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16-454MR ASIC reports on ASX equity market outage in September 2016
ASIC has released a report on the findings of its review of the ASX outage that affected the operation of the Australian equity market on 19 September 2016. It provides a whole-of-market perspective, with observations on how ASX and other important stakeholders responded on the day.
The outage highlighted the fact that despite considerable market developments in Australia in recent years, ASX's trading system remains pivotal to the functioning of our equities markets.
A general lack of confidence on the day resulted in trading drying up, with very little liquidity shifting to Chi-X’s competing market. A key benefit of market competition is the availability of an alternative market when ASX is unavailable. As part of our review we identified changes that will better assist confident trading to continue as soon as possible when one part of the market is not performing as expected.
ASIC Commissioner Cathie Armour said, ‘Well-functioning financial market infrastructure is critical to the integrity and reputation of the Australian equity market and the trust and confidence investors have in it. As the primary equities market in Australia, ASX has a critical role to play.’
ASIC’s review found that, in responding to the outage, ASX broadly adhered to its existing procedures for incident management. There are, however, some areas where ASX could enhance its arrangements to support technology resilience and the robustness of the wider Australian equity market. In some important areas, market participants can also take action to support these improvements.
The report makes a number of recommendations – for both ASX and market participants – designed to improve the resilience and robustness of the wider market and to promote confidence that any future incidents will be managed effectively. They include recommendations for ASX to:
- map the dependencies that stakeholders have on ASX (e.g. listing function) and mitigate the effect of system failures on these stakeholders
- review when it is appropriate for all or a subset of securities to be available for trading and consider whether the open rotation process is still necessary
- strengthen business continuity and IT disaster recovery, including system testing and recovery procedures, and a repository of documentation
- implement comprehensive and robust technology status monitoring, including automated data-integrity checking processes and system-monitoring alerts
- enhance its key enterprise architecture documentation to more fully describe ‘current’ and ‘target’ states for business processes, systems, data and information flows
- review its communication strategy, including mechanisms to communicate the status of infrastructure that other market operators are dependent on and for a ‘single source of truth’ for the wider market, and
- review ASX’s operational risk arrangements, including the ‘four eyes’ principle, pre-open period and trade cancellation policy.
ASIC also identified areas where market users could contribute to a more resilient and robust market. Market participants should:
- review their arrangements for dealing with market outages, including the operation of best execution policies, algorithms and smart order routers, and arrangements for undertaking and reporting crossings, and
- review their own system-preparedness for managing market outages, including participation in market operators’ business continuity testing.
ASX has already identified a number of actions to enhance its incident management capabilities and technology resilience. ASIC understands many market participants are also reviewing their preparedness for managing market outages.
Commissioner Armour said, ‘The pace, complexity and dynamic nature of the Australian market and the important role of market infrastructure in its integrity and reputation continues to grow and evolve. ASX Group is embracing these developments with an expansive technology investment agenda.’
For these reasons, ASIC will undertake a wider review in 2017 of the operational and technological risk management arrangements across ASX Group.
ASIC’s report also foreshadows an intention to consult in 2017 on making market integrity rules on the technological and operational performance of market operators.
Under the Corporations Act 2001, market licensees are required to operate a market that, to the extent reasonably practicable, is fair, orderly and transparent, and to have sufficient resources (financial, technological and human) to operate the market.
On 19 September 2016, ASX’s equity trading system (ASX Trade) experienced a hardware failure, which triggered events that delayed the opening of the ASX market and caused it to close early. It also affected the operation of the Chi-X market and caused considerable uncertainty among market users.
ASIC reviewed the incident, drawing on:
- ASX’s incident report, detailed follow-up discussions and extensive documentation provided by ASX
- discussions with Chi-X, market participants, fund managers and data vendors
- our analysis of relevant trading activity, and
- perspectives from regulators in major jurisdictions, with particular focus on their approach to incident management and equity market structure.