Australia is one of the world’s most expensive developed markets to clear and settle equities, according to industry analysis.
And the report by independent research house Market Structure Partners says the risk management model in Australia is unusual when compared to other global markets.
Clearing fees total about $43 million a year in Australia. If you add trading, clearing and settlement together then clearing is about 40% of the total fee to make a trade.
The report was commissioned by a group of clearing participants including Pershing, Citi, Deutsche Bank, Credit Suisse, Morgan Stanley and Bank of America Merrill Lynch.
The findings show combined costs for clearing in Australia are the third-most expensive in developed markets after Spain and Brazil.
These countries all share one thing in common: each as a dominant share trading operator. In Australia, that’s the ASX.
Looking at value and number of trades cleared versus the average cost to clear them, the report shows Australia as the second most expensive market after Brazil, even when economies of scale have been accounted for.
Market Structure Partners CEO Niki Beattie says the three most expensive markets for post-trade – Spain, Brazil and Australia – all have one dominant exchange.
The report also analyses the unusual risk management and default “waterfall” model used in Australia.
“In most other markets, after the funds of the defaulting participant are used, there is a default fund where the risk is shared between the non defaulting market participants,” Ms Beattie said.
“ASX Clear is unusual in that is uses its 100% of its own capital to substitute for a default fund.
“Is it appropriate to have this much of shareholders’ capital at risk? Does this create the wrong type of behaviour when it comes to risk management? Who says $250 million is the right number? Is this the most systemically stable model? And how is replenishment going to work when these funds run out? These are all issues worth exploring.”
The report does not make recommendations on the basis of its research.
However with the moratorium on clearing competition coming to an end early next year, Ms Beattie said it was a sensible time to independently review the real cost to Australian market participants of such high post-trade fees and the overall risk model.