ASIC launches inquiry into ASX after "repeated and serious failures"

The nation's corporate watchdog has amplified pressure on share market operator ASX Ltd (ASX: ASX) in response to a failure of its CHESS Batch Settlement system in December, launching an inquiry amidst concerns over its ability to maintain stable, secure and resilient critical market infrastructure.

These are concerns shared by the Reserve Bank of Australia (RBA), which in March took the “unprecedented” step of downgrading its assessment of subsidiaries ASX Clear, a clearing house for futures and options, as well as ASX Settlement, the sole provider of settlement services for Australia’s equity markets.

The central bank's assessment of these systems' operational compliance within its operational risk standards was brought down from "partly observed" to "not observed", signifying a need for immediate action.

An expert panel will lead the Australian Securities and Investments Commission's (ASIC) inquiry, probing the ASX's governance, capability, risk management frameworks and practices, making recommendations over any identified shortcomings or deficiencies.

"ASX operates Australia’s critical markets infrastructure. Investors and market participants deserve to have absolute confidence that ASX is operating soundly, securely and effectively," says ASIC chair Joe Longo.

"ASIC’s decision to initiate an Inquiry follows repeated and serious failures at ASX.

"ASX is ubiquitous, you simply cannot buy and settle on the Australian public equities and futures markets without relying on ASX and its systems."

Longo says the inquiry provides an opportunity for ASX to bolster market trust.

"The chairs of the ASX entities, members of the board, and CEO and CRO have assured me ASX will fully cooperate with the Inquiry and ASIC welcomes this cooperation," he adds.

ASIC will discontinue its investigation of the 20 December 2024 CHESS Batch Settlement failure, bringing the issue into the broader scope of the new inquiry.

The problem arose after as an error prevented completion of the settlement of two trades by a Friday deadline, postponing it until the following Monday on 23 December. Investigations over that weekend allowed the ASX to identify the cause of the error in the CHESS code, and a fix was developed, tested and implemented on the Sunday.

Today's announced inquiry begins as the market operator is two years into a five-year strategy involving major technological upgrades, although it has been trying to upgrade its decades-old CHESS share settlement since 2017.

An earlier blockchain-based settlement project was abandoned in 2022 due to significant flaws identified by independent consultancy Accenture, which resulted in a $250 million write-down for ASX later that year.

Last year, the ASX announced that the cost of the first stage of its new replacement for CHESS to be introduced next year would land at the upper end of its forecast between $105 million to $125 million.

The second stage, to be implemented by 2029, is estimated to cost between $270 million and $320 million.

ASX chairman David Clarke says the group welcomes the opportunity for independent parties to review the work under way and advise on what more can be done.

"We acknowledge the seriousness of this action, and ASIC’s inquiry will have our full cooperation," Clarke says.

"We have been working hard on a transformation strategy with several of the initiatives designed to strengthen culture and capabilities, operational risk management, business resilience and technology resilience, but we acknowledge there have been incidents that have damaged trust in ASX."

ASX managing director and CEO Helen Lofthouse says the operator of critical market infrastructure recognises the significance of this action by ASIC, and is committed to supporting the inquiry.

"This is a wide-ranging inquiry and it will provide an independent and transparent view of the work we have done, and the work we still have to do. It will be critical to ensuring our stakeholders can have trust and confidence in ASX," she says.

"Each person at ASX understands the key role we play in the financial system and we will provide all the support required to ensure this inquiry is effective."