2.9.1. Safeguarding and administration of users’ assets

(1) An Authorised Market Institution must ensure that where its facilities include making provision for the safeguarding and administration of assets belonging to users of those facilities, including Members and other participants, satisfactory arrangements are made for that purpose with an appropriate custodian or settlement facility and clear terms are agreed between the users of the facility and the Authorised Market Institution.

(2) When assessing its systems and controls for the safeguarding and administration of assets belonging to users of its facilities, an Authorised Market Institution must have regard to the totality of the arrangements and processes by which it records:

(a) the assets held and the identity of the legal and beneficial owners of the relevant assets, and where appropriate, any Persons who have charges over, or other interests in, those assets; and

(b) any additions, reductions and transfers in each individual account of assets.

(3) When determining whether it has made satisfactory arrangements for the safeguarding and administration of assets belonging to the users of its facilities, an Authorised Market Institution should have regard to:

(a) the level of protection which the arrangements provide against the risk of theft or other types or causes of loss;

(b) whether the arrangements ensure that assets are only used or transferred in accordance with the instructions of the owner of those assets or in accordance with the terms of the agreement by which the Authorised Market Institution undertook to safeguard and administer those assets;

(c) whether the arrangements ensure that the assets are not transferred to the Authorised Market Institution or to any other Person to settle the debts of the owner (or other Person with the appropriate rights over the assets) except in accordance with valid instructions from a Person entitled to give those instructions, or in accordance with the terms of the agreement by which the Recognised Body undertook to safeguard and administer those assets;

(d) whether the arrangements include satisfactory procedures to ensure that any rights arising in relation to the assets held as a result of any actions by the issuers of those assets (or other relevant Persons) are held, transferred or acted upon in a timely and accurate manner in accordance with the instructions of the owner of those assets or in accordance with the terms of the agreement by which the Recognised Body undertook to safeguard and administer those assets;

(e) whether there are adequate arrangements to ensure the proper segregation of assets belonging to the Authorised Market Institution (or to Undertakings in the same Group) from those belonging to the users of its facilities for the safeguarding and administration of assets;

(f) whether its arrangements include satisfactory procedures for the selection, oversight and review of custodians or sub-custodians used to hold the assets;

(g) whether the agreements by which the Authorised Market Institution undertakes to safeguard and administer assets belonging to users of its facilities include appropriate information regarding the terms and conditions of that service and the obligations of the Authorised Market Institution to the user of the service and of the user of the service to the Authorised Market Institution;

(h) whether the records kept of those assets and the operation of the safeguarding services provide sufficient accurate and timely information to:

(i) identify the legal and beneficial owners of the assets and of any Persons who have charges over, or other interests in, the assets;

(ii) record separately any additions, reductions and transfers in each account of assets held for safeguarding or administration; and

(iii) identify separately the assets owned by (or, where appropriate, on behalf of) different Persons, including, where appropriate, the assets owned by Members of the Authorised Market Institution and their Clients;

(i) the frequency of reconciliation of the assets held by (or on behalf of) the Authorised Market Institution with the accounts held with the Authorised Market Institution by the users of its safeguarding and administration services and the extent of the arrangements for resolving a shortfall identified in any reconciliation; and

(j) the frequency with which statements of their holdings are provided to the users of the safeguarding and administration services, to the owners of the assets held and to other appropriate Persons in accordance with the terms of the agreement by which the Authorised Market Institution undertook to safeguard and administer those assets.

2.9.2. Custody and investment risk

(1)     An Authorised Market Institution must have effective means to address risks relating to:

1. (a)      custody of its own assets, in accordance with (2), if it is an Authorised Clearing House; or
2. (b)      investments, in accordance with (3), if it is an Authorised Investment Exchange.
3. (c)     [intentionally omitted]

(2)     For the purposes of (1)(a), an Authorised Clearing House must:

1. (a)      hold its own assets with entities which are licensed for holding deposits or providing custody, as judged appropriate by the AFSA or a Financial Services Regulator acceptable to the AFSA;
2. (b)      be able to have prompt access to its assets when required; and
3. (c)      regularly evaluate and understand its exposures to entities which hold its assets.

(3)     For the purposes of (1)(b), an Authorised Investment Exchange must ensure that:

1. (a)      it has an investment strategy which is consistent with its overall risk-management strategy and is fully disclosed to its Members and other participants using its facilities;
2. (b)      its investments comprise instruments with minimal credit, market, and liquidity risks; and
3. (c)      its investments are secured by, or represent claims on, high-quality obligors, allowing for quick liquidation with little, if any, adverse price effect.