Our clearing house is in order, says Reserve

Sydney Morning Herald

Wednesday September 23, 2009

Eric Johnston

AS MANY as 15 brokerages were placed on an alert watchlist by the nation's equities and futures clearing house at the height of market volatility over the past year, amid concerns a squeeze in liquidity would hurt the smooth running of the Australian sharemarket.However, by the end of June the number of brokerages on Australian Clearing House's warning watchlist had dropped back to eight, according to the Reserve Bank of Australia's latest annual assessment of the clearing house performance.The clearing house provides the facility for equities, warrants and fixed interest transactions to be settled and paid for. It is backed by the National Guarantee Fund, which provides investor protection funding, and both are formally overseen by the RBA.Meanwhile, rules to increase minimum capital requirements for brokers to remain in the clearing house to $5 million from July next year are starting to have an effect, with nine resigning over the past year, although one new member joined.Before the change, brokers were required to have a minimum capital of only $100,000, although this requirement will eventually be raised to $10 million.In all, the Australian clearing house has 57 participants, including 27 Australian brokers, 20 subsidiaries of foreign banks and brokers and eight subsidiaries of Australian banks.The collapsed Wall Street brokerage Lehman Brothers was not a direct participant in Australia's share settlements and clearing system, but "its failure and [the] resulting spillover to securities and derivatives markets did pose some challenges," the RBA said in its assessment of the clearing house. Despite the sharemarket volatility, Australia's clearing and settlement facilities "were resilient to the turbulent market conditions during this period".In the cash equity market, after very strong growth in recent years, average daily trading volumes increased by 16 per cent. In value terms, daily cash equity transactions fell by 30 per cent, reflecting the heavy losses in share prices during the year.The RBA said Australian Clearing House acted in a "timely manner" to bolster its risk management activities in response to the heightened market's volatility late last year. However, further refinements to its risk-management framework should be considered.The RBA assessment of the clearing and settlement facilities comes before the release tomorrow of a broader review of Australia's banking sector.