ASX to defend landmark ASIC legal action, denies breaking the law over CHESS upgrade

The ASX will vehemently defend legal action brought against it by the corporate regulator, denying it contravened the law in how it communicated to investors about its bungled CHESS upgrade.

ASX CEO Helen Lofthouse does not accept the allegations that the exchange breached the law. Picture: Max Mason-Hubers

ASX Limited will vehemently defend a landmark legal action brought against it by the corporate regulator, denying it contravened the law or made misleading or deceptive statements relating to its bungled CHESS upgrade.

In a statement on Friday, the exchange operator noted it had filed a concise statement in response to the Australian Securities and Investments Commission’s Federal Court case against it. The ASX said it denied that statements made by the company on February 10, 2022, about the status of the CHESS technology upgrade, broke the law.

The ASX also heaped blame on its technology partner and vendor Digital Asset Holdings for delays and issues with the initial CHESS upgrade project.

“ASX accepts that the delays with the previous CHESS replacement project caused disruption, something for which we’ve apologised. However, there was a reasonable basis for the statements ASX made about the project’s progress on 10 February 2022 and we do not accept the allegations that we breached the law,” ASX CEO Helen Lofthouse said.

“ASX provided regular updates on the project, including that it was subject to feedback and change, as well as the input of our external suppliers. When we became aware that the project required a deeper reassessment, we commissioned an independent review.

“We took the difficult decision to pause and reassess the project.”

Sources close to ASIC told The Weekend Australian the regulator was highly confident in its case and was reluctant to engage in any settlement discussions with ASX and its legal team.

ASIC kicked off the legal case against the ASX in August alleging a “collective failure” by the company’s board and executives to keep investors, the public and stakeholders properly informed on the CHESS replacement project.

ASIC claims statements made by the exchange operator in February 2022 were “misleading and deceptive” around how its CHESS technology upgrade project was tracking.

The maximum penalty for the ­alleged contraventions of the ASIC Act is $555m.

The court document filed by the ASX with the Federal Court denies any wrongdoing by the exchange and says ASX did not make a representation that the CHESS upgrade was tracking to plan in February 2022.

“ASX denies that the statements concerning the CHESS replacement project contained in the 10 February releases did or could have caused harm in the manner alleged by ASIC or otherwise,” the document said.

“Even if ASX had made the tracking to plan representation as alleged by ASIC (which is denied), that representation would not have been understood to mean that each aspect of the published plan had been or would be met precisely on the terms and at the times described in the Published Plan and therefore was not misleading in the manner alleged.”

ASX’s shares rose 0.7 per cent to $66.22 on Friday, in line with a gain in the S&P/ASX200 index. ASIC and the ASIC are due back in court on December 4 for a case management hearing.

The blockchain-led upgrade of CHESS, the ASX’s clearing and settlement system, was shelved in November 2022 after the project was riddled by numerous delays. Eventually, the ASX also booked steep writedowns related to the failed project. The blockchain-led upgrade was being pursued with financial technology company Digital Asset, of which the ASX also owned a strategic stake.

Late last year, ASX moved in a different direction, securing an agreement with Indian conglomerate Tata Consultancy Services to replace the ageing CHESS cash equities clearing and settlement system. CHESS was implemented in 1994 and in 2015 the ASX started evaluating how it could replace the underlying system and technology. The ASX’s concise statement filed with the Federal Court apportions blame to Digital Asset for a spate of issues with the upgrade project.

Former ASX chief executive Dominic Stevens. Picture: Bloomberg

It refers to events in 2019 and Digital Asset changing its business model, meaning “it was no longer able to deliver the ledger technology itself”. ASX then engaged VMware

Australia and VMware International as the developer of the ledger, while Digital Asset continued to be responsible for developing the application.

The statement also referenced delays by Digital Asset in its delivery of code in the latter half of 2021.

In a submission to a parliamentary committee last year Digital Asset said, however, issues related to the CHESS project emanated from “specific functional requirements imposed by ASX… were incompatible with a contemporary, scalable system”.

The ASX court documents cite a meeting on February 8, 2022 when then ASX CEO Dominic Stevens and Digital Asset co-founder Yuval Rooz discussed whether the latter company could cut the time frames within which it would deliver work, by providing “adequate resources and prioritising the work” for the CHESS replacement project.

“During that discussion, Mr Rooz gave Mr Stevens his assurance that Digital Asset would adequately resource and prioritise the CHESS Replacement Project in order to ensure that Digital Asset would provide certain code to ASX by 15 March 2022,” the document said. “The provision of this code by 15 March 2022 would enable the upcoming critical path milestones of ITE2 and Accreditation to be met in time for the CHESS replacement system to “go-live” in April 2023.

The concise statement noted that in December 2021, the ASX CHESS team did not have a resolution around delays to the project and set the CHESS replacement project status to “red”.

“That ‘red’ status was used as, and understood within ASX to be, an escalation step which signalled that a key milestone was at risk and that intervention was required within ASX at an executive level, above that of the project team, by way of engagement with Digital Asset,” the document said.

It also noted a meeting in January 2022 between ASX’s then chairman Damian Roche, and Digital Asset’s chair Susan Hauser to discuss the CHESS replacement project.

“The purpose of that discussion was for ASX to escalate, to Digital Asset’s chair, ASX’s concern to ensure that adequate resources and prioritisation were being provided by Digital Asset management to the CHESS replacement,” the concise statement said.

The ASX said at a February 9, 2022 board meeting – the day prior to the ASX announcement being contested in court – Mr Stevens and another executive reported to the board the conversations with Digital Asset and the assurances received around the CHESS project’s timeline.

On Friday, Ms Lofthouse said ASX’s engagement with ASIC remained constructive and noted the exchange believed it was in the interests of the company and its shareholders to defend the legal action.

Originally published as ASX to defend landmark ASIC legal action, denies breaking the law over CHESS upgrade