ASX offers $70m to incentivise CHESS replacement partners

ASX CHESS replacement Lofthouse

Following the scrapping of its high-profile blockchain-backed clearing and settlements platform replacement solution in late 2022, the Australian Securities Exchange (ASX) has announced it will front up to $70 million to establish a CHESS Replacement Partnership Program, with millions to be allocated to stakeholders to help meet key project milestones.

ASX managing director and chief executive Helen Lofthouse conceded during the company’s shareholder briefing yesterday that while the ASX ultimately remains responsible for delivering the CHESS replacement, delivery of the project will require the “combined efforts of many stakeholders to achieve the best outcome for the market”.

She confirmed that the securities exchange will establish “a development incentive facility” funded to the tune of up to $55 million, made available to major stakeholders that contribute to facilitating the roadmap and build of the CHESS replacement platform.

“These incentives will be paid based on the achievement of project milestones noting an initial pool of approximately $10 million will be paid to eligible stakeholders within this financial year,” Lofthouse said.

She added that the final size of the development incentive facility will depend on the chosen solution design.

The ASX will also allocate $15 million in direct rebates for participants, to be paid in August this year, based on clearing and settlement fees paid to ASX.

Lofthouse welcomed the $70 million Partnership Program as “a substantive contribution that takes into account the extended timeline of the project and aligns all of us towards achieving a successful outcome for the market”.

Among the key milestones ahead involve a solution assessment phase, which will include:

  • the issuing of a vendor RFI (request for information)
  • a review of current solution components
  • a short listing of options for detailed assessment
  • and an assessment of solution design fit with baseline requirements.

Once complete, the ASX will enter a solution finalisation phase, which will include:

  • a detailed design and integration approach
  • the approval of a solution design
  • and a commercial contracts negotiation

A final solution design is expected to be announced by the December quarter of 2023.

Lofthouse said the ASX would seek feedback from the CHESS Replacement Technical Committee on “revalidating the business requirements, stakeholder readiness activities, and the migration approach”.

“This will ensure that our industry stakeholders have good visibility of progress and are involved in our decisions and processes.”

Announced last November, the CHESS Replacement Technical Committee consists of major participants, industry associations, software vendors, approved market operators and share registries.

Tim Whiteley, appointed last November as Project Director for the CHESS replacement ‘mark two’ solution, reports directly Lofthouse, with the ASX chief praising the project leader.

The original CHESS replacement program, backed by blockchain technology, was beset by multiple and costly delays, with an independent auditor flagging a number of technical concerns with the proposed replacement platform, including excess latency, an inability to support effective batch processing, and, as a result, limits to the platform’s scalability or “extensibility”, with the ASX ultimately deciding to reset and retool the program.

Regulators ASIC and the Reserve Bank of Australia (RBA) blasted the ASX following the release of the auditor’s findings, stating at the time that the delay “marks a significant setback to the replacement of critical national infrastructure for Australia’s cash equity markets and now brings into sharp focus the longevity of the existing CHESS platform”.

Lofthouse confirmed that the ASX is considering “a broad range of options including the use of some existing assets that have already been developed as well as potential vendor solutions”.

She added that the “exploration of new vendor solutions… is driving this timeline”.

A solution design reassessment phase will include existing assets and vendors, including Digital Asset, which was involved in the original blockchain project.

“We have also reviewed the world’s top 20 exchanges and central securities depositories to update our view of relevant technology providers for clearing and settlement. And we will be issuing [RFIs] to a list of relevant vendors very shortly.”

“We’re aware that there is no off-the-shelf vendor solution that can meet all the requirements of the Australian market, such as the name on register ownership model, so we will need to conduct a detailed assessment of vendor solutions to understand the customisation and integration requirements.”

“This will take time and it will also be dependent on vendors’ availability to carry out this assessment work.”

Lofthouse concluded: “This is a once-in-a-generation reset of this technology and it’s important that we get it right.”