The introduction of a new blockchain system to finalise local equity trades has been pushed back by the Australian Securities Exchange (ASX) due to stakeholder concerns and impacts of the coronavirus pandemic.
The replacement of the legacy Clearing House Electronic Subregister System (CHESS) with distributed ledger technology (commonly known as blockchain) was originally targeted for year end, at which time the ASX would become the first mainstream exchange in the world to migrate one of its core services to a blockchain-based system.
But concerns raised last month by registry company Computershare (ASX: CPU) on the project’s perceived lack of clarity put pressure on the ASX to delay its move.
Lack of information
Computershare said it had not been given the necessary technical, operational and regulatory information on how the new system would operate or the fees that would be charged by the ASX for existing and new services.
It originally lobbied for a delay until April 2023 which it claimed would allow enough time to address the risks of the project, particularly in light of complications introduced by the COVID-19 pandemic.
“The ASX should focus on its core systems rather than prioritise the development of new commercial services,” Computershare said.
“In order to get this project back on track, we really need a robust governance framework which isn’t there today and at the end of the day, we need to take a look at the timeline.”
On 30 June, ASX deputy chief executive officer Peter Hiom announced the revised “go-live” date of April 2022.
“We have listened to the diverse views of stakeholders and accommodated feedback on timing, user readiness and changes to functionality [and] we have been very mindful of the challenges the industry faces during COVID-19,” he said.
“The recent period of record trading activity and volatility, and the prevalence of manual and paper-based processes in many back offices across the industry, have underlined why the implementation of the next generation of technology to support the digitisation of Australia’s equity market is a priority.”
Cash equity market
The development of CHESS 25 years ago enabled the dematerialisation of the cash equity market (the conversion of physical shares into an electronic format); a move to a T+5 (trading day plus five days) settlement; and improved the general efficiency and effectiveness of post-trade processing in Australia.
It has become the ASX’s core system which manages clearing, settlement, asset registration and other post-trade services considered critical to the orderly functioning of the market.
In 2016, the ASX confirmed it had commenced a project to replace CHESS with distributed ledger technology (DLT) developed by US-based blockchain start-up Digital Asset in an effort to cut operational costs and boost transaction efficiency.
In 2018, chief executive officer Dominic Stevens said distributed ledger technology could potentially save the ASX as much as $23 billion.
“At present, equity clearing and settlement costs the industry roughly $100 million alone, and the total cost of all communications and other issues to the “super industry” is closer to $23 billion,” he said at the time.
“All day every day, participants send messages back and forth to the CHESS database to make sure they are perfectly reconciled with it [and] this process is prone to errors and expensive to fix.”
These are problems that a distributed ledger could solve.
“With the new system, participants will run nodes instead of sending messages, and connect to the whole database instead of having many “disparate databases,” which will help to eliminate errors,” he said.
“Those customers who don’t want to run nodes will still be able to receive messages in a similar fashion to how they do today.”
Changing over to DLT would provide “tremendous value by being a great business enabler for our customers, and a significant enabler of innovation for issuers and investors”.
In 2018, the ASX moved its target DLT date for the first time, pushing it from end-2020 to mid-2021 following concerns by stakeholders such as clearing and settlement participants, payment providers and market operators that the date might not be achievable “given the significance of the technology change”.
They said the new system featured “too much functionality being implemented in too short a timeframe”, resulting in increased project risk and complexity.
In March this year, the ASX gave notice that the timetable was again under review but said it would wait until June to commence consultation, allowing users to focus on their day-to-day operational activities during the “challenging COVID-19 pandemic”.
The extended timeframe also enabled the ASX to assess the impact of the pandemic, requests for changes, and the ability of all participants to commence the operational readiness phase of the project.
“Recent market volatility and activity levels have reinforced why CHESS replacement is an important priority to complete on a timely basis [and] it is also important the ASX does so safely,” it said.
“As a result, an additional 12 months have been included for the completion of this important initiative, which moves the target live date from April 2021 to April 2022.”
The new date is subject to industry consultation, feedback and finalisation processes by end July.