility are achieved. Table 1 lists those desired regulatory outcomes. Page 5 REGULATORY GUIDE 211: Clearing and settlement facilities: Australian and overseas operators © Australian Securities and Investments Commission December 2012 Page 5 RG 211.3 If you are already, or intend to become, a CS facility operator, we expect your facility to deliver the relevant regulatory outcomes. In determining the relevance of the regulatory outcomes and how you achieve them, we will adopt a flexible approach and take into account the characteristics of your facility, including: (a) the nature of the activities conducted by your facility; (b) the nature of the financial market or markets (if any) with which your facility has arrangements in relation to clearing and/or settlement; (c) the nature of the financial products for which your facility provides services, including whether the contracts constituting the products are standard contracts widely accepted by the industry; (d) the size of your facility, including the systemic risk it poses to the Australian financial system and its potential impact on financial stability; (e) the type of your participants and who they represent; and (f) the technology used in the operation of your facility. Table 1: Regulatory outcomes for CS facility operators Regulatory area Regulatory outcomes CS facility stability The regular mechanism provided by the facility operates reliably and the risk of failing is minimised, so that:  existing and potential facility users can be confident that it will be available in the future; and  the risk of existing and potential facility users, operators of markets or other CS facilities being adversely affected by any failure of the facility is also minimised. Clearing and settlement process The clearing and settlement process is transparent so that participants:  understand their obligations and the operation of the facility; and  can identify, understand and evaluate the financial risks and costs associated with their participation in the facility. Users of a CS facility are confident that the facility operates fairly and that settlement obligations will be met in a timely manner. For example, participants:  promptly and properly settle their obligations; and  comply with the law and the facility’s operating rules. Page 6 REGULATORY GUIDE 211: Clearing and settlement facilities: Australian and overseas operators © Australian Securities and Investments Commission December 2012 Page 6 Regulatory area Regulatory outcomes Facility and participant supervision The facility and its participants are properly supervised by the operator so that breaches of the law or the facility’s operating rules are likely to be detected and disciplined. As a result:  participants and existing and potential facility users have confidence in the operation of the facility;  participants and facility users are not disadvantaged by breaches of the facility’s operating rules; and  the facility has a good reputation. Facility supervision is not compromised by:  conflicts between the facility operator’s duties and its commercial interests;  the influence of a major shareholder;  the involvement of unfit individuals in the management of the facility operator; or  the facility operator’s lack of resources. Risk management Risks relating to default and other risks, including systemic risk, counterparty risk, market risk, liquidity risk and operational risk, are anticipated and appropriately dealt with, so that:  participants and existing and potential facility users can be confident that the clearing and settlement obligations will be met promptly and properly in case of a participant default;  the risk of operators of markets, participants of the CS facility or other CS facilities being adversely affected by a participant default will be minimised; and  systemic risk to the Australian financial system is reduced. RG 211.4 To achieve the above regulatory outcomes, the CS facility operator should: (a) ensure that its services are provided in a fair and effective manner; (b) comply with any licence conditions or exemption conditions, including those relating to financial stability and, if applicable, with the RBA’s financial stability standards (see RG 211.8); (c) make available to the market in a timely manner necessary information on the clearing and settlement process, such as the rules and procedures, operational requirements and restrictions; (d) have adequate arrangements for supervising the facility; (e) have adequate financial, technological, human and other resources to supervise the facility; (f) have adequate arrangements for handling conflicts of interest; (g) enforce compliance with the facility’s operating rules; (h) notify ASIC of disciplinary action against a participant, and suspected significant breaches of the law or the facility’s operating rules by a participant; (i) provide information to ASIC and the RBA to enable ASIC and the RBA to monitor the facility operator’s compliance with its obligations; Page 7 REGULATORY GUIDE 211: Clearing and settlement facilities: Australian and overseas operators © Australian Securities and Investments Commission December 2012 Page 7 (j) take reasonable steps to ensure an unacceptable control situation does not develop or exist if it is a widely held market body within the meaning of Div 1 of Pt 7.4; and (k) take reasonable steps to ensure that no disqualified individual becomes or is involved in the facility operator. Who regulates CS facilities? Minister RG 211.5 The Minister, with the advice and assistance of ASIC and, on certain issues, the RBA, is responsible for: (a) licensing CS facilities operating in Australia; (b) varying, suspending or cancelling a CS facility licence; (c) determining whether a CS facility has adequate operating rules; (d) making directions about the operation of a CS facility; and (e) granting exemptions from the requirement to hold a licence to operate a CS facility in Australia. RG 211.6 In deciding whether to grant a CS facility licence, the Minister must consider the matters set out in s827A, which focuses on the operation of the facility. These include any relevant advice from ASIC and the RBA: s827A(2)(h). Department of Treasury RG 211.7 The Department of Treasury: (a) advises the Minister on clearing and settlement policy; (b) briefs the Minister on CS facility licence and exemption applications and operating rule change notifications; and (c) arranges for licences and exemptions to be drafted by the Australian Government Solicitor. RBA RG 211.8 The RBA regulates CS facilities by: (a) setting financial stability standards for the purposes of ensuring that CS facility licensees conduct their affairs in a way that causes or promotes overall stability of the Australian financial system. The RBA has issued two separate standards, one for securities settlement systems and one for central counterparties (CCPs); Note: See s827D and www.rba.gov.au/payments-system/clearing- settlement/standards/index.html. Page 8 REGULATORY GUIDE 211: Clearing and settlement facilities: Australian and overseas operators © Australian Securities and Investments Commission December 2012 Page 8 (b) assessing, at least once each year, CS facility licensees’ compliance with their obligations under the financial stability standards (where they apply) and to do all other things necessary to reduce systemic risk, and reporting to the Minister on the result of the assessment (s823CA); and (c) advising the Minister about matters for which the Minister has a discretion under Pt 7.3. For example, the RBA may advise the Minister about: (i) applications for a CS facility licence; and (ii) a licensee’s breach of their obligations, to the extent that it is reasonably practicable to do so, to comply with the financial stability standards and do all things necessary to reduce systemic risk. Note: See s827A(2)(h), 821BA(2). ASIC RG 211.9 ASIC regulates CS facilities by: (a) advising the Minister about: (i) applications for a CS facility licence (s824A(2), 827B); (ii) applications for a CS facility licence exemption (s820C(1)); (iii) changes to operating rules (s822D, 822E); and (iv) other matters for which the Minister has a discretion under Pt 7.3. For example ASIC may advise the Minister of a licensee’s breach of their obligations (s821B(1)); (b) assessing and reporting to the Minister on CS facility licensees’ compliance with their obligations, other than the obligations relating to financial stability standards compliance and systemic risk reduction, which are assessed by the RBA (s823C); (c) enforcing CS facility licensees’ compliance with their obligations under the Corporations Act (s822C, 823C); and (d) enforcing the prohibition on a person operating, or holding out that the person operates, a CS facility in Australia if the person does not hold a licence or an exemption (s820A, 1311(1), 1313(1)). RG 211.10 When considering issues about CS facilities, we focus on the regulatory outcomes that CS facility regulation seeks to achieve, which are outlined in Table 1. RG 211.11 ASIC works closely with the RBA in performing its functions to regulate CS facilities. Page 9 REGULATORY GUIDE 211: Clearing and settlement facilities: Australian and overseas operators © Australian Securities and Investments Commission December 2012 Page 9 When do you need a CS facility licence? RG 211.12 You need a CS facility licence if: (a) you operate a CS facility in Australia; and (b) the Minister has not exempted you. Note: See s820A. RG 211.13 In assessing whether your facility is a CS facility operating in Australia we: (a) have regard to the key terms in the definition of CS facility in the Corporations Act and whether they apply to your operations (s768A); and (b) evaluate whether there is a sufficient nexus between the facility’s operations and Australia. RG 211.14 You may apply for a licence under either: (a) s824B(1), for a domestic or, in some instances, an overseas operator; or (b) s824B(2), for an overseas operator. RG 211.15 You may operate more than one CS facility in Australia. RG 211.16 For a comprehensive explanation of how we decide whether you require a licence and what type of licence, see Section B. Are you eligible for a CS facility licence exemption? RG 211.17 You can apply to the Minister, through ASIC, for an exemption from the requirement to hold a CS facility licence. We will recommend an exemption only when we are satisfied that there is no satisfactory policy reason for regulating you as a CS facility licensee. All applications are assessed on a case-by-case basis. Note: See s820C and the Explanatory Memorandum to the Financial Services Reform Bill 2001 (Explanatory Memorandum) para 8.37. RG 211.18 Section C explains our approach to CS facility licence exemptions. Applying for a CS facility licence or an exemption RG 211.19 After you have read Sections B and C, we recommend you discuss your proposed operations with us. RG 211.20 Once you have your discussion with us and have decided that you wish to apply for an exemption, submit an application as set out in Section C. If you Page 10 REGULATORY GUIDE 211: Clearing and settlement facilities: Australian and overseas operators © Australian Securities and Investments Commission December 2012 Page 10 decide that you need a CS facility licence, use Section E to prepare your application. RG 211.21 If you are an overseas operator, please read also Section D, which sets out our approach in relation to an application for an overseas CS facility licence under s824B(2). Examples of facilities and our regulatory approach to them RG 211.22 For examples of some facilities and our view on whether they are CS facilities operated in Australia, see Appendix 1. Continuing obligations if you have a CS facility licence RG 211.23 If you are granted a licence, you should ensure that you are complying with your licensee obligations and provide an annual report to ASIC about your compliance: s821E. RG 211.24 ASIC will assess, at least annually, whether you are complying with your obligations (other than your obligations, to the extent that it is reasonably practicable to do so, to comply with the financial stability standards and do all things necessary to reduce systemic risk) as a CS facility licensee under the Corporations Act. Note: See s823C and Explanatory Memorandum para 8.122. RG 211.25 The RBA will assess, at least annually, whether you are complying with the financial stability standards (where they apply) and doing all things necessary to reduce systemic risk. RG 211.26 Refer to Section F for more details of licensee obligations, annual reporting and assessment. Page 11 REGULATORY GUIDE 211: Clearing and settlement facilities: Australian and overseas operators © Australian Securities and Investments Commission December 2012 Page 11 B Do you need a CS facility licence? Key points You need a CS facility licence if you operate a CS facility in Australia and the Minister has not exempted you from holding a CS facility licence. In assessing whether you operate a CS facility in Australia we: have regard to the key terms in the definition of CS facility in the Corporations Act and whether they apply to your operations; and evaluate whether there is a sufficient nexus between the facility’s operations and Australia. You can apply for a licence under: s824B(1), if you are a domestic operator or, in some instances, an overseas operator; or s824B(2), if you are an overseas operator (see Figure 2). You may also apply for a CS facility licence that authorises you to operate more than one CS facility, but each of those CS facilities will be regulated separately: RG 211.74–RG 211.77. When do you need a CS facility licence? RG 211.27 You need a CS facility licence if you: (a) operate a CS facility in Australia; and (b) the Minister has not exempted you. Note: See s820A. Clearing and settlement arrangements What are clearing and settlement arrangements? RG 211.28 In addition to CS facilities, the Corporations Act also refers to a concept of clearing and settlement arrangements. RG 211.29 Clearing and settlement arrangements are arrangements for clearing and settlement of transactions effected through a financial market (s790A) which may include arrangements: (a) with a CS facility licensee; or (b) that are part of the market’s operating rules. RG 211.30 A CS facility is one type of clearing and settlement arrangement. Page 12 REGULATORY GUIDE 211: Clearing and settlement facilities: Australian and overseas operators © Australian Securities and Investments Commission December 2012 Page 12 Clearing and settlement arrangements for a licensed financial market RG 211.31 The Minister decides whether: (a) clearing and settlement arrangements are necessary for a financial market; (b) the clearing and settlement arrangements in place are adequate; (c) the clearing and settlement arrangements need to be provided by a person who holds a CS facility licence; or (d) an exemption from having a CS facility licence should be granted to the provider of clearing and settlement arrangements. ASIC will recommend the most appropriate option to the Minister. RG 211.32 If the Minister thinks that there needs to be clearing and settlement arrangements then a condition will be included in the Australian market licence specifying the type of clearing and settlement arrangements that are adequate for that market: s796A(4)(c), 792A(b). RG 211.33 ASIC will advise the Minister that some form of clearing and settlement arrangements is necessary if: (a) concluded contracts are entered into on the financial market; and (b) parties to the contracts do not know the identity of the person with whom they contract. RG 211.34 We may also advise the Minister that clearing and settlement arrangements are necessary in other circumstances, particularly where the market users include retail investors. RG 211.35 In deciding whether to advise the Minister that the provider of the clearing and settlement arrangements should have a CS facility licence, we will consider the following factors: (a) whether the clearing and settlement arrangements will be provided by a person other than a participant, or an agent of a participant, in the market; (b) the size and sophistication of the market, including whether there are retail market users; (c) the classes of financial products and the anticipated trading volume; (d) the complexity of the clearing and settlement arrangements proposed for the market, including the resources required to conduct the arrangements; (e) the procedures for dealing with failure to settle; (f) whether the clearing and settlement arrangements may result in systemic risks; and Page 13 REGULATORY GUIDE 211: Clearing and settlement facilities: Australian and overseas operators © Australian Securities and Investments Commission December 2012 Page 13 (g) the extent to which the clearing and settlement arrangements are otherwise regulated. CS facilities must be licensed RG 211.36 If a financial market’s clearing and settlement arrangements constitute a CS facility, they must be operated by a CS facility licensee, unless the CS facility is exempt: s820A(1). RG 211.37 The Corporations Act imposes different obligations for market licensees and CS facility licensees because they provide different services and give rise to different risks. RG 211.38 In general, we do not consider that an Australian market licence is an appropriate substitute for a CS facility licence or that Australian market licence conditions can adequately replace the obligations imposed by the Corporations Act on CS facility licensees. However, there may be circumstances where the operation of a financial market arguably falls within the broad definition of a CS facility. In that situation, we may, after considering the nature of the operations of the financial market and all the relevant circumstances of the case, decide that regulating the operator under the Australian market licence regime is more appropriate than regulating the operations both as a market and a CS facility. Deciding whether your operation is a CS facility RG 211.39 Figure 1 may assist you in deciding whether you need to apply for a CS facility licence, or apply for an exemption from the requirement to hold one. Page 14 REGULATORY GUIDE 211: Clearing and settlement facilities: Australian and overseas operators © Australian Securities and Investments Commission December 2012 Page 14 Figure 1: Deciding whether you need a CS facility licence or exemption Is there a regular mechanism for the parties to transactions involving financial products to meet obligations to each other arising out of the transactions? Are those obligations of a kind prescribed by the Corporations Regulations, reg 7.1.09, involving different types of specified financial products such as securities, managed investments and derivatives? Is the regular mechanism provided by means of a facility? Does your operation fall within s768A(2), which excludes certain types of activities from the definition of CS facility? Do you operate the facility? Do you operate the facility in Australia? You need a CS facility licence or an exemption The operation is not a CS facility requiring a CSF licence No No No Yes No No Yes Yes Yes No Yes Yes You do not need a CS facility licence or an exemption Page 15 REGULATORY GUIDE 211: Clearing and settlement facilities: Australian and overseas operators © Australian Securities and Investments Commission December 2012 Page 15 What type of operation is not considered a CS facility? RG 211.40 Section 768A(2) of the Corporations Act sets out what conduct does not constitute operating a CS facility. The Corporations Act specifically excludes the following: (a) an authorised deposit-taking institution (ADI) acting in the ordinary course of its banking business; (b) a person acting on their own behalf, or on behalf of one party to a transaction only; (c) a broker dealing with its client’s account in the ordinary course of its business activities; (d) a participant in a CS facility taking on the delivery or payment obligations of its client; (e) treasury operations between related corporate bodies; (f) a facility for the exchange and settlement of non-cash payments (see s763D) between providers of non-cash payment facilities; and (g) any other conduct prescribed by reg 7.1.10(2), which excludes conduct of National Stock Exchange of Australia Limited, Bendigo Stock Exchange Limited and their participants in operating a facility in accordance with the operating rules of a licensed market if the requirements of reg 7.1.10(3) are met. What type of operation is considered a CS facility? RG 211.41 We will consider all the functions and operations of a facility when determining whether it is a CS facility. You may need to obtain your own legal advice about whether you operate a CS facility. RG 211.42 In assessing whether you operate a CS facility we will have regard to the key terms in the definition of CS facility in the Corporations Act and determine whether it applies to your operations. A typical CS facility either operates a securities settlement system or acts as a CCP through a novation mechanism, but the definition in the Corporations Act also encompasses other types of facilities. RG 211.43 Appendix 1 gives some examples and our view on whether or not they are CS facilities. Page 16 REGULATORY GUIDE 211: Clearing and settlement facilities: Australian and overseas operators © Australian Securities and Investments Commission December 2012 Page 16 Definition of CS facility RG 211.44 Under s768A(1), a CS facility is defined as a facility that provides a regular mechanism for the parties to transactions relating to financial products to meet obligations to each other that: (a) arise from entering into the transactions; and (b) are of a kind prescribed by reg 7.1.09, including obligations arising from a contract to transfer a security, a derivative or an interest in a managed investment scheme. RG 211.45 More details about the obligations referred to in reg 7.1.09 are set out in RG 211.53. Considering key terms RG 211.46 We use our interpretation of the following four key terms in the Corporations Act when deciding whether you operate a CS facility: (a) ‘facility’; (b) ‘regular’; (c) ‘mechanism’; and (d) ‘to meet obligations to each other’. Note: See s768A(1). ‘Facility’ RG 211.47 The word ‘facility’ is not defined in the Corporations Act for these purposes. We consider that a ‘facility’ means any form of infrastructure, including relatively simple elements of infrastructure. RG 211.48 An integrated infrastructure constitutes a single facility and may be a CS facility even if any or all of its component parts, when considered in isolation, do not constitute a CS facility. RG 211.49 The following factors indicate that a number of component parts constitute an integrated infrastructure and a single facility: (a) the component parts are owned or controlled by the same entity or are part of the same corporate group; or (b) together the component parts assist the parties to transactions in financial products to meet obligations to each other and no component part is a regulated CS facility. These factors are not exhaustive. Note: Our approach to the definition of a facility is consistent with Carragreen Currency Corporations Pty Ltd v Corporate Affairs Commission (NSW) (1986) 11 ACLR 298, 312–3, which held that a facility is any form of infrastructure. Page 17 REGULATORY GUIDE 211: Clearing and settlement facilities: Australian and overseas operators © Australian Securities and Investments Commission December 2012 Page 17 ‘Regular’ RG 211.50 ‘Regular’ means systematically, in the sense that there are recurring opportunities for transaction parties to meet obligations to each other through the facility. ‘Regular’ does not mean continuously or at specified intervals. A CS facility operating for a short time may still operate regularly. Note: See Explanatory memorandum para 8.26. ‘Mechanism’ RG 211.51 A ‘mechanism’ includes technical infrastructure, regulations and procedures. Note: See Explanatory memorandum para 8.24. RG 211.52 An association which just coordinates the making of clearing and settlement regulations and procedures that are then adopted by its members, but which does not provide technical infrastructure, would not be operating a CS facility. Note: See Explanatory memorandum para 8.25. Meaning of ‘to meet obligations to each other’ RG 211.53 The relevant obligations comprise: (a) obligations arising from a contract to transfer a security; (b) obligations arising from a contract to transfer any of the following in relation to a registered scheme: (i) an interest in the scheme; (ii) a legal or equitable right or interest in an interest covered by RG 211.53(b)(i); or (iii) an option to acquire, by way of issue, an interest or right covered by RG 211.53(b)(i)–RG 211.53(b)(ii); (c) obligations arising from a contract to transfer any of the following in relation to a managed investment scheme that is not a registered scheme, other than a scheme (whether or not operated in this jurisdiction) in relation to which none of s601ED(1)(a), (b) and (c) of the Corporations Act are satisfied: (i) an interest in the scheme; (ii) a legal or equitable right or interest in an interest covered by RG 211.53(c)(i); or (iii) an option to acquire, by way of issue, an interest or right covered by RG 211.53(c)(i)–RG 211.53(c)(ii); (d) obligations arising from a contract to transfer a debenture, stock or bond issued or proposed to be issued by a government; Page 18 REGULATORY GUIDE 211: Clearing and settlement facilities: Australian and overseas operators © Australian Securities and Investments Commission December 2012 Page 18 (e) obligations arising from a contract to transfer a foreign exchange contract that is not: (i) a derivative; or (ii) a contract to exchange one currency (whether Australian or not) for another that is to be settled immediately; (f) obligations arising from a contract to transfer a right that includes an undertaking by a body to repay, as a debt, money deposited with or lent to the body; (g) obligations arising from acquiring or providing a derivative; and (h) obligations arising from the entry into a repurchase agreement. Note: See reg 7.1.09. RG 211.54 The obligations do not have to arise from transactions made on a financial market as defined in the Corporations Act. They include obligations which arise from bilateral transactions entered into in the over-the-counter (OTC) markets. RG 211.55 A facility can provide a mechanism for parties ‘to meet obligations to each other’ in a number of ways, such as facilitating the transfer of consideration from a purchaser to a seller, and facilitating the transfer of the financial product from the seller to the purchaser. The phrase means more than simply providing information to allow parties to transactions to know the nature of their obligations to each other (for example, by providing parties to transactions with trade confirmations). RG 211.56 We consider that novation, a process through which the original obligation between counterparties of a transaction is discharged and substituted by two contracts under which a CS facility becomes the seller to every buyer and the buyer to every seller, is one of the mechanisms by which parties can meet obligations to each other. The phrase ‘to meet obligations to each other’ does not exclude from the definition CS facilities that use novation. RG 211.57 Similarly, s768A(2)(b), which excludes from the definition of CS facility arrangements where a person acts on their own behalf or only on behalf of one person to the transaction, does not apply to CS facilities that use novation. Note: See Explanatory memorandum para 8.27–8.28. Do you operate the facility? RG 211.58 In determining who operates a facility we will consider a range of factors including who: (a) provides the services offered by the facility to end users; Page 19 REGULATORY GUIDE 211: Clearing and settlement facilities: Australian and overseas operators © Australian Securities and Investments Commission December 2012 Page 19 (b) sets the operating rules and procedures; and (c) oversees compliance with operating rules of the facility. RG 211.59 The facility may comprise infrastructure which is owned by one entity and leased or licensed to another entity that provides the service to facility users. Is your CS facility operating ‘in Australia’? RG 211.60 An operator of a CS facility only requires a CS facility licence if it operates the CS facility in Australia. RG 211.61 A CS facility is operating in Australia if it is operated by a body corporate that is registered under Ch 2A of the Corporations Act: s820D(1). RG 211.62 A CS facility may also operate in Australia in other circumstances. When assessing whether a CS facility operates in Australia, we will consider a number of factors including: (a) whether all or a significant part of the CS facility’s technical infrastructure is located in Australia. Technical infrastructure includes hardware of any computerised clearing and settlement system; (b) whether the CS facility has one or more users and/or participants in Australia and is targeted at Australian users and/or participants; (c) whether the volume and value of transactions cleared and settled by the facility that are submitted by Australian participants and/or users are material (to be determined on a case-by-case basis); (d) the nature of the transactions and financial products in respect of which the facility’s services are made available, such as whether the financial products are denominated in Australian dollars, referenced to an Australian-based entity, or issued by an Australian-based entity; and (e) whether the CS facility operator has entered into an arrangement with the operator of a licensed or exempted financial market (whether a domestic market or an overseas market) operating in Australia to provide clearing and settlement services to that financial market. RG 211.63 These factors are not exhaustive. The presence or absence of one or more of these factors will not be determinative of our approach to a particular facility. We will consider all the circumstances surrounding the operation of the facility in assessing whether the facility is operating in Australia. However, ultimately our assessment will turn on whether there is a nexus between operation of the regular mechanism provided by the facility and Australia. Note 1: See s820D(2) and Explanatory Memorandum para 8.31-8.33. Page 20 REGULATORY GUIDE 211: Clearing and settlement facilities: Australian and overseas operators © Australian Securities and Investments Commission December 2012 Page 20 Note 2: Our policy in RG 211.62–RG 211.63 is similar to our policy on when a financial market operates in Australia: see Regulatory Guide 172 Australian market licences: Australian operators (RG 172). It is expected that mere accessibility by one or a few persons in Australia to a CS facility based overseas would not be enough to constitute operating in Australia. See Explanatory Memorandum para 8.33. RG 211.64 A CS facility may operate simultaneously in Australia and other jurisdictions either as an Australian or overseas CS facility: s824B(2). When is a CS facility targeting Australian users and/or participants? RG 211.65 Determining whether a CS facility targets Australian investors and/or participants requires assessing all the facts and circumstances about the facility. The following factors may indicate that a CS facility is targeting Australian investors and/or participants: (a) participants in Australia have direct secure access, including through the internet, to the facility; (b) the operator, or a person acting with the endorsement of the operator, promotes the CS facility in Australia by, for example: (i) advertising the CS facility in Australian publications; (ii) sending direct mail publicity about the CS facility to Australian addresses; or (iii) sending email publicity about the CS facility to Australian addresses; (c) the CS facility actively seeks to provide services for financial products traded by Australian-based entities whether over the counter or on market; or (d) the operator is targeting Australian-based participants, including through their branch operations. These factors are not exhaustive. Systemically important with a strong domestic connection RG 211.66 If a CS facility is systemically important with a strong domestic connection, we would ordinarily recommend the entity apply for a domestic operator licence under s824A(1). We may advise the Minister to impose relevant conditions on your overseas or domestic licence. RG 211.67 The following factors may indicate that your CS facility is systemically important: (a) the size of the facility in Australia—for example: Page 21 REGULATORY GUIDE 211: Clearing and settlement facilities: Australian and overseas operators © Australian Securities and Investments Commission December 2012 Page 21 (i) the absolute number and value of transactions processed by your facility in Australian dollar-denominated products; (ii) your facility’s market share; or (iii) for CCPs, the total amount of initial margin held in respect of Australian dollar-denominated products; (b) the availability of substitutes for your facility’s services in Australia; (c) the nature and complexity of the products cleared and settled by your facility; and (d) the degree of interconnectedness with other parts of the Australian financial system. RG 211.68 The following factors may indicate that your CS facility has a strong domestic connection: (a) whether your facility offers services in a domestic or overseas market; (b) the mix of domestic and overseas participants in your facility; (c) the potential for disruption of your facility to affect the real economy; (d) whether the market serviced by your facility has retail or wholesale clients; (e) whether your facility clears or settles a domestic securities market; and (f) links that your facility has with other CS facilities or market infrastructure providers more generally. RG 211.69 The above factors are indicative only. They are neither exhaustive nor determinative. Determining whether your CS facility is systemically important and has a strong domestic connection will require an assessment of all the facts and circumstances pertaining to the CS facility. You can discuss with us our views about the characterisation of the CS facility at a preliminary stage of any licence application if needed. We will adopt a consistent approach with the RBA in determining whether we will consider whether a facility is systemically important and whether it has a strong domestic connection. RG 211.70 More generally, even if a facility entered the Australian market with a small operation, the requirements for systemically important facilities with a strong domestic connection can apply should its market share grow substantially or the nature of its operations or participants change. Accordingly, over time as the facility’s systemic importance increases, we may advise the Minister to vary conditions attached to the facility operators’ licence. See RG 211.155 for further information about when we may advise the Minister to impose licence conditions to complement the RBA’s financial stability standards. Page 22 REGULATORY GUIDE 211: Clearing and settlement facilities: Australian and overseas operators © Australian Securities and Investments Commission December 2012 Page 22 RG 211.71 We will clarify the indicative factors on a case-by-case basis during bilateral discussions with prospective CS facility licensees at the application stage, and on an ongoing basis for current and future licensees. This will enable us to be adaptive to the nature of the entity, the service it is providing and any other relevant circumstances at that time. What type of CS facility licence do you need? RG 211.72 If you have concluded that your facility requires a CS facility licence, use Figure 2 to decide whether you will apply for a: (a) CS facility licence (domestic operator): or (b) CS facility licence that authorises you to operate your overseas CS facility in Australia (overseas operator): see Section D. Figure 2: Deciding whether you require a licence as a domestic or overseas operator RG 211.73 It is the Minister’s discretion to grant an overseas CS facility licence to an overseas operator under s824B(2), rather than a domestic CS facility licence under s824B(1). The Minister can only exercise this discretion after being satisfied with a number of matters, in particular those set out in s824B(2), which focuses on regulatory equivalence, and s827A. Is your principal place of business Australia? Is your CS facility systemically important with a strong domestic connection? Is your CS facility authorised to operate in an overseas country where its principal place of business is located and which has an equivalent regulatory regime? NO NO Apply for a CS facility licence under s824B(1) for a domestic operator YES YES Subject to the circumstances set out in RG 211.100, apply for a CS facility licence under s824B(2) as an overseas operator YES You may need to apply for a CS facility licence under s824B(1) for a domestic operator Page 23 REGULATORY GUIDE 211: Clearing and settlement facilities: Australian and overseas operators © Australian Securities and Investments Commission December 2012 Page 23 How many CS facility licences do you need? RG 211.74 If you will be operating more than one CS facility in Australia, you may apply for a CS facility licence that authorises you to operate two or more CS facilities: s824E. RG 211.75 These are some of the characteristics we will consider in deciding when you need more than one CS facility licence: (a) whether there is more than one facility provided for participants to meet obligations to each other arising from transactions in financial products; (b) the transaction volume and the number and types of financial product for which each facility provides a regular mechanism for meeting obligations; and (c) whether the operating rules are materially or substantially different for alternative financial products or different mechanisms for meeting obligations are provided. RG 211.76 We will assess and separately regulate each CS facility even though it may be on the same licence as another CS facility: s824E. RG 211.77 If you think you will be operating more than one CS facility, please discuss this with us before applying. Page 24 REGULATORY GUIDE 211: Clearing and settlement facilities: Australian and overseas operators © Australian Securities and Investments Commission December 2012 Page 24 C Can you get a CS facility licence exemption? Key points The Minister may grant a licence exemption for your CS facility when there is no satisfactory policy reason for regulating it as a licensed CS facility. We normally only advise the Minister to exempt a particular CS facility or type of CS facility if: regulatory outcomes for CS facilities are not relevant to the facility; regulatory outcomes for CS facilities are achieved without regulation; or the cost of regulation required to achieve the regulatory outcomes for CS facilities significantly outweighs the benefits of those outcomes. When applying for an exemption, please provide the information about your facility as set out in this section. When CS facility licence exemption may be granted RG 211.78 The Minister decides whether to grant an exemption under s820C(1). RG 211.79 The Minister’s exemption power is intended for use when there is no satisfactory policy reason for regulating the arrangements as a licensed CS facility. Note: See Explanatory memorandum para 8.37. RG 211.80 ASIC will consider each exemption application on a case-by-case basis. Before finalising our advice, ASIC will discuss the exemption application with the RBA. RG 211.81 Figure 3 shows a summary of the exemption process: Figure 3: CS facility licence exemption process CS facility operator Prepares application for exemption based on information provided in accordance with this section. Lodges an application with ASIC  ASIC Copies application to the RBA Assesses application Discusses with the RBA Makes a recommendation to the Minister  Department of Treasury Briefs the Minister on application If appropriate, arranges for an exemption notice to be drafted by the Australian Government Solicitor Minister Makes the decision whether to grant an exemption Page 25 REGULATORY GUIDE 211: Clearing and settlement facilities: Australian and overseas operators © Australian Securities and Investments Commission December 2012 Page 25 When we will advise the Minister to grant an exemption RG 211.82 We normally only advise the Minister to exempt a particular CS facility or type of CS facility if: (a) regulatory outcomes for CS facilities are not relevant to the facility (see RG 211.83); (b) regulatory outcomes for CS facilities are achieved without regulation under Pt 7.3 (see RG 211.84); or (c) the cost of regulation required to achieve the regulatory outcomes for CS facilities significantly outweighs the benefits of those outcomes (see RG 211.85–RG 211.88). These categories may overlap. Note: The regulatory outcomes for CS facilities are those matters that we have detailed in Table 1 including financial stability, effectiveness of clearing and settlement processes, supervision and risk management. Regulatory outcomes are not relevant to the CS facility RG 211.83 Under special circumstances, we may advise the Minister that even if your facility meets the definition of a CS facility, it does not need a licence because the regulatory outcomes for CS facilities that we have identified in Table 1 are not relevant to your facility. In these circumstances, there may be no satisfactory policy reason for regulating it as a licensed CS facility. Regulatory outcomes achieved without Pt 7.3 RG 211.84 We may advise the Minister to exempt your CS facility because it is subject to other forms of regulation that ensure the regulatory outcomes for CS facilities that we have identified in Table 1 are achieved without regulation. In these circumstances, there may be no satisfactory policy reason for regulating the facility as a licensed CS facility. Regulatory cost significantly outweighs benefits RG 211.85 We may advise the Minister to exempt your CS facility if the cost of regulation significantly outweighs the benefits. In making the assessment we will take into account factors including: (a) the volume and value of transactions cleared and/or settled by or through your facility; (b) the impact of the activities of your facility on the Australian financial system; (c) the degree of systemic risk posed by the activities of your facility; (d) your characteristics as the facility operator, including whether you operate any other CS facilities; Page 26 REGULATORY GUIDE 211: Clearing and settlement facilities: Australian and overseas operators © Australian Securities and Investments Commission December 2012 Page 26 (e) the type of entities that are parties to the transactions in respect of which your facility provide services, and who those entities represent; (f) the number and type of Australian participants who use your facility; (g) the nature of the regular mechanism provided by the facility for parties to transactions in financial products to meet the obligations to each other arising out of those transactions; (h) the nature of the financial products for which your facility provides services; (i) whether the financial products to which the relevant transactions relate are commonly acquired and disposed of by retail investors; (j) the number of financial products for which a regular mechanism is provided to the parties to transactions relating to those financial products to meet their obligations; and (k) whether you are subject to other forms of regulation and the nature of that regulation. RG 211.86 The benefits of CS facility regulation arise from achieving the regulatory outcomes in Table 1. When we consider the costs of CS facility regulation, we look at the burden or costs associated with meeting the regulatory obligations including: (a) supervising the CS facility and its participants; (b) maintaining operating rules in accordance with the Corporations Act; and (c) reporting and completing an annual assessment. RG 211.87 You should make a clear case for why the costs outweigh the benefits of regulation. RG 211.88 An example of a situation when we may advise the Minister to grant an exemption is for a CS facility that only clears and settles trades in shares of an incorporated club with a small number of members. There may be a limited number and value of shares traded each year, so that the club is able to rely on the Corporations (Low Volume Financial Markets) Exemption Notice 2003 [03/1162] and does not need an Australian market licence. The activities of the CS facility are unlikely to have any significant impact on the Australian financial system or pose any systemic risk. The shares in this situation are not acquired or disposed of primarily for making a financial investment. The cost of regulation, as a CS facility, would be unduly onerous. Page 27 REGULATORY GUIDE 211: Clearing and settlement facilities: Australian and overseas operators © Australian Securities and Investments Commission December 2012 Page 27 When we will advise the Minister not to grant an exemption RG 211.89 We will not advise the Minister to exempt: (a) an overseas CS facility solely because it is subject to regulation in the foreign country where its principal place of business is located, even if regulated by sufficiently equivalent regulations in the foreign country. Giving an exemption could undermine the licensing regime; or (b) a CS facility solely because there is doubt about whether the financial products to which the facility relates are, or should be, within the definition of financial product. These circumstances are not exhaustive. Will there be obligations with an exemption? RG 211.90 There may be ongoing obligations imposed on a facility operator after an exemption has been granted. RG 211.91 We may advise the Minister to impose conditions on the exemption to protect the users of the facility. Conditions may include a requirement: (a) to hold an Australian financial services (AFS) licence; (b) where a foreign operator is exempt from the requirement to hold an AFS licence, whether under the Corporations Act, Corporations Regulations 2001 (Corporations Regulations) or a class order for wholesale foreign financial service providers, that: (i) it must submit to the jurisdiction of an Australian court in an action brought by us in relation to its operation of the facility; and (ii) it must register with us as a foreign company if required under the Corporations Act; (c) for the key features of the CS facility to remain as they are when the exemption is granted; (d) to report to us periodically about the operation of the CS facility and compliance with conditions of the exemption; (e) to alert users of the CS facility to the fact that the CS facility is exempted; (f) to report to us any disciplinary action taken against a user of the CS facility or when the CS facility operator suspects that a person has committed, is committing or is about to commit a significant contravention of the Corporations Act; (g) to report to us any significant system outages; (h) to obtain an audit report about the operation of the CS facility prepared by a specified person or body that is suitably qualified; Page 28 REGULATORY GUIDE 211: Clearing and settlement facilities: Australian and overseas operators © Australian Securities and Investments Commission December 2012 Page 28 (i) to maintain records of all activities of the facility for five years; (j) to make available on its website the facility’s annual audited financial statement; (k) if the financial products to which the facility relates are not traded on a licensed market or the traded price and other post-trade data of those products are not readily available to the public, and if we consider it is appropriate to do so, to make available to the current and potential users of the facility and to us: (i) all end-of-day settlement prices of those products that are used for margin calculation; (ii) aggregate open interests of those products accepted for clearing and settlement by the facility; (iii) any other pricing or valuation information on those products; and (iv) any other information that is necessary to enable the current and potential users of the facility to evaluate the costs and risks associated with using the facility; (l) to provide us with regular reports or electronic feeds of data, as prescribed by us, on all or classes of transactions cleared and/or settled via the facility, to support our supervision of financial markets; (m) to enter a written cooperation agreement with us and the RBA; or (n) any other conditions that are necessary to ensure that the regulatory outcomes in Table 1 will be achieved. How to apply for a licence exemption RG 211.92 Apply by submitting an application to us. The application should provide details of: (a) the operation of the particular CS facility or type of CS facility; and (b) the reasons why you should be exempted from the requirements of Pt 7.3. RG 211.93 We recommend you discuss your application with us before you submit it. Processing time for an exemption application RG 211.94 We encourage you to submit a draft application before your formal application so we can ensure it is complete and detailed enough for ASIC to advise the Minister, and for the Minister to make a decision. RG 211.95 ASIC and the RBA will complete the assessment of your formal application in 12 to 16 weeks. This is the time between you submitting a formal application and our referral of your application to the Minister. This processing time excludes: Page 29 REGULATORY GUIDE 211: Clearing and settlement facilities: Australian and overseas operators © Australian Securities and Investments Commission December 2012 Page 29 (a) time spent clarifying issues with you; (b) time waiting for information from you; (c) any time we may spend consulting with third parties; and (d) the time between referral to the Department of Treasury and the Minister’s decision. RG 211.96 Occasionally, ASIC or the RBA may need to consult with the public about an application for exemption. In such cases, it will take us longer than 16 weeks to provide advice to the Minister. In deciding whether to consult with the public, we will consider: (a) whether the exemption is for a type of CS facility or a particular CS facility; (b) the features of the CS facility, including: (i) the anticipated volume and value of transactions to be cleared and settled through the facility; and (ii) the likely facility users; and (c) the need to apply the financial stability standards to the facility by assessing the likely impact of the activities of the facility on the Australian financial system and level of systemic risk it will pose. Page 30 REGULATORY GUIDE 211: Clearing and settlement facilities: Australian and overseas operators © Australian Securities and Investments Commission December 2012 Page 30 D CS facility licence—overseas operators Key points You are eligible to apply for an overseas CS facility lic