Regulators move to appoint tech expert amid serious ASX CHESS concerns

The Reserve Bank of Australia (RBA) and the Australian Securities and Investments Commission (ASIC) are taking further steps to address increasing concerns over the management of operational risk at ASX, following the Clearing House Electronic Subregister System (CHESS) batch settlement failure incident that occurred on 20 December 2024.

In a joint letter to ASX, the regulators expressed their deep concerns about the potential for operational incidents, such as the CHESS batch settlement failure, to affect the ability of CHESS to reliably service the Australian equities market until it is replaced.

CHESS is used to clear and settle trades, an essential element that keeps the market in operation. The three-decade-old platform suffered an outage on 20 December 2024 which was related to a problem involving the allocation of computer memory for settling trades between buyers and sellers. This meant the batch settlement process could not be completed at a time it was required to do so.

The regulators also highlighted their concern about the speed and nature of ASX’s remediation actions following the initial incident.

In response, the RBA has taken the unprecedented step of reassessing the compliance of ASX Clear and ASX Settlement with the RBA’s Financial Stability Standards outside the usual annual assessment cycle. 

The RBA has downgraded its assessment of these entities’ compliance with the “Operational Risk” standard from partly observed to not observed. A rating of not observed is made when the RBA has identified serious issues of concern that warrant immediate action.

In addition, ASIC has directed ASX to engage an expert approved by ASIC to undertake a technical review of CHESS. 

This review and any remediation will provide greater confidence to regulators and the public in the stability and operational resilience of the current CHESS platform, the regulators said in a joint statement. 

“It is deeply disappointing that the regulators need to take these actions today. But they are necessary,” RBA governor Michele Bullock said. “ASX operates critical infrastructure that plays a central role in the financial system. ASX’s management of operational risk has been a concern for RBA staff and the Payments System Board for some time and the recent CHESS incident has underscored those concerns. 

“The underlying issues that we have raised need to be addressed as a matter of priority to strengthen the resilience of the CHESS system.”

ASIC Chair Joe Longo added its actions underscore its increasingly deep concerns with ASX’s management of CHESS and it will continue to consider further action. 

“The technical review of ASX’s core technology infrastructure is necessary given the ongoing concerns the regulators have raised about ASX’s operational resilience. It is troubling that these risks were realised in this major incident,” Longo said. 

The regulators together outlined their expectations that ASX needs to give the highest priority to the immediate remediation of issues that caused and exacerbated the December 2024 incident. If not urgently addressed, the regulators are prepared to take further regulatory action.

This could include the use of the regulators’ new powers under reforms to modernise the regulatory framework for Financial Market Infrastructures, which came into effect in September 2024, and further rulemaking under the Competition in Clearing and Settlement reforms.

In 2017, following two years of evaluation, the ASX confirmed it was spending $50 million in replacing CHESS with blockchain-inspired distributed ledger technology (DLT) developed by US software firm Digital Asset.

The attempt to build “a next generation post-trade platform using contemporary technology” was totally ditched following significant technology, governance and delivery challenges in a $250 million CHESS project failure blowout.

The ASX engaged TCS and Accenture for its multi-year, multi-million-dollar CHESS replacement project in 2023 involving its BaNCS for Market Infrastructure product, featuring a modular technology platform for clearing and settlement services due by 2029.

The plan involved implementing the platform over two main releases with the clearing service delivered first and the settlement and sub-register services to follow in a second release. Accenture will be supporting the ASX’s project delivery as the solution integration partner and will also provide additional capability and capacity in technology project delivery and expertise.

The staged approach aims to reduce delivery risk and manage impact on industry stakeholders with the first phase of the project estimated to cost $105 million to $125 million at the time.