The corporate regulator has taken the unprecedented step of imposing conditions on the licence of the Australian Stock Exchange as the market operator moves to a new technology system that uses blockchain technology.
It comes after confidence in the ability of the ASX, which is a key piece of Australia's financial infrastructure, to process an average of about 1.5m share trades a day was shaken by a botched technology upgrade last November that stopped trade for a day.
The Australian Securities and Investments Commission's action against the ASX, one of the top 20 exchanges in the world, is likely to be closely watched by overseas regulators that oversee markets that also need regular technology upgrades.
"The Australian economy, economies in general, are very reliant on markets being liquid and being open when they're supposed to be open," the Asic chairman, Joe Longo, told Guardian Australia.
"From the international perspective of the Australian market, people expected it to be open and it wasn't, so for people who were managing superannuation funds, managing people's wealth and assets, it's really a critical part of the Australian economy to have a fully functioning robust stock exchange."
Longo said that the ASX failed to follow its own risk management procedures when upgrading the system at the centre of the November outage, ASX Trade, "so things went wrong".
"They just weren't careful enough," he said.
Asic has not decided to pursue allegations against ASX that it breached its market licence. Instead, ASX has agreed to changes to its licence.
Longo said taking ASX to court would mean it could only deal with the November outage but striking a deal with the exchange meant the new licence conditions could also take in its planned upgrade to the crucially important system that records ownership of shares, Chess.
The Chess project, which has been repeatedly delayed, uses the blockchain or "distributed ledger" technology that is behind cryptocurrencies including bitcoin - something that has never before been attempted by a stock exchange.
"I think the short answer is yes we do have confidence that ASX is going to deliver this system," Longo said.
"The way we have confidence is by the kind of licence conditions we impose today and ensuring there's an assurance framework that gives us confidence they are going to deliver."
He said the shift to using blockchain, or "distributed ledger", to record share ownership was "in everybody's interest because that technology is more resilient, it's more robust, and it'll be able to handle more trades".
In a report into the November outage released on Wednesday, Asic said it showed "the serious deficiencies in ASX's and market participants' ability to limit the impact on overall liquidity highlighted by the outage despite some of these deficiencies having been raised by Asic" in 2016.
Asic said the testing ASX did of the system it was upgrading, ASX Trade, was not comprehensive enough to meet the exchange's "near zero appetite for service disruption".
Under the new licence conditions, the ASX must appoint an independent expert to oversee technology programs, including the Chess upgrade.
The project was championed by the previous ASX chief executive Elmer Funke Kupper, who first floated the idea of a blockchain-based system in 2015.
However, the project has been repeatedly delayed, in part due to the Covid-19 pandemic, and is now set to go live in April 2023.
Asic also requires the ASX to provide it with attestations, board and senior management and assuring the regulator that proposed technology changes are ready to go, a fortnight before new systems including the Chess replacement go live.
And the ASX is also required to provide Asic with quarterly updates on its progress in implementing recommendations made by IBM in a report commissioned by the regulator after the November outage.
Dominic Stevens, the ASX chief executive officer, said: "The new licence conditions are practical and are aligned with the action ASX is taking to improve the way we operate our business.
"We are pleased that Asic's investigation into the market outage is closed and that no breach of ASX's licence conditions was found," he said.
"However, we will continue to invest to strengthen the quality of our infrastructure and reduce operational risk."
