NZSA Disclaimer
The ASX is often seen as a happy hunting ground for New Zealanders looking to broaden their investments. It offers a plethora of exchange traded funds, but is perhaps better known for the exposure it provides to the mining and banking sector.
It’s why most Kiwi investors should be really interested in the final report issued by the Australian Securities and Investments Commission (ASIC) last week. This followed a draft report issued in December; but if the ASX was hoping for a toned-down version of ASIC’s findings, they were left wanting.
Read the full report here.
The final report is as close to a regulatory “line in the sand” as we are likely to see in public markets.
The review was triggered by a series of technology failures, most notably the aborted CHESS replacement. However, the conclusions go far deeper. The report outcomes are less about a review into a failed technology programme, than a critique of ASX governance structures and culture.
Short-term Profit vs Long-term sustainability
At its core, ASIC’s conclusion is stark: ASX prioritised shareholder returns over the resilience of critical market infrastructure.
Over an extended period, high dividend payouts and cost discipline came at the expense of re-investment. The result was predictable; under-investment in systems, repeated outages, and ultimately a failed transformation programme.
For a systemically important market operator, this is more than a strategic mis-step. It is a failure to recognise its ultimate purpose.
A listed exchange cannot behave like a conventional listed company, in that it is required to balance two key roles: its commercial imperatives and a credible enforcement function. The former is of interest to the exchange and its investors, while the latter is ultimately about creating confidence amongst investors.
No confidence = No investors = no exchange.
In this regard, NZX investors are well-served, with the company offering a strong model that serves both functions. The establishment of NZ RegCo as a ‘first line’ market enforcement organisation has markedly improved NZX compliance outcomes. While NZ RegCo is a wholly owned subsidiary of NZX Limited, it operates with an independent Board and a stand-alone organisation structure.
While the ASX has a compliance function, led by the newly-appointed Lucinda McCann, it still operates within the construct of the ASX ‘commercial’ business; there is no separate regulatory board or oversight; while NZ RegCo offers structural independence of market enforcement, ASX does not.
Governance and Culture
ASIC’s critique of governance is equally direct. The ASX board and structure were not configured to manage the inherent conflict between commercial returns and public-market obligations.
This manifested in blurred accountability between group-level objectives and licensed market functions, insufficient independence in clearing and settlement governance, and a lack of structural separation between profit and regulatory responsibilities.
Perhaps the most damning element of the report is cultural. ASIC describes ASX as “insular and defensive”, with a tendency to downplay issues and rely on short-term fixes.
This is not a peripheral issue. It is the connective tissue behind weak escalation of risk, poor stakeholder engagement, and repeated execution failures.
The inquiry also found that risk management was not embedded in decision-making, but instead treated as a compliance overlay. Combined with capability gaps, particularly in large-scale technology delivery, this left ASX poorly equipped to execute its most critical transformation.
The failure of the CHESS replacement programme is discussed as an inevitable outcome of deeper organisational weaknesses.
The way forward
The most important conceptual shift in the report is ASIC’s framing of ASX’s role. ASX, it argues, failed to act as a steward of critical market infrastructure.
Instead, it operated as a commercial platform; compliant, but not aspirational.
ASIC is not calling for incremental change. It has effectively demanded a strategic reset at ASX including governance restructuring, greater independence at key operating levels, increased capital buffers, sustained investment in systems and capability, and ongoing regulatory oversight.
The NZX is in the fortunate position of having learned these lessons in ways that offered far less long-term implication, suffering technology issues during 2020. The first series of incidents was creating by increasing trading volumes during the Covid-19 lockdowns, while the second incident was a malicious distributed denial-of-service attack (DDoS). This latter incident led to trading halts as the sheer volume of attacks crowded out the possibility of legitimate trades.
The subsequent review carried out by the Financial Markets Authority noted that NZX had failed to meet its licensed market operator obligations, requiring a formal remediation programme and improvements to systems. For its part, NZX brought forward its technology investment plans and strengthened its cybersecurity practices.
A key difference is that while the earlier NZX issues were exposed thanks to “external” factors, the ASX has contrived to create this situation all by itself. For both countries, it highlights the nature of their respective exchanges as critical infrastructure, with failures and outages becoming increasingly unacceptable.
For New Zealand investors, there is plenty of opportunity on the ASX. No doubt, NZX would love the vibrancy and opportunity of their market. But as the ASIC report highlights, this opportunity also comes with structural trade-offs. Ultimately, it’s in investors interests that the ASX gets it right.
And for once, there is plenty to learn from their little sibling across the Tasman.
Oliver Mander