Today, the Australian Stock Exchange (ASX) was met with pushback from shareholders and the central bank in relation to its long-delayed CHESS blockchain clearing and settlement system. In August, ASX announced another delay that pushed the release back to late 2024 at the earliest. Accenture was hired to review the code and it was revealed that $150 million has been spent on the project so far.

At today’s annual general meeting (AGM), the vote on a pay package was met with 30% opposition, which ASX chairman Damian Roche described as a “strike”. Previously, former CEO Dominic Stevens had his variable rewards reduced by 40%, and other ASX staff in the CHESS replacement project also had their bonuses reduced.

“The CHESS project is very complex and remains challenging,” said President Damian Roche. “There is no question that the performance of this project did not meet our expectations or those of our customers in 2022. We share the frustration of our stakeholders.”

The central bank asks questions

Also today, the Reserve Bank of Australia (RBA) published its annual assessment of the ASX clearing and settlement facility. The report devoted a significant section to the new DLT post trade system expressing its disappointment at the delay.

According to the review, the current iteration of the DLT system can handle normal current volumes. But presumably it can’t handle major spikes, since it mentions that ASX has “identified a number of scenarios that could create bottlenecks or latency issues”.

While these scalability issues are significant and need to be addressed, it appears that the bottom line is in sight.

Digital Asset is developing the smart contract application and VMware Blockchain is responsible for the ledger. These relationships have been in the spotlight. The central bank’s announcement said: “ASX will need to demonstrate that appropriate arrangements are in place to manage the risks related to its reliance on key suppliers.”

The report goes into more detail, saying regulators want more information from ASX regarding:

• “the Board’s oversight of vendor relations;
• how the original design specifications were communicated and the subsequent engagement between ASX and suppliers on any challenges that develop with respect to these specifications;
• and ASX’s contingency plans should its current supplier agreements require changes.

Other risk management issues

The central bank’s report covers a wide range of topics, including potential conflicts of interest. The Reserve Bank noted that the new platform allows ASX Group to offer services in addition to the clearing and settlement (CS) services provided by the existing system. One example is that it now offers the Blockchain as a Service Synfini solution and shows asset tokenization, which is not directly relevant to CHESS.

The Bank expressed concern about other services that may present a conflict of interest. “There may be scenarios where a decision to improve the resiliency of CS services in replacement of CHESS limits the potential of ASX to offer these non-core services,” the report says.

The planned start-up procedure has always been one of the biggest risks with the new CHESS system. It will not work in parallel with existing systems, and the transition is scheduled for a single weekend. One of the main reasons is that the new system uses ISO 20022 messaging instead of the proprietary format currently used. Therefore, trading in parallel would require market participants to send two messages.

ASX has a low risk tolerance, but the “program was operating out of risk appetite, in particular due to delivery delays,” the central bank report said.

When the latest delay was announced in August, ASX’s new CEO, Helen Lofthouse, was asked if there was a risk the project might not be completed. Referring to CHESS, Lofthouse said at the time, “it absolutely needs to be replaced. Therefore, we will replace it. This review is just working out some of the details of the challenges we’re having with the project.”