ASIC investigating if settlement outage at ASX broke law

The corporate regulator is probing whether ASX’s settlements arm broke the law when it was unable to process batch settlements.

ASIC is investigating an outage at the ASX’s that delayed trade settlement shortly before Christmas. Picture: Newswire/ Gaye Gerard

The corporate cop has launched an investigation into a major outage at the ASX that delayed the settlement of trades in the run-up to Christmas.

The ASX on Monday confirmed the Australian Securities and Investments Commission was probing whether the market operator’s settlements arm broke the law when it was unable to process batch settlements on December 20, the third-last settlement day before Christmas.

“ASIC’s investigation is into ASX Settlement Pty Ltd’s compliance with section 821A (1) of the Corporations Act 2001,” ASX said in a statement.

“ASX takes its regulatory obligations seriously and will co-operate fully with ASIC.”

The regulator last month flagged an investigation against the market operator was imminent, with ASIC chairman Joe Longo saying the ASX was at risk of new enforcement action or further licence conditions after a “serious failure” led to the unprecedented and damaging settlement outage.

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 point of view, everything’s on the table in terms of a regulatory response,” Mr Longo said at the time. “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 on Monday confirmed an investigation was underway but declined to comment further.

ASIC and the RBA received a detailed report from the ASX on the incident earlier in January.

The ASX last month said the outage arose from a combination of events but was isolated to an area of CHESS that calculates memory allocation for the settlement processes. Trading and Clearing services were unaffected by the outage, but trade settlement, typically two days after a trade takes place, or T+2, was delayed by a day, meaning trades made on the Wednesday before Christmas could not be settled until the following Monday.

The error was 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”.

“Not being able to complete batch settlement is unprecedented and we fully appreciate the seriousness of this matter,” ASX chief executive Helen Lofthouse said of the outage.

“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,” she said.

Following the outage on the Friday before Christmas, the ASX’s “emergency software release” was not deployed until just after 4pm on Sunday December 22nd.

As part of its investigation into the incident, ASIC’s Mr Longo has flagged the regulator is looking closely at how the market operator communicated the outage.

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

The Reserve Bank is also assessing the outage, with assistant governor of the RBA’s financial system group, Brad Jones, in January saying: “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 as well as the departure of its chief executive and chief financial officer.