Regulators Slam ASX for Batch Settlement Breakdown: What You Need to Know

Recent incidents involving the ASX’s Chess system have raised significant concerns about the operational reliability of the Australian equity market. Specifically, an issue with the Chess system’s memory allocation logic led to the inability to complete batch settlements for cash equities, prompting the ASX to cancel and reschedule the settlement process.

Regulatory Concerns Over Chess System Reliability

In a joint communication to the ASX, regulatory bodies expressed serious apprehensions regarding potential operational failures that could impact the Chess system’s capability to serve the Australian equities market reliably. They emphasized the importance of swift and effective remediation actions following such incidents.

RBA’s Assessment and Recommendations

In response to the incident, the Reserve Bank of Australia (RBA) conducted an out-of-cycle assessment of ASX Clear and ASX Settlement against its Financial Stability Standard for Operational Risk. This assessment led to a historic downgrade of ASX’s rating to ‘not observed’ for the operational risk standard. Key recommendations included:

• Publicly outlining plans to strengthen resources and third-party support for the Chess system.
• Presenting options for implementing effective contingency arrangements.

Statements from Regulatory Leaders

RBA Governor Michele Bullock remarked, “ASX operates critical infrastructure that plays a central role in the financial system. The management of operational risk by ASX has raised concerns for some time, underscored by the recent Chess incident.” He emphasized the need for urgent action to bolster the resilience of the Chess system.

Similarly, ASIC Chair Joe Longo indicated that regulators are ready to explore additional measures, particularly concerning competition reforms in the clearing sector. He stated, “Our actions reflect our deepening concerns with ASX’s management of the Chess system, and we are considering further actions.” Longo highlighted the necessity of a technical review of ASX’s core technology infrastructure due to ongoing operational resilience issues.

Transitioning from Blockchain to Modern Solutions

The ASX previously committed to replacing its aging Chess system with a blockchain-based settlement solution, which was expected to launch in 2021. However, due to rising costs and a series of delays, the ASX ultimately abandoned this ambitious project in late 2022.

Currently, the ASX is collaborating with Tata Consultancy Services to implement the BaNCS for Market Infrastructure platform. This platform is already in use for settlement and clearing operations on the New Zealand Stock Exchange as well as other national exchanges in South Africa and Finland.

ASX’s Commitment to System Modernization

ASX Managing Director and CEO Helen Lofthouse stated, “We’re heavily investing in modernizing our systems, and the project to replace Chess is progressing well. The delivery of the clearing services component is scheduled for March to April next year, with initial industry testing having commenced recently.”

Lofthouse assured stakeholders that the new Chess system is being developed with a modern, modular architecture and extensive consultation to meet market needs. She concluded by acknowledging the lessons learned from the recent settlement incident, emphasizing a commitment to continuous improvement in operational practices.