Chapter 7The ASX CHESS Replacement Project - ASX Governance
Introduction
7.1This chapter discusses the evidence received by the committee on the governance and stakeholder engagement arrangements of the Australian Securities Exchange (ASX) and its Clearing House Electronic Subregister System (CHESS) Replacement Project, which was paused in late 2022 and restarted in late 2023.
ASX and CHESS Replacement Project governance arrangements
7.2This section considers evidence put to the committee on:
an analysis of ASX’s corporate and CHESS Replacement Project governance arrangements;
the interactions between the CHESS Replacement Project and competition in clearing and settlement;
external reviews of the ASX and CHESS Replacement Project governance;
ASX senior leadership changes; and
the ASX Code of Practice.
7.3 The following two areas of governance are discussed in this chapter:
corporate governance, including laws and associated regulations, guidelines and policies that underpin and direct the governance of the ASX Group; and
project governance for the CHESS Replacement Project.
An analysis of ASX’s corporate and CHESS Replacement Project governance arrangements
7.4This section summarises an analysis of the ASX’s corporate and CHESS Replacement Project governance by academic submitters Helen Bird and William Klein (Swinburne Law School).
7.5The ASX is subject to corporate governance requirements, including:
the Corporations Act 2001 on company formation and operation, including directors duties and continuous disclosure;
case law standards of behaviour for company directors;
ASX listing Rules, as the ASX is a listed company;
the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations;
the ASX’s company constitution;
conditions set by Australian Securities and Investments Commission (ASIC) for the ASX, including its licence to operate a clearing and settlement facility;
the Financial Stability Standards set by the Reserve Bank of Australia (RBA);
the 2017 statement of regulatory expectations; and
the ASX Cash Equities Clearing and Settlement Code of Practice.
7.6In their submission Bird and Klein described corporate governance as follows:
The expression ‘corporate governance’ has its genesis in the Cadbury Report, more recently expounded by Justice Owen as being ‘the framework of rules, relationships, systems, and processes within and by which authority is exercised and controlled in corporations’. It includes the practices by which that exercise and control of authority is in fact effected. This definition is currently accepted by the ASX in its own Corporate Governance Principles and Recommendations… Corporate governance is not found exclusively in legislation, but includes consideration of a company’s constitution or applicable replaceable rules, case law, institutional and industry codes of conduct and ethics.
7.7Bird and Klein analysed the ASX’s corporate and CHESS Replacement Project governance and concluded that there was:
- A failure of project governance by the ASX, specifically to properly manage and supervise the project to replace the CHESS infrastructure with a system based on blockchain technology.
- A failure of corporate governance by the ASX, specifically, a failure by the ASX board of directors and ASX executive management to sufficiently monitor and supervise its technology operations including the project to replace CHESS.
- Bird and Klein considered that poor project management and governance of the CHESS Replacement Project was likely the product of:
inadequate planning;
lack of sufficiently documented requirements;
the apparent absence of adequate supervision of the project and a risk champion capable of drawing together the common threads of work being done by ASX and Digital Asset;
identifying the serious risk of project failure; and
drawing that risk to the ASX Executive and Board members’ attention.
7.9For corporate governance, Bird and Klein observed that issues included board technology experience and whether sufficient attention was given to warning signs such as the 2020 system outage:
Poor corporate governance of the CHESS replacement project reflects in some part a critical lack of senior executive and board experience and history in monitoring and providing oversight of large-scale technology transformation projects. ASX directors claimed not to be alerted to problems with the CHESS replacement project…in 2019 and 2020, although they could not avoid knowledge of system outages occurring in 2020. Whether the events of 2020 caused or should have caused a sensation of ‘chronic unease’ by senior management and the board as regards the CHESS replacement project requires further investigation.
7.10Bird and Klein identified seven specific concerns for ASX corporate governance:
The quality and robustness of the ASX’s enterprise risk governance. The ASX acknowledged in 2018 that its risk management systems required significant reform. Risk management and governance, particularly of technology risks, were deficient in two regulatory reviews undertaken in 2018 and 2021.
Deficiencies in the ASX’s three lines of defence risk management.
The pace of implementation of the 2018 recommended reforms.
The quality of reporting of technology risk management issues up to the Executive Technology Operations and Security Committee and through them to the Board Audit and Risk Committee until 2021 and the Board Technology Committee from 2021 onward.
Robust oversight of technology projects by ASX Directors.
Board skill set: Before 2022, no ASX director had any relevant skills, expertise or experience in digital transformation projects despite the ASX being a technology company with a full slate of such projects. The ASX Annual Reports from 2011 to 2022 reported high levels of IT and technology competencies on the board, but it is not clear what were the specific competencies being claimed and which directors possessed them.
Risk governance resourcing: The 2018 and 2021 Governance Reviews conducted by the KPMG and the Reserve Bank, respectively found there was limited sharing of risk information across relevant boards and committees within the ASX group.
7.11Bird and Klein also analysed the management of the CHESS Replacement Project against the internationally recognised framework of project management known as the PMBOK Guide – A Guide to the Project Management Body of Knowledge. Bird and Klein concluded that:
The CHESS project ran off the rails in 2020, even though a significant portion of its work was in the project execution phase. However, the extent of the project’s problems did not become evident until the Accenture review was undertaken in mid-2022.
Three project management factors contributed to the CHESS Replacement Project failure:
Project conception failure: the ASX failed to properly identify the CHESS replacement project’s core objectives from the very start of the project. Was it merely to replace the existing CHESS system with a like-for-like new system? Or was it to provide functionality that went well beyond the existing CHESS system? To use that technology to expand the range of services that the ASX, as opposed to its stakeholders, could additionally provide in connection with their [clearing and settlement] facilities?
Project specification and design failure: there were consistent, on-going alterations being made to the project’s ‘day 1’ design and functionality requirements with the result that the design stage of the project was never completed, despite the project moving to execution stage in 2020; and
Project scalability risks were not properly identified and managed; with the result that it was never clear whether the proposed blockchain technology could in fact adequately replace the existing CHESS system.
7.12In relation to the above criticisms regarding project conception, specification, and design, the ASX noted in an answer to a question on notice that the project scope and business requirements had been developed through a two-year consultation process with industry participants. It set out in summary the course of this process:
an initial consultation paper on a like-for-like replacement of CHESS;
industry feedback did not support a like-for-like replacement and preferred a CHESS Replacement Project to deliver service enhancements and business process efficiencies;
the ASX then held industry workshops to assist in determining business requirements; and
in September 2018, the Day 1 scope for the CHESS Replacement Project was determined.
7.13The broader debate on the adequacy of stakeholder consultation for the CHESS Replacement Project is discussed later in this chapter. Project scalability risks are discussed in chapter5.
The interaction of the CHESS Replacement Project and competition in clearing and settlement
7.14In 2019 and thereafter, criticism of the ASX’s use of its market power in handling the project began to appear in the financial press. Bird and Klein noted that the media and other sources identified:
The criticisms were not about project viability or milestones but rather the potential misuse of the ASX’s market power in scoping the new distributed ledger technology system.
Stakeholders criticised the ASX’s lack of transparency, particularly concerning the business case for the replacement technology and mechanisms for handling conflicts of interest once implemented.
Most participants were also concerned about their software upgrade costs for connecting to the new CHESS.
A lobby group known as the CHESS Replacement Stakeholder Group formed and responded to the ASX with concerns that the primary beneficiary of the project was the ASX. They accused the ASX of having broader ambitions for the new CHESS than previously disclosed.
Stakeholders had concerns that the scope of the CHESS Replacement Project was not clear on whether it would encompass capabilities well beyond its existing capabilities and hence, the potential for the ASX to encroach on the services that stakeholders provide.
7.15Cboe suggested that there needs to be more recognition of the role played by the integration operations and systems between the ASX clearing and settlement functions and the rest of the industry. Cboe noted that the tight integration of systems and operations means that any governance reforms may be compromised because the clearing and settlement entities are locked into the ASX group. Cboe argued that any solutions in this area must address integration across all levels.
7.16Cboe indicated that, in its view, regulators have not been able to address the ASX’s use of market power adequately with their current toolkit. Cboe suggested that while there has been recognition that the integrated governance of ASX clearing and settlement functions with the rest of the group is not appropriate, it did not believe the actions taken by regulators to date have been sufficient to fix this issue.
For example, [the Council of Financial Regulators] has required the board of ASX Clear and ASX Settlement to retain at least 50 per cent non-executive directors who are not directors of the ASX Limited Board (non-ASX Limited directors). This should have theoretically helped control the fundamental conflict of interest. However subsequent annual reviews by the Reserve Bank found that non-ASX Limited directors were not sufficiently included in certain matters affecting the clearing facility, thereby undermining this regulatory intervention.
7.17Cboe also recommended that regulators consider the effects on competition of the pause and redesign of the CHESS Replacement Project:
The regulators consider the effects that the failed CHESS Replacement program and the requirement for a complete restart of this project have on competition when exercising their supervision functions and any rulemaking powers, noting that these failures have resulted in industry stakeholders needing to commit resources to ASX until up to 2032.
7.18The National Stock Exchange of Australia (NSXA) broadly agreed with Cboe's recommendation. NSXA suggested that the proposed completion time for the CHESS Replacement Project should not be used to harbour the continuation of current monopoly services and related commercial practices. NSXA also suggested that the flaws of the CHESS Replacement Project can also be attributed to the policy of maintaining a monopoly infrastructure run by a commercial enterprise:
ASX has significant incentive to be the only service provider to everyone. This has the effect of crowding out potential entrants and startups wishing to compete in various areas which have influenced, over time, the implementation of legislation and regulator views as to contestability of clearing and settlement services. NSXA submits that these failings have revealed more deep-seated problems and that there has certainly been legislative bias toward the incumbent at the expense of others. Meaning when a major project fails and there is no Plan B or competitors that can provide an alternative service, then government and the market bear the cost.
7.19Finclear also drew a connection between the lack of competition in clearing and settlement and the challenges with the CHESS Replacement Project:
The deficiencies, previously identified by the Council of Financial Regulators, in the current regulatory framework for financial market infrastructure – including the lack of competition in clearing and settlement for equities – continue to exist and are beginning to have real consequences with the bungled replacement of the CHESS system.
ASX cannot be relied upon to fix what is critical infrastructure. It would be a mistake to leave it to ASX to design a solution. ASX remains in a highly conflicted position and its competence to deliver such a complex project is highly questionable. At best it will lead to a piecemeal of disparate technologies, entrenching monopoly, or at worst, to another aborted project.
7.20In response to the above concerns the ASX submitted that:
ASX engaged law firm Herbert Smith Freehills (HSF) as an external expert to review ASX’s arrangements to identify and manage potential conflicts between the commercial interests of ASX Group and the licence obligations of ASX Clear and ASX Settlement, focusing on current CHESS and CHESS replacement. Chair and Senior Partner of HSF Rebecca Maslen-Stannage led the review. ASX publicly released the findings of the HSF review on 28 July 2023 (HSF report). Overall and having regard to recent governance enhancements by ASX, the HSF review found that “the existing framework for conflict identification and management within the ASX Group…is sophisticated and consistent with the framework [HSF] would expect from a listed group of the complexity and scope of potential conflicting operations of the ASX Group.” ASX is well progressed on implementing the recommendations outlined in the HSF report.
7.21Treasury indicated that the new competition in clearing and settlement laws will give ASIC power to make rules for the governance of clearing and settlement facilities:
Schedule 3 of the Treasury Laws Amendment (2023 Measures No. 3) Bill 2023 (the Bill) implements this recommendation by providing for an ASIC rule-making and an ACCC arbitration power. ASIC’s rule-making power will allow ASIC to make rules for the governance of a [clearing and settlement] facility licensee where there is at least an indirect connection between the rule and the provision of [clearing and settlement] services. This will allow ASIC to ensure that a [clearing and settlement] facility licensee’s governance arrangements, including matters such as board composition, do not impede competition or the provision of [clearing and settlement] services to users on terms consistent with the [Council of Financial Regulator’s] Regulatory Expectations for Conduct in Operating Cash Equity Clearing and Settlement Services in Australia (Regulatory Expectations).
7.22ASIC acknowledged the impact of ASX’s decision to pause and redesign the CHESS Replacement Project on the broader industry. ASIC noted that under the competition in clearing and settlement reforms, it will be able to make clearing and settlement service rules that facilitate outcomes expected in a competitive market for clearing and settlement services and ensure that competition, should it emerge, is safe and effective. ASIC confirmed that following a determination by the Minister, ASIC would be able to make rules for clearing and settlement facilities governance arrangements, including board composition, participation of users in the governance arrangements, and arrangements for handling conflicts of interest.
External reviews of ASX and CHESS Replacement Project governance
7.23As outlined in Table 5.1 (Chapter 5), numerous external reviews of the ASX and the CHESS Replacement Project by regulators and consultants have been undertaken. To give a sense of the issues and recommendations that have arisen and how they changed over time, this section summarises two assessments in 2018 and 2023 that consider the governance of the ASX and the CHESS Replacement Project.
7.24The 2018 review of the ASX Group’s technology governance and operational risk management standards undertaken by KPMG at the request of the regulators made recommendations in the following areas to improve the ASX’s risk management:
refresh the risk appetite statement;
roll out a new three-year enterprise risk management plan;
roll out a risk communication plan;
develop a holistic view of all policies, procedures and controls;
increase risk management resourcing;
develop and mature the first line risk function in technology;
include more detailed risk management performance goals;
develop measures to track, monitor, and assess the impact of risk initiatives on culture;
embed risk management into business processes;
enhance the consideration of risk in project management;
enhance risk reporting;
develop a key risk indicator dashboard; and
embed a governance, risk, and compliance system into the organisation’s reporting functions.
7.25The 2018 review also made the following recommendations to the ASX to improve its technology governance:
expand the governance structure to incorporate technical design and compliance, clarify roles and processes, and include evidence of risk outcome assessment analysis in governance reports;
develop a technology target operating model for team structure and roles;
continue to develop a technology and capability roadmap;
enhance program management frameworks and compliance;
use an integrated channel for planning resource demands across change activities;
enhance information technology service management software tools and practices;
enhance the supplier governance framework;
mature risk indicators for technology reporting; and
continue to consolidate all technology controls into a single register.
7.26The ASX indicated that it recognised the areas for improvement identified in the 2018 review and was undertaking an extensive work program to implement all of the recommendations. ASX also advised that work had commenced on almost half of the recommendations either before the review started or before the recommendations were finalised.
7.27The RBA’s 2023 assessment of ASX clearing and settlement facilities noted that the ASX had made progress in addressing the RBA’s previous recommendations on governance. However, the RBA identified some continuing concerns:
ASX’s improved transparency has provided the Bank with greater insight into several areas of ASX’s governance that require further improvement, a number of which have been long-running concerns. One of these concerns is whether reporting to the boards assists their ability to oversee the management of the key issues raised in this Assessment. The Bank also remains concerned about the effectiveness of ASX’s Internal Audit function. Other areas for improvement include the rigor and extent of the CS Lead Executives’ ownership of ASX’s self-assessment against the [Financial Stability Standards], the documentation of clear lines of accountability within ASX, and the effectiveness of stakeholder engagement on the CHESS Replacement Program.
7.28From its 2023 assessment, the RBA made the following findings on governance, risk management, and operational risk:
Governance: The Bank has downgraded ASX to partly observed. The Bank welcomes the progress that has been initiated under the leadership of a new Chief Executive Officer, including increased accountability for executives. However, the Bank’s assessment is that the documentation supporting clear lines of accountability should be strengthened, along with the approach to stakeholder management and the effectiveness of ASX’s Internal Audit function. The Bank has also determined that the information reported to the boards needs to be more effective in assisting their ability to oversee the management of the key issues raised in this Assessment.
Framework for the Comprehensive Management of Risks: The Bank has downgraded ASX to partly observed. The Bank continues to hold concerns about ASX’s risk management culture and the length of time ASX has operated at a heightened overall risk position.
Operational Risk: The Bank rated ASX as partly observed. While ASX has made some progress towards addressing previous recommendations, ASX should place a high priority on the [remediation] of ageing assets. ASX should also continue to focus on the delivery of its cyber strategy and security capabilities in line with the rapidly changing threat landscape.
7.29The ASX media release following the RBA assessment, made the following statements, indicating the ASX’s willingness to implement the RBA’s recommendations:
ASX Chair Damian Roche said: “We accept the RBA’s recommendations in full and acknowledge there’s continued work to do. Many of the concerns outlined by the RBA have already been in focus for ASX, and while some items are well progressed, ASX will now incorporate the work from the new recommendations.
“Changes have been underway for more than 18 months and we are cognisant there is more work to do to restore trust. Some of the key changes that have taken place include Board renewal and significant change in leadership to underpin the cultural transformation and operational risk uplift at ASX.”
ASX Managing Director and CEO Helen Lofthouse said: “At our FY23 results two months ago, I noted ASX has been operating at a heightened level of risk in some areas and addressing this is our priority.
‘This assessment aligns with the view of the ASX Board and I that we are not where we want to be in some key areas. We are making changes to remediate issues and strengthen our overall capability, although we recognise it will take time for these changes to be fully embedded. There is certainly more work to do but we are clear on the path ahead and I’m confident the actions we’re taking will continue to build on the foundations of an enduring and high quality business.’
ASX senior leadership changes
7.30As part of its response to concerns about governance and the challenges with the CHESS Replacement Project, the ASX has made several changes to its senior leadership, including:
In June 2022, the ASX appointed Ms Helen Lofthouse as Managing Director and Chief Executive Officer with effect from the beginning of August 2022.
In May 2023, the ASX appointed Mr Tim Whiteley as Chief information Officer with effect from 1 July 2023.
In August 2023, the ASX appointed Diona Rae as the Chief Operating Officer.
7.31In February 2023 and earlier in 2022, the ASX announced changes to its directors, appointing Vicki Carter, Luke Randell, and Dave Curran to enhance the board's skills in managing technology and large-scale transformation projects.
The ASX Code of Practice
7.32In September 2017, the Council of Financial Regulators updated the Regulatory Expectations for the Conduct of Cash Equity Clearing and Settlement Services in Australia (Regulatory Expectations). The ASX Cash Equities Clearing and Settlement Code of Practice (ASX Code of Practice) sets out the ASX’s commitment to comply with the Regulatory Expectations and its commitments to customers and other stakeholders in managing cash equities clearing and settlement infrastructure and services for the Australian market. The updated 2023 version of the ASX Code of Practice makes four commitments:
(1)customer and stakeholder engagement;
(2)transparent and non-discriminatory pricing;
(3)transparent and non-discriminatory access; and
(4)the protection of confidential information.
7.33Commitments made by the ASX Code of Practice on customer and stakeholder engagement that are relevant to the CHESS Replacement Project include:
ASX will invest in the ongoing operation and development of the core cash equities clearing and settlement infrastructure promptly and efficiently. Such investments will seek to meet the needs of users and the market, recognising users' diversity and differing needs.
ASX will maintain an advisory Business Committee consisting of representatives of financial market issuers and intermediaries and their industry associations, other listing and trading markets, and other relevant stakeholders that connect to or use ASX's cash equities clearing and settlement infrastructure.
ASX will consult the Business Committee on its investment decisions about the design, operation and development of new cash equities clearing and settlement infrastructure and services, including developing a transition and implementation plan for new infrastructure.
ASX will report annually to the Business Committee on the cash equities clearing and settlement service developments and investment projects progressed and how it has taken into consideration the views of users.
7.34The Regulatory Expectations require the ASX to commit to submitting an annual external audit of its governance, pricing, and access arrangements. In the Code of Practice, the ASX committed to annually commission an external audit of its compliance with the Regulatory Expectations to be conducted by an independent assurance firm. The conduct and findings of the external audit in 2023 were:
PwC undertook a seventh reasonable assurance audit in relation to ASX’s compliance with the Regulatory Expectations in accordance with the Australian Standard on Assurance Engagement 3100—Compliance Engagements issued by [Australian Accounting Standards Board] for the year ended 30 June 2023. PwC assessed ASX’s compliance with the Regulatory Expectations by reference to the Compliance Framework developed by ASX, which comprises the ASX Code of Practice and related policies and procedures.
The assurance report sets out PwC’s unqualified audit opinion that “ASX has complied, in all material respects, with the Regulatory Expectations as evaluated against the Compliance Framework for the year ended 30 June 2023.
7.35However, the external audit includes the following caveat, which may mean that the problems with the CHESS Replacement Project may not have been in the scope for the audit:
In respect of our reasonable assurance engagement, the Regulatory Expectations provides that an “[audit] generally would not be required to form a judgement on the more subjective matters contained in the Regulatory Expectations, such as the promptness and efficiency of investments or the efficiency of prices. Rather, such an audit should develop an evidence base of relevant actions taken by ASX, and in particular provide assurance that it has policies and procedures in place aligned with the Regulatory Expectations and that it has conducted its operations in accordance with these policies and procedures.” Accordingly, we have not provided assurance on ASX’s compliance with the more subjective matters contained in the Regulatory Expectations.
The design and operating effectiveness of ASX’s technology, governance and delivery processes associated with the CHESS replacement project. The CHESS replacement project has been subject to focus by the regulators, and there are ongoing investigations being performed by the regulator over possible breaches in ASX’s legal obligations. Our engagement has only considered governance processes that enable user input on the setting of investment strategy and not these broader technology, governance and delivery processes.
7.36NSXA asserted that ASX Clear and ASX Settlement did not comply with several ASX Code of Practice commitments. NSXA gave the following examples to illustrate its concerns:
Given that NSXA’s securities were cash equities (the same as ASX’s) and already settling through CHESS, the process of applying and obtaining approval for [Trade Acceptance Service] should have been straight-forward. Yet, the ASX Group managed to stall access and approval for [Trade Acceptance Service] for 3.5 years with NSXA finally going live with [Trade Acceptance Service] on 23 November 2020.
Coincidentally, ASX Settlement introduced this new monthly fee structure to issuers in July 2022 a few months ahead of the decision to not proceed with the [Distributed Ledgers technology] based replacement of CHESS – locking in all issuers to a fee model tied both to transactions and CHESS access into the future. NSXA understands that ASX’s decision not to proceed with the CHESS Replacement also meant that the ACCC would not be required to review fees.
7.37Access to the Trade Acceptance Service also involved several steps by the regulators, contributing to the timeframe beyond ASX’s control (see also chapter 4). NSXA noted that its experience above was not supported by the annual audit assessments of the ASX Code of Practice that were carried out during this period. The ASX noted the roles of the regulators and indicated that the ASX considered that it had followed the ASX Code of Practice for the NSXA matters.
Stakeholder consultation and engagement
7.38The section summarises views put to the committee by inquiry participants regarding the effectiveness of the ASX’s stakeholder consultation and engagement for the CHESS Replacement Project. The Business and Technical Committees are described first to provide context.
The Business and Technical Committees
7.39The ASX has mechanisms for stakeholder interaction, including the Business Committee, a CHESS Replacement Project Technical Committee and the new ASX Cash Equities Clearing and Settlement Advisory Group (Advisory Group). The Advisory Group is discussed in a later section, while the business and technical committees are described as follows:
The ASX Business Committee was established by ASX for the purpose of providing user input to management and the boards of ASX Clear and ASX Settlement on the ongoing operation and development of cash equities clearing and settlement infrastructure and services. It currently comprises of representatives of clearing participants, settlement participants, approved market operators, other relevant stakeholders and their associated industry organisations.
The ASX Business Committee has also established a sub-committee, the CHESS Replacement Technical Committee (Technical Committee). The Technical Committee is separately chaired and provides a forum for industry engagement on technical aspects of CHESS replacement project planning and solution design.
The ASX Business Committee and the Technical Committee operate alongside the Cash Equities Clearing and Settlement Advisory Group.
Stakeholder consultation
7.40Several submitters and witnesses raised concerns about the adequacy of the ASX’s consultation process for the CHESS Replacement Project prior to the project pause.
7.41Bird and Klein indicated in their submission that while the ASX sought extensive stakeholder consultation, it appeared mainly to take place after the commitment had been made to use distributed ledger technology. Bird and Klein also raised concerns about how stakeholder requirements were added to the project through subsequent consultation processes:
The April 2018 consultation document hinted at tensions between stakeholder requested business requirements and ASX delivery expectations, specifically as to whether they could be delivered on Day 1 of the CHESS replacement commencing operation. The consultation document acknowledged a full roll-out of all the required features could not realistically be delivered on Day 1. However, critically, the ASX left the door open for further, additional requirements to be requested by stakeholders. The ASX specifically invited stakeholders to advise them on any specific new business requirements that had not been captured to date and which required inclusion. By flagging that further additions were possible, it could hardly be said that the key objectives of the plan, including scalability requirements, were finally determined. Equally, the business requirements being discussed were clear evidence that the CHESS replacement project was developing over time into something far more than mere replacement of existing CHESS technology.
7.42Computershare argued that inadequate project governance was a significant contributor to the problems with the CHESS Replacement Project and recommended that a governance committee should be established:
We are strongly of the view that a lack of effective, representative governance is at the of heart the project’s failure. To remedy this, we respectfully recommend that ASX be required to establish a new committee (the Clearing and Settlement Governance Committee or the CSG Committee) to provide enhanced governance of clearing and settlement. This committee should include substantial stakeholder representation.
Without an adequate overarching governance framework, and the right skills and project program framework, there is a risk that mistakes of the [CHESS Replacement Project] CRP will be repeated. ASX may understandably require additional technical support from stakeholders, as it asserted when forming the new Technical Committee. However, this is a sub-committee of the Business Committee and cannot currently direct ASX or hold it to account. The project is also critically deficient in high-level policy guidance, advice, governance, engagement and oversight. In our view, a new industry-led governance committee, with ASX representatives working together with stakeholder representatives, needs to be introduced to provide effective governance for clearing and settlement services. The existing consultation groups, Business Committee and Technical Committee, do not effectively undertake this role.
7.43NSXA argued that the ASX’s consultation on the CHESS Replacement Project lacked meaningful collaboration expected for the replacement of critical central market infrastructure because:
there were separate working groups and restricted access to the technical committee;
the ASX controlled the content and discussions;
it was difficult to obtain a full picture of the project; and
documentation was provided with insufficient time to prepare for meetings.
7.44NSXA further submitted that:
[ASX] created a governance framework for [the CHESS Replacement Project] that was a work in progress. Governance continued to be developed as questions were asked through the quarterly ASX Business Committee meetings, various working groups and the technical committee. In the end, independent reports and assurance exercises were carried out by a number of professional firms to resemble a well thought out governance framework.
The project governance framework and consultation approach outlined above resulted in an inconsistent level of transparency across a number of key aspects of the project. Communication on the sequence of project delays is a prime example.
7.45The Australian Custodial Services Association (ACSA) indicated that, in its view, the ASX Business Committee and the CHESS Replacement Project Technical Committee generally operated in line with their terms of reference. However, there were some concerns about the balance of the membership:
The business committee is dominated by the CHESS replacement project and should be more forward looking on broader clearing and settlement matters, including covering all products including fixed income, [Exchange Traded Derivatives], futures clearing etc. This optimises industry resources across similar feedback mechanisms.
The scope discussions in the technical committee need to flow into design consideration and that there are a vocal few who dominate the discussions. It was also noted that whilst it generally follows the terms of reference it is yet to be seen if it drives successful outcomes for the functionality, technical and operational outcomes for CHESS replacement.
7.46The Governance Institute of Australia raised concerns that the consultation mechanisms provided by the ASX were too technical for some participants, lacked representation from share issuers and investor representatives, and that the business committee may not be the most suitable governance mechanism.The Governance Institute of Australia submitted:
…the ASX Business Committee which then had oversight of the Project, should be expanded to include issuer and investor representatives which occurred in 2019. We also raised the issue of how ASX would ensure a competitive market for the additional services ASX planned at that stage to offer as part of the Replacement Project. We also raised two further concerns: the impact of COVID-19, then at its height, on the Project and whether the ASX Business Committee was the most suitable model to provide input to ASX’s governance and decision-making process about CHESS Replacement. We encouraged ASX to consider a new governance model for ASX that would better enable issues to be discussed and aired in a purpose-designed forum.
7.47The Governance Institute of Australia also raised concerns on whether the ASX Technical Committee was appropriate to provide stakeholder engagement to the CHESS Replacement Project and suggested that an independently chaired governance oversight body was needed:
While we understand the Technical Committee’s role in providing a forum for industry engagement to review, debate and provide input in relation to Project planning, and design assumptions and scope, and industry benefits, our members consider it is not well designed to provide governance oversight of the Project.
Our members commend ASX’s willingness to be more consultative and seek input into the planning and scope of the Project, but remain concerned that the size of the Technical Committee while appropriate for the technical aspects of this stage of the Project, is still too large for it to hold two-way discussion and debate of the issues.
7.48Computershare acknowledged the consultation through the Business Committee and the Technical Committee. However, Computershare argued that the Business and Technical Committees did not provide time to consider documentation and did not provide the high-level policy guidance, advice, governance, engagement, and oversight needed by the CHESS Replacement Project:
ASX may understandably require additional technical support from stakeholders, as it asserted when forming the new Technical Committee. However, this is a sub-committee of the Business Committee and cannot currently direct ASX or hold it to account. The project is also critically deficient in high-level policy guidance, advice, governance, engagement and oversight. In our view, a new industry-led governance committee, with ASX representatives working together with stakeholder representatives, needs to be introduced to provide effective governance for clearing and settlement services. The existing consultation groups, Business Committee and Technical Committee, do not effectively undertake this role.
7.49Computershare recommended that:
ASX should be required to establish an effective governance framework with an industry-representative governance committee. All major stakeholder groups must be represented in a manner that directly and substantively influences strategic direction and project management. This should take the form of a high-level governance committee with direct and substantive involvement in clearing and settlement matters.
ASX should be required to communicate its intended guiding principles and core attributes of the new platform.
ASX should clearly articulate the impact of the business case on the relevant stakeholder groups, engage in effective consultation on it and negotiate with stakeholders and regulators to achieve a fair and representative balance of interests in the final overall project strategy.
Development should recommence only after the above steps have been concluded.
ASX should provide clear and comprehensive project status communications to stakeholders and regulators, including on its internal development milestones.
ASX response to concerns
7.50The CEO of the ASX Ms Helen Lofthouse acknowledged the concerns from major customers and other ASX stakeholders, including some registries, about inadequate stakeholder engagement. At the same time, Ms Lofthouse spoke in defence of the ASX's consultation processes.
7.51In September 2023, the ASX appointed an independent chair, Mr Paul Rayson, to the ASX Business Committee, the market announcement noting its intent to facilitate inclusive stakeholder engagement.
7.52Table 5.1 in chapter 5 identifies in italics when many ASX consultation processes occurred in the project timeline. In answer to the question on notice, ASX provided the following summary, which also addresses the first two points of the Bird and Klein analysis. The ASX had earlier noted that the business requirements for CHESS Replacement Project were driven by feedback from industry stakeholders in consultation processes carried out by ASX between 2016 and 2019:
- At the outset of the CHESS replacement project in 2016, ASX issued a consultation paper that proposed a largely like-for-like replacement system for existing CHESS, with the introduction of global messaging standards (ISO20022).
- Feedback from clearing and settlement participant stakeholders evidenced that they did not broadly support a like-for-like replacement system. The clearing and settlement participants expressed a desire for CHESS replacement to deliver service enhancements and business process efficiencies.
- In 2017, ASX held a series of industry working groups to identify the business requirements that stakeholders thought should be considered for CHESS replacement and their relative prioritisation. These working groups had diverse membership and included custodians, brokers, clearing and settlement participants, industry associations as well as the three largest share registries.
- In April 2018, ASX asked industry stakeholders if there were any other business requirements they wanted considered for CHESS replacement that were not already captured by the industry working groups held in 2017.
- In September 2018, ASX confirmed the Day 1 scope for CHESS replacement based on industry feedback received through the consultation processes undertaken in 2017-2018.
To support the changes in business requirements for CHESS replacement identified through industry consultation, ASX carried out three detailed public consultation processes on draft proposed rule amendments between late 2019 and 2021.
- During the consultations, share registries raised concerns regarding some of the proposed solution designs for the service enhancements included in the Day 1 scope, which clearing and settlement participants had sought. These related to dividend and distribution reinvestment plan (DRP) elections, bonus share plan (BSP) elections and electronic acceptance and payment for entitlement offers.
- In response to this feedback, ASX put forward changes to the solution design for the DRP and BSP elections. In addition, the proposed functionality for electronic acceptance and payment for entitlement offers was not included in the Day 1 scope for the replacement system.
- More broadly, ASX actively made changes to proposed rule amendments based on industry stakeholders’ feedback in several other areas.
- Further detail on the ASX’s engagement with industry stakeholders on the CHESS Replacement Project from 2016 to 2023 is available in the ASX answer to question on notice four on the committee’s website.
The new Advisory Group
7.54To address the stakeholders' concerns about project governance and stakeholder consultation, the ASX recently established a Clearing and Settlement Advisory Group (Advisory Group) at ASIC's request. On 14 July 2023, ASIC indicated in a media release that it had requested that ASX establish a high-level industry advisory group to support ASX’s CHESS Replacement Project. It was proposed that this group be independently chaired and advise on significant strategic clearing and settlement issues relating to cash equities trading in Australian markets with a focus on the CHESS Replacement Project.
7.55ASIC indicated that:
The Advisory Group will be a crucial mechanism for stakeholders to input into the governance of ASX Clear and ASX Settlement on strategic issues and the CHESS Replacement Project.
ASIC has set clear public expectations of the ASX on the clearing and settlement Advisory Group.
Any final decisions on strategic issues on the CHESS Replacement Project will be made once the Advisory Group has sufficient information and time to consider and provide any recommendations and for ASX Clear and ASX Settlement to respond. The regulators must also be briefed.
The effectiveness of the ASX's stakeholder engagement is critical to restoring trust and confidence in the ASX's CHESS Replacement Project.
ASIC will use its powers, including its new clearing and settlement service rule-making powers, if required, to underpin the effectiveness of the Advisory Group.
In taking regulatory action concerning the ASX, ASIC insists on transparency, including publishing assurance reports, reviews, and special audits.
ASIC has worked closely with the RBA on its oversight of the ASX, including on current CHESS and the CHESS Replacement Project.
7.56Subsequent developments and actions for the Advisory Group included:
The proposed Advisory Group was discussed at an industry roundtable on 2August 2023.
The ASX appointed Mr Alan Cameron AO as the independent chair on 3August 2023.
A preliminary meeting occurred on 31 August 2023.
The first formal meeting was on 5 October 2023.
The Advisory Group communique on 11 October 2023 indicated that the independent chair would report the Advisory Group’s discussions and conclusions to the ASX Clear and ASX Settlement boards.
The Advisory Group met on 9 November 2023.
The Advisory Group communique on 20 November 2023 indicated that the Advisory Group:
Had considered the CHESS Replacement Project product-based solution proposed by the ASX, including, the preferred vendor and product, the appointment of solution integrator and the staged implementation approach.
Advised the ASX that the Advisory group considered that the ASX was in a position to proceed with decisions on the new high-level solution design.
the Advisory Group was supportive of selecting a vendor product that minimises the impact on the industry by supporting the standard messaging interfaces developed for the previous iteration of the project and accommodating features of the Australian market without significant customisation.
The ASX indicated that stakeholder input on the project objectives and scope via the Advisory Group and Technical Committee had been critical to the 20 November 2023 announcement of a product-based solution.
7.57The committee was concerned about the potential for conflicts of interest with the ASX CEO, who would be part of strategic decisions by the ASX, being a member of the Advisory Group scrutinising those decisions.
7.58Mr Alan Cameron AO, indicated that the Advisory Group had considered the potential conflict of interest and was addressing it by splitting the meeting into two sessions, one with and one without the ASX CEO present:
We have a private segment of that meeting which Ms Lofthouse excused herself from, and she was happy to do that. We had previously discussed that it probably would be necessary from time to time for her to do that. While she is a member of the group, and in my view I think that is appropriate, it is also appropriate that the group from time to time meet without her in the room—so, has already.
…there will be a record of when she's there and when she's not. It will be clear whether she is privy to a decision in the sense that she was in the room for the decision being taken or whether she excused herself simply to allow a free discussion to occur without any influence from her being in the room. I think we're perfectly capable of that, because of the informality of the group.
7.59The CEO of ASX Ms Helen Lofthouse, also responded and commented on measures to manage the potential conflict by the ASX CEO leaving the room when the Advisory Group needed to deliberate on its decisions in private.
7.60MsLofthouse also noted the benefits of the ASX attending at other times to inform the Advisory Group on the ASX strategy and approach:
I think it is obviously useful to have representation of the ASX group there because we are able to provide insights to the group on strategy and so on. But certainly we have given careful consideration to the need to make sure that group also has the opportunity to consider matters sometimes without ASX in the room. So the approach we have taken is to make sure that we schedule periods during the advisory group meetings when there is the opportunity for private discussion, and certainly that happened at the last advisory group when there was an extensive private discussion and I left the room for that. I am completely comfortable with that and want to encourage the group to have that opportunity where appropriate, but also that they have me there when needed to make sure that I am able to answer questions and help with the discussion.
7.61The ASX also responded to questions on whether ASX could effectively provide information to the Advisory Group without being a member:
Certainly when we reviewed the make-up of the committee, including on review with the regulators, we did feel that it was important to have that ASX expertise and representation in the group.
Committee view
7.62The committee thanks inquiry participants for their views on the ASX governance and stakeholder engagement for the CHESS Replacement Project. The committee observes that governance and stakeholder engagement have been long-running issues for the ASX and the CHESS Replacement Project. The committee also notes that the ASX has indicated its willingness and made progress on implementing the large number of recommendations from the numerous external reviews.
7.63The committee observes that the market structure and competition challenges have been well-known to Treasury, ASIC, and the RBA for over a decade. It arguably should have been foreseeable by those agencies that difficulties in developing an industry consensus or compromise on the requirements for the CHESS Replacement Project may affect the project. Further, Treasury, ASIC, and the RBA should likely have been more proactive in establishing a governance mechanism for those issues and providing the project a better chance of success. It was unrealistic to assume that the ASX, as a commercial entity, could or would develop an appropriate governance framework by itself.
7.64The lack of a mechanism to ensure industry participant issues had adequate ventilation at a strategic level, with transparent decisions and everybody moving forward, has most likely limited the CHESS Replacement Project. The committee welcomes the establishment of the Advisory Group and its work to assist the ASX in resetting the CHESS Replacement Project. The committee hopes that the Advisory Group continues to be an effective mechanism and that ASIC, the RBA, and the Treasury pay close attention to future developments. The committee welcomes the inclusion of the ACCC in supervising competition in clearing and settlement (as discussed in Chapter 2), noting that the legislated scope of its role is limited. The committee also observes the roles that ASIC and the RBA have for competition in clearing settlement are limited.
7.65The committee welcomes the updated 2023 ASX Code of Practice, and that the ASX’s compliance with the ASX Code of Practice is audited annually as required by the 2017 regulatory expectations. However, the committee is concerned that the 2017 regulatory expectations provide an exception, which means that the significant issues around governance, technology, and delivery arising from the CHESS Replacement Project were out of scope for the audit. The committee considers that the above exception seriously diminishes the value and credibility of the regulatory expectations, the ASX Code of Practice and the audit. Hence, the committee recommends that the Council of Financial Regulators give serious consideration to amending the regulatory expectations and the external audit requirement to remove the exception.
7.66The committee recommends that the Council of Financial Regulators amends the 2017 regulatory expectations for Conduct in Operating Cash Equity Clearing and Settlement Services in Australia so that technology, governance, and delivery issues such as those that occurred for the CHESS Replacement Project are within the scope for the annual external audit of the ASX’s compliance with the ASX Cash Equities Clearing and Settlement Code of Practice.
Senator Deborah O'Neill
Chair