ASX CEO Dominic Stevens Leaves $250M in CHESS-Blockchain Unfinished Business

“You start saying, in fact, it’s somebody else’s strategy to drive it, and we should start thinking about this person who gets in the seat and actually gets up and goes through with me and which is also going through with the end of this project.”

Some research questions

The market was not impressed with the explanation. It erased $640 million from ASX’s market capitalization on Thursday as the stock fell 3.8%.

The fact that Stevens does not stay the course until the completion of the CHESS project will irritate market participants and raise some research questions for the Roche-led ASX board.

Does the board accept the repeated assurances from Stevens and project manager Tim Hogben that the CHESS replacement is “on track” and will go live in April of next year?

Or do they give the new CEO the opportunity to take a fresh look, examine the robustness of the project, and pass judgment on the credibility of the testing schedule?

Is the board ready to extend the completion date a fourth time, which would mean higher capital expenditure and a heavier financial burden for market participants? Or will he give the new CEO the mandate to draw a line in the sand and start over if he sees fit?

These questions carry more weight as representatives of at least two major market players have told Chanticleer they believe the project will not meet the April 2023 go-live date.

They believe the go-live date will be pushed back at least six months and possibly 12 months to April 2024. That would be a blow to the 100 customers who depend on ASX’s monopoly control over clearing and settlement.

Roche says all is well and tells Chanticleer, “The CHESS replacement project is on track and going well. The industry test environment is open and connected software vendors successfully process hundreds of thousands of transactions. »

The ASX has always argued that new clearing technology is based on what the market has said it wants.

But with the market having committed significant IT resources to replacing CHESS over the past four years, it won’t be happy about further delays.

The CEO of an investment bank said the ASX never specified the business case for replacing CHESS or the cost savings that would be passed on to market participants.

Big hit if CHESS is dropped

Roche and his fellow board members may well decide that further delay in replacing CHESS is tolerable given the amount of sunk costs and the fact that another year won’t make much difference to a project that started in 2016.

This argument also applies to Stevens.

Why not wait another year to complete it rather than remain a lame CEO for six months or more?

If the ASX is forced to push back the start date of CHESS by a year, the company could avoid a deprecation of the software and retain the idea that it can lead the world in blockchain-based DLT.

However, if the project is scrapped, it would be a blow to the preservation of the ASX’s monopoly on clearing and settlement at a time when regulators are losing patience. Hogben told Chanticleer last year that there was no “plan B”.

If the ASX is forced to go back to the drawing board on replacing CHESS, the Reserve Bank of Australia and the Australian Securities and Investments Commission may well say it’s time for competition in clearing and trading. regulation.

Successor needs Canberra ties

The ASX has proven adept at maintaining its clearing monopoly through the efforts of previous chairmen and CEOs, including Maurice Newman, David Gonski, Rick Holliday-Smith, Richard Humphrey and Elmer Funke Kupper.

That’s why the board might be tempted to put more emphasis on the new CEO having a political savvy and strong connections in Canberra.

But the board should be focused on finding new avenues for revenue growth given the powerful disruptive forces unleashed by decentralized finance apps and smart contracts.

While replacing CHESS gives the ASX the ability to take over the work done by share registries and other transactional intermediaries, the new CEO will need to have skills in blockchain, data analytics, and information services.

This line of thinking should put pressure on Roche to conduct a comprehensive search for Stevens’ successor. Chanticleer understands that a global search will take place.

The complexity of replacing CHESS will play into the hands of Hogben, who is considered a possible inside candidate to replace Stevens.

However, Hogben may not be considered to have the breadth and depth of experience needed in a CEO given that he has spent the vast majority of his working life at ASX.

The other possible internal candidate is group head of markets Helen Lofthouse, a former banker who worked in clearing and settlement at UBS and JPMorgan in Europe before joining ASX in September 2015. She was promoted during a management reshuffle in July last year.

Many delays

Project CHESS replaces a bespoke software and messaging platform introduced in 1994. It uses DLT provided by VMware. It includes the ISO 20022 messaging standard.

The initial cost was estimated between $30 million and $50 million with a completion date of April 2021.

But in February 2020, the completion date was pushed back to April 2022. Then in October 2020, following a series of consultations, the ASX pushed back the go-live date to April 2023.

A key part of the original deal was a $30 million investment by the ASX in Digital Asset Holdings in New York. Its shareholding was diluted by a series of capital increases in which ASX did not participate.

Even so, ASX has a vested interest in the success of Digital Asset.

Other exchanges, including Hong Kong and Frankfurt, have begun testing Digital Asset’s distributed ledger software language called daml.

But no other exchange has invested as much as the ASX or been brave enough to lead the world in implementing untested blockchain-based technology.

The explosion in the cost of replacing CHESS to $250 million has more than doubled ASX’s capital spending over the past three years, from $50 million to $116 million projected for this fiscal year.

Growing market concerns over larger investment budgets have put downward pressure on ASX shares, which trade at a price-to-earnings ratio of 34x the market leader, mainly due to its profit margins of 70%.

Those profit margins, which make the ASX one of the most profitable exchanges in the world, are so despite the emergence of an equity market competitor in Cboe Australia, formerly Chi-X Australia, which owns 18% of market share.

Replacing the 28-year-old CHESS platform was one of Stevens’ six technology priorities designed to update ASX’s aging technology infrastructure.

Despite two notable stock market outages in September 2016 and November 2020, Stevens managed to oversee the construction of a new data center with proper secondary redundancy, a new monitoring system, an improved website and a new trading system. shares provided by the Nasdaq.

Additionally, the number of “severity 1” technology incidents at the ASX has dropped 91% since 2015.

If Project CHESS is completed in April 2023, the average age of ASX stock technology infrastructure will be at its lowest level since the digitalization of markets in the 1990s.

A strategic move by Stevens that did not pan out was the stock market’s $30 million investment in electronic mortgage processing company Sympli. It was expected to be operational and break even last year. But it is still in the development phase.

ASX wants the leading company in electronic mortgage transactions, PEXA, to be forced by state governments to provide competitors such as Sympli with access to its monopoly technology platform.

It would be ironic if this argument for interoperability were also applied to Australia’s clearing and settlement system.

The outages and loose governance of ASX-controlled clearing entities have caused angst for the RBA and ASIC.

ASIC, which took a year to investigate the November 2020 stock market blackout and imposed additional licensing terms on the ASX, said it was disappointed that the shortcomings in 2020 were similar to those in 2016.

ASX was forced to take “corrective action” and subject its CHESS testing regime to independent oversight by a third party, believed to be EY.

The RBA’s Annual Clearing and Settlement Assessment called on the ASX to upgrade the skills, experience and understanding necessary to oversee ASX’s technology upgrades, including the replacement of CHESS .

Stevens started his career at Bankers Trust Australia, had a short stint at Zurich Capital Markets before joining Challenger, where he was head of capital, risk and strategy for four years before becoming CEO in 2008.

He left Challenger in 2012 and joined the board of ASX, where he was a non-executive director. He was asked to step down from the board and become CEO when Funke Kupper suddenly resigned.

During Stevens’ tenure, ASX’s management ranks and board were bolstered by people Stevens had worked with in the past. Hamish Treleaven, a former BT and Zurich Capital Markets executive, was appointed chief risk officer in 2017.

Rob Woods, who worked with Stevens at BT, Zurich Capital Markets and Challenger, was appointed non-executive director of the ASX in January 2020.

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