© Reuters. FILE PHOTO: A man looks at the main board at the Australian Securities Exchange building in central Sydney, Australia, February 6, 2018. REUTERS/Daniel Munoz
By Byron Kaye
SYDNEY (Reuters) – In a Sydney hotel conference room in May, Tim Hogben, head of securities and payments for ASX Ltd, which runs Australia’s stock exchange, told traders, registry operators and clearing house representatives what they wanted to hear. .
A rebuild of the exchange’s old software using blockchain-based technology is generally ready after seven years of development, putting the ASX on the verge of the first transformation in the world that will be able to increase trading volumes and compete more aggressively with global rivals.
“Ninety-six percent of the software is now in the operating and testing environment. That’s 96% of the software in use,” Hogben said at the Stockbrokers and Investment Advisers Association conference, in footage seen by Reuters. “If it doesn’t work, you’ll hear about it, let me tell you.”
In November, the ASX abandoned the project, citing dysfunctional management, concerns about product complexity and scalability, and difficulty finding experts to support it. The axing comes after new CEO Helen Lofthouse commissioned a review of Accenture (NYSE: ) that found the rebuild was only 63% delivered and nearly half the code needed to be rewritten.
More than a dozen brokers, other market participants and people directly involved in the blockchain project told Reuters the failure has shaken confidence in the Australian exchange operator. Some have expressed disappointment at the time and cost involved in the upcoming venture and the ASX’s repeated assurances that all is well with the upgrade, which has experienced five delays since its scheduled 2020 launch.
The experience also raises questions about the mismatch between the promise and reality of the technology that underpins cryptocurrencies. The use of distributed ledgers in Australia’s critical financial infrastructure will be one of the most important applications of blockchain-based systems in a major enterprise setting.
“The ASX may have chosen a stable and stable clearing and settlement system (but) it chose an unproven, untried advanced technology,” said Michael Somes, general counsel of Cboe Australia, a securities and derivatives exchange involved in the project.
“The ASX option has resulted in one of the largest critical services seen in global financial markets.” On top of the cost of A$ 245-A$ 255 million ($ 164-171 million) ASX plans to take for the debacle, market players estimate that together they spend on things that are again preparing for the rollout, including in software upgrades, airfares and employee hours used. attending webinars and consultations. At a parliamentary hearing this month, the ASX apologized for the failure but denied misleading the market or regulators. Chairman Damian Roche, when asked by MPs about the statement in the company’s 2021 annual report that the project had “moved from the design and build phase to test and delivery”, said the statement referred to the “functional” part of the software, not the “non-functional part”. like security and scalability.
An ASX spokesman told Reuters in an email that the company was providing project updates based on the latest information available and that some challenges “only become apparent as we get to the final stages”.
ASX’s efforts to change the platform that facilitates trade – known as CHESS, for Electronic Clearing House Subregister System – began when CEO Elmer Funke Kupper was in 2015, when there was a global fascination with cryptocurrency and blockchain.
After the New York start-up Digital Asset Holdings showed the ASX executives a test transaction on its blockchain software, the ASX in early 2016 entered a little-known company to start exploratory work on the overhaul. ASX buys 5% stake in Digital Asset.
Two months later Funke Kupper quit due to bribery allegations related to a previous role; he was cleansed. The ASX was hit with a rebuild, and it raised its holding in Digital Asset to 8.5%. Under Funke Kupper’s successor, Dominic Stevens, the exchange operator moved from no market consultation to extensive consultation, a person involved in the project told Reuters on condition of anonymity out of concern for professional repercussions.
The scope has also increased. From the initial plan to open about 12 of the 400 CHESS data transfers per transaction on the blockchain, the ASX decided that the new system would include all 400 transfers, the person said.
People working on the project raised concerns that Digital Asset lacked aftermarket support and that the ASX had boarded the company without testing its product for scalability, the person said, adding that those concerns had not been addressed. Ultimately, ASX had 300 people working on the CHESS replacement project, about a third of its workforce.
“To try and put something that hasn’t been tried and tested into Australia, I think is unwise,” said William Slack, managing director of Morrison Securities, which has two staff allocated to ASX projects and three or four staff to each ASX consultancy. for several years.
Funke Kupper did not respond to a request for comment. Efforts to reach Stevens were unsuccessful. When he announced his retirement in February, he told the Australian Financial Review that his successor would find the blockchain project delivered and working, and that “the next phase is over”.
When CHESS went live in 1994, it was seen as innovative because it combined trading, clearing and settlement in one platform. But over time it becomes outdated and harder to maintain. When the surge in trading in March 2020 led the regulator to close trading due to process delays, the Reserve Bank of Australia said replacing CHESS “with more modern technology is critical”.
But by trying to replicate all the functions of CHESS in one system, ASX risked undermining the advantage of the block, which is to reduce the point of contact that is a slow process, people involved in the project said.
“It might be easier, I think, to just build a new version of CHESS in some other modern language, rather than blockchain,” said Ramy Aziz, the former ASX chief financial officer who oversaw the project’s budget, governance and schedule. at the initial stage.
“Maybe the blockchain needs to evolve a bit more before we can do what we want for CHESS. Maybe it won’t work.”
Digital Asset declined to comment beyond a statement on its website agreeing with parts of the Accenture report that highlighted “the need for consistent business requirements (and) simplifying solution design”.
“Clear requirements, alignment in goals and manageable milestones with defined success criteria are paramount,” he said.
An ASX spokesperson told Reuters that distributed ledger technology could be transformational and that the company had chosen Digital Assets after a “robust global” search.
Shortly after ASX shelved the project, AP Moeller-Maersk A / S and IBM (NYSE: ) is ending its blockchain-enabled shipping platform, due to a lack of global cooperation.
FALLOUT Recriminations were swift. The Australian Securities and Investments Commission, which regulates the exchange, called the late disclosure of the problem “unsatisfying” and demanded a special report from the ASX commission explaining its plans for CHESS, while the Reserve Bank of Australia called the failure “very disappointing”. MPs want to expand ASIC’s powers on the ASX.
Morgan Stanley (NYSE: ) analysts slashed ASX shares by 10%, citing strategic uncertainty.
ASX users, meanwhile, want compensation for the time and money they lost to projects they couldn’t choose.
“Public announcements by the ASX about the trip have always been shown to be inaccurate, some may even be misleading,” said Daniel Spokes, director of client support services for Morgans, a Brisbane brokerage. Vendors investing in the technology should “have the right to compensation”, he said.
The CEO of a small broker that uses its own trading software, who spoke on condition of anonymity so as not to damage ties with the exchange, told Reuters that he employed four full-time software developers for three years, at a cost of more than A$1 . million, to keep up with the ASX’s frequent update requirements.
The RBA and ASIC have said they expect the ASX to cover industry write-downs associated with failure. A spokesperson for the ASX said the company was “very aware of the investment customers and other stakeholders have made (and) we will keep this in mind as we consider what work we can use to build new solutions”.
The exchange “offered rebates to customers in the past”, the spokesperson said, without elaborating.
For some companies, these costs are difficult to quantify. One of the largest third-party trading providers, FinClear Pty Ltd, is delaying the integration of its software systems with an acquired company to 2021 based on an abortive ASX exchange date.
“This means it’s about the decision-making process of other technology projects that are all interconnected,” said FinClear CEO David Ferrall.
“The ASX is probably, accidentally or intentionally, misleading the market. I’d like to think it was unintentional.”
Chris Burrell, managing director of Burrell Stockbroking, said he had employees who retired late after learning from the opening schedule of the project, “then the date came and I was pushed out”.
As a result, the ASX still needs to determine how to update its core platform. The spokesperson told Reuters that “no solution is available to meet the needs of the Australian market”.
Aziz predicts the exchange will be more careful in the next attempt.
“They will probably create a new version of CHESS in a normal programming language, not in blockchain,” he said. “That’s all we can do.”