ASIC and the Reserve Bank of Australia (RBA) (the regulators) note ASX’s announcement on the CHESS Replacement program. ASX’s announcement marks a significant setback to the replacement of critical national infrastructure for Australia’s cash equity markets and now brings into sharp focus the longevity of the existing CHESS platform.

As a result of ASX’s announcement and release of the independent report, ASIC and RBA have today provided ASX with a joint letter of regulatory expectations to highlight what is required of ASX Clear Pty Ltd (ASX Clear) and ASX Settlement Pty Ltd (ASX Settlement). In particular the regulators expect that:

• the current CHESS is supported and maintained to ensure its stability, resilience and longevity so that it can continue to service the market reliably
• ASX improves its program delivery capabilities, and
• the replacement program is brought back on track after the solution design has been completed so ASX’s commitment to deliver safe and reliable clearing and settlement infrastructure is fulfilled.

‘ASX has rightly recognised that pausing the program while it revisits the technology design for the CHESS replacement was a necessary decision. It opens the way for the resolution of the issues identified in the independent report and ASX securing the necessary capabilities to deliver the replacement,’ ASIC chair Joe Longo said.

‘The independent report has found significant gaps and deficiencies in ASX’s program delivery capabilities and that there are significant challenges in the technology design. That these findings can be made at this late stage of a critical replacement program is altogether unsatisfactory.’

‘ASX has failed to demonstrate appropriate control of the program to date, and this has undermined legitimate expectations that the ASX can deliver a world-class, contemporary financial market infrastructure.’

‘The regulators are closely monitoring ASX’s ongoing management of clearing and settlement under its licences. Our immediate focus is to ensure current CHESS continues to provide the level of service, reliability and resilience that is required. The regulators will bring to bear the full range of regulatory options to ensure this is the case,’ continued Mr Longo.

Reserve Bank Governor Philip Lowe said, ‘The announcement by ASX after many years of investment by both ASX and industry is very disappointing. ASX needs to prioritise developing a new plan to deliver safe and reliable clearing and settlement infrastructure. The Reserve Bank of Australia also expects ASX to maintain the current CHESS so that it continues to operate reliably and support confidence in Australia’s cash equity markets.’

ASX having released the independent report must now carefully evaluate and select the most appropriate and timely way forward to replace CHESS.

Industry needs to have confidence in and certainty on how this will be achieved. That requires, once the solution design is complete, a delivery plan, including a highly credible, hard go-live date. The regulators expect ASX to actively consult industry throughout this process to ensure there is market confidence in its selected implementation option, delivery plan and timeline. The regulators will engage with industry directly to make sure their perspectives are given appropriate consideration by ASX.

Industry has incurred significant cost to date on the CHESS Replacement program and will need to continue to invest and commit resources until an alternate solution is rolled out. The regulators expect that any write-down of work and investment capitalised by ASX be borne fully by ASX Limited.

The regulators’ expectations

It is ASX Clear and ASX Settlement’s responsibility as licensed CS facilities to replace CHESS with a system that does not compromise financial stability. These facilities are also expected to ensure that they provide their services in a fair and effective way.

As set out in the joint letter of expectations, ASX must significantly uplift its capabilities to address the serious deficiencies identified by the independent report in ASX’s program delivery. This should start with a robust response plan to address the deficiencies.

It is critical that market and service continuity be secured. The regulators expect ASX to maintain and support current CHESS to meet on-going resilience, reliability, integrity, and security requirements. The current CHESS system must continue to reliably service the market.

The regulators will continue to closely monitor ASX’s compliance with its CS facility licence obligations, including the additional licence conditions imposed in November 2021, as well as ASX’s observance against the relevant Financial Stability Standards – and take action if required.

Background

CHESS Replacement is an ASX program.

ASIC and the RBA are co-regulators of licensed clearing and settlement (CS) facilities.

The RBA and ASIC have supervisory responsibilities for the four CS facilities in the ASX Group: two central counterparties – ASX Clear Pty Ltd and ASX Clear (Futures) Pty Ltd – and two securities settlement facilities – ASX Settlement Pty Ltd and Austraclear Limited.

The RBA conducts annual assessments covering the CS facilities' observance of relevant Financial Stability Standards determined by the RBA.

For more information on the RBA's approach to supervising and assessing CS facilities, see: The Reserve Bank's Approach to Supervising and Assessing Clearing and Settlement Facility Licensees.

ASIC has separate, but complementary, responsibilities for the licensing and supervision of CS facilities licensed under Part 7.3 of the Corporations Act. ASIC is responsible for assessing whether a CS facility’s services are provided in a fair and effective way. ASIC also has regulatory responsibilities for operators of licensed markets, including the ASX market. In carrying out supervision and assessments of CS facilities, the RBA and ASIC work closely as appropriate.