ASX put on notice as regulators threaten to use crisis powers to take charge amid CHESS failures

Both ASIC and the Reserve Bank have threatened to use new powers to seize control of the market operator as they lose patience with the rate of clearing and settlement failures.

The CHESS system went dark on December 20 after a lull in trading in the lead-up to Christmas. Picture: Gaye Gerard/NewsWire

The Australian Securities Exchange needs to lift regulatory spending to deflect further intervention from the corporate regulator and the Reserve Bank of Australia, which threatened to seize control of the market operator if it cannot resolve critical technology issues.

UBS analyst Kieren Chidgey warned the ASX is now facing “near-term costs with risk of a more heavy handed regulatory intervention” after the RBA and the Australian Securities and Investments Commission took aim at it on Friday.

The joint regulators of the ASX warned the major technical outage on 20 December last year was unacceptable, demanding a new review into the incident.

The CHESS clearing and settlement system went dark on December 20 after a lull in trading in the lead up to Christmas exposed a technical vulnerability baked into the ageing technology.

Traders were left owing clients billions, while the ASX was unable to settle other trades.

UBS warned the ASX would see expenses surge 10.6 per cent in the year ahead, racing ahead of consensus estimates of 7.5 per cent growth, and warning that the market operator was valued like its overseas peers despite having a moderate earnings outlook.

Shares in the ASX closed down 2.74 per cent on Monday, slipping $1.84 to $65.14.

ASIC and the RBA have slapped the ASX with new orders amid concerns over its ageing CHESS technology. Picture: John Feder

In its letter to the ASX, the RBA warned the market operator was failing to live up to its Financial Stability Standards, downgrading it to “not observed”.

This comes after the RBA rated the ASX as only “partially observed” for three years running as part of its annual review.

The RBA made the unprecedented move after an out-of-cycle review of the ASX Clear and ASX Settlement functions.

ASIC also demanded the ASX engage experts to complete a technical review of CHESS. A current project is under way to replace the ageing technology with a new system from Tata Consulting Services.

The ASX selected TCS BaNCS to replace its CHESS system in November 2023, after an earlier failure to build a new clearing and settlement system using blockchain technology.

American technology firm Digital Asset had been initially picked to build the CHESS replacement system in 2016, before the ASX pulled the plug on the program in 2022 triggering a $250m writedown.

ASIC said the review and any remediation must “provide greater confidence to regulators, and the public, in the stability and operational resilience of the current CHESS platform”.

ASX must provide a report to the two agencies within 150 days of appointing an expert.

ASIC chair Joe Longo told The Australian the ASX was now facing a 12 month test “as to whether further action will need to be taken”.

The ASX had failed to move fast enough on key operational issues.

“These are issues the ASX should have already been on top of,” he said.

“They simply have not made the appropriate investments or given the appropriate urgency and priority to these issues.”

ASX CEO Helen Lofthouse at the ASX AGM. Picture: Max Mason-Hubers

In a joint letter to the ASX, Mr Longo and RBA governor Michele Bullock described increasing concern and deep disappointment with the ASX.

“For some time, the regulators have been raising serious concerns about operational risk at the ASX clearing and settlement facilities. These risks were realised in this major operational incident,” they wrote.

“The ASX Group bears a significant responsibility to ensure that it provides its services in accordance with its obligations under its various licences and with genuine regard to the interests of the Australian economy and community. The regulators are increasingly concerned that ASX may not be fulfilling those responsibilities.”

ASIC and the RBA warned if they weren’t satisfied, the regulators could trigger their new crisis management powers to take over the ASX.

The December CHESS outage “demonstrates that the pace of change at ASX is too slow, and broader improvements are needed to more comprehensively address these foundational issues”.

In response, the ASX said it was taking the CHESS outage very seriously.

ASX chair David Clarke said the market operator understood “how disappointing” it was, noting it had an action plan to minimise the risk of future incidents.

“Management has commenced work to establish a new enterprise-wide program that goes beyond immediate actions to respond to the settlement incident and this will comprehensively address the regulatory concerns and expectations,” he said.

ASX chief executive Helen Lofthouse said the TCS BaNCS work would not be paused, noting the delivery of new clearing services as part of the CHESS replacement project was slated for March and April 2026.

“We meet regularly with ASIC, you can expect I’ll continue to have very active engagement with them on multiple occasions,” she said.