RBA to keep a close eye on ASX's CHESS and its replacement

ASIC and the Reserve Bank of Australia have put the Australian Securities Exchange (ASX) on notice that they’re watching its CHESS replacement project, after the collapse of a years-long attempt to replace the settlement system with one based on distributed ledger technology.

ASIC has directed ASX to engage consultancy EY to conduct an audit into the “support and maintenance” of its clearing settlement system, with chair Joe Longo calling CHESS “critical financial market infrastructure”.

The RBA’s letter [pdf] requires the ASX to offer a public undertaking that it can continue to support CHESS in its existing form – including by having ongoing access to programmers trained in the right language (believed to be COBOL).

The RBA’s expectations also include compliance with financial stability standards, which include business continuity and security arrangements; identifying what upgrades will be needed to keep CHESS in operation until its replacement is ready; consulting with stakeholders over CHESS’s future; and publishing “key details and timelines for all upgrades”.

Before the replacement project ran into trouble, the ASX had decided to delay implementing two features. These are compliance with the ISO 20022 universal financial industry message scheme, and pushing trading capacity over 10 million trades per day. 

The RBA wants the ASX to “explain its plans for these features”.

The regulator has also instructed the exchange to implement four recommendations it made in its 2021/22 assessment of the ASX [pdf]:

• a feasibility study into intraday margining of cash positions; assess the account structure;
• present a plan to implement “omnibus or individual client separation” by December 2023; and;
• complete an analysis of some of its legal powers.

CHESS replacement

Given the failure of the blockchain-based replacement project, it’s no surprise that the RBA is watching the exchange’s plans closely.

The bank has put forward six actions for the ASX has to take, including a public response to the 45 recommendations of the Accenture report, including disclosing to regulators and stakeholders the “risks and benefits” of the next iteration of its CHESS replacement, detailing what the backup plan is if the CHESS replacement runs late, and giving regulators “full and unfettered access” to the ASX’s new delivery partners.

The RBA is also requiring one other backup plan from the ASX "if the selected CHESS replacement solution is unable to be implemented."

In addition, it said, the “ASX is to publish on its website its project and implementation timeline with dates for key milestones.

"This plan should have a new and credible go-live date for CHESS replacement.”

The RBA also made a number of stipulations about project governance.

The processes are to be made public, and the ASX is to engage external advice to handle conflicts between its commercial interests and its financial stability obligations.

The ASX has responded in a letter [pdf] saying it will comply with the two regulators’ requirements.