ASX considers abandoning blockchain for CHESS replacement
This process is expected to show the ASX whether a “product-based solution”, supplied by a large vendor with an established track record working for other large global exchanges, might be a faster and more reliable option for ASX than a complete redesign of CHESS, or redoing the existing project with New York-based Digital Asset.
This would be a backflip on the initial approach that attempted to use an unproven technology – blockchain – to build a new system untested by other markets. Any out-of-the-box solution would be amended to incorporate Australian peculiarities around share trading.
“We have gone through a process, an international scan of international exchanges, and after a big [request for information], we have selected a few with a [request for proposal], so are down in detail now. We expected the RFP responses by the end of this month,” Mr Whiteley said.
ASX declined to name the parties it has approached and these have not been provided to market participants more broadly.
Market sources said the companies that could be involved – based on their supply of clearing and settlement software to global exchanges – include Deutsche Boerse’s Clearstream, LCH Group, and Belgium’s Euroclear.
CBOE, which competes against ASX in share trading but also provides clearing and settlement systems in offshore markets, told a parliamentary committee earlier this month it has not been included in the RFP. It is also unclear if Digital Asset has been included in the RFP.
ASX is under significant time pressure to decide on the path forward, after the embarrassment of last November, which saw ASX dump its first attempt at the CHESS replacement using blockchain, triggering a $250 million write-down then unprecedented pressure from a parliamentary committee and regulators.
These include the Reserve Bank and the Australian Securities and Investments Commission, to which the government is giving extra legislative powers to police the exchange’s governance of the project and its effective monopoly over settlement.
ASX said it remains on track to announce the full solution by the end of the calendar year. Given the time that commercial negotiations will take once a provider is chosen, it is expected that the decision on the successful system vendor will be made around September.
One of the most significant changes to CHESS will be that the new system will be switched on over time, rather than a “cutover” over a weekend that involves decommissioning the existing system and enabling the new one simultaneously. This plan made many market participants nervous.
“We are looking as much as we can at separating cutovers between clearing and settlement,” said Mr Whiteley, a former technology executive at Westpac and Commonwealth Bank who was brought on to fix the project last November.
Whether blockchain is used will depend on what the RFP returns. However, market insiders said it would be highly unlikely that Clearstream, LCH or Euroclear would suggest blockchain as the underlying technology for a clearing and settlement system, given the need for the new system to be completely reliable and scalable.
ASX continues to assess, in parallel to the out-of-the-box solution, something based on the failed CHESS implementation that would use some of the work already done by Digital Asset, but using “more conventional technology”, Mr Whiteley said.
It is also considering whether an entire new system can be built from scratch, or whether the legacy CHESS can be incrementally built upon to improve its functionality in line with what the market needs.
The scope of the new system is still to be determined, via a technical committee set up by ASX that will vote on what is included. However, Mr Whiteley said the ASX is not considering widening the scope into the functions of registries or corporate actions, which came under fire during the initial project.
“None of the ideas are about taking over corporate actions or registries,” he said. Any broader scope would be about “mostly minor efficiencies in messaging and processes across a range of areas”.
ASX also responded to criticism from market participants on Thursday about its so-called partnership program, which was announced at its full-year results in February and will make up to $70 million in payments to “recognise future industry co-operation on the project”.
The ASX and market does not consider this a compensation offer for investment that might need to be written off after the failed first attempt at a CHESS replacement, estimated to be around $250 million across the market.
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