Treasurer Morrison looks at exposing ASX to fresh competition

The federal government is holding open the prospect of greater equities competition for the ASX.

Years of value

The federal government is holding open the prospect of competition for the remaining monopoly equities business operated by the ASX as it dictates terms for new players wanting to provide post-trade services in Australia’s $1.2 trillion sharemarket.

Scott Morrison will today release policy statements on regulation for clearing and settlement services for share trading that could expose the ASX to new competition within 18 months.

Continuing a trend of opening up monopoly markets that began in 2011 with the introduction of the Chi-X exchange to offer competing share trading services, the government plans to legislate recommendations from financial regulators that would set the rules for competitors as well as the incumbent ASX.

The opening of the equity market has followed pressure from high-frequency trading firms for lower costs — such as trading, clearing and settlement fees on the high volume of low-margin trades they execute every day.

The ASX has previously argued any cost savings have come out of its revenue but have been captured by other intermediaries such as brokers rather than being passed on to clients.

The Treasurer said the reforms were part of the Turnbull government’s competition law reform agenda and “demonstrate our commitment to open and competitive markets, which are fundamental to a vibrant, modern, world-leading economy’’.

While the reforms are focused on clearing services they could also guide competition for settlement — the final leg of a share trade — as rapid technological change, such as blockchain, undermines what were considered natural monopolies.

According to a policy statement from the powerful Council of Financial Regulators, the minimum conditions were developed in line with the prevailing monopoly settlement services market structure.

“Nevertheless, the statutory framework applies to both clearing and settlement and recent rapid advances in technological developments may increase the prospect of competition emerging,’’ according to the statement.

Clearing services have the ASX standing between buyer and seller to guarantee a share trade is completed, while settlement is the transfer of share certificates and consideration.

The CFR — which includes the Reserve Bank, the Australian Prudential Regulation Authority, the Australian Securities & Investments Commission and the federal Treasury — has been working on the reforms since March when the government accepted its recommendation on allowing competition in clearing.

In January the ASX unveiled a $15m investment in Digital Asset Holdings — a New York-based company developing blockchain technology for financial services — as part of an overhaul of its CHESS settlement service.

Blockchain threatens to revolutionise such services because it allows each side of a trade to verify each stage of the process and settle in real time, instead of the two-day settlement cycle, and could remove the need for an intermediary or central counterparty such as the ASX.

The ASX has since boosted its investment to $US17.4m for an 8.5 per cent stake and said the initial development stage was complete, with the technology meeting performance, security and scalability thresholds.

It expects to decide on its CHESS replacement in the 2017-18 financial year.

Regulators have already granted international licences to the giant CME and LCH Clearnet to operate clearing services for over-the-counter derivatives such as Australian interest rate swaps.

The rules released by the CFR have retained a requirement for competitors to establish a local presence — rather than putting local trades through international settlement services — and hold enough capital to cover operating expenses for 12 months.

New users would have to deposit capital to back their operations and come to terms with the complexity of “interoperability’’ between clearing houses.

But observers have questioned whether any competitors would want to offer equity clearing services because they only generate $55m of revenue as an ASX monopoly and a rival would likely drive this lower through price competition.

The ASX handled $1.2 trillion worth of share trades in 2015-16, but has grown its clearing revenue by pushing into markets such as the multi-trillion-dollar interest rate swap business used by banks to manage their loan books.

It has also had to raise capital to boost the equity held in the clearing service to meet international regulatory demands.

Mr Morrison said regulatory expectations provided by the CFR would cover the way the ASX’s engaged with users of its cash equity clearing and settlement services, including governance, pricing and access.

The ASX would be expected to commit to act in line with those expectations by releasing a code of practice for the service.

Mr Morrison also recommitted to loosening the ASX’s ownership restrictions, “recognising the place of ASX in a more competitive environment”.

Current regulations require parliament to approve a single shareholder lifting their interest above 15 per cent, but the reforms would transfer this power to the Treasurer, in line with other financial sector companies such as banks and insurance companies.

This would allow the ASX more flexibility in raising capital, Mr Morrison said.