Overview of Market
General Market Overview
The Australian Securities Exchange is a top 10 global securities exchange by value and is owned by the Australian Securities Exchange Ltd, or ASX Limited, an Australian public company. Prior to December 2006 it was known as the Australian Stock Exchange, which was formed on April 1, 1987 as an amalgamation of the six state securities exchanges. It merged with the Sydney Futures Exchange in 2006.
A domestic fixed income central securities depository (CSD) is offered through Austraclear. The repurchase market (repo) utilizes the global master repo agreement (GMRA), which allows for cash collateral versus the repo of fixed income securities. Repos or reverse repos are conducted as delivery versus payment (DVP) to eliminate intraday exposure risk, and bonds can be delivered bilaterally or via tri-party through ASX.
Fixed income repo or loans are conducted on a T+1 basis and can be open or termed (where the repo or loan is executed between set dates) with tri-party repo becoming increasingly popular.
Historically, beneficial ownership of Australian government securities has been majority held offshore, although the proportion has declined recently from nearly 70% to around 50%.
Beneficial owners can utilize the repo market to provide leverage via repo or securities lending. If securities are not recycled back to the market and become scarce, the Australian Office of Financial Management (AOFM) can lend specific Australian Government Securities (AGS) to those who are short to cover ongoing obligations. Liquidity in the repo market or the availability of cash to domestic deposit takers is monitored by the Reserve Bank of Australia (RBA), which conducts daily market operations to lend cash via repo on pre-specified terms at 9:20 a.m. daily with a further operation at 5:10 p.m. if needed. The RBA will also conduct operations in the foreign exchange (FX) forward market to satisfy demand for Australian dollars for institutions that do not have capabilities in repo.
Collateral for repos with the RBA include Australian government and semi-government (state-issued) bonds, foreign AAA-rated government bonds and bank paper issued by deposit taking institutions down to BBB- or A1 and higher-rated Australian ABS. Both AGS and semi-government bonds count as high-quality liquid assets (HQLA) domestically, with semis generally trading with a slight discount to Australian
Australian Securities & Investment Commission: https://asic.gov.au/
Securities Borrowing and Lending (SBL)
The Australian market historically used a legal agreement known as the Australian Master Securities Lending Agreement (AMSLA). The AMSLA was based on the Overseas Stock Lending Agreement (OSLA). However, the Global Master Stock Loan Agreement (GMSLA) is used more broadly today. Both allow for the collateralization of loans by cash or alternative collateral of equity or fixed income securities which are delivered ahead of the loan of Australian securities (prepay).
The AMSLA can be used for both agency and principal transactions. An agent lends securities on behalf of the beneficial owner and does not take on any risk for the transaction. Subsequently, the counterparty risk lies with the beneficial owner and the borrower. Loans and the collateral are transferred on a title transfer basis.
Short Selling Rules
|Is short selling permitted?||Short Selling is permissible under the Corporations Act 2001.|
|Definition of short sale||Generally, where a person executes a short sale and relies on an existing securities lending arrangement to have a “presently exercisable and unconditional right to vest” the products in the buyer at the time of sale, the sale of the products is a covered short sale. (RG 196.2 Corporations Act 2001)|
|Pricing requirement for short sale||None|
|Short Position Reporting|
|Disclosure of short position||Public disclosure is required under certain conditions.
The threshold for reporting is when a firm’s short position is more than AU$100,000 or 0.01% of the total quantity of securities or products in the relevant class of securities or products.
|When does a report need to be made||A person must report their short positions as at 7 p.m. on each reporting day. Short position reports must be received by ASIC before 9 a.m. three reporting days after the date of the short position. (RG 196.133 Corporations Act 2001)|
Settlement participants, i.e. selling brokers, are required to close out settlement shortfalls that remain after batch settlement on T+4 by purchasing or borrowing the shares required to complete the settlement. An outstanding settlement position that has not been resolved by T+8 will be referred to ASX Markets Supervision for investigation and possibly to the Disciplinary Tribunal.
The price bid for the buy-in is based on the last recorded sale price adjusted by either a higher bid price or a lower offer price, as at 12:00 noon on settlement day (SD) plus a margin above the market price of the securities. This margin rises each day that the trade remains outstanding.
Borrowing in Australia across both domestic and international lenders requires collateral to be lodged before the physical shares can move. Collateral can be USD, GBP, AUD or JPY cash, or forms of equities and government debt depending on the underlying clients’ preferences and internal compliance approval. Normal collateral headroom is 105% of the stock’s market value.
Foreign Investor Limits
Individual foreign ownership is capped at 15%; anything more than 15% requires approval from the Foreign Investment Review Board. The aggregate limit is 40%. Certain industries such as ASX, telecommunications, gaming, etc., have further restrictions.
Operational and Post Trade
Scheduled Settlement (101) – 11:30 a.m. – a full DVP system allowing simultaneous turnaround and simultaneous exchange of securities and cash in CHESS (the Australian settlement system).
Demand Settlement (005) – For off-market trades or to process a same-day turnaround trade that is not matched in time for the scheduled settlement process. Payments (if any) are made by 4:30 p.m. via the Austraclear system, while the securities transfers are processed through CHESS. Subject to the agreement of both settlement parties, securities can settle until 7 p.m.
Failed Trade Fees – Equities – 0.1% of the value of the shortfall, subject to a daily minimum fee of AU$100 and maximum fee of AU$5,000. The value of the shortfall is calculated based on the failed trade quantity
multiplied by the valuation price of the security.
On some state holidays, the ASX remains open for trading and settlement. Such days are considered as trading, but not business days.
Special Auction Rules
Pre-open: 7:00 – 10:00 a.m.
Opening auction: 10:00 – 10:09:15 (staggered for different groups of equities)
Opening takes place at 10:00 a.m. Sydney time and lasts for about 10 minutes. ASX Trade calculates
opening prices during this phase. Securities open in five groups, according to the starting letter of their
Group 1: 10:00:00 +/- 15 secs 0-9 and A-B, e.g. ANZ, BHP
Group 2: 10:02:15 +/- 15 secs C-F, e.g. CPU, FXJ
Group 3: 10:04:30 +/- 15 secs G-M, e.g. GPT
Group 4: 10:06:45 +/- 15 secs N-R, e.g. QAN
Group 5: 10:09:00 +/- 15 secs S-Z, e.g. TLS
The time is randomly generated by ASX Trade and occurs up to 15 seconds on either side of the times
given above—e.g., Group 1 may open at any time between 9:59:45 and 10:00:15.
Pre-close: 16:00 – 16:10
Closing auction: 16:10 – 16:12
Talking Points & Future Developments Facing the SBL Model
AFMA / ASIC: Give-up of cash and swap contracts. Exemption notice 1020F(1)(a) relating to Short Selling Market Making exemption. ASIC is clarifying the multiple exemptions that apply when firms are selling to hedge swaps. AFMA (Australian Financial Markets Association) and ASIC are working together to ensure that the rules are correctly understood and applied by market participants. A decision is expected in 2020.
ASLA (Australian Stock Lending Association): Working group to add an Australian addendum to the GMSLA.
DOI / ASIC relief application: ASIC is asking agent lenders to disclose positions greater than 5% on a combination of lending pool, on loan and collateral received balances. The first reporting day has been deferred to December 2020 to finalize requirements.