Executive summary

1.1As part of its statutory inquiry duties under the Australian Securities and Investments Commission Act 2001, the committee has inquired into the regulation of financial market infrastructure and problems with the ASX Clearing House Electronic Subregister System (CHESS) Replacement Project.

1.2In relation to the regulation of financial market infrastructure:

The committee identified significant industry support for the government’s competition in clearing and settlement and financial market infrastructure reforms. Hence, the committee has recommended that the government proceed with those reforms in a timely way.

The committee considered further clearing and settlement reforms proposed by industry participants including pricing and structural incentives, central counterparty interoperability and operational standards, regulator competition mandates, and central counterparty default funds.

The committee also explored other industry proposed reforms for ASX services, including removing the staggered opening of the ASX equities trading, moving to T+1 settlement, access to electronic CHESS statements, regulations for titles and transfers, ASIC’s role in approving ASX operating rules, and fair access to the ASX Trade Acceptance Service.

1.3The problems, pause, and redesign of the ASX CHESS Replacement Project were a significant focus of the committee’s work.

The costs to industry participants in preparing their systems for the new CHESS have been substantial, probably tens of millions of dollars in aggregate. ASX shareholders have suffered the impacts associated with a $250million write-down by the ASX. Acting too late has magnified the costs of the regulatory cleanup by ASIC and the RBA.

The CHESS Replacement Project is a critical component of Australia’s financial market infrastructure and therefore responsibility for it extends beyond the strict legal obligations of the ASX. The CHESS Replacement Project is too important to fail.

The ASX, ASIC, the RBA, and Treasury should have identified and monitored strategic technical risks such as scalability for the CHESS Replacement Project more carefully. The committee considers that the ASX, ASIC, the RBA, and Treasury, should enhance technology skills and experience at the most senior levels, and place less reliance on outsourcing their responsibility to contractors and consultants.

The committee has made recommendations to address the above issues and improve the regulatory supervision of critical financial services technology platforms such as CHESS.