ASX considering abandoning blockchain for CHESS replacement

This process is expected to show the ASX whether a “product-based solution”, provided by a large supplier with an established track record working for other major global exchanges, can be a faster and more reliable option for the ASX than a complete redesign of CHESS, or the existing project with New York-based Digital Asset.

This would be a setback to the first approach that tried to use an unproven technology – blockchain – to build a new system unproven by other markets. Any out-of-the-box solution will be modified to incorporate Australian idiosyncrasies around share trading.

“We have gone through a process, an international scan of international exchanges, and after a big one [request for information]we have selected someone with one [request for proposal], so are down in detail now. We expected the RFP responses by the end of this month, Whiteley said.

The ASX declined to name the parties it has approached, and these have not been released to market participants more widely.

Market sources said the companies that could be involved – based on their provision of clearing and settlement software to global exchanges – include Deutsche Boerse’s Clearstream, LCH Group and Belgium’s Euroclear.

The CBOE, which competes against the ASX in stock trading but also provides clearing and settlement systems in offshore markets, told a parliamentary committee earlier this month that it is not included in the RFP. It is also unclear whether Digital Asset has been included in the RFP.

The ASX is under significant time pressure to decide the way forward, following last November’s embarrassment which saw the ASX dump its first attempt at the CHESS replacement using blockchain, triggering a $250 million write-down and 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 gives extra legislative powers to oversee the exchange’s management of the project and its effective monopoly on settlement.

The ASX said it remains on track to announce the full resolution by the end of the calendar year. Given the time that commercial negotiations will take once a supplier is selected, it is expected that the decision on the successful system supplier 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, instead of a “cutover” over a weekend which involves taking out the existing system and activating the new one at the same time. This plan made many market players nervous.

“We’re looking as much as we can at demarcating clearing and settlement,” said Whiteley, a former chief technology officer at Westpac and the Commonwealth Bank, who was brought in 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 propose 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 consider, in parallel with 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”, Whiteley said.

It is also considered whether a completely new system can be built from scratch, or whether the old CHESS can be built on step by step to improve the 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 the ASX which will vote on what is included. However, Whiteley said the ASX was not considering expanding its scope to the functions of registries or corporate actions, which came under fire during the first project.

“None of the ideas are about taking over corporate actions or records,” he said. Any wider scope would be about “mostly less efficiency in messaging and processes across a range of areas”.

The ASX also responded to criticism from market participants on Thursday about the so-called partnership programme, which was announced at its annual results in February and will make up to $70 million in payments to “recognise future industry collaboration on the project”.

The ASX and the market do not consider this a compensation offer for investment that may have to be written off after the failed first attempt at a CHESS replacement, estimated at around $250 million across the market.