ASX sells stake in IRESS as move from CHESS to distributed ledger technology advances

ASX IRESS CHESS distributed ledger technology DLT blockchain shares
The ASX has entered into an underwriting agreement to sell its 18.6% shareholding in IRESS for $385 million, as the move to a blockchain based trading system accelerates.

ASX Ltd (ASX: ASX) is set to continue its march to introduce blockchain inspired securities trading after grabbing a hefty $161 million gain for selling out of software company IRESS (ASX: IRE).

The operator of the Australian Securities Exchange sold its 18.6% stake in IRESS through investment bank UBS, with 32.2 million shares being offered to fund managers at $11.95 each.

The ASX first bought the stake in IRESS’ initial public offering in 2000 when both companies were focused on the Australian equities market, but ASX chief executive officer Dominic Stevens said the IRESS holding was no longer as strategic because both companies have grown and developed.

IRESS helping automate financial advice

IRESS software is being touted as one of the answers for automating financial advice in the wake of the Hayne Royal Commission while Mr Stevens said ASX was “focused on a multi-layered growth strategy built upon our position as an independent and reliable operator of financial market infrastructure.’’

“IRESS has been an attractive investment for ASX over many years. But we believe now is the right time to divest as it no longer provides the strategic value to ASX that it once did,’’ said Mr Stevens.

While ASX said it was reviewing its options for the proceeds of the sale and will provide an update after completing that review, it has been one of the world’s most active stock exchanges in introducing blockchain-inspired distributed ledger technology (DLT).

CHESS to be replaced by distributed ledger technology

ASX’s decades old CHESS system (Clearing House Electronic Subregister System) is in the process of being replaced by blockchain-inspired distributed ledger technology.

The ASX has been investing heavily in the DLT system, with $75 million set aside in the 2019 financial year for new technology, which includes the costs for the ongoing development of the DLT.

DLT-based CHESS is seen as a transformational technical innovation that would become the first industrial-scale application of DLT in critical financial market infrastructure anywhere in the world.

ASX is also upgrading its ageing secondary data centre to bring it into line with the advanced features available on its primary system.

DLT-based CHESS fast and accurate

Unlike the slow and cumbersome current CHESS system, the DLT based system would get rid of the expensive and occasionally error prone process of sending messages back and forth to ensure that market trades are reconciled.

DLT-based CHESS would see market participants linked via “nodes” that directly access the distributed ledger, thus forming a perfect and lightning fast chain of title that cannot be altered.

ASX is currently planning for the DLT system to be between September 2020 and March 2021, with some of the goals of the new system real-time reconciliation, instant trade settlement and lower commission costs for Australian investors.

Blockchain technology has already transformed several industries including finance, supply-chain management, record keeping and cryptocurrencies, greatly streamlining the storage and transmission of financial data and improving security and system stability.

There have been small scale trials of blockchain technologies on exchanges including the NASDAQ, NYSE, Tokyo Stock Exchange, Deutsche Bourse and India’s Securities Exchange Board but ASX is still on track to be the first major exchange to make the transition to a blockchain linked system.

ASX’s investment in IRESS was held at $357.9 million or $11.12 per share at 31 December 2018 while the cost base of its shareholding is $151 million or $4.70 per share.

The sale will generate a post-tax gain of $161 million, which will be recognised directly in equity.