The Reserve Bank of Australia (RBA) has urged the ASX to step up its governance and risk management culture following an assessment of its clearing and settlement (CS) facilities.
Each year, the RBA undertakes an assessment of how ASX’s CS facilities are aligning with the central bank’s financial stability standards.
While the CS facilities were rated as having “observed” or “broadly observed” many of these standards in the latest assessment released on Monday, the RBA said that requirements related to governance, risk management, and operational risk were only “partly observed”.
These findings, which cover the period from 1 July 2022 to 30 June 2023, come after ASX decided to pause its CHESS replacement project in November last year.
“The bank welcomes the progress that has been initiated under the new ASX leadership, including increased engagement with regulators and stronger accountability for executives,” commented RBA assistant governor (financial system) Brad Jones.
“However, it is important that ASX address recommendations related to board oversight, the effectiveness of the internal audit function, stakeholder management, and the management of ageing assets.”
As part of its recommendations, the RBA said that the market operator should “redouble its efforts” to ensure that key issues are appropriately raised with the ASX boards.
The central bank also called on ASX to assess and implement cultural changes to remediate the relationship between its internal audit function and its executives.
Furthermore, the RBA recommended that ASX facilitate effective stakeholder engagement, including by actively consulting with stakeholders on the redesign, project and implementation timeline for its troubled CHESS replacement.
Additionally, the central bank said that ASX should prioritise the implementation of short-term controls in order to “mitigate the immediate risks” of ageing assets including CHESS.
The current CHESS was considered to be broadly consistent with the financial stability standards, but the RBA said that high priority should be given to the management of ageing assets supporting CHESS in light of capacity requirements and bottlenecks.
“Given ASX operates critical financial market infrastructure, it is imperative that it continues to conduct its clearing and settlement operations in a way that promotes stability in the Australian financial system,” Mr Jones noted.
ASX pledged to implement all of the RBA’s recommendations in a statement on Monday, while noting that the assessment coincided with a period of “significant change and reset”.
“We accept the RBA’s recommendations in full and acknowledge there’s continued work to do. Many of the concerns outlined by the RBA have already been in focus for ASX, and while some items are well progressed, ASX will now incorporate the work from the new recommendations,” said ASX chair Damian Roche.
“Changes have been underway for more than 18 months and we are cognisant there is more work to do to restore trust. Some of the key changes that have taken place include board renewal and significant change in leadership to underpin the cultural transformation and operational risk uplift at ASX.”
ASX managing director and chief executive officer Helen Lofthouse said the RBA’s assessment aligned with the view of the ASX board that “we are not where we want to be in some key areas”.
“We are making changes to remediate issues and strengthen our overall capability, although we recognise it will take time for these changes to be fully embedded,” she said.
“There is certainly more work to do but we are clear on the path ahead and I’m confident the actions we’re taking will continue to build on the foundations of an enduring and high-quality business.”
In August, ASX committed to implementing all recommendations from an external review into aspects of its CHESS replacement program by June next year. ASX also plans to implement recommendations related to its intra-group conflict management arrangements.
