ASX scraps blockchain-based CHESS replacement project, loses $250m

The Australian Securities Exchange (ASX Limited ASX: ASX) has scrapped a $250 million blockchain project after an independent review identified significant challenges with its ability to meet legal requirements.

The controversial project was scheduled to replace the legacy CHESS (clearing house electronic subregister system) platform in April after years of setbacks including market readiness and the global pandemic.

However, a recent review by Accenture found it would not be capable of meeting high ASX and market standards.

Significant technology, governance and delivery challenges are believed to be core issues of the blockchain proposal which would threaten to undo the secure and stable environment created by CHESS since its introduction more than 25 years ago.

The ASX will write-off up to $255 million pre-tax in costs associated with the project, which was intended to be used as a world-first example of industrial-scale blockchain use.

Ageing technology

CHESS currently provides all the core clearing and settlement functions for the Australian cash equities market however it is an ageing technology which is believed to be nearing the end of its useful life.

In 2015, the ASX began to evaluate replacement options, with the main considerations being scalability, security and performance according to then deputy chief executive officer Peter Hoim.

“These are important questions that must be answered and we must ensure that the current processes of our equity market can be performed by the new platform,” he said at the time.

“We must engage with our customers to ensure the platform meets existing and new requirements, and with regulators to ensure we continue to comply with the highest regulatory and operational standards.”

Blockchain system

By the end of 2018, the ASX had decided on a blockchain system incorporating Synfini distributed ledger technology (DLT) offered as a cloud service, which would allow flexibility and scalability to ASX customers as their usage grows.

The solution focused on the objectives of improved availability, reliability and performance.

The ASX contracted US blockchain-focused company Digital Asset to help build a prototype solution which was completed in late-2021.

Project review

In September, Accenture was appointed to review the project and found that aspects of the design would contribute to challenges in achieving the objectives.

Specifically, it found the application software was only 63% progressed with an uncertain timeline to completion and there was a complexity in the integated solution design, including the way in which ASX requirements interact with the application and underlying ledger.

The review also identified a number of issues in the delivery lifecycle through to testing, with siloed execution and reporting resulting in “misaligned views” of status on delivery progress, risks and issues.

It determined that “greater consideration” was required regarding the purpose of the consensus layer given the ASX’s position as the central market operator for CHESS.

Scrapping the project

This morning, ASX chief executive officer Helen Lofthouse (who was appointed to the hot seat in August) said the organisation had decided to scrap the blockchain project on the back of the review findings.

“Replacing CHESS is a large and complex undertaking,” she said.

“While the ASX is keen to embrace technology that benefits the market, it is clear we need to revisit the solution design as well as validate and test feedback from the independent review to assess changes required to bring the project to market safely, efficiently and for the long-term.”

Ms Lofthouse said CHESS would stay in place until a suitable alternative had been found.

“Our priority is continuing to maintain the stability of the existing CHESS system, which underpins the smooth operation of our financial markets,” she said.

“In recent years, we have increased our investment in the capacity and resilience of CHESS, and are confident it will continue to serve the Australian marketplace well into the future.”

Best long-term solution

ASX chairman Damian Roche said the organisation remained committed to providing the best long-term clearing and settlement solution for the Australian financial market.

“We began this project with the latest information available at the time determined to deliver a post-trade solution which balanced innovation and state-of-the-art technology with safety and reliability,” he said.

“After further review, including consideration of the findings in the independent report, we have concluded that the path we were on will not meet ASX and market standards we are committed to providing the market with the very best and most viable long-term solution.”

Humbled by error

Mr Roche said the ASX was humbled by its error.

“On behalf of the ASX, I apologise for the disruption experienced in relation to the CHESS replacement project over a number of years  … CHESS is performing well and our investment in it will continue, giving us flexibility to reassess the various pathways for its ultimate replacement,” he said.

“The ASX always endeavours to act in the best interests of the market, and I thank our customers and other stakeholders for their patience and support … today’s decision has not been made lightly.”

New project director

The ASX has appointed technology transformation executive Tim Whiteley to the role of project director for the next phase of the CHESS replacement project.

Mr Whiteley will focus on revisiting the solution design, establishing new project governance arrangements, strengthening vendor management and positioning the project for the next delivery phase.

His role will include selecting delivery partners to help address capability gaps, including those identified by the independent review.

The ASX said it would establish an industry forum to provide input and receive regular status reporting on the project.