Multiple clearing and settlement venues will be crucial to delivering the full benefits of competition to the Australian securities market, said William Tonkin, director of SecuritEase, the interface technology provider selected this week by Chi-X Australia to connect its trading platform to the clearing and settlement infrastructure operated by the Australian Securities Exchange (ASX).
While Chi-X Australia's entry will force down the cost of trading on the ASX, new players are needed to generate competition at the clearing and settlement level too, Tonkin said. “When one organisation has control of both the market and the clearing and settlement infrastructure, it could be easy to move costs out of the market component into the settlement and clearing component so that it can compete more aggressively with a new market operator. However, if there are multiple clearing and settlement venues then that form of cost transfer can't occur,” he said.
Chi-X's impending entry, scheduled for Q4 2011, and the market structure review currently being undertaken by the Australian Securities and Investments Commission are expected to promote competition in clearing and settlement in Australia. European clearing house LCH.Clearnet was reported this week to be maintaining a close watching brief on regulatory developments in Australia, with a view to clearing ASX-listed securities.
“We have fulfilled our key objective in negotiations with ASX of ensuring that all market participants have an equitable post-trade service, regardless of execution venue,” said Peter Fowler, chief operating officer, Chi-X Australia. “We have chosen to apply for the five-year pricing option as this has the advantage of spreading the costs imposed by ASX over a longer period. Importantly, the arrangement will not lock Chi-X into exclusively using ASX for the duration of this period.”
Chi-X Australia, owned by market operator and trading technology provider Chi-X Global, recently released the names of brokers that intend to participate in the launch. The firms that have confirmed their participation are Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, Instinet, ITG, J.P. Morgan, Macquarie, Merrill Lynch, Morgan Stanley, Nomura, Penson, RBC Capital Markets, RBS and UBS.
Settlement and clearing of trades in shares listed on ASX is effected by a computer system called CHESS, (Clearing House Electronic Subregister System) and is operated by the ASX Settlement Corporation, a wholly-owned subsidiary of the ASX. CHESS also provides an electronic subregister for shares in ASX-listed companies.
The SecuritEase system has the CHESS Release 8 Approved Market Operator technical accreditation needed to support the interconnection between ASX Settlement and the Chi-X market. Chi-X Australia has lodged an application to receive the ASX's Trade Acceptance Service (TAS), which passes trades executed on the trading platforms of other market operators to ASX Clear and ASX Settlement in real time for clearing and settlement.
The ASX makes available to prospective approved market operators options of one-, three- or five-year terms for the TAS, with annual service fees of AUD1.25 million for a one-year commitment, AUD450,000 for three years and AUD275,000 for five years.
“The ease of working with SecuritEase, the proven ability of the SecuritEase system to interface to CHESS for high throughput and availability, and the proven capability to simultaneously interface to other clearing infrastructure suppliers were key factors in Chi-X's decision-making process,” said Tonkins after SecuritEase won the competitive tender process run by Chi”‘X.
He added that the SecuritEase system is able to support the multiple clearer model very quickly should it be required by Chi-X. SecuritEase it is a multi market system, which means its is simultaneously able to route trade notifications through to any number of different settlement infrastructure components. “So if there were multiple venues for clearing and settlement, our systems could take the trades executed on the Chi-X market and route them through to ASX or any other clearing and settlement venue in the Australian market.”