ASIC sues stock exchange ASX for alleged misleading CHESS statements

ASX Limited, Australia’s largest market operator, faces court proceedings for allegedly making misleading statements regarding its Clearing House Electronic Subregister System (CHESS) replacement project.

The CHESS project has been going on for many years, and ASIC now alleges that statements made in February 2022 saying that the project was “on-track for go-live” in April 2023 and was “progressing well” were misleading and deceptive.

“ASX’s statements go to the heart of trust in the integrity of our markets. We believe this was a collective failure by the ASX Board and senior executives at the time,” said ASIC Chair Joe Longo.

“Companies and market participants rely on what the ASX says about its operations to make their own decisions and investments.”

Fundamental significance

The CHESS project started in 2016, and Longo described it as a “technology project of fundamental significance, replacing critical national infrastructure crucial to the operation of the Australian economy.”

Therefore, he added, is it of “critical importance” to be honest about how it progresses.

“The delay and subsequent pause of the project in November 2022 caused significant cost to ASX and market participants who relied on assurances as to the progress of the project and scheduled go-live date.”

ASIC is still deciding on what penalty it will seek for the alleged contraventions.

A$1m fine in March

On March 7, the company paid a penalty of A$1,050,000 ($692,994) for failing to comply with Market Integrity Rules – the first infringement notice issued to a market operator.

Allegedly, ASX breached the pre-trade transparency rule requirements 8,417 times between April 2019 and December 2022, when failing to make certain information about orders available on its trading system. The fault was found as a result of an incorrect system configuration, which went undetected until a market participant noticed it.

“The delay and subsequent pause of the project in November 2022 caused significant cost to ASX and market participants who relied on assurances as to the progress of the project and scheduled go-live date.”
ASIC Chair Joe Longo

In August, ASIC also proposed rules to facilitate competitive outcomes in cash equity clearing and settlement (CS) services provided by the ASX Group. Which Commissioner Simone Constant said were also a response to the concerns around ASX’s handling of the CHESS replacement program, and that those rules “will help to ensure that those mistakes are not repeated.”

“We are moving at pace to develop and implement these important rules, which require that during the CHESS replacement program and beyond, the ASX remains responsive to users and does not create barriers to competition.”

ASX’s CHESS replacement project timeline:

January 2016: ASX determines to replace CHESS.
December 2017: Engages Digital Asset (DA) to build the Ledger and Application for the CHESS Replacement System.
April 2019: Establishes and makes available the Customer Development Environment for software developers to interact with and test parts of the Application.
August 2019: Engages VMware to build the Ledger. DA continues to be engaged to build the Application.
March 2020: Announcement to replan the CHESS Replacement Project and that the then go-live date of April 2021 would be delayed.
October 28, 2020: Announcement of the new plan including consultation on features of the Net Broker Obligation (NBO) and other business processes and a new go-live date of April 2023 (Published Plan).
June 30, 2021: Completes consultation on features of the NBO and publishes an updated implementation timetable.
June to November 2021: Makes statements to the effect that it was releasing code in accordance with the Published Plan and was ‘on track’ for go-live in April 2023.
DA records a red “RAG” delivery status in its reporting to ASX, where there were material risks to its delivery in the time frames required and mitigants/resolutions were not in place to address that risk.
November 30, 2021: Opens a descoped Industry Test Environment 1(ITE1).
Early December 2021: DA proposes a draft delivery plan to ASX which indicates a delay up to November 2022 for DA to complete the development of the Application.
December 21, 2021: ASX records a red “RAG” status for the CHESS Replacement Project overall and for the Application.
February 3, 2022: ASX’s Audit and Risk Committee is informed of the CHESS Replacement Project’s overall red “RAG” status.
February 8, 2022: Two meetings take place between ASX and DA representatives where the representatives discuss DA delivering to ASX a release candidate for a descoped ITE1 Accreditation.
February 10, 2022: Half-year results are published, with an announcement concerning retirement of the CEO, and contain the tracking to plan, on-track to go-live and progressing-well representations.
March 28, 2022: Announcement of that there is a strong likelihood of delay to the go-live date of April 2023.
September to November 2022: Engages Accenture to review the Ledger and Application and produce a report concerning the CHESS Replacement Project.
November 2022: Announcement to pause the CHESS Replacement Project, that it would reassess all aspects of the CHESS Replacement Project and that it had derecognized approximately A$245-255m ($163-169m) (pre-tax) in capitalised costs.
August 3, 2023: ASIC welcomed the establishment of an ASX Advisory Group and the appointment of Alan Cameron AO as Independent Chair, which would advise ASX Clear and ASX Settlement on strategic clearing and settlement issues, including inputs on the governance of the ASX CHESS replacement project.
August 2023: ASIC acknowledged ASX’s release of three new reports, where one was the CHESS Replacement Program External Review Report – which resulted in a pause of the CHESS replacement program while ASX revisited the solution design. This contained 45 recommendations to implement to align with its objectives.
August 2023: ASIC and the RBA issued a joint letter outlining regulatory expectations of ASX Clear Pty Limited and ASX Settlement Pty Limited for engaging with the newly established ASX Cash Equities Clearing and Settlement Advisory Group.
November 2023: ASIC and the Reserve Bank of Australia acknowledged ASX’s announcement of a solution design to replace CHESS, which ASX said to to be “a foundational step in getting the CHESS replacement program back on track.”