ASIC ‘was warned about problems with ASX CHESS upgrade’

The Australian Securities & Investments Commission was among the regulators that received multiple warnings about problems with the ASX’s key technology overhaul project.

ASX chairman Damian Roche and CEO Helen Lofthouse are under intense pressure following ASIC’s landmark legal action against the exchange.

The Australian Securities & Investments Commission was among the regulators that received multiple warnings in 2020 and 2021 about problems with the ASX’s key technology overhaul project, including its scalability and governance, sources say.

The Australian understands a technology vendor – which was closely liaising with the ASX on the upgrade of the CHESS clearing and settlement system – in 2021 provided ASIC with a detailed letter covering its concerns about the program. The same vendor also had meetings with ASIC, the Reserve Bank and the prudential regulator to discuss its concerns about the scalability and operability of the CHESS ­upgrade.

The ASX project “was completely screwed”, a source familiar with the events said on condition of anonymity. “ASIC was asleep at the wheel – so were the RBA.”

The corporate regulator this week launched landmark legal action against the exchange, alleging ASX made “misleading and deceptive” statements to investors about the status of the technology upgrade.

An ASIC spokesman declined to comment on the vendor letter, but said the regulator had been “continuously increasing its supervision” of ASX. “ASIC imposed additional licence conditions on ASX Ltd, ASX Clear and ASX Settlement in November 2021, which included the requirement for an independent expert to review the CHESS implementation program. This was completed by EY and published in March 2022,” the spokesman said.

Another warning to regulators came via former Sydney Futures Exchange and ASX senior manager Phillip Galvin. He raised concerns over the CHESS program with the then-RBA assistant governor Michele Bullock in 2021, noting he was later assured by the central banker that the project was on track.

Mr Galvin, who has since retired, said he repeatedly raised concerns internally at ASX over the CHESS program’s operability and specifications, from as far back as 2016, in a number of meetings with the market operator’s chairman, chief executive and board. “From about 2018 onwards I considered that the project was going to fail and at that point I talked to the chair and the then-CEO Dominic Stevens, and once (chairman) Rick (Holliday-Smith) and Dominic left, I spoke with (new chairman) Damian (Roche). And I aired my views at at least two AGMs,” he added.

Mr Galvin said Mr Roche also assured him “everything is fine”.

Representatives for the RBA and ASX separately declined to comment, citing ongoing legal proceedings.

In 2020, a second firm involved in the CHESS upgrade consultations expressed concerns about the project to a number of domestic regulators.

That followed a Deloitte report commissioned by parties including the Australian Shareholders Association, Australasian Investor Relations Association, Link Administration and Computershare that highlighted issues including that the ASX’s project had failed to install a framework to manage conflicts of interest or conduct a detailed a cost-benefit analysis.

The ASX responded to the report by saying the parties were resisting technological change.

Several institutional stockbroking sources canvassed by The Australian said the industry may have a strong case for a class action against the ASX, as they estimated large participants had spent about $150m on the bungled iteration of the CHESS replacement program. When retail brokers, share registries, clearing participants and others are added to that figure the capital tipped into the failed program probably exceeded $250m.

ASIC’s legal case alleges ASX market announcements in February 2022, saying the CHESS project remained “on-track for go-live” in April the following year, and was “progressing well”, were misleading.

The botched CHESS upgrade was shelved late in 2022 and was associated with hundreds of millions of dollars in writedowns.

The ASX’s latest CHESS upgrade is tied to payments for industry participants including a rebate sum of up to $15m, which has been paid to clearing and settlement participants. There is an additional pot of up to $55m – known as the development incentive pool – of which about $16.8m has been paid.

The legal action by ASIC against the ASX has also prompted calls for Mr Roche, the current chair, to swiftly vacate the role. 

Sydney Futures Exchange founder Les Hosking – who led the SFE for 15 years until 2000 – said Mr Roche should consider resigning. “Given he’s been with the exchange for 10 years as a director, and now assumed chair, and therefore has been present through this whole sequence of this blockchain implementation, he should consider whether he should resign,” he added.

“It’s been frustrating watching them over the past 20 years in the way they’ve managed their derivative markets and been fined for their core responsibilities of operation (of) reliable markets.”

Corporate law expert Ian Ramsay on Thursday questioned why individuals at the ASX were not listed as co-defendants in ASIC’s case.

Mr Ramsay, who is emeritus professor at Melbourne Law School, said it was typical in this type of litigation for executives from the company involved to be named.

“Given that the (former) ASX CEO is mentioned in ASIC’s concise statement (in relation to some of the factual background), ASIC would have looked closely at his role in this matter before deciding that there was insufficient evidence to make him a co-defendant,” Mr Ramsay added in an interview.

“In its media release, ASIC refers to a ‘collective failure’ but any collective failure is made up of failures by individuals.”

Mr Ramsay said ASIC’s case information did not go into detail about the role of individuals, but this could come out in a hearing.

Additional reporting: Glenda Korporaal

Originally published as ASIC ‘was warned about problems with ASX CHESS upgrade’