A blowtorch is being applied to share market operator ASX Ltd (ASX: ASX) by both Australia’s central bank and the corporate watchdog after they revealed “serious concerns” of ongoing operational risks from its clearing and settlement systems, following a major glitch that disrupted settlements for investors in December last year.
The Reserve Bank of Australia (RBA) and the Australian Securities and Investments Commission (ASIC) are concerned over a lack of progress by the ASX following the technical issue that hit its ageing CHESS Batch Settlement system which caused delays of several days in settling trades.
In a joint letter to the ASX, the RBA and ASIC have raised concerns about the ability of the CHESS system to reliably continue servicing the Australian equities market until the system is replaced, while also criticising the management of last December’s incident and the “speed and nature” of the ASX’s remediation actions.
The RBA has taken the “unprecedented” step of reassessing the compliance of ASX Clear Pty Limited (ASX Clear) and ASX Settlement with the central bank’s Financial Stability Standards outside the annual assessment cycle.
“The RBA is downgrading its assessment of these entities’ compliance with the ‘Operational Risk’ standard from partly observed to not observed,” the regulators say in the letter to the ASX.
“This indicates that the RBA has identified serious issues of concern that warrant immediate action.”
Separately, ASIC has given the ASX written notice directing the securities market operator to engage an approved expert to undertake a technical review of CHESS.
“This review and any remediation will provide greater confidence to regulators, and the public, in the stability and operational resilience of the current CHESS platform,” they say.
“This review is therefore intentionally technical by nature. ASIC will expect a version of the report by this expert to be made public to provide confidence across the market and the economy of the operational resilience of ASX’s core technology infrastructure.”
ASIC has given the market operator 42 days to appoint the expert to review ASX Settlement and ASX Clear with a report expected within 150 days of the appointment.
“It is deeply disappointing that the regulators need to take these actions today, but they are necessary,” says RBA Governor Michele Bullock.
“ASX operates critical infrastructure that plays a central role in the financial system. ASX’s management of operational risk has been a concern for RBA staff and the Payments System Board for some time, and the recent CHESS incident has underscored those concerns.
“The underlying issues that we have raised need to be addressed as a matter of priority to strengthen the resilience of the CHESS system.”
The regulators have warned that if these matters are not urgently addressed, they plan to take further regulatory action which could include drawing on new powers introduced in September last year that were aimed at modernising the regulatory framework for financial markets.
“Our actions underscore our increasingly deep concerns with ASX’s management of the CHESS system, and we will continue to consider further action,” says ASIC chair Joe Longo.
“The technical review of ASX’s core technology infrastructure is necessary given the ongoing concerns the regulators have raised about ASX’s operational resilience. It is troubling that these risks were realised in this major incident.”
In a statement to the share market this morning, ASX has confirmed receipt of the joint letter from the RBA and ASIC which has come a little over two months after the ASX published the findings of its formal review of the CHESS incident that occurred on 20 December 2024.
“There is no question that the settlement incident was very serious,” says ASX chairman David Clarke.
“The directors of ASX and the Clearing and Settlement boards are highly engaged on this matter; we understand how disappointing it was and we are absolutely committed to rebuilding confidence in ASX.
“ASX has been executing an action plan in response to the incident to minimise the risk and impact of potential future incidents and enhance overall system resilience, but more needs to be done and we must act with greater urgency.”
Clarke notes that management has begun work on implementing a new “enterprise-wide program” to “comprehensively address the regulatory concerns and expectations”.
“This is a CEO-sponsored, business critical initiative with its success a strategic priority of the board,” he says.
The Australian Securities Exchange operator first moved in 2017 to upgrade its decades-old CHESS share settlement system but the program has been plagued with problems and delays ever since.
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.
Help us deliver quality journalism to you.
As a free and independent news site providing daily updates
during a period of unprecedented challenges for businesses everywhere
we call on your support