The Reserve Bank of Australia (RBA) and the Australian Securities and Investments Commission (Asic) have expressed grave concerns about the management of operational risk at the country's leading stock exchange following a batch settlement failure in December last year.
The settlement incident arose from an issue relating to the current Chess system’s memory allocation logic that meant ASX was not able to complete batch settlement for the cash equities market on that day. A process was then undertaken to cancel batch settlement and reschedule it to the next business day.
In a joint letter to ASX, the regulators express deep concerns about the potential for operational failures to affect the ability of the Chess system to reliably service the Australian equities market. The regulators also highlight their concern about the speed and nature of ASX’s remediation actions following the initial incident.
Following the incident, the RBA has conducted an out-of-cycle assessment of ASX Clear and ASX Settlement against its Financial Stability Standard for Operational Risk. In an unprecedented move, the RBA has revised its rating for the Operational Risk standard to 'not observed'. It has also made recommendations for ASX to outline and communicate publicly how its plans to strengthen resourcing and third-party support arrangements for Chess, and to outline options for implementing contingency arrangements.
RBA governor Michele Bullock says: "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 says the regulators are prepared to take further action, adressing competition reforms in the clearing arena.
"Our actions underscore our increasingly deep concerns with ASX’s management of the Chess system, and we will continue to consider further action," he says. "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."
The ASX had bet the bank on replacing the ageing Chess with a blockchain-based setttlement system that was originally set to go live in 2021. However, escalating costs and series of delays and postponements led the ASX to eventually abandon the project in late 2022.
The exchange is now working with Tata Consultancy Services to license the BaNCS for Market Infrastructure platform which is used for settlement and clearing on the New Zealand Stock Exchange as well as the national exchanges in South Africa and Finland.
ASX managing director and CEO Helen Lofthouse says: “We’ve been investing heavily in modernising our systems and our project to replace Chess is well underway. The delivery of the clearing services component is planned for between March and April next year and the first stage of industry testing commenced at the end of last month. The new Chess system is being built on modern, modular architecture and is benefitting from extensive stakeholder consultation to ensure it will meet the needs of the market as a whole.
“Meanwhile we continue to invest in current Chess, and while the settlement incident was unprecedented we need to draw lessons from it and ask ourselves how we could do better.”