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21-313MR ASIC imposes additional licence conditions on ASX and issues expectations to improve market resilience
ASIC has concluded its investigation and consideration of the November 2020 market outage at the ASX. Additional licence conditions have been imposed on three licences held within the ASX Group. The licence conditions are directed at mitigating risks for future upgrades, with specific emphasis on the oversight of the CHESS Replacement Program, due to go live in April 2023.
‘The ASX outage was a very serious event, exacerbated by subsequent operational issues. The imposition of these licence conditions will confirm that remedial actions are implemented appropriately and efficiently to address these operational issues - including for the critical rollout of the CHESS Replacement Program,’ said ASIC Chair Joe Longo.
ASIC has also released a report into the outage that outlines ASIC’s expectations for market operators and participants, to improve market resilience. The report notes the serious deficiencies in ASX’s and market participants’ ability to limit the impact on overall liquidity highlighted by the outage. ASIC finds this particularly disappointing in circumstances where some of these deficiencies had previously been raised by ASIC in Report 509 Review of the ASX equity market outage on 19 September 2016.
Mr Longo continued, ‘ASIC’s actions today are all about ensuring the efficient and effective future operation of Australia’s financial markets infrastructure. ASX and market participants must act to ensure that the market can function at all times, so that vital sources of capital are available to the economy.’
- Australian market licence of ASX Limited
- Australian CS facility licence of ASX Clear Pty Limited
- Australian CS facility licence of ASX Settlement Pty Limited
The additional licence conditions imposed on ASX’s Australian market licence require remediation of underlying issues with ASX operations that led to the November 2020 market outage. Further, the conditions assign accountability to the ASX board and senior executives for the implementation of the remedial actions and require attestations on behalf of the ASX board that adequate controls, procedures, skills, and resources are in place.
The additional conditions imposed on the licences of ASX Clear Pty Ltd and ASX Settlement Pty Ltd require an independent expert to be appointed as approved by ASIC to assess whether ASX’s assurance program for the replacement of CHESS is fit for purpose, identifying any shortfalls, and reporting regularly to ASIC.
ASX did not oppose the imposition of the additional licence conditions. In addition to the conditions, the ASX board will provide attestations specifying individual executive accountability, with clear links to remuneration consequences. The relevant executives’ interests will be appropriately aligned with the success of any remedial actions, avoidance of any further outage and with any failure to comply with their accountability obligations.
ASIC’s expectations for industry in responding to a market outage
ASIC’s report examined the broader context behind the outage and the subsequent inability or reluctance to maintain trading through other venues. The report outlines ASIC’s expectations of market operators and participants, aimed at ensuring future continuity of operations and trading, especially in the event of a future incident.
ASIC expects market operators and participants to implement the measures set out in the report in order to maintain compliance with their obligations under the law. Critically, these expectations require market participants to have the required certainty and ability to trade on alternative venues in the event of a future market outage. The expectations also require market operators to review their procedures, including for determining session states, such as Enquire or Adjust, in order to facilitate continued participant interaction with their orders during any future outage.
ASIC will be actively evaluating and monitoring the implementation of actions taken in response to this report to ensure that market operators and participants are taking appropriate steps. Failure to implement measures to address the expectations set out in the report may lead to further action being taken under the Corporations Act 2001 and the ASIC Market Integrity Rules (Securities Markets) 2017.
In the week beginning 16 November 2020, following a weekend software upgrade to the ASX equities trading system (ASX Trade), several operational incidents impacted the effective operation of the ASX equity market, including:
- the ASX market outage on 16 November [20-284MR];
- the incorrect pricing and subsequent unavailability of ASX Centre Point orders [20-289MR];
- the degradation and failure of mass-order cancellation functionality; and
- the unavailability of tailor-made order combinations.
Following the outage, ASIC commenced an investigation into whether ASX had met its obligations under its Australian market licence. As a result of the imposition of the additional conditions, ASIC’s investigation has now concluded.
Additionally IBM Australia Limited (IBM) undertook an independent expert review. Its purpose was to examine the ASX Trade software update project and assess whether it met internationally recognised standards or frameworks and relevant securities industry practices. 21-220MR provided an update on that review, including a summary of its conclusions.
ASIC has previously issued Consultation Paper 314 which proposes market integrity rules for market operators and market participants to ensure the resilience of their critical business services. The proposed rules clarify and strengthen existing obligations for market operators and market participants. It is expected that these market integrity rules will be made in early 2022.