Australia’s financial regulator has initiated legal proceedings against the Australian Securities Exchange (ASX), accusing Australia’s largest stock exchange of making misleading statements about a major overhaul of an important financial instrument.
The accusations relate to the replacement of the Clearing House Electronic Subregister System (CHESS), ASX’s electronic book entry register of approved securities holdings. The exchange has been progressing through a plan to replace the system since 2022.
However, the project has not been meeting its initial targets, with the first ‘go-live’ date set for April 2023. A series of technical issues have held up the replacement, which has since seen an overhaul.
The first plan for the CHESS replacement was for a blockchain-based system to be introduced. This has now been abandoned in favour of a more conventional system to underpin Australia’s book registry, essential for the facilitation of stock transactions.
The Australian Securities and Investments Commission (ASIC) has now taken aim at ASX for making misleading statements about progress made during this time. A statement on 10 February 2022 asserted that the project was ‘on track for go live’ in April and was ‘progressing well’.
ASIC alleges that these statements implied the project was on track for the April 2023 launch, which was not the case. The regulator has not decided what financial penalty it will seek against ASX.
ASIC Chair, Joe Longo, said: ‘ASX’s statements go to the heart of trust in the integrity of our markets. We believe this was a collective failure by the ASX Board and senior executives at the time.
‘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.”
ASIC alleges that by issuing misleading statements, ASX had breached terms of the ASIC Act 2001 concerning misleading or deceptive conduct. The significance of the CHESS system, and its replacement, to Australia’s financial infrastructure is the regulator’s main concern.
As the system is critical to facilitating the clearing and settlement of trades on ASX, Australia’s leading stock exchange and the 25th largest globally by market cap, ASIC is also concerned with how misleading statements about the replacement’s progress could impact market confidence and potential investment.
Longo explained: ‘It’s critical importance was all the more reason ASX needed to ensure it told the Australian public the truth about how the project was tracking and whether it would be completed on time.
“We allege that the true state of affairs as at 10 February 2022 was that the project was not ‘progressing well’, contrary to ASX’s announcement. 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.
“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.”
Responding to ASIC’s allegations, ASX stated that it will keep the market informed regarding any future developments in accordance with its disclosure obligations.
Helen Lofthouse, ASX Managing Director and CEO, said: “We recognise the significance and serious nature of these proceedings. We cooperated fully with ASIC’s investigation and are now carefully reviewing and considering the allegations.
“We play a critical role at the centre of Australia’s financial markets, and continue to focus on supporting and delivering for customers. We are committed to taking ASX forward, and have made strong progress as an organisation over the past two years.”
The CHESS replacement is not the only financial overhaul taking place in Australia, and is not the only one where delays and slow progress have caught some attention. The country’s banking sector has raised concerns about lack of engagement with the Customer Data Right (CDR) four years after its implementation.
Other major areas of financial regulation in Australia at the moment include buy now, pay later (BNPL) and digital ID. The government has moved to include BNPL firms under credit legislation, introducing a Bill to Parliament to do so, whilst legislation to introduce digital ID received royal assent a few months ago.