‘Collective failure’: Watchdog ASIC takes court action over ASX’s bungled CHESS clearing system

The corporate watchdog has accused stock exchange operator ASX of making misleading statements about the progress of its failed project to replace an antiquated transaction clearing system.

In another sign of a strained relationship between Australia’s main market operator and regulator, the Australian Securities and Investments Commission is attacking re-assurances given by ASX that included the project was “going well”.

ASIC’s Federal Court action is focused on announcements made on February 10, 2022, claiming that the Clearing House Electronic Subregister System replacement project was “on-track for go-live” in April 2023.

ASX revealed in late March 2022 that there was a strong likelihood this deadline would not be met and it then called in consultants Accenture, whose review led to the project being shelved and $250 million of write-offs by ASX.

In a statement unveiling the legal action on Wednesday, ASIC chair Joe Longo said the watchdog believed “there was a collective failure by the ASX board and senior executives at the time”.

“ASX’s statements go to the heart of trust in the integrity of our markets,” Mr Longo said.

“Companies and market participants rely on what the ASX says about its operations to make their own decisions and investments. We expect the ASX to be a place to list and invest with confidence.

“When the ASX falls short, it has wide ranging consequences across the market.”

The legal action comes five months after ASIC revealed ASX had paid a penalty of $1,050,000 following an ASIC investigation into its compliance with the market integrity rules.

Unveiling the hit on the ASX, ASIC also pointed to criminal charges it laid last month against four people allegedly involved in a pump and dump scheme using social media platform Telegram.

“These proceedings underscore ASIC’s commitment to ensuring all market participants comply with the law,” ASIC said in its statement unveiling the latest ASX action.

CHESS is a major transaction and share transfer clearing system unveiled in 1994, replacing a paper-based system that dated back to before the creation of the electronic Australian Stock Exchange.

The award-winning transaction clearing system underpinned brokers floating their exchange in 1998 as the company now formally known ASX Ltd.

ASX decided to replace the CHESS system in 2016 and it originally set a target of April 2021 to have the project working.

But it revealed in March 2020 that it would be re-planning the new system and set a new target date of April 2023.

In a media release unveiling the Federal Court action, ASIC points to ASX’s consultants Digital Assets giving the project a high risk “red RAG” status from June to November 2021.

Red RAG is information technology jargon that delivers projects red, amber or green status — with green generally meaning it is good to go.

ASIC claims the RAG status for the CHESS replacement indicated “there were material risks to its delivery in the time frames required” and that potential fixes were not in place.

ASIC said the ASX recorded the red RAG status in December 2021 and it was delivered to the company’s audit committee on February 3, 2022.

The broker published its half-yearly report a week later that contained the allegedly misleading representations about the project tracking to plan and progressing well.

Mr Longo said his agency would allege the true state of affairs on February 10, 2022, was the project was not “progressing well”.

‘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,” he said.

“The CHESS replacement project must be managed effectively and transparently. Failure to do so can lead to a lack of confidence in Australia as a market to attract investment.”