The operator behind the Australian stock market, ASX, has failed an important operational risk standard, after experiencing a settlement failure in December
The Australian Securities Exchange (ASX) has failed an operational risk standard set by its regulators, following an out-of-cycle review of its clearance and settlement system CHESS.
Clearance and settlement operations are managed by two entities within the public market operator, ASX Clear Pty Limited and ASX Settlement Pty Ltd, which fall under the oversight of the Reserve Bank of Australia (RBA) and ASIC.
The RBA has now downgraded its assessment of these entities’ compliance with the operational risk standard from ‘partly observed’ to ‘not observed’.
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
“A rating of ‘not observed’ is made when the RBA has identified serious issues of concern that warrant immediate action,” the central bank said on Monday.
In response to the review, ASIC has directed ASX to engage an expert to undertake a technical review of CHESS. The expert will need to be approved by the regulator.
“Our actions underscore our increasingly deep concerns with ASX’s management of the CHESS system, and we will continue to consider further action,” Joe Longo, Chair of ASIC, said in a media release.
“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,” he said.
System Failure Identified
The RBA decided to do an out-of-cycle assessment after a settlement failure occurred on Friday, 20 December. That day, a batch of trades failed to settle, due to a memory issue, stemming from the introduction of the mFund capabilities in 2014, an analysis by the ASX showed.
The ASX was not able to resolve the error before the relevant cut-off time and rescheduled the settlement for Monday 23 December 2024. The settlement process started at 12:30pm, one hour later than usual after market participants requested an extension, and was successfully completed at 1:08pm the same day.
Since trades are settled over a two day period, the so-called T+2 cycle, the batch settlement included trades executed on 18 and 19 December 2024. The trades from 19 December 2024 were settled within the required timeframe of the T+2 settlement cycle.
However, the regulators were concerned about the speed and nature of ASX’s remediation actions following the incident.
“It is deeply disappointing that the regulators need to take these actions today. But they are necessary,” Michele Bullock, Governor of the RBA, 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,” Bullock said.
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