ASX doubles down on defence of CHESS handling

ASX Ltd’s leaders have pushed back on suggestions it’s not up to the task of replacing its ageing infrastructure with blockchain technology.

ASX Ltd chairman Damian Roche and chief executive Helen Lofthouse.

ASX Ltd executives have pushed back on suggestions the exchange operator isn’t up to the task of replacing its ageing clearing and settlements infrastructure with blockchain technology, following its decision to mothball the project last month after working on it for seven years.

At a Parliamentary Joint Committee on Corporations and Financial Services hearing, chairman Damien Roche and CEO Helen Lofthouse doubled down on their defence of ASX’s handling of the troubled CHESS replacement project and its ability to come up with the best long-term solution.

Mr Roche rejected the notion that the ASX was “covering up the failure of CHESS”.

“I believe that we were being transparent and engaging with our regulators on the status of the project at all times,” Mr Roche told the hearing.

ASX will “engage transparently and openly” with regulators, and understands the importance of the CHESS replacement project and “what we need to do to get it right”, he said.

In an update to the market last month, ASX said it would reassess all aspects of the CHESS replacement project and write off $250m in associated development costs following its internal assessment and an independent review by Accenture, which found the draft delivery plan was “high risk.”

Mr Roche conceded last month that “the path we were on will not meet ASX’s and the market’s high standards” and that it faced “significant technology, governance and delivery challenges”.

Asked on Monday if ASX was “really up to the job”, of replacing its now 25-year-old CHESS system, Ms Lofthouse said it “has been a very large and complex project over a long period of time.”

“There are some really important lessons to be learned here,” she added.

“ASX has been very focused on meeting its commitments to getting the functionality into customer test environments to enable the industry to be interacting with the software.

“I think one of the challenges, that we can see very clearly from the Accenture report, was that meant that some of the key non-functional requirements were actually quite late in the project schedule, and that is exactly the area where the really material issues have emerged.”

Whereas the project had a strong focus on functional requirements, almost all the issues identified by the Accenture report related to the non-functional completion of the system.

“Functional” relates to what the system actually does or intended to do. In relation to CHESS, it includes capabilities like trade registration, updating customer addresses, settlement, and asset servicing.

Of the functional requirements in testing that Accenture assessed, the average score of their completion status was 81 per cent.

“Non-functional” relates to how the system performs those functions. It includes how many trades the system can register per second or per day; how long the settlement process would take; and how the system would be able to recover from incidents.

The average completion status score of non-functional requirements in testing was 23 per cent.

“That’s a really important issue for us to stare into as we re-plan the project for the future,” Ms Lofthouse told the committee. “The issues are really around the non-functional requirements and making sure we have the right scalability for the future in some of the key areas of clearing and settlements.”

“While our customers have been interacting with the functional parts of the system for some time, we need to really make sure that when we’re replanning this project, we are looking very carefully at where those problems arose.”

She said the “really material issues” that led ASX to “pause and re-plan” its approach to replacing CHESS, were identified too late in the project to change course without needing a new plan.

“We need to figure out how we make sure that we identify those issues earlier in the new project plan,” she added.

Ms Lofthouse confirmed that after record ASX trading volumes in March 2020 — around the start of the Covid-19 pandemic — caused processing delays on CHESS which led ASIC to require large market participants to cut their trading volumes by 25 per cent, ASX boosted the capacity of its existing CHESS system by 50 per cent in July that year.

“The March 2020 volumes were a record – about two-and-a-half times the previous peak, so a very substantial increase – we absolutely did invest in upgrading the capacity and the resilience around that of the CHESS platform, so we’re confident at this stage that it can handle significantly higher volumes than those, and there’ve been a number of areas of performance improvement since then,” she said. “So we’ve absolutely invested to ensure that the current system can handle those volumes and significant capacity beyond those peaks. The current system is performing well.

“While I can assure the committee that the current system is performing well at this stage, and we’ll be continuing to invest in it to ensure that it performs well for the Australian market for as long as it needs to, clearly, to support further change and innovation for the Australian market in the future, replacing it continues to be a very high priority for us.”

Originally published as ASX doubles down on defence of CHESS handling