ASX’s clearing program must be a high priority

The ASX has advised it will provide no details on its new CHESS replacement proposal for another nine months. Picture: Liam Kidston.

The announcement from the ASX last Thursday will do little to comfort many stakeholders and regulators in the long-running CHESS replacement saga.

When CHESS was launched, it was world-leading, and assisted Australia to attract an outsized share of global investment. But after nearly three decades, it is dated compared to the technologies our global peers are implementing.

As I stated in December, we need to embrace world-leading technology to remain world beaters, for the sake of our industry, investment and all consumers who will end up footing the bill through higher fees in their investment funds or, worse still, suffering underperformance through restricted investment opportunities.

Clearing and settlement (C&S) is a vital function to any financial market and there are three objectives that we can use to judge the performance of a market’s C&S capabilities.

First, it needs to be efficient. It should be able to handle large volumes of transactions, quickly and without failures. Second, it should be accessible and promote easy participation from all market participants. Third, it should be innovating to absorb new technological capabilities to ensure that it’s globally competitive.

We do not know if the ASX can meet all these objectives with its second attempt.

The exchange has advised it will provide no details on its new CHESS replacement proposal for another nine months, but the latest announcement suggests it intends to continue maintaining the current monopolistic model.

FinClear founder and CEO David Ferrall.

This is despite global initiatives and trends that would suggest vertical structures where exchanges also control C&S capabilities are open to disruption from more efficient models. It would be a mistake for the ASX to design a solution based on an operating model that is likely to change, as that would lead at best to a piecemeal of disparate technologies or, at worst, to another aborted project.

Worse still, the compensatory program that chief executive Helen Lofthouse announced may not be paid fully and is structured incorrectly.

Of the $70m promised to market participants, only $25m will be used for compensation. The remaining $45m is for incentives aimed at “fostering a closer working relationship”.

There is little clarity on what this involves, or if this money will ever be distributed. What we have here is the ASX leveraging its monopolistic position to corral the industry into its next long phase, rather than allowing for development of innovative solutions that could be delivered in the near term.

We believe this structure should be reviewed by regulators for appropriateness.

There is also no certainty on when the ASX’s second effort at substituting CHESS will occur. The exchange has given itself until the end of this year to finalise a design.

Given the length of the previous attempt, it would be unrealistic to expect something operational any less than three to five years after the design has been decided upon. This would see a launch date of somewhere between 2028 and 2031, for a project that began in 2015.

Such behaviour suggests that the ASX believes that replacing CHESS is a niche technical exercise. Instead, it is a critical and urgent undertaking that affects the entire financial sector and, in turn, the Australian economy.

An underperforming and uncompetitive clearing and settlement facility threatens our ability to attract capital. Poor infrastructure undermines our national competitiveness, something which cannot stand in the present global economic environment where investment is scarce.

The ASX says it needs to rebuild trust. We agree and thankfully our government appears to be taking notice.

Last weekend, the House of Representatives launched an inquiry into competition and economic dynamism, led by Daniel Mulino MP. This welcome inquiry is tasked with studying the extent to which anti-competitive behaviour and needless infrastructure and financial barriers hold our economy back.

At the launch of this inquiry, the committee chair said: “The economy has changed significantly over the past decade or so, particularly in digital technology and disruptive new technologies. We need to ensure we are harnessing this technology in the best way in the interests of consumers.”

The replacement of CHESS fits this concern.

If we want Australia to remain at the forefront of financial innovation then we need a different approach that engages in a meaningful way with the industry.

Such an approach would embrace proven technological advances. It would focus on delivering the best outcomes for the market and our economy, instead of the interests of a publicly listed corporation.

At a minimum, while the ASX continues to inch along, competition must be encouraged via a dual-track approach that incentivises innovation and is accompanied by reforming broader policy settings.

Our financial and competition regulators, policymakers and industry leaders can save one lost decade from becoming two.

David Ferrall is founder and chief executive of FinClear. David will be appearing before the Parliamentary Joint Committee on Corporations and Financial Services statutory inquiry into ASIC, the Takeovers Panel, and the corporations law for the public hearing into the CHESS replacement project on Thursday February 23.