The ASX has come under renewed regulatory pressure after burning A$250 million on an aborted blockchain-based clearing and settlement replacement system.
Following an expensive six-year effort to swap out its aging CHESS back-office software with a new-age digital version, the Australian stock exchange pulled the plug last November citing “significant technology, governance and delivery challenges” indentified in an independent external review.
Last week the Australian Securities and Investments Commission (ASIC) ordered the ASX to produce two more special reports to complement a CHESS review notice issued by the regulator in December 2022.
Joe Longo, ASIC chair, said one of the two new reports would “be about ASX’s response to the findings and recommendations of the external report on the CHESS replacement application, and the other will be a holistic assessment of ASX’s program and project management framework”.
Ernst & Young will audit all three of the ASX special CHESS reports.
“These reports will help build confidence in ASX’s ability to deliver the CHESS Replacement and any other programs ASX undertakes,” Longo said in a statement. “The audited special reports will assist ASIC in its assessment of whether any further regulatory action is required.”
The ASX hired US blockchain specialist, Digital Asset, in 2016 to build a new clearing and settlement system but the project hit numerous delays and cost blowouts before being pronounced dead last November.
In the wake of the new ASIC orders, ASX chief, Helen Lofthouse, said the group “has an ongoing program of work to enhance delivery capability and strengthen project governance”.
“We welcome the opportunity to present this work in special reports to ASIC,” Lofthouse said. “In relation to CHESS replacement, good progress has already been made in the areas of solution design, quality engineering and testing, and ASX has identified recommendations which it will extend to policies and practices across the organisation.”
She told investors at the ASX half-year results meeting earlier this month that CHESS was functioning well as is.
However, Lofthouse said the ASX still planned to upgrade the system.
“There has been some interest in why we are replacing CHESS if the current platform is performing effectively. What we intend to do is build a new, contemporary platform that provides the flexibility and further scalability to evolve and grow with the Australian market,” she said.
“… We are considering a broad range of options including the use of some existing assets that have already been developed as well as potential vendor solutions. And we are taking on-board learnings from our experience with the project so far.”
Among other elements of the CHESS reboot plan the ASX has set aside A$70 million to distribute to market participants and software vendors in a ‘partnership program’.
“… there is still some way to go and we need engagement from the industry for longer than we originally expected,” Lofthouse said.
Aside from deeply embarrassing the ASX, the CHESS debacle triggered alarms at ASIC and the Reserve Bank of Australia (RBA) over threats to a key piece of the national financial architecture.
Longo told an Australian government hearing last week that the regulator supported proposed reforms to encourage competition in the local clearing and settlement sector and improve oversight of the financial market infrastructure.
“These reforms will strengthen our supervisory powers, including information-gathering powers,” he said. “They will broaden the range of enforcement tools we, the RBA and the ACCC [Australian Competition and Consumer Commission] have available.”