ASX rating outlook downgraded by S&P over 'risk management failures'

ASX Ltd, the parent company of Australia’s market operator, has had its credit outlook downgraded from stable to negative, the latest in a litany of setbacks for the stock exchange.

Last Monday, the ASX suffered an outage that disrupted trading and prevented dozens of companies from posting announcements. Picture: David Moir/Bloomberg

ASX Ltd, the parent company of the Australian Securities Exchange, has had its rating outlook downgraded to negative by S&P after a string of risk management failures.

The rating agency revised ASX’s outlook from stable to negative on Monday afternoon, citing “multiple risk events of the past two years”, which S&P said was “unusual among financial market infrastructure peers”.

“Increasing regulatory scrutiny following ASX’s operational lapses over the past year reduces the headroom under the current rating,” S&P said in a statement.

“These lapses, among other things, drove several downward revisions in the annual clearing and settlement review of ASX led by Australia’s central bank.”

The market operator has earned the ire of its co-regulators, the Australian Investment & Securities Commission and the Reserve Bank of Australia, over recent years for persistent risk management failures, which triggered system outages, settlement failures and concerns about operational resilience.

Perhaps the most seismic failure was the meltdown of its ageing core technology Clearing House Electronic Subregister System, or CHESS, last December, which disrupted trade processing over a weekend, triggering serious concerns about its operational risk frameworks.

The system-wide failure of its clearing and settlement units prompted the RBA to call for “foundational changes” after an investigation into the CHESS disaster.

“ASX is not currently meeting the regulators’ expectations for an operator of critical national infrastructure,” RBA assistant governor for financial systems Brad Jones said in September.

“Resilient and secure clearing and settlement facilities are crucial to the stability of the Australian financial system.”

And just last Monday, the ASX suffered an outage that disrupted trading and prevented dozens of companies from posting announcements.

In June, ASIC announced an inquiry into the ASX’s governance, capability and risk management frameworks. It is due to report in March next year.

While the ASX’s rating outlook was revised down to negative, S&P maintained its “AA-” long-term and “A-1+” short-term issuer credit ratings.

S&P said that the downgrade was reflective of its “view that the recurring operational lapses indicate potential weaknesses in its risk management and governance, which could hinder its business operations”.

“In our view, such operational failure events suggest a decline in ASX’s operational resilience, reducing the headroom at our current ratings,” it added.

The ASX is currently in the process of replacing CHESS with a more modern system. But the technology overhaul has faced long delays and massive cost blow-outs. It is also aiming to finalise an upgrade to its risk management systems by 2028.

Despite the downgrade, S&P said that it expected the ASX to maintain its market dominance due to a lack of competition. The ratings agency said it would not rule out further downgrades if the ASX’s profitability fell or it did not address its operational failures.

However, S&P said it could revise its outlook to stable if it considered that the ASX addressed its problems.

“This could happen if we observe improvements in the RBA’s clearing and settlement facilities’ assessment specifically regarding key aspects of operational risk, margin management, and credit risk,” S&P said in a statement.

“We could also revise our outlook to stable if ASX makes significant progress in its risk-uplift program, resulting in fewer risk management and governance lapses.”

A spokesperson for the ASX said it had “clear plans in place to strengthen the Group’s operational risk management and is improving data controls for managing clearing credit risk”.

“We note the change to outlook does not affect ASX’s funding profile. S&P has acknowledged the substantial upgrades that ASX is currently undertaking on its risk management program as part of its multi-year transformation. ASX has an acute focus on improving operational risk management and organisational resilience under the Group’s Accelerate program,” the spokesperson added.