The Treasurer’s decision to raise the drawbridge on the ASX has the financial sector in uproar, agog at what the reasons might be.

Stock exchange mergers are going off like spring weddings in the Botanic Gardens these days, but in Australia? Hands off.

It is emerging that the concerns about Singapore Exchange’s takeover bid for the ASX centres around the clearing and settlement activities of the exchange rather than the simple provision of a market in securities.

Companies and investment funds are now listing their securities and trading them on various exchanges and it makes no sense for any jurisdiction to attempt to put walls around its own exchange in the context of rampant global market-shopping by issuers, buyers and sellers.

Clearing and settlement, however, are regulated national monopolies in which the clearing-house assumes counterparty risk in the period between trade and settlement. There is obviously a need for this to be regulated to ensure there is enough capital in the system to offset the risk of default by one of the parties. But the question is whether this activity also needs to be owned in Australia as well as regulated here.

As with banking, the regulation of clearing and settlement creates an implicit government guarantee — that is, in the event of a catastrophic failure the government would step in and support settlement. Unlike banking, however, securities clearing and settlement is a natural monopoly. While competition is entering the business of providing a market, that won’t happen with settling the trades.

So it seems very likely the Treasurer’s reasons will focus on this regulated, monopolistic part of the system, with the implication that if ASX and SGX jettisoned it in some way, the merger would be approved.

The ASX makes about a fifth of its revenue from clearing and settlement and there is no stomach at either the ASX or the SGX to voluntarily offload it to a local provider after the merger — for the same reason that that the Treasurer is worried about ownership of it going to Singapore: it’s a monopoly.

The Australian government granted licences to 16 foreign banks in 1985, as a result of which those banks were admitted to the payments system and they became members of the Australian Payments Clearing Association, which is the body that co-ordinates much of the system, apart from credit cards and EFTPOS. Final settlement in banking is conducted through Exchange Settlement accounts at the Reserve Bank.

Although securities clearing and settlement is managed by the ASX, which is a private institution, it’s also part of the Sydney/Canberra club. If there are any problems, a chap can ring up a chap and have a chat you know.

If Singapore takes it over, whom do we ring up? Do they even have chaps in Singapore?

This sort of stuff, of course, will not form part of the Treasurer’s reasons for denying the SGX takeover of the ASX, but it is implied. Why else would the local regulators gang up against the SGX, which has a perfectly well-functioning treading and settlement system of its own?

It must be because they don’t trust their own ability to regulate Australia’s system if it is not owned by Australians.

This represents a fundamental hurdle for the inclusion of the ASX in the global consolidation of securities trading that’s currently taking place.

If the ASX is not to gradually dwindle in both size and relevance, it’s important that the Treasurer does not simply block its takeover: he needs to spell out an alternative regulatory environment for securities clearing and settlement, perhaps one that matches the combination of APCA and the RBA that controls the payments system.

This article was originally published at Business Spectator.

Peter Fray

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