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ASX to improve conflict of interest policies amid CHESS replacement

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An expert report on ASX’s intra-group conflict management arrangements has made 13 recommendations.

Law firm Herbert Smith Freehills has recommended improvements relating to how the ASX Group identifies and manages conflicts between its commercial interests and the general licence obligations of its subsidiaries, ASX Clear and ASX Settlements.

In its expert report, which was produced following a request by the Reserve Bank of Australia (RBA) last year and focused on the governance of CHESS as well as the ASX’s troubled CHESS replacement, Herbert Smith Freehills provided an overall positive assessment.

The law firm said that “the existing framework for conflict identification and management within ASX Group is sophisticated and consistent with the framework we would expect from a listed group of the complexity and scope of potential conflicting operations of the ASX Group”.

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However, noting “the scope of the advice we have been asked to provide, the critical financial market infrastructure nature of CHESS, and the importance of compliance with the licence obligations of ASX Clear and ASX Settlement”, a total of 13 recommendations were made.

These include updates to the ASX’s policy and handbook for conflicts management, specific training for identifying and managing intra-group conflicts and more frequent meetings between non-ASX clearing and settlement directors and the RBA and the Australian Securities and Investments Commission (ASIC).

“This report demonstrates that improvements we’ve made to governance are making a difference,” ASX chairman Damian Roche said in a statement.

“We need to be transparent about the work we’re doing and I’m hopeful this report gives further confidence to our stakeholders that we have appropriate conflict management arrangements in place.”

The ASX noted that it had introduced a number of improvements to its governance framework during the past two years, including in response to recommendations made in the RBA’s 2021 Financial Stability Standards Assessment Report.

Mr Roche added that he has remained focused on continuing to improve the ASX’s governance arrangements since becoming chair in 2021.

“I am also keenly aware that we need to help our stakeholders better understand our governance arrangements, including those in place to identify and manage potential intra-group conflicts relating to CHESS and CHESS replacement,” he continued.

“The public release of today’s report should underscore our commitment for increased transparency and engagement.”

The RBA outlined a number of expectations in a letter to the ASX last December, including that it “seek external expert advice to identify the conflicts between the commercial interests of ASX Group Ltd and the financial stability obligations of ASX Clear and ASX Settlement”.

“ASX is to put in place and document a robust framework for managing these conflicts and assurances regarding how the framework is being implemented and observed,” the RBA said.

At the time, RBA governor Philip Lowe said that the central bank expected the ASX would give “the highest priority” to ensuring the stability and resilience of critical infrastructure supporting the country’s cash equity markets.

“This needs to be the focus for current CHESS as well as in rethinking the design and implementation of its replacement. The RBA also expects to see further uplift by ASX with respect to its governance arrangements,” Dr Lowe said.

Last month, ASX detailed its arrangements for supporting and maintaining CHESS to ensure it remains operationally reliable until a replacement solution is implemented.

The report included 27 initiatives related to capacity, availability, performance, and IT management as well as security and continuity, to ensure the ongoing operation of CHESS.

“CHESS was a globally leading system when it was first introduced and I’m pleased to note that it has continued to operate safely and efficiently since then, serving the Australian market well,” said ASX managing director and chief executive Helen Lofthouse.

“ASX considers that its existing governance, investment and management arrangements for CHESS are commensurate with its role in providing critical financial market infrastructure. Today’s report provides comprehensive information to demonstrate this.

“The report is also transparent about the risks and how these are being managed or mitigated, including through an ongoing roadmap of maintenance and support.”

Meanwhile, ASIC chair Joe Longo told the parliamentary joint committee on corporations and financial services last month that its current regulatory approach to the ASX CHESS replacement involves “more intense proactive supervision”.

ASX to improve conflict of interest policies amid CHESS replacement

An expert report on ASX’s intra-group conflict management arrangements has made 13 recommendations.

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Jon Bragg

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.

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