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Source: Reserve Bank of Australia

ASIC and the Reserve Bank of Australia (RBA) (the regulators) have outlined their expectations of ASX as it replaces the Clearing House Electronic Sub-register System (CHESS). This follows the release today of the RBA’s 2020 Assessment of ASX Clearing and Settlement Facilities.

The 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 (refer to 20-062MR). In implementing the replacement, ASX should take into account CHESS user feedback from its recent consultation on a revised implementation timeline. 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.

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.’

RBA Assistant Governor (Financial System) Michele Bullock 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 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.

ASIC and the RBA, with the broader Council of Financial Regulators (CFR) and the Australian Competition and Consumer Commission are also closely supervising ASX’s conduct in the CHESS replacement program of change in accordance 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.

In order to demonstrate its readiness to migrate to the new system, ASX is expected to provide independent assurances to the regulators. Seeking independent assurances is also consistent with an enterprise risk management three-lines-of-defence model. At a minimum, the new system must meet requirements which CHESS meets today for system availability, resilience, recoverability, performance and security. ASX has announced non-functional business requirements for the replacement system that will exceed these minimum requirements. ASX will need to provide assurances to demonstrate that these non-functional requirements have been met.

ASX is also expected 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 closely supervise ASX’s CHESS replacement program of change.

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