The Australian stock exchange’s blockchain failure burns confidence in the market

SYDNEY, Dec 20 (Reuters) – In a Sydney hotel conference room in May, Tim Hogben, the head of securities and payments for ASX Ltd, which runs the Australian stock exchange, told traders, share register operators and clearing house representatives what they were. hope to hear.

A rebuild of the exchange’s aging software using blockchain-based technology was largely complete after seven years of development, putting the ASX on the brink of a world-first transformation that would enable it to increase trading volumes and compete more aggressively with global rivals.

“Ninety-six percent of the software is currently in an operational and test environment. That 96% of the software is working,” Hogben told a conference of stockbrokers and investment advisers, in footage seen by Reuters. “If it didn’t work, you’d hear about it, let me tell you.”

In November, ASX abandoned the project, citing dysfunctional management, concerns about the product’s complexity and scalability, and difficulty finding experts to support it. The rejection came after new chief executive Helen Lofthouse commissioned an Accenture review which found the redevelopment was only 63% delivered and almost half the code needed to be rewritten.

More than a dozen brokers, other market participants and people directly involved in the blockchain project told Reuters the failure had shaken confidence in the Australian exchange operator. Some expressed dismay at the time and cost they contributed to the doomed endeavor and the ASX’s repeated assurances that all was well with the upgrade, which had suffered five delays since an originally planned launch in 2020.

The experience also raised questions about a mismatch between the promises and reality of the technology underpinning cryptocurrencies. Using a distributed ledger in Australia’s critical financial infrastructure would have been one of the most significant applications of blockchain-based systems in a mainstream corporate setting.

“ASX could have chosen a stable and stable clearing and settlement system (but) chose an innovative technology that was unproven, unproven,” said Michael Somes, general counsel for Cboe Australia, a securities and derivatives exchange involved in the project.

“ASX’s election has resulted in one of the largest critical service stuff-ups seen in financial markets globally.”

On top of the A$245-A$255 million ($164-171 million) charge the ASX plans to take for the debacle, market players estimate they collectively spent about that again preparing for the rollout, including on software upgrades, flight fares and staff hours spent. attend webinars and consultations.

At a parliamentary hearing this month, the ASX apologized for the error but denied misleading the market or regulators. Chairman Damian Roche, when asked by lawmakers about a statement in the company’s 2021 annual report that the project had “moved from the design and construction phase to testing and delivery”, said the claim referred to “functional” parts of the software, not “non-functional” parts such as security and scalability.

An ASX spokesperson told Reuters in an email that the company provided project updates based on the latest available information and that some challenges “only became apparent as we reached the final stages”.

SCOPE OF CREEP

ASX’s quest to replace its trade-facilitating platform – known as CHESS, for Clearing House Electronic Subregister System – began under then CEO Elmer Funke Kupper in 2015, when there was global fascination with cryptocurrency and blockchain.

After New York start-up Digital Asset Holdings showed ASX executives a test transaction on the blockchain software, the ASX signed on the little-known company in early 2016 to begin exploratory work on an overhaul. ASX bought a 5% stake in Digital Asset.

Two months later, Funke Kupper quit due to bribery allegations related to a previous role; he was cleared. The ASX continued with the rebuild, increasing its stake in Digital Asset to 8.5%. Under Funke Kupper’s successor, Dominic Stevens, the exchange operator went from no market consultation to extensive consultation, a person involved in the project told Reuters on condition of anonymity because of concerns about professional repercussions.

The scope was also expanded. From an initial plan to run about 12 of CHESS’s 400 data transfers per transaction on the blockchain, the ASX decided the new system would include all 400 transfers, the person said.

People working on the project raised concerns that Digital Asset lacked aftermarket support and that the ASX had listed the company without testing the product for scalability, the person said, adding that those concerns remained unresolved. Ultimately, ASX had 300 people working on the CHESS replacement project, about a third of its workforce.

“To try to put something that hasn’t been tried and tested into Australia I think was quite unwise,” said William Slack, chief executive of Morrison Securities, which had two staff partially allocated to the ASX project and three or four staff at each ASX -consultation for several years.

Funke Kupper did not respond to requests for comment. Attempts to reach Stevens were unsuccessful. When he announced his retirement in February, he told the Australian Financial Review that his successor would find the blockchain project delivered and working and that “the next stage is the swap over”.

When CHESS went live in 1994, it was seen as innovative because it combined trading, clearing and settlement on one platform. But over time it became outdated and more difficult to maintain. When a surge in trading in March 2020 led to regulators cracking down on trades due to processing delays, the Reserve Bank of Australia said replacing CHESS “with more modern technology is critical”.

Yet by trying to replicate all CHESS functions on a single system, ASX risked undermining an advantage of blockchain, which was to reduce touchpoints that slowed processing, people involved in the project said.

“It would have been easier, I guess, to just build a new version of CHESS in another modern language, instead of blockchain,” said Ramy Aziz, a former ASX finance director who oversaw budgets, governance and schedules related to the project in its initial stages.

“Maybe blockchain needs to evolve a bit more before it’s able to do what they want it to do for CHESS. Maybe it never will.”

Digital Asset declined to comment beyond a statement on its website agreeing with part of Accenture’s report which highlighted “the need for consistent business requirements (and) simplification in solution design”.

“Clear requirements, alignment with the goals and manageable milestones with defined success criteria are essential,” it said.

The ASX spokesperson told Reuters distributed ledger technology could be transformative and the company chose Digital Asset after a “robust global” search.

Shortly after the ASX shelved the project, AP Moeller-Maersk A/S ( MAERSKb.CO ) and IBM ( IBM.N ) ended a blockchain-enabled shipping platform, citing a lack of global cooperation.

FALL OUT

The accusations spread quickly. The Australian Securities and Investments Commission, which regulates the exchange, called the delayed disclosure of problems “unsatisfactory” and demanded a special report from the ASX Commission explaining its plans for CHESS, while the Reserve Bank of Australia called the failure “very disappointing”. Lawmakers want to extend ASIC’s power over the ASX.

Morgan Stanley analysts cut their valuation of ASX shares by 10%, citing strategic uncertainties.

ASX users, meanwhile, want compensation for time and money lost to a project they say they could not opt ​​out of.

“The public announcements from the ASX about this trip have certainly proven to be inaccurate, some might say misleading,” said Daniel Spokes, director of customer support services for Morgans, a Brisbane brokerage. Suppliers who invested in the technology should “have some sort of right to compensation”, he said.

The CEO of a small brokerage that runs its own trading software, who spoke on condition of anonymity to avoid damaging relations with the stock exchange, told Reuters he hired four full-time software developers for three years, at a cost of more than A$1 million , to keep up with the ASX’s frequent update requirements.

The RBA and ASIC have said they expect the ASX to cover industry write-downs related to the failure. The ASX spokesperson said the company was “very aware of the investment customers and other stakeholders have already made (and) we will keep this in mind when considering what work can be leveraged into a new solution”.

The exchange had “offered discounts to customers in the past,” the spokesperson added, without elaborating.

For some companies, the cost was difficult to measure. One of the largest third-party trading providers, FinClear Pty Ltd, postponed the integration of its software system with that of a company it acquired in 2021 based on one failed ASX transition date.

“That’s what it’s meant to be in terms of our decision-making process around other technology projects that are all interconnected,” said FinClear CEO David Ferrall.

“The ASX has probably, whether inadvertently or intentionally, misled the market. I’d like to think unintentionally.”

Chris Burrell, chief executive of Burrell Stockbroking, said he had staff delaying retirement after learning of the project’s launch schedule, “and then the dates came and got pushed out”.

In the aftermath, the ASX must still decide how to update the core platform. Its spokesperson told Reuters there was “no off-the-shelf product available to meet the needs of the Australian market”.

Aziz predicted that the stock market would tread more carefully next time.

“They will probably go and build just a new version of CHESS in a normal programming language, not within the blockchain,” he said. “That’s all they can do really.”

Reporting by Byron Kaye; Editing by David Crawshaw

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