A world-leading bid effort to use blockchain technology to upgrade key capital markets infrastructure ended when ASX Ltd (the Australian Stock Exchange) paused the project and wrote off costs of AUD 250 million ($169m). On 14 August the Australian Securities and Investments Commission (ASIC) watchdog announced it was suing the ASX for “allegedly making misleading statements”.
The ASX had announced the blockchain project to replace the Clearing House Electronic Subregister System (CHESS), which manages shareholdings and settlement, according to this report in The Block website. CHESS is a clearing and settlement system for the cash equities market.
According to an ASIC press release: “ASIC alleges statements made in ASX announcements on 10 February 2022 that the project remained ‘on-track for go-live’ in April 2023 and was ‘progressing well’ were misleading.”
Project timeline
According to a timeline in the ASIC press release, the ASX announced plans to replace CHESS depository and settlement system in January 2016 and in December 2017 it engaged a firm called Digital Asset (DA) to build the Ledger and Application for the replacement system. In August 2019 it engaged another firm, VMware, to build the Ledger, while DA continued to build the Application.
In March 2020, ASX announced it was replanning the capital markets infrastructure project and the former “go-live” date of April 2021 would be delayed. It announced a new plan and consultation in October 2020 and a new go-live date of April 2023. However, in 2021 DA flagged up material risks to delivery and no mitigants to address the risk.
In December 2021 ASX also recorded a material risk for the CHESS Replacement Project overall and for the Application and on 3 February 2022 the ASX Audit and Risk Committee was informed. However, on 10 February when ASX published its half year results, it said the project was tracking to plan, on track to go-live and progressing well.
ASIC adds that six weeks later, on 28 March 2022, the ASX announced that there was a strong likelihood of delay to the go-live date of April 2023. ASX then engaged consulting firm Accenture to review the project. The review identified “significant challenges with the solution design and its ability to meet the ASX’s requirements”. After the Accenture report was published, ASX paused the project in November 2022. According to regulator, ASX wrote down costs of AUD 245m – AUD 255m ($165m – $172m).
Trust and market integrity
ASIC alleges the February 2022 representations “were misleading and deceptive because, at the time of the announcements, the project was not tracking to plan and ASX did not have any reasonable basis to imply the project was on track to meet future milestones.
“ASIC Chair Joe Longo said, ‘ASX’s statements go to the heart of trust in the integrity of our markets. We believe this was a collective failure by the ASX Board and senior executives at the time.
‘Companies and market participants rely on what the ASX says about its operations to make their own decisions and investments. We expect the ASX to be a place to list and invest with confidence. When the ASX falls short, it has wide ranging consequences across the market.’”
Previously, on 7 March 2024, ASIC announced that ASX had paid a penalty of AUD 1.05m ($708,335) after an investigation into whether ASX complied with rules on market integrity.
According to a statement by the ASX, also dated 14 August, ASIC filed civil proceedings against the ASX in the Federal Court of Australia on 13 August: “The proceedings follow a broad ranging investigation by ASIC into suspected contraventions of the ASIC Act 2001 and the Corporations Act 2001 in relation to the previous CHESS replacement project.” ASX said that ASIC is seeking declarations, financial penalties, an adverse publicity order and costs against ASX. ASIC had not yet decided what penalty it will seek.
Helen Lofthouse, ASX Managing Director and CEO, said: “We recognise the significance and serious nature of these proceedings. We cooperated fully with ASIC’s investigation and are now carefully reviewing and considering the allegations. We play a critical role at the centre of Australia’s financial markets, and continue to focus on supporting and delivering for customers. We are committed to taking ASX forward, and have made strong progress as an organization over the past two years.”
New project to replace CHESS
ASX continues to work to replace the upgrade the CHESS system and make it scaleable and resilient. It has dropped the blockchain approach and is working with global technology provider TATA Consultancy Services (TCS) on the new system. According a report in The Fintech Times, it will roll out implementation in two phases.
On 2 August ASX announced it had released a consultation paper. ASX Group Executive Securities & Payments Clive Triance said “Our commitment to transparent and collaborative consultation is central to the success of the CHESS replacement project as well as Australia’s approach to T+1.
“The proposal to implement CHESS replacement across two main releases reflects how we’ve listened to industry feedback. The staged approach to implementation, where we are delivering the clearing services first in Release 1, followed by delivery of settlement, subregister and additional clearing enhancements in Release 2 is designed to manage several factors, including materially reducing delivery risk and allowing for industry readiness.”
In June the ASX said Release 1 would come in the first half of 2026 and Phase 2 in 2029.
