ASIC and RBA Outline Expectations for ASX CHESS Replacement Project

ASIC and the RBA told the Australian Stock Exchange (ASX) it should replace its aged Clearing House Electronic Sub-register System (CHESS) in a safe but timely manner.

October 2, 2020 | AtoZ Markets – Australian Securities and Investments Commission (ASIC) and the Reserve Bank of Australia (RBA) have outlined their expectations of the Australian Securities Exchange (ASX) as it replaces the Clearing House Electronic Sub-register System (CHESS).

This follows days after ASX told shareholders it was yet again delaying the launch of its blockchain-based trading system.

What does the ASIC and RBA expectations from the CHESS Replacement Project?

Both regulators expect ASX to replace CHESS as soon as this can be safely achieved by ASX and users of CHESS. CHESS is a critical clearing and settlement (CS) system for the Australian cash equity market. It contributes to investor confidence, the reduction of systemic risk, and the performance and stability of the Australian financial system.

The importance of replacing CHESS in a safe and timely manner was particularly highlighted in recent record trading volumes and the associated CHESS processing delays observed in March. In implementing the replacement, ASX should take into account CHESS user feedback from its recent consultation on a revised implementation timeline.

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ASX is expected to demonstrate the readiness of the CHESS replacement system and will be required to provide supporting independent assurances to the regulators before migrating to the new system.

Commenting on this development, ASIC Commissioner Cathie Armour said:

"ASIC believes the Australian financial system requires contemporary CS infrastructure that is efficient, resilient, reliable and scalable to meet existing and future needs of the market and participants."

Michele Bullock, RBA Assistant Governor said:

"CHESS has supported the clearing and settlement of Australian equities for over 25 years but is becoming harder to maintain and is less flexible than contemporary software. Replacing the system with more modern technology is critical to ASX’s ongoing management of systemic risk."

ASIC and RBA monitoring ASX compliance

ASIC and the RBA, as co-regulators of licensed CS facilities, continue to closely monitor ASX’s compliance with its CS facility licence obligations. ASX Clear Pty Limited and ASX Settlement Pty Limited, as licensed CS facilities, are required to ensure that their facilities’ services are provided in a fair and effective way and that they have sufficient resources (including financial, human, and technological) to operate their facilities. CS facilities are also subject to the RBA’s Financial Stability Standards.

Along with ASIC and the RBA, the broader Council of Financial Regulators (CFR), as well as the Australian Competition and Consumer Commission, are also closely supervising ASX’s conduct in the CHESS replacement program of change in line with the CFR’s Regulatory Expectations for Conduct in Operating Cash Equities Clearing and Settlement.

The Regulatory Expectations seek to ensure that ASX remains responsive to users’ evolving needs and provides access to its monopoly cash equity CS services on a transparent and non-discriminatory basis with terms and conditions, including pricing, that are fair and reasonable.

The regulators’ supervision and engagement with ASX is focused on ASX’s governance of the change program, its engagement with stakeholders, the functional and technical aspects of the replacement system, and its management of the risks associated with the migration to the new system.

To prove its readiness to migrate to the new system, ASIC and RBA expect the ASX to provide independent assurances to the regulators.

"Seeking independent assurances is also consistent with an enterprise risk management three-lines-of-defense model. At a minimum, the new system must meet requirements which CHESS meets today for system availability, resilience, recoverability, performance, and security," the regulators added.

The regulators also expect ASX to achieve a significant uplift in intraday trade processing capacity and end-of-day processing performance in the new system.ASIC and the RBA will continue to monitor ASX’s CHESS replacement program of change.

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