Regulators Respond to Serious Operational Failures at ASX
The Reserve Bank of Australia (RBA) and the Australian Securities and Investments Commission (ASIC) have ramped up their scrutiny of the Australian Securities Exchange (ASX) following a significant operational failure. On 20 December 2024, ASX experienced a major disruption in its CHESS batch settlement system, which prompted a swift response from both regulators. The incident has raised serious concerns about ASX’s management of operational risks, with the regulators questioning the exchange’s ability to handle such failures and ensure the stability of the Australian equities market.
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The CHESS Incident and Its Aftermath
The CHESS batch settlement failure was a crucial incident that affected the functioning of the CHESS system, which is integral to the clearing and settlement of Australian equities. This failure has raised alarms within the RBA and ASIC, who have consistently expressed concerns about the operational resilience of ASX’s core infrastructure. The regulators have pointed out that the failure was indicative of deeper issues with ASX’s risk management practices, particularly with regard to operational risks.
RBA’s Response: Unprecedented Action
In a move that has raised eyebrows, the RBA has taken the extraordinary step of reassessing the compliance of ASX Clear Pty Limited and ASX Settlement Pty Ltd with its Financial Stability Standards, outside the usual annual review cycle. The RBA downgraded its assessment of ASX’s compliance with the “Operational Risk” standard from “partly observed” to “not observed.” This dramatic downgrade signifies that the RBA has identified serious issues that demand immediate attention.
RBA Governor’s Statement
RBA Governor Michele Bullock commented,
“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.”
She emphasized the urgency with which ASX must address these operational concerns to maintain the stability of the financial system.
ASIC Takes Action: Technical Review of CHESS
Alongside the RBA’s move, ASIC has directed ASX to engage an expert, approved by ASIC, to conduct a technical review of the CHESS system. The review will assess the operational resilience of the platform and identify areas requiring remediation.
ASIC Chair’s Statement
ASIC Chair Joe Longo stated,
“Our actions underscore our increasingly deep concerns with ASX’s management of the CHESS system, and we will continue to consider further action.”
This technical review is expected to provide greater confidence in the stability of ASX’s infrastructure and help address the concerns raised by the regulators. ASIC’s decision to involve an external expert is a clear signal that the regulators are not satisfied with ASX’s current handling of operational risks.
Immediate Remediation and Future Expectations
Both the RBA and ASIC have made it clear that ASX must give the highest priority to addressing the issues that led to the CHESS incident. The regulators are particularly concerned about the resilience and reliability of the CHESS system, the resources allocated to maintain it, and the effectiveness of ASX’s incident and business continuity planning. Furthermore, there is a growing expectation that ASX must demonstrate significant improvements in its governance and risk management culture.
Key Areas of Concern:
- Resilience and reliability of the CHESS system
- Resources allocated to maintain the system
- Incident and business continuity planning
- Culture of ASX regarding risk management
- Governance practices at ASX
ASX has been given a timeline to act on these concerns. The regulators have made it clear that if ASX fails to meet their expectations, further regulatory actions will be taken. These could include leveraging the new powers granted to them under recent reforms to the regulatory framework for Financial Market Infrastructures, which came into effect in September 2024.
Regulators Prepare for Further Action
The regulators have indicated that they are prepared to take additional steps if ASX does not urgently address the operational risks highlighted by the CHESS failure. This could involve invoking their new regulatory powers, which were part of the reforms aimed at modernising the regulatory framework for Financial Market Infrastructures. The regulators have also hinted at further rulemaking under the Competition in Clearing and Settlement reforms, which could bring about stricter requirements for ASX and other financial market operators.
Quotations from the Original Letter
In their joint letter to ASX, the regulators expressed their dissatisfaction with ASX’s actions. The regulators noted:
“The regulators are increasingly concerned that ASX may not be fulfilling those responsibilities.”
They further emphasized:
“Clearing and settlement services are critical services for the effective functioning of Australia’s financial markets in the interests of the Australian economy and community.”
Additionally, they outlined their expectations:
“ASX needs to give the highest priority to the immediate remediation of issues that caused and exacerbated the seriousness of the incident.”
ASX’s Path Forward: A Critical Moment
The actions taken by the RBA and ASIC are significant and mark a critical juncture for ASX. As the operators of essential infrastructure for Australia’s financial markets, ASX must take immediate action to restore confidence in its ability to provide secure and reliable services. The regulators have given ASX a clear mandate: fix the operational risks that were exposed in the December 2024 incident, or face further regulatory intervention.
ASX has stated that it is committed to addressing the concerns raised by the regulators. However, the clock is ticking. If ASX is to maintain its position as the dominant player in Australia’s financial market infrastructure, it must demonstrate swift and decisive action. This includes ensuring that its technology platform, CHESS, meets the highest standards of operational resilience and that it can continue to serve the needs of the Australian equities market without disruption.
The Road Ahead for ASX and the Regulators
The relationship between ASX, the RBA, and ASIC is now at a pivotal point. The regulators have made it clear that ASX must act quickly to address the operational risks that were highlighted by the CHESS failure. If ASX does not take swift and meaningful action, the regulators are prepared to take further steps to ensure the stability and integrity of Australia’s financial markets.
The CHESS incident is not just a wake-up call for ASX but also for the broader financial market infrastructure in Australia. As the market evolves, regulators will continue to closely monitor ASX’s efforts to improve its operations and ensure that it can handle the challenges of the future.
In the coming weeks, ASX will meet with the regulators to discuss its remediation plan and provide updates on its progress. The outcome of these discussions will be crucial in determining the future of ASX and its role in the Australian financial system.
Conclusion: A Make-or-Break Moment for ASX
The actions taken by the RBA and ASIC in response to the CHESS incident are a reminder of the importance of operational resilience in Australia’s financial markets. ASX must now work to restore confidence in its systems and demonstrate that it can effectively manage operational risks. The regulators have set clear expectations, and it is up to ASX to meet them. The future of the Australian equities market depends on it.
