Trades executed on ASX Trade or the trading platform of an Approved Market Operator (AMO), are sent to ASX Clear for registration.
Step 2: Novation and clearing
Once accepted by ASX Clear, each cash market transaction or derivatives market contract is novated – replaced with two separate transactions or contracts between the clearing participants and ASX Clear as the Central Counterparty (CCP). However, if a trade is cleared on both sides by the same clearing participant, there is no need for novation and ASX Clear simply notifies the participant of the trade.
At the end of the trading day, ASX Clear nets all cash CCP transactions to create one net receipt or delivery per line of stock and one net cash payment or receipt per clearing participant. Generally, if a stock is undergoing a corporate event, the netting facility is turned off and the gross transaction is retained through to the settlement cycle.
Step 3: Settlement
The resulting transactions are sent to ASX Settlement for settlement in CHESS on the morning of T+2.
A trading participant to a cash market transaction or derivatives market contract has exposure to the counterparty trading participant until that transaction or contract is novated. Novation is the replacement of a cash market transaction or derivatives market contract between trading participants with two separate cash CCP transactions or derivatives CCP contracts between ASX Clear and each clearing participant for that transaction or contract.
As a result, ASX Clear becomes the seller to every buying clearing participant and the buyer to every selling clearing participant under each cash market CCP transaction or derivatives CCP contract and is responsible to that counterparty for completion.
Protection if a counterparty defaults
The novation process helps to protect clearing participants and their clients if another participant defaults and does not meet its obligations. Different arrangements apply to different categories of financial product transactions. Clients, typically investors, must be fully informed and satisfied with the creditworthiness and performance risk of their clearing participant. ASX Clear does not interpose itself between a clearing participant and its clients. Novation does not change the exposure that clients have if their own clearing participant defaults and cannot meet its obligations to them.
ASX Clear is an approved netting market under the Payment Systems and Netting Act. As a result, where a market participant executes multiple trades in a single stock, ASX Clear can offset buys and sells to calculate a single, net transaction between the participant and ASX Clear, simplifying administration and reducing transaction costs.
Trade acceptance service
The Trade Acceptance Service (TAS) accepts trades in CHESS-eligible ASX-quoted securities from Approved Market Operators (AMOs), including Chi-X Australia.
Accepted trades are cleared and settled by ASX Clear and ASX Settlement in the same way as trades executed on ASX Trade. As a result, trades accepted through TAS are registered and novated from the time of trade execution (that is, immediately after matching of bids and offers on the trading platform).