ASIC orders ASX to prepare reviews into operations after CHESS delays

The ASX will be required to prepare two reports into its operations and frameworks after shelving its $300m CHESS replacement scheme.

The corporate regulator has slapped the Australian Securities Exchange with orders to prepare two reports into its CHESS scheme and the market operator’s internal workings.

The Australian Securities & Investments Commission announced on Wednesday it had hit three ASX entities with orders to prepare reports into their internal functioning after the blow-up of the market operators’ much touted blockchain CHESS replacement scheme.

The ASX will be required to prepare a report by June 30 on how its licensees will respond to the findings and recommendations of an external review and special report prepared by technology consultancy Accenture.

Accenture pointed to problems in the ASX’s proposed CHESS upgrade system in November, warning the program was years behind schedule and “high risk with low confidence”.

The ASX had been seeking to replace its 26-year-old CHESS scheme, which allows for the settlement and clearing of trades on the share market.

This led to the ASX announcing it would shelve the CHESS Replacement scheme and book a $245-$255m pre-tax impairment.

The ASX will also be required to hand over a report to ASIC by July 31 scrutinising its current portfolio, program and project management frameworks and an assessment of those frameworks against internationally recognised standards.

ASIC’s letter to the ASX notes the market operator must show how these frameworks will address and manage stakeholder engagement and communications, as well as management of resources, capabilities, vendors, risk and issues, and quality and assurance.

ASIC corporations senior executive leader Claire LaBouchardiere also noted the ASX must show how it will address and manage organisational change management, regulatory engagement, benefits management, and effective monitoring, reporting and performance assessment against approved plans

Both reports will be audited by Ernst & Young and must be signed off by the ASX’s board of directors.

However, letters from ASIC markets group market infrastructure senior executive leader Nathan Bourne to the ASX show the regulator may take further action amid concern over the ASX’s CHESS Replacement scheme if it remains unsatisfied.

ASIC chair Joe Longo said the reports were needed from the ASX to provide assurance to the regulator and industry the market operator was “taking all possible steps to respond to the findings and recommendations outlined in the External Review” prepared by Accenture, which identified 45 recommendations.

“More broadly an assessment of ASX’s portfolio, program and project management frameworks against internationally recognised frameworks will demonstrate which components are fit-for-purpose and the measures to be adopted to address identified gaps and deficiencies.”

“The audited special reports will assist ASIC in its assessment of whether any further regulatory action is required.”

In a market update on Wednesday, ASX chief executive Helen Lofthouse said the market operator had an “ongoing program of work to enhance delivery capability and strengthen project governance”.

“We welcome the opportunity to present this work in special reports to ASIC,” she said.

“In relation to CHESS replacement, good progress has already been made in the areas of solution design, quality engineering and testing, and ASX has identified recommendations which it will extend to policies and practices across the organisation.”

The orders come as the ASX, ASIC, and the Reserve Bank of Australia prepare to front parliament on Thursday.

Unveiling the results last week, Ms Lofthouse said the ASX was “acting with urgency” to redesign the replacement for its CHESS clearing scheme.

Ms Lofthouse took on the role of ASX boss in June 2022 after Dominic Stevens announced he would quit the top job in February.

The $300m CHESS replacement scheme was announced under former ASX boss Elmer Funke Kupper in 2016 and slated for launch in April 2023.

The action from ASIC comes after the ASX has run afoul of the regulator over several bungles.

ASIC ordered ASX clear and ASX Settlement in December to produce a special report on the current CHESS scheme.

The Reserve Bank and ASIC also wrote to the ASX in November last year, outlining a list of regulatory expectations, putting the market operator on notice that it supported and maintained its current CHESS system and improved delivery capabilities.

ASIC also imposed extra licence conditions on the ASX in November 2021 after the market crashed and trading was cancelled on November 16, 2022.

This came after the ASX attempted to roll out an upgrade to its systems after incorrect pricing and order cancellation crippled the system.

IBM Australia was commissioned by ASIC to prepare a report into the ASX’s operations and determine whether it was able to meet international benchmarks.