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 to its ability to meet legal requirements.

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

However, a recent review by Accenture found it would not be able to meet high ASX and market standards.

Significant technology, governance and delivery challenges are believed to be core issues in the blockchain proposal, which will 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 the use of blockchain on an industrial scale.

Aging technology

CHESS currently provides all the core clearing and settlement functions for the Australian cash share market, but it is an aging technology that is believed to be nearing the end of its life.

In 2015, the ASX began evaluating replacement options, with the main considerations being scalability, security and performance according to then deputy CEO Peter Hoim.

“These are important questions that need to be answered and we need to ensure that the current processes of our stock market can be carried out by the new platform,” he said at the time.

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

Blockchain system

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

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

The ASX contracted US blockchain-focused company Digital Asset to help build a prototype solution that 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 that the application software was only 63% advanced with an uncertain timeline to completion, and there was complexity in the integrated solution design, including the way the ASX requirements interact with the application and the underlying ledger.

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

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

Demolition of the project

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

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

“While ASX is keen to embrace technology that benefits the market, it is clear that we need to revise 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.”

Lofthouse said CHESS would remain in place until a suitable alternative was found.

“Our priority is to continue 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 organization remains committed to providing the best long-term clearing and settlement solution for the Australian financial market.

“We started this project with the most recent information available at the time [and we were] determined to deliver a post-trade solution that balances innovation and state-of-the-art technology with security and reliability, he said.

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

Humble to a fault

Roche said the ASX was humbled by the error.

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

“The ASX always endeavors 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 taken lightly.”

New project manager

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

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

His role will include selecting delivery partners to help address capacity 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.