The Australian Securities Exchange (ASX) is once again in hot water with the authorities, as the Reserve Bank of Australia (RBA) and the Australian Securities and Investments Commission (ASIC) (the regulators) take further steps to address their increasing concern over the management of operational risk surrounding CHESS (Clearing House Electronic Subregister System).
In a joint letter to ASX, the regulators expressed their deep concerns about the potential for operational incidents, such as the CHESS batch settlement failure, to affect the ability of CHESS to reliably service the Australian equities market until CHESS is replaced. The regulators also highlighted their concern about the speed and nature of ASX’s remediation actions following the initial incident.
In response, the RBA is reassessing the compliance of ASX Clear Pty Limited and ASX Settlement Pty Ltd with the RBA’s Financial Stability Standards outside the usual annual assessment cycle. The RBA has downgraded its assessment of these entities’ compliance with the ‘Operational Risk’ standard from partly observed to not observed. A rating of not observed is made when the RBA has identified serious issues of concern that warrant immediate action.
In addition, ASIC has directed ASX, under section 823BB(4) of the Corporations Act 2001, to engage an expert approved by ASIC 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.
Brewing concerns
ASX has been in the regulator’s firing line for over a year and a half. In August 2024, ASIC alleged that ASX misled investors and market participants about the progress of the CHESS replacement project, making optimistic statements about the project’s timeline and success, despite being aware of substantial internal challenges and delays.
What’s next?
If not urgently addressed, the regulators are prepared to take further regulatory action. This could include the use of the regulators’ new powers under reforms to modernise the regulatory framework for Financial Market Infrastructures, which came into effect in September 2024, and further rulemaking under the Competition in Clearing and Settlement reforms.
RBA governor, Michele Bullock, said: “It is deeply disappointing that the regulators need to take these actions today. But they are necessary. 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.”
ASIC chair, Joe Longo, said, “Our actions underscore our increasingly deep concerns with ASX’s management of the CHESS system, and we will continue to consider further action. 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.”
