RBA and ASIC demand answers from ASX on CHESS fail

In unprecedented regulatory action, sharemarket operator ASX must detail risks, functionality and capability of the existing platform after problems plagued its replacement project.

New chief executive Helen Lofthouse and chairman Damian Roche have defended the ASX’s handling of CHESS.

The nation’s corporate regulator has intervened in the turmoil engulfing ASX Limited, demanding the exchange operator prepare a special report audited by EY outlining the capacity of its clearing and settlements systems.

At the same time, the Reserve Bank has written to the company and its subsidiaries – ASX Clear and ASX Settlement – outlining its expectations and threatening “further regulatory responses” if it deemed necessary.

On November 17, the ASX conceded it would have to write off $250m associated with a plan to replace the two-decade-old clearing and settlement service, known as CHESS, with blockchain. Its own review, written by Accenture, found there were significant gaps in the project’s test, analysis and design, and overall program and project management.

Stockbrokers are estimated to have spent as much as $100m working with the ASX on the long-running replacement program, and the company has yet to outline what its next steps are.

On Thursday, RBA governor Philip Lowe said the central bank – which also regulates the clearing and settlement monopoly – expected “the highest priority be given to ensuring the stability and resilience of the critical infrastructure supporting Australia’s cash equity markets”.

In a letter sent to the board on Thursday, Dr Lowe writes: “ASX is to make a public undertaking that they have the resources and capabilities to support the ongoing operation, maintenance and investment in the current CHESS to ensure it continues to service Australia’s cash equities markets reliably until after its replacement goes live.

“By June 30, 2023, ASX is to publicly respond to the 45 recommendations in the Accenture report and include a plan with timelines to address these recommendations.

“It is critical that ASX significantly uplifts its capabilities to address the gaps and deficiencies identified by (Accenture) in analysis and design, program delivery capabilities, including but not limited to execution rigour, program and project management, vendor management, testing, and risk management.”

Accenture noted that “evolution to siloed management and execution structures and tooling has impeded collaboration with inefficient escalation processes … resulted in friction at the working team level and resulted in misaligned views of accountability”.

The report to be prepared for ASIC and audited by EY will need to identify and address risks to resilience, reliability, integrity and security of the ongoing operation of CHESS while detailing how it will ensure it is functional and capable of accommodating ­current and future growth in trading volumes.

ASIC chairman Joe Longo. Picture: David Geraghty

It is the first time that the corporate regulator is using the powers to force a market operator to take specific action.

“CHESS is critical financial market infrastructure for our country,” said the regulator’s chairman, Joe Longo. “ASIC’s immediate priority is to ensure the current CHESS continues to provide the level of service, reliability and resilience that is required.

“This is important not just for industry but also for the Australian economy and investors.”

In response, ASX chief executive Helen Lofthouse, who took the top job in August, said ASX would co-operate with regulators and was “confident that current CHESS will serve the Australian market well into the future”.

“ASX will engage transparently and constructively with the regulatory agencies. We remain committed to working closely with stakeholders to deliver the best long-term clearing and settlement solution.”

The move from the RBA and ASIC is the second intervention into the ASX’s monopoly in the past week, with the government flagging legislation to boost competitive outcomes, where the ASX has a near monopoly in clearing and settlement, delivering the competition and corporate regulators additional powers. It wants more competition in the clearing and settlement of cash equities trades, following a turbulent ­operational period for the ASX.

Under the plan, ASIC – with ministerial approval – could act to institute rules around competition, spanning areas such as pricing, market access, governance and interoperability.

The ASX outlined its CHESS replacement project in early 2016, linking with a US start-up led by Blythe Masters, a former JPMorgan executive, known as Digital Asset Holdings.

Ms Masters, who had taken over as CEO in March 2015, was feted when she came to Australia for a conference as the ASX moved further to tie its fortunes to the capacity of Digital Asset to handle such a major project.

By December 2018, however, Ms Masters was stepping down, citing family reasons.

Commissioned by Ms Lofthouse this year, the Accenture report shows only 65 per cent of the project had been handed over by Digital Asset for testing.

The report concluded that, ­despite years of working on the project in conjunction with stockbrokers and other market participants, “many of the non-func­tional capabilities are either to be built or in build stages”. Delays in Digital Asset shipping other ­aspects of the system “would have a significant impact on testing … and program-wide planning”.

The draft delivery plan by Digital Asset, which is 5.4 per cent-owned by the ASX, was described by Accenture as “high risk with low confidence”, with the report noting that there was a lack of internal milestones for early testing and validation needed to build confidence in the system.

Originally published as RBA and ASIC demand answers from ASX on CHESS fail