Australia’s stock exchange is in huge trouble this week after a major tech failure following a disastrous multimillion upgrade program has left it non-compliant with its risk obligations.

Evidently frustrated regulators have gone public with a press release and letter to the Australian Stock Exchange (ASX) accusing it of risking “the stability of Australia’s financial system” as they downgraded official assessment of ASX compliance with risk standards.

A major problem emerged in late December 2024, when a group of trades failed.

The base cause was bad code in the Clearing House Electronic Subregister System (CHESS) that records trades on the stock market so Australians can be confident in knowing who owns what, who is buying and who is selling.

There was no backup plan for what to do if the code failed.

“The overarching cause was the CHESS memory allocation being insufficient for the number of settlement participants on 20 December 2024” writes the RBA in its official assessment.

“This was due to incorrect logic in the CHESS code for the calculation of the number of settlement participants.

“The incorrect logic has existed since 2014.”

The issue appeared on a Friday and was diagnosed only on the Sunday morning.

The failed trades were put through on the Monday.

'Concerned and disappointed'

The RBA and ASIC are “increasingly concerned and deeply disappointed” at the slackness shown by the ASX in remedying problems that have been identified over the past several years, but the issue seems to have come to a head following the breakdown in December 2024.

“Due to the seriousness of the CHESS incident, the RBA has decided, for the first time, to revise its assessment against one of the [Financial Stability Standards] outside the usual annual cycle,” the RBA wrote in its damning assessment of the ASX’s performance.

Regulators have downgraded the performance of the ASX from “partly observed” to “not observed”, essentially a failing grade in two of the four Financial Stability Standards (FSS).

The changed rating of the ASX. Photo: Supplied

The ASX has shown ample signs of realising the CHESS system is not up to scratch.

In 2017 the idea of replacing it with blockchain was floated.

The ASX spent seven years and $250 million investigating that idea.

However, it ultimately failed.

Now there is a new plan to replace the CHESS system, piece by piece, over the next four years.

But that seems to be not good enough for the regulators as the old system is evidently straining.

“In the regulators’ view, the incident and ASX’s response demonstrates that the pace of change at ASX is too slow,” writes the RBA.

According to the law

RBA and ASIC are responsible for the stability of Australia’s financial system under the law.

ASX is held to a very high standard because it represents a single point of failure for the Australian financial system.

RBA describes it as “a vertically integrated monopoly provider.”

ASX is a public company with a market capitalisation of $3.6 billion.

It is itself listed on the ASX and in the first hour of trade on Monday its stock price fell around two per cent.

On Monday morning, ASX released a statement in response to the downgraded compliance assessment.

“We continue to invest in current CHESS, and while the settlement incident was unprecedented, we need to draw lessons from it and ask ourselves how we could do better,” said CEO Helen Lofthouse.

“We recognise we have to do more to lift capabilities in key areas such as risk management and business resilience.”

Company chairman David Clarke added, “We are absolutely committed to rebuilding confidence in ASX.”