The Reserve Bank of Australia (RBA) and the Australian Securities and Investments Commission (ASIC) (the regulators) have taken further steps to address their increasing concern over the management of operational risk at ASX, following the 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 the CHESS system to reliably service the Australian equities market until CHESS is replaced. 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 Pty Limited and ASX Settlement Pty Ltd 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, under section 823BB(4) of the Corporations Act 2001, 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.
RBA Governor Michele Bullock said, 'It is deeply disappointing that the regulators need to take these actions today. But they are necessary. 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 said, 'Our actions underscore our increasingly deep concerns with ASX's management of the CHESS system, and we 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.'
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.
Background
The RBA and ASIC are co-regulators of licensed CS facilities and have separate, but complementary, responsibilities for the licensing and supervision of CS facilities licensees.
These responsibilities include supervising each CS facility licensee's compliance with the obligation to do all things necessary to ensure that the facility's services are provided in a fair and effective way, to the extent it is reasonably practicable to do so. In carrying out supervision and assessment of CS facilities, the RBA and ASIC work closely as appropriate.
The RBA supervises CS facilities from the perspective of the facilities' importance to the stability of Australia's financial system. This includes the power to determine financial stability standards for the purpose of ensuring that CS facility licensees conduct their affairs in a way that causes or promotes overall stability in the Australian financial system.
ASIC's regulatory action announced today are in addition and separate to ASIC's investigation into ASX Settlement Pty Ltd (ASX Settlement) for suspected contraventions of section 821A of the Corporations Act.
