Australian central bank blasts ASX for trading settlement failures

By Scott Murdoch

SYDNEY (Reuters) -The Australian Securities Exchange must make "foundational changes" to its governance, culture and risk management after last year's trading settlement failure, the country's central bank said on Wednesday.

The Reserve Bank of Australia also warned ASX's clearing and settlement units still fall short of key regulatory standards and pledged to monitor progress closely.

The central bank, which has oversight of the clearing and settlement systems, said in a statement following its investigation into the settlement failures it would consider further regulatory responses if ASX did not improve.

The RBA's criticism underscores the growing regulatory pressure on ASX, by far Australia's biggest equity market operator, to ensure the stability of essential financial systems.

"ASX is not currently meeting the regulators' expectations for an operator of critical national infrastructure," said RBA Assistant Governor (Financial System) Brad Jones.

"Resilient and secure clearing and settlement facilities are crucial to the stability of the Australian financial system."

ASX needed to improve its risk transformation plan and conduct a review of its business continuity and contingency arrangements in its clearing and settlement division, the RBA said.

The ASX handled an average of 2.56 million equity trades over 21 trading days in August, according to Reuters calculations based on exchange data. The average daily cash market trading value in the ASX's past financial year was A$6.1 billion ($4.04 billion), the company's full-year results showed.

ASX shares were 0.8% lower when the RBA's statement was published and fell further afterward, ending the day down 1.17%. The overall S&P/ASX200 declined 0.9%.

The ASX came under fire in December after deferring a day's worth of trading settlements following a breakdown in its Clearing House Electronic Subregister System (CHESS).

"We are acutely aware ASX must accelerate our progress to rebuild trust with our regulators, particularly following the disappointing incidents of the past year," ASX Chief Executive Helen Lofthouse said in a statement.

Lofthouse added ASX is focused on contingency arrangements for CHESS and has completed some code fixes and memory increases to improve its resiliency.

In June, the Australian Securities and Investments Commission appointed an expert panel to investigate ASX's governance and risk management practices that is due to deliver its findings by March.

The aging all-in-one CHESS system usually settles a trade two business days after a buyer and seller agree to the trade by arranging for money transfers.

Along with settlements, CHESS electronically registers the ownership of shares on its subregister.

ASX had been looking to replace the CHESS software using blockchain-based technology, but abandoned the overhaul in November 2022, six years after announcing it, citing concerns about the product's complexity and scalability.

($1 = 1.5101 Australian dollars)

(Reporting by Scott Murdoch in Sydney, additional reporting Roshan Thomas in Bengaluru; Editing by Harikrishnan Nair and Christian Schmollinger)