Australian Stock Exchange Confirms Major 5-Year Technology Modernisation Program

The Australian Stock Exchange (ASX) has entered into an agreement with Indian-based, global technology services provider TATA Consultancy Services (TCS) to deliver the technology to replace the CHESS computer system. CHESS is the acronym for Clearing House Electronic Subregister System and is the software used by the ASX to effect settlement of share transactions and to record shareholdings.

The CHESS replacement is an essential component of the ASX’s 5-year technology modernisation program. Phase one of the project (clearing) is estimated to cost up to $125 million. Clearing involves checking and double checking the terms of each ASX transaction immediately after the trade, but before settlement. Settlement is a more complex process in which securities are simultaneously transferred in exchange for money. The cost of phase two of the modernisation project (settlement and sub-register) is likely to be substantially more than the cost of phase one. The cost will be determined in late 2024 following stakeholder consultation.

Indicative timeframe for implementation of the first release (the clearing service) is 2026 and the second release (settlement and sub-register services) is 2028 or 2029.

The technology service provider, TCS, is a recognised global technology services provider that currently provides services in Finland, South Africa and New Zealand and is currently implementing a clearing and settlement product similar to the ASX replacement system in Canada.

The ASX plans to issue a corporate bond of up to $300 million to fund its 5-year technology modernisation capital expenditure requirements, although no further details have been provided so far. Proceeds from the bond issue will be sufficient to fund the proposed technology expenditure as well as enable ASX to maintain its dividend payout ratio of between 80 and 90 percent of underlying net profit after tax.

ASX is key to stability of the Australian financial system

The ability of the ASX to process, clear and settle securities and derivative transactions reliably and efficiently is fundamentally important to the Australian financial system and the broader economy.

This is why the RBA has determined performance and compliance standards to ensure that Clearing and Settlement Facilities (CS) are conducted in a way that promotes the overall stability of the Australian financial system. The RBA conducts annual assessments of how well the ASX CS facilities are complying with their statutory obligations to comply with those standards and to do all other things necessary to reduce systemic risk.

The ASX CS facilities barely gained a ‘pass mark’ according to the RBA’s assessment against the Reserve Bank’s Financial Stability Standards (FSS) that was released on 9 October 2023. The ASX CS facilities were rated as having ‘observed’ or ‘broadly observed’ most of the FSS. The RBA assessed that the ASX CS facilities ‘partly observed’ requirements under the FSS related to Governance, the Framework for the Comprehensive Management of Risks, and Operational Risk. The RBA went on to recommend that the ASX should facilitate effective stakeholder engagement, including by actively consulting with stakeholders on the solution design, project, and implementation timeline for the CHESS replacement and prioritise the implementation of short-term controls to mitigate the immediate risk of ageing assets.

In other words, the RBA holds concerns about ASX’s risk management culture and expects the ASX to place a higher priority on the remediation of ageing assets. ASX should also focus on the delivery of its cyber strategy and security capabilities in line with the rapidly changing threat landscape.

A safe and reliable transition from the incumbent CHESS platform to the modernised clearing and settlement system is critical to ensure the ongoing stability of the Australian financial system. Market participants are looking for clear evidence that progress is being achieved on this critical technology, service and security issue.