Regulators watch ASX CHESS replacement delays
The Reserve Bank has stressed the market operator’s new system should not begin to operate unless it is safe.
The Reserve Bank and the Australian Securities and Investments Commission (ASIC) are closely watching the latest delays in the ASX’s shift to a blockchain based replacement for its CHESS system, with expectations that its start date will be delayed for a fourth time.
This follows the ASX’s announcement on Monday that there was a “strong likelihood of delay” to its latest go live date of April 2023, as a result of a three-month delay in the time of its next software release for the change.
The ASX said it would be engaging with its stakeholders about the timing of its next software release “to assess the flow on impacts on project milestones, industry testing, operational readiness, migration dress rehearsals and the go live date.”
Both ASIC and the Reserve Bank oversee the ASX – with ASIC overlooking the issue from a corporate point of view, given that the ASX is an ASX listed company, while the Reserve Bank oversees the exchange from a financial stability point of view.
The Reserve Bank is currently undertaking a “deep dive” into how the ASX is handling the CHESS replacement system which will be released in September.
In a report issued last September, the Reserve Bank warned that the ASX would “need to place a high priority on addressing … the operation risk of all the ASX clearing and settlement facilities.”
The Bank was not commenting on the Monday’s statement from the ASX but, in the past, it has stressed that the shift to the new system should not occur unless it was safe to do so.
ASIC is also keeping a close eye on the situation but so far has not yet been formally notified of any official delay in the April 2023 start date.
Last November, ASIC issued additional license conditions on the ASX as a result of its review of a market outage in November 2020.
The regulator said the additional conditions were “directed at mitigating risks for future (system) upgrades, with specific emphasis on the oversight of the CHESS replacement program.”
The ASX said on Monday that it would update the market on any new go live date once it had had more discussions with its stakeholders.
While market watchers are understood to be disappointed with the news of a further potential delay in the change, there seems to be a view that the exchange is still fully committed to its ambitious plan to become the first stock exchange in the world to be planning to fully shift to a blockchain based system.
The ASX has repeatedly told investors that there is no “Plan B” for the change to replace its 30 year old clearing and settlement system.
But some wonder if the new chief executive, now being sought to replace current chief executive Dominic Stevens, might announce a change of tack once he or she is appointed to the job.
Stevens confirmed six weeks ago that the blockchain shift, which has been delayed several times from its original start date in April 2021, would go ahead as planned in April next year.
At the same time, he said he would be leaving the exchange when a replacement could be found – a comment which confirmed he would not be around for the scheduled start date for the change.
The software is being developed for the ASX by New York based Digital Asset Holdings which is also part owned by the ASX.
The ASX said Monday that the basic blockchain based ledger system was “performing well” and application code fixes were “in line with expectations.
But it said that a software update — version 1.3, which is part of the communication between the ledger and outside parties — had been delayed from April to July this year.
As a result of the change, it said, migration dress rehearsals for the shift would now not go ahead as planned for this October.
“We recognise the impact these delays will have on our customers’ programming activities and apologise for the inconvenience,” the ASX’s Group executive, Securities and Payments, Tim Hogben said in a statement.
But while the regulators are keeping an eye on the situation, the chief executive of stockbroking firm Ord Minnett, Karl Morris, said the delay was not a surprise and would have “no impact” on his firm.
“They are not the only company having to review the time frame for something as complicated as they are doing,” he said.
“Going to a completely new technology has even greater complexity. It comes as no surprise.”
He said delays in major technological and software updates were common practice in business.
The chief executive of one of Australia’s largest share registry services, Automic Group, Paul Williams said he was “not surprised” at the news of the potential delay to the implementation of the new system.
“It’s a massive project,” he said.
“If the Australian Securities Exchange and its blockchain expert partner Digital Asset require more time to deliver it, so be it.
“This replacement has been projected as the landmark innovation to put the Australian financial industry on the global map, bringing sophistication and visibility to an otherwise overlooked and out-of-date functionality.
“As we have done with our share registry business, the ASX is trying to modernise an antiquated industry with modern technology to solve problems which had long become accustomed to the industry.
“It’s an enormous project to take on so it hasn’t surprised me at all that the deadlines have been moved again.
“As a share registry and board management platform built with modern technology, we’ve been very supportive of the ASX’s CHESS replacement. As an industry participant, we have offered guidance where needed and have prepared our team to integrate with the replacement once it is ready.
“We’re ready for this change whenever it takes place, and we’re happy to continue to contribute to the ASX and the industry in any form to help it realise it,” he said.
ASX’s shares rose by 34c to close at $80.83 on Monday after a surge in late trading.
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