ASX dumps CHESS overhaul and wears $250m loss amid cost blowouts, review findings

The Reserve Bank and the Australian Securities and Investments Commission have come out swinging after ASX Ltd shelved its troubled program to replace its clearing system.

The Reserve Bank and the corporate regulator have delivered scathing assessments of how the ASX handled the critical CHESS replacement program after the exchange mothballed the project.

ASX Limited, the exchange operator, will write off $250m associated with the program, which was to have replaced a two-decade old clearing and settlement service with blockchain technology.

“(The) ASX has failed to demonstrate appropriate control of the program to date, and this has undermined legitimate expectations that (it) can deliver a world-class, contemporary financial market infrastructure,” Australian Securities and Investments Commission chairman Joe Longo said.

“The regulators are closely monitoring ASX’s ongoing management of clearing and settlement under its licences. Our immediate focus is to ensure current CHESS continues to provide the level of service, reliability and resilience that is required. The regulators will bring to bear the full range of regulatory options to ensure this is the case.”

ASIC chairman Joe Longo. Picture: David Geraghty

Mr Longo’s comments, and similar criticism from RBA governor Philip Lowe, come after an independent review found signif­icant gaps in the ASX’s ability to deliver the CHESS replacement program.

The review, authored by Accenture and released on Thursday, found there were significant gaps in the project’s test, analysis and design, and overall program and project management. “The program lacks a holistic, agreed, single view of status with adequate traceability of resources and estimation to the draft delivery plan,” it said.

Stockbrokers around Australia are estimated to have spent as much as $100m working with the ASX on the long-running replacement program, which has included several testing operations over weekends this year.

They too were left wondering how the ASX would proceed.

RBA governor Philip Lowe has criticised the shelved ASX project.

“What were they really trying to achieve? The original scope was just too wide,” Ord Minnett chief executive Karl Morris. “We always had our concerns in relation to the success of this particular project and we were extremely conservative in the time, effort or money in preparing for it.”

Another broker, who spoke on condition of anonymity, told The Australian: “They should have just outsourced it to Nasdaq or one of the big exchanges rather than trying to be at the bleeding edge of the blockchain revolution.

“They were trying to be one of the frontrunners by using a whole new technology … you never want to be first,” he said.

Judith Fox, the chief executive of Stockbrokers Investment Advisers’ Association, said her members had “spent significant millions” to prepare for the new system. “A lot of time and money and effort has been spent on the CHESS replacement system,” Ms Fox said. “We need to look at not just what has been spent, but what can be retained in the technological development that has been undertaken to date.” She said the report showed that blockchain “introduced too much slowness and complexity”.

Ord Minnett chief executive Karl Morris said his company always had concerns about the project.

“Everything under the ASX project was being written to the blockchain,” Ms Fox said. “We saw massive spikes in trading in March 2020 with the onset of Covid.

“It showed that the CHESS replacement project has to be able to handle much greater volumes than it had to handle before.”

The ASX has appointed former Westpac executive Tim Whiteley as project manager for the next phase of the CHESS replacement project, promising to consult widely with the industry on the process.

ASX chief executive Helen Lofthouse said she was “open-minded” about which system would ultimately replace CHESS, and did not rule out another blockchain-based solution.

“We are considering all options,” Ms Lofthouse said. “We are going back to the solution design stage to take on board our assessment of where we are so far.”

Ms Lofthouse said the decision to pause the project did not represent a complete scrapping of the blockchain-based system concept.

Australian Shareholders Association chief executive Judith Fox. Picture: Hollie

“We are taking a pause and we are reassessing,” she said, added that the system developed had not “met the high standards that we have for the CHESS replacement”.

Earlier this year, the ASX announced that the proposed “go live” date of April 2022 was being reviewed, leading to ongoing market uncertainty about the move to the new system. The software was being developed with New York-based Digital Asset in which the ASX has a 5.4 per cent stake currently valued at $35m.

Ms Lofthouse, who has been chief executive since August, said there was no “off the shelf solution” which could be used to replace the and settlement system.

“The current CHESS platform is working really well and continues to serve us well,” Ms Lofthouse said. “We will continue to invest in it and maintain it.”

Mr Longo said the independent assessment had “found significant gaps and deficiencies in ASX’s program delivery capabilities and that there are significant challenges in the technology design”. “That these findings can be made at this late stage of a critical replacement program is altogether unsatisfactory,” he added.

ASX chief executive Helen Lofthouse made the decision to can the ill-fated project.

Dr Lowe said the announcement by ASX “after many years of investment by both ASX and industry” was “very disappointing”.

The Accenture report noted that “evolution to siloed management and execution structures and tooling has impeded collaboration with inefficient escalation processes … resulted in friction at the working team level and resulted in misaligned views of accountability”.

Mr Lofthouse said the ASX was setting up an industry forum to consult on the CHESS replacement. She said the company needed to revisit the CHESS 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”.

“The independent report, coupled with our own assessment work, confirms a number of significant challenges associated with aspects of the CHESS replacement project,” she said.

The ASX said it would “derecognise” its capitalised software in relation to the project in the first half of the 2023 financial year.

The charge is estimated to be in the range of $245m-255m pre-tax or $172-179m after tax and will be classified as a significant item in the first-half results for the 2023 financial year. But the ASX said it was still planning to keep its existing dividend policy and its outlook for 2023 operating expense growth remains at 10-12 per cent.

ASX shares closed down 13c on Thursday at $71 after being down 2.5 per cent at $69. They are down 23 per cent since December 31.

Originally published as ASX dumps CHESS overhaul and wears $250m loss amid cost blowouts, review findings