ASX today formally lodged amendments to the ASX Settlement Operating Rules in respect of transfers to the CHESS subregister.

These amendments relate to one of two BAU business requirements[1] identified by stakeholders through the Settlement Enhancements Working Group convened by ASX in 2017 in connection with the replacement of CHESS (captured as item 1 in Appendix 2 to ASX’s Consultation Paper CHESS Replacement: New Scope and Implementation Plan released in April 2018 available here). Stakeholders were also consulted on this business requirement through further targeted consultation - ASX released a consultation paper Transfers to the CHESS Subregister in July 2018 and responded to submissions received in August 2019.  

These rule amendments seek to streamline the process for effecting transfers to the CHESS subregister by removing the requirement for certain eligible settlement participants that are not also ASX trading participants to receive and provide to the issuer, a registrable transfer document in order to effect a transfer of an issuer sponsored holding to a CHESS holding.

These amendments in mark-up are provided here.

More detail on rule amendments

Currently, the ASX Settlement Operating Rules impose different requirements on the transfer of financial products from an issuer sponsored holding to a CHESS holding controlled by a settlement participant for:

-               settlement participants that are ASX trading participants; and

-               settlement participants that are not also ASX trading participants (settlement-only participants).

Settlement participants that are also ASX trading participants are required to send a CHESS MT015 message, which is then processed by the issuer’s share registry. Share registries process these transfers without any associated follow up paperwork.

Settlement-only participants are required to send a CHESS MT015 message and receive and provide to the issuer (generally through the issuer’s share registry) a registrable transfer document, being a transfer document signed by or on behalf of the holder. Issuers are similarly prohibited from authorising a transfer from an issuer sponsored holding to a CHESS holding controlled by a settlement-only participant, unless the issuer receives a registrable transfer document signed by or on behalf of the holder and the details on that document match the issuer’s records in relation to that holder.

Additional requirements are imposed on settlement-only participants as holders are not protected under the National Guarantee Fund in respect of unauthorised transfers by settlement-only participants.

These rule amendments:

1.             Introduce a new sub-class of settlement-only participant, “custodial settlement participant”

To be eligible to be a custodial settlement participant, a settlement-only participant must:

-       hold an Australian financial services licence with an authorisation to provide custodial or depository services (or be able to rely on a suitable exemption from this requirement); and

-       either meet the higher of the net tangible asset requirements specified for providers of custodial services under the Corporations Act (currently greater of $10 million or 10% average revenue held in liquid assets and 50% in cash), or enter into a guarantee in a form acceptable to ASX with an entity that does. ASX has prepared a standard form of guarantee that is acceptable to it, available here. Participants seeking to rely on a guarantor to meet these financial requirements will need to provide a guarantee in this format.

Settlement participants that ASX has recognised as a custodial settlement participant will be identified by using the Broker Non Broker Indicator of “B” on certain CHESS transfer and conversion messages outlined below. Settlement only participants that are not recognised by ASX as a custodial settlement participant will continue to be identified through the Broker Non Broker Indicator “N” (ie non-broker participant) indicating to issuers (and their registry) that a paper transfer document needs to be received and validated by the issuer before processing the transfer.

2.             Align the treatment of custodial settlement participants with settlement participants that are ASX market participants

This means that custodial settlement participants will:

-       not be required to obtain and provide to the issuer a registrable transfer document in order to effect a transfer of an issuer sponsored holding to a CHESS holding controlled by it;

-       warrant that they have the holder’s authority to effect a transfer; and

-       be required to carry out additional post-transfer checks to ensure that financial products subject to a transfer were deducted from the correct holding and to take rectification steps if that was not the case.

3.             Require custodial settlement participants to undertake pre-transfer validation checks

Custodial settlement participants will be prohibited from transmitting messages to initiate a transfer to the CHESS subregister unless they have verified that the SRN and registration details they have for the holder match the SRN and registration details maintained by the issuer. This provides for verification checks, similar to those currently carried out by issuers (through their share registries) prior to a transfer being authorised.

It will be optional for those settlement-only participants who meet the qualifying criteria to apply to ASX to be recognised as a custodial settlement participant, and by doing so:

-               have the benefit of not having to provide a paper transfer document to issuers as part of the processing of transfers to the CHESS subregister;

-               but also be subject to the additional pre and post transfer validation checks and warranties that apply.

Effective Date

Subject to regulatory clearance, these rule amendments will become effective on or around Friday, 20 December 2019. ASX will release a future market notice confirming the effective date once known.  

[1] The other BAU business requirement dealing with the processing of off-market takeovers has already been implemented through rule amendments which came into effect on 30 September 2019 available here.

What do I need to do by when?

ASX will begin accepting applications from settlement-only participants that wish to apply to be recognised as a custodial settlement participant from the effective date of these rule amendments. Early applications will not be accepted. Settlement-only participants wishing to apply to become a custodial settlement participant can do so by emailing Participants.Compliance@asx.com.au.

Issuers (and their registry) will be able to identify whether a settlement-only participant is a custodial settlement participant as they will have a Broker Non Broker Indicator of “B” in the following CHESS transfer and conversion messages (CHESS messages 404, 408, 416, 418, 716 and 719).  ASX will also publish information which identifies the participants that ASX has recognised as a “custodial settlement participant”.

Settlement only participants that are not recognised by ASX as a custodial settlement participant will continue to be identified through the Broker Non Broker Indicator “N” (ie non-broker participant) indicating to issuers (and their registry) that a paper transfer document needs to be received and validated by the issuer before processing the transfer.

Need more information?

Issued by

Con Korkofigas
Senior Manager and Senior Legal Counsel

Contact information

Con Korkofigas
Senior Manager and Senior Legal Counsel
con.korkofigas@asx.com.au

Bill Woods
Principal Adviser
bill.woods@asx.com.au

Adriana Wild Taylor
Legal Counsel
adriana.wild-taylor@asx.com.au

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