Hurry up on CHESS move, ASX told

ASX Limited urged to implement new system for the clearing and settlement of cash equities trades “as soon as this can safely be achieved”.

ASIC Commissioner Cathie Armour. Picture: Hollie Adams/The Australian

ASX Limited has been urged to implement its new system for the clearing and settlement of cash equities trades “as soon as this can safely be achieved”, after its outdated Clearing House Electronic Subregister System (CHESS) received a less-than-perfect scorecard from the Reserve Bank.

In its October 2020 Assessment of the ASX Clearing and Settlement Facilities, the RBA found the ASX Clear futures system only “partly observed” margin requirements, while both ASX Clear and ASX Settlement did not fully meet the central bank’s standard for operational risk.

The RBA concluded that, on balance, the facilities had “conducted their ­affairs in a way that causes or promotes overall stability in the Australian financial system”, but it said ASX needed to “place a high priority on addressing recommendations related to margin at ASX Clear and operational risk at ASX Clear and ASX Settlement, including via the replacement of CHESS”.

The RBA said a key finding of its assessment was that ASX should implement its new system for the clearing and settlement of cash equities trades “as soon as this can safely be achieved by ASX and users of the existing CHESS system”.

It said the importance of replacing CHESS in a safe and timely manner was highlighted by processing delays experienced in March when the coronavirus pandemic and associated restrictions on economic activity caused record trading volumes, which increased operational risk.

In a joint statement, the RBA and Australian Securities & Investments Commission said ASX should not only take into account CHESS user feedback from its recent consultation on a revised implementation timeline, but it would need to demonstrate the readiness of the replacement and provide supporting independent assurances to the regulators before migrating to the new system.

“ASIC believes the Australian financial system requires contemporary critical clearing and settlement infrastructure that is efficient, resilient, reliable and scalable to meet existing and ­future needs of the market and participants,” said ASIC commissioner Cathie Armour.

While CHESS had supported the clearing and settlement of equities for more than 25 years, it was now harder to maintain and was less flexible than contemporary software, RBA assistant governor Michele Bullock said.

“Replacing the system with more modern technology is critical to ASX’s ongoing management of systemic risk,” she said.

ASX Limited said it was close to completing its review of feedback from CHESS users.

The exchange operator plans to announce the revised implementation schedule for the CHESS replacement this month.