The Reserve Bank of Australia (RBA) and the Australian Securities and Investments Commission (ASIC) have raised serious concerns regarding the management of operational risk at the country’s primary stock exchange following a settlement failure in December of last year.
The incident occurred due to an issue with the current Chess system’s memory allocation logic, which prevented the ASX from completing batch settlements for the cash equities market on that particular day. Consequently, a decision was made to cancel the batch settlement and reschedule it for the next business day.
In a joint letter to the ASX, the regulators expressed their deep concerns about the potential for operational failures affecting the Chess system’s capacity to reliably serve the Australian equities market. They also emphasized their worries regarding the pace and nature of ASX’s remediation efforts following the initial incident.
In response, the RBA has conducted an out-of-cycle assessment of ASX Clear and ASX Settlement in accordance with its Financial Stability Standard for Operational Risk. In an unprecedented move, the RBA revised its rating for the Operational Risk standard to “not observed.” The RBA has recommended that the ASX publicly outline its plans to enhance resources and third-party support arrangements for Chess, as well as to develop options for implementing contingency plans.
RBA Governor Michele Bullock stated, “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 highlighted those concerns. The underlying issues we have raised must be addressed as a priority to strengthen the resilience of the Chess system.”
ASIC Chair Joe Longo indicated that the regulators are ready to take further action concerning competition reforms in the clearing sector. He remarked, “Our actions underline our deepening concerns about ASX’s management of the Chess system, and we will continue to evaluate additional measures. A technical review of ASX’s core technology infrastructure is necessary given the ongoing issues regarding ASX’s operational resilience. It is concerning that these risks manifested in this significant incident.”
Initially, the ASX planned to replace the aging Chess system with a blockchain-based settlement solution, anticipated to go live in 2021. However, rising costs and a series of delays eventually led the ASX to abandon the project in late 2022.
The exchange is currently collaborating with Tata Consultancy Services to license the BaNCS for Market Infrastructure platform, which is utilized for settlement and clearing on the New Zealand Stock Exchange as well as the national exchanges in South Africa and Finland.
ASX Managing Director and CEO Helen Lofthouse stated, “We are heavily investing in modernizing our systems, and our project to replace Chess is progressing well. The delivery of the clearing services component is scheduled for March to April next year, and the first phase of industry testing began at the end of last month. The new Chess system is being developed on modern, modular architecture and benefits from extensive stakeholder consultation to ensure it will meet the market’s needs as a whole.
“In the meantime, we continue to invest in the current Chess system. Although the settlement incident was unprecedented, we must learn from it and determine how we can improve.”