Checkmate for ASX’s big tech bet

The ASX woes show how dangerous tech overhauls are, which is why there is an in-built bias among Australian businesses to steer clear of such moves.

The ASX’s ambitious settlements upgrade will be four years late and millions over budget. Picture: Bloomberg

Three days into the job new ASX chief executive Helen Lofthouse has called out the costly and much maligned technology overhaul that initially promised to turn the nation’s main stock exchange provider into a cutting edge market.

Critically, the ASX has also waived the white flag on the promised delivery date of the clearing and settlements platform (CHESS) now guiding their big customers to the end of 2024. When the project was launched under a different CEO in early 2017 the go-live date was estimated to be late 2020 or “early” 2021. The most recent timing had been April 2023. Now the project is to be four years overdue.

ASX Ltd CEO and managing director Helen Lofthouse.

It shows how dangerous a technology overhaul can become for all businesses, which is why there is an in-built bias among Australian boards and management to stay away from the hard stuff and work the old technology well past their use by dates.

And the ASX’s woes coincide with a landmark Productivity Commission review into the economy urging businesses and governments to double down on their investment in technology particularly which will lead to a productivity dividend.

Remarkably none of the key executives at the sign-off of the ambitious CHESS overhaul are still with the ASX or its technology partner, the blockchain specialist Digital Asset. This includes former CEO Dominic Stevens, Digital Asset’s founder and former CEO Blythe Masters. Other roles turned over through retirement and attrition including former ASX deputy CEO Peter Hiom. Several board positions have turned over, including former chairman Rick Holliday-Smith retired last year.

System crash

The new go live date marks the fifth delay in the project that promises to introduce blockchain technology into the ASX’s critical clearing and settlement operations. Ironically the latest delays, which are to make sure the system is safe to use, have simply served to further undermine confidence in the project for when it eventually goes live.

ASX’s Lofthouse has delivered a fresh set of eyes to the project, which has clearly gone off the rails. The appointment of consulting firm Accenture to review the project will provide much needed integrity in assessing the much delayed go-live date and give ASX customers some confidence they will see the end of the project in their lifetime.

It is understood the latest issue centres on the top layer programming, which is the nerve centre of the ambitious project that attempts to introduce bitcoin-style technology for the daily settlement of billions of dollars worth equity and derivatives trades.

The coding is simply not up to scratch in meeting “resilience requirements”, which is tech shorthand for the system crashes unexpectedly. Accenture’s review will be limited to the software problems but not the viability of the project. Late last year the stock market operator also appointed an independent expert, EY, which is reporting back to market watchdog ASIC and the RBA on whether the project is fit for purpose.

Former ASX boss Dominic Stevens retired last month. Picture: Bloomberg

Lofthouse on Wednesday was quick to apologise to customers for the project she has inherited but intends to see through.

“There has been significant progress with CHESS replacement. But it is important that we take time for a careful, independent review of the work done to date and the work still to do”.

Importantly she added there is still plenty of life in the existing (and working) settlements platform noting the ASX has “strengthened its capacity, speed and resilience to cater for the increased trading activity in recent years”.

It is expected there will be an update on the cost blowout at the ASX’s results on August 18. Analysts have previously speculated the project to have a foundation cost of around $250m, but the ASX has not confirmed its own number.

The Accenture review comes at a time that Lofthouse also has some big executive roles to fill, including her own head of markets position. The ASX chief financial officer Gillian Larkins is retiring by late August and a month later the head of compliance Janine Ryan. But this means Lofthouse has the room early to put her stamp on the team, as well as wrestling back the now deeply unloved tech project.

In reality, it has been ASX shareholders funding the real world development of the untested settlements technology through an offshore tech company. If it eventually works as promised the same tech will be sold around the world.

Using distributed ledger technology which is technology traced back to bitcoin, the new system was promised to have better performance, resilience and security for settlements. Settlements and clearing of trades could be done in real time and the system would have significantly more capacity. It also gives the option of safely trading in new digital assets including crypto currencies.

Japanese venture capital fund SBI recently injected funds in Digital Assets in its latest funding round while the New York-based tech company is also doing projects for Singapore Stock Exchange, Deutsche Borse and Hong Kong Stock Exchange, although none are as ambitious as the ASX.

Front lines

While Lofthouse is not entirely a cleanskin, in her previous role as head of markets overseeing the ASX’s core business of equities trading and derivatives, she has previously expressed support for it, but was not operationally involved in the upgrade.

She was previously on the front line when it came to feedback from investment banks and big brokerages around frustrations for the delay and the costs, which mean she has some perspective about the outside.

The ASX knows how much is riding on this. Not only do they have customers but they also have both the Reserve Bank of Australia and corporate watchdog ASIC looking over their shoulder and both regulators are increasingly conscious they too have let the project slip too much.

Both have publicly expressed disappointment about the latest delay and said it was critical that the market have a high degree of confidence and certainty in the project.

“Given the delays and duration of the project, it is critical that Accenture now undertake this review to provide assurance on the delivery of a resilient replacement for CHESS and a high degree of confidence in a revised go-live date,” ASIC chairman Joe Longo said.

RBA governor Philip Lowe said: “The replacement system must be safe and reliable to maintain investor confidence and the stability of Australia’s financial system.”

There was a sting in the tail of their comments, both noting they were monitoring ASX’s compliance with its licence obligations. EY has so far been providing assurances and its own criticisms over various aspects of the CHESS replacement project.

Running out of patience: ASIC chairman Joe Longo. Picture: David Geraghty

For big users there’s nothing but frustration and the cost blowouts they are facing.

Multiple investment banks and retail stockbrokers have their own teams assembled and have been employing vendors getting systems ready and for ongoing work so their back office systems can “talk” to the ASX’s new settlements platform. Every time there is a delay there is a question around whether these teams should be stood down.

“The constant putting back of the start date is putting material costs on the entire industry,” one major broker tells The Australian. “History showed they clearly underestimated the project when they went into it.”

There have been industry level meetings about the costs through The Stockbrokers Association and the investment banking body The Australian Financial Markets Association, but local bosses of banks and their trading executives have also had their own private meetings with the ASX to express their frustration.

For new CEO Lofthouse it is all about delivery, rather than accusations. There are no suggestions of legal action mounting against its tech partner Digital Assets. Insulating the tech company, the ASX also has a 6 per cent stake in it after investing more than $US31m ($45m) over two funding rounds.

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