ASIC chair Joe Longo lambastes ASX for settlement failure, warns all options are on the table

ASX is at risk of new enforcement action or further licence conditions over a damaging settlement outage caused by a decade-old systems error.

ASIC chair Joseph Longo may face off against ASX chief Helen Lofthouse after the exchange endured another damaging outage in December.

The corporate regulator’s chair Joe Longo says the ASX is at risk of new enforcement action or further licence conditions after a “serious failure” led to an unprecedented and damaging settlement outage at the exchange late last year.

Mr Longo told The Australian it was a “very disappointing, serious situation” that saw the ASX unable to settle trades in the lead-up to Christmas, and the regulator was assessing its options alongside the Reserve Bank regarding the best course of action.

“From ASIC’s (the Australian Securities & Investments Commission’s) point of view, everything’s on the table in terms of a regulatory response,” he said. “This is a serious failure, and we want to understand what went wrong.

“We think there are some significant lessons to be learned of a broader nature … the underlying failure, I think, is very disappointing.”

ASIC and the RBA received a detailed report from the ASX on the incident last week.

The ASX on Thursday told its customers and investors that batch settlement could not proceed on Friday, December 20, because “a critical step in the settlement process generated an error”.

That related to an issue going back a decade when ASX launched its managed fund offering mFund, and did not identify the changes required to the Clearing House Electronic Sub-register System (CHESS) memory system. That created a lingering error in the system’s “memory allocation logic”.

A detailed incident review said the ASX’s engineering team had a potential workaround for the issue late on December 20, but concluded that would require testing and validation. The team then did not identify a fix to the problem until mid-morning on Sunday, about 48 hours after the issue emerged.

The ASX noted the “root cause” of the incident was linked to a combination of events, but was isolated to an area of the 30-year-old CHESS that “calculates memory allocation for the settlement processes”.

The review showed that it wasn’t until just after 4pm on Sunday, December 22 that the ASX’s “emergency software release” was deployed.

The domestic bourse was deemed to be in an “emergency situation” on December 20 when it was unable to settle trades from two days prior. The ASX works on a timetable where trades are settled two days after they occur, known as T+2.

The incident in late December reflected an embarrassing chain of events for the ASX that left stockbrokers having to scramble to put out capital to cover their clients’ trades.

ASX chief executive Helen Lofthouse on Thursday apologised to customers and attributed the incident to a “latent flaw” that had existed in the system since 2014. She said the issue should have been identified and rectified at the time but wasn’t, and pledged the exchange would provide $1m in credit to settlement participants in acknowledgment of the disruption.

“I really understand the significance of the issue, and not being able to settle the whole cash equities market on that day was a big deal,” she said. “We’re really taking the time to learn from it and really look at post-incident actions.

“While the incident was successfully resolved such that the market could open normally on the next business day, this does not meet the high operating standards expected of ASX and which we expect of ourselves.”

ASIC chair Joseph Longo. Picture: Britta Campion

Responding to a question about other potential vulnerabilities in the ASX’s settlement system, Ms Lofthouse said: “That’s exactly one of the questions that we’ve got detailed in the (action) plan.”

The action plan released on Thursday includes an initiative to review “if there are any further areas of the CHESS system that require enhanced technical ­controls”.

Another incident occurred in 2008 when ASX settlement was delayed, but that was due to an issue at Tricom Equities, a stockbroker that later collapsed.

The Australian foreshadowed ASX was set to give aggrieved customers an explanation this week about the root cause of the December outage.

Mr Longo said ASIC, in conjunction with the RBA, would be “carefully considering” their regulatory response in light of the ASX outage.

“It’s inappropriate for me to sort of pre-empt where we’ll land. We’ll have an investigation, “ he added.

“It was disappointing that it (the outage) took so long to fix.

“There were issues around the comms (communications). I think the impact on market participants was very significant.”

Assistant governor of the RBA’s financial system group Brad Jones said: “The RBA is reviewing the incident carefully and working closely with ASIC to consider the ramifications of what was a deeply disappointing event.”

ASIC last year launched legal action against ASX relating to the exchange’s prior bungled CHESS upgrade, which drew on blockchain technology and eventually led to $250m in writedowns. The regulator alleges the exchange failed to make adequate disclosures regarding the real state of the project. ASX is, however, defending the court action.

In 2021, ASIC hit the ASX with additional licence conditions after completing an investigation surrounding a November 2020 trading outage that was caused by heavy volumes during the depths of the pandemic.

Ms Lofthouse said while the 2024 outage occurred in late December the ASX was able to mobilise its “full team” and make use of external contractors or consultants. “Part of our standard support arrangements for CHESS include both internal and external teams,” she added.

Asked if the ASX would review accountability to pinpoint consequences for those that missed the issue a decade ago, Ms Lofthouse said: “It’s certainly not a focus for us today … the question I think we should be asking is: what can we learn?”

She said ASX was engaging with regulators in an “open and transparent fashion”.

Stockbroker Ord Minnett’s boss Karl Morris said since 1989 downtime on the ASX had been “extremely low”, but the ASX’s communication with customers remained a concern.

“Nothing can be perfect, no code is perfect. We will now start to get perfect code because of the way AI (artificial intelligence) works,” he added. “Errors happen. But they (the ASX) don’t communicate as well as they should.”

Mr Morris also lamented that when there were trading problems with ASX, volumes were not directed to alternative exchange Cboe.

Another ASX participant, speaking anonymously, said given the age of CHESS he expected the ASX to have further problems. “Their explanation highlights the problem that they’ve got … There are going to be all sorts of things like this that can unravel,” he said.

The participant said the $1m credit payment was a “nominal amount” and there was no guidance as to how it would be carved up. The inability of the ASX to settle trades on the Friday before Christmas had market participants concerned the exchange may delay the start to trading on the Monday or not trade at all.

Participants joined a video call conducted by the ASX late in the afternoon on December 22, as they sought clarity about whether the ASX would open the following day.

ASX representatives gave an assurance it would, albeit with some delay to the daily batch settlement.

Originally published as ASIC chair Joe Longo lambastes ASX for settlement failure, warns all options are on the table