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Industrials
The Australian Securities Exchange (ASX) has faced unprecedented regulatory scrutiny following a significant batch settlement breakdown in the Clearing House Electronic Sub-register System (CHESS) on December 20, 2024. This incident has prompted the Reserve Bank of Australia (RBA) and the Australian Securities and Investments Commission (ASIC) to take stern action, highlighting deep concerns about operational risk management and system resilience.
The CHESS system, which handles cash equities settlements in the Australian market, encountered an issue with its memory allocation logic, preventing batch settlement on the designated day. This unforeseen event was a first for CHESS, as the system had never failed to complete batch settlement before. The ASX rescheduled the settlement for the following business day, ensuring minimal disruption to trading activities, but the event has sparked intense scrutiny from financial regulators.
In response to the incident, the RBA conducted an out-of-cycle assessment of ASX Clear Pty Limited and ASX Settlement Pty Ltd against its Financial Stability Standards. The assessment led to a downgrade in the Operational Risk standard from "partly observed" to "not observed," indicating serious concerns that require immediate attention. The RBA has urged ASX to strengthen resourcing and third-party support for CHESS and to develop contingency plans to mitigate future risks.
ASIC has also taken concrete steps by directing ASX to engage an expert for a technical review of CHESS. This review aims to assess the technical architecture and code quality of the system. A version of the report will be made public, ensuring transparency in the process. ASIC's actions are part of a broader investigation into ASX Settlement Pty Ltd for suspected contraventions under the Corporations Act.
The regulators' actions emphasize concerns over ASX's operational risk management practices. The RBA and ASIC have reiterated the importance of addressing the underlying issues promptly to ensure the stability of Australia's financial system. ASX operates critical infrastructure, and its performance directly affects market confidence and resilience.
In response to these concerns, ASX has committed to enhancing system resilience through a technology modernization strategy. The strategy includes maintaining the current CHESS system while developing a replacement built on modern, modular architecture. ASX is collaborating with Tata Consultancy Services to implement the BaNCS for Market Infrastructure platform, which has been successfully used in other markets. The project to replace CHESS is well underway, with significant investment and stakeholder engagement.
Regulators have made it clear that ASX must prioritize these remediation efforts. Failure to address these concerns could lead to further regulatory actions, leveraging new powers granted under recent reforms to modernize the regulatory framework for Financial Market Infrastructures. These powers enable regulators to enforce stricter standards and oversight.
The incident and subsequent regulatory actions have prompted ASX to re-evaluate its incident management protocols and engage more closely with stakeholders. This includes releasing detailed incident reviews and offering rebates to affected participants. ASX Managing Director and CEO Helen Lofthouse has emphasized the organization's commitment to transparency and customer satisfaction, despite the shortcomings highlighted by the incident.
The regulatory actions against ASX underscore the importance of operational resilience in financial infrastructure. As the ASX navigates this challenging period, it must demonstrate a robust response to restore confidence in its systems. The implementation of a new CHESS system and ongoing modernization efforts are critical to meeting regulatory expectations and ensuring the reliability of the Australian equities market.
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