ASX Dismisses New Concern Over CHESS Oversight Amid Delivery Disaster

New questions about high-level oversight of ASX’s stressed project come as market participants’ frustration boiled over on Monday following ASX’s confirmation The Australian Financial Review signal that there would be another delay in the new clearing and settlement system.

Brokers are worried about rising costs as they consider delaying plans to integrate with the system that records stock ownership.

The ASX said there was a “high likelihood” it would be forced to push back an April activation date next year. This came after a three-month delay in a software upgrade from its technology partner, Digital Asset, which was due to be delivered in April but will now only be received in July. This is supposed to fix various performance and functionality issues that ASX hasn’t been specific about.

ASX did not say when the new system, a private version of a distributed ledger shared among ASX participants, will go live. Stock market leaders expect the delay to be at least six months and likely 12 months – which would see it go live three years later than originally planned.

ASX CEO Dominic Stevens, who announced his retirement in February, flew to New York last week to meet with software developers from the CHESS project. Rhett Wyman

“It’s extremely boring,” said a senior executive at one of the nation’s largest brokerages. “There is not enough information. We don’t know the next steps. We are in a waiting pattern.

Judith Fox, CEO of the Stockbrokers and Investment Advisers Association, said that while the delay “creates more time to ensure testing is completed to everyone’s satisfaction, each delay means additional IT deployment and cost to our members”.

“This is particularly challenging for our members given other time calls from their IT teams, including meeting ASIC expectations of market participants in light of the November 2020 ASX outage. “, she added.

Amid ASX’s assurances that its underlying blockchain is “working well” in the “Industry 1 Testing Environment” (known as ITE1), some players say testing failed been as extensive as they would have liked, and it didn’t involve running the system at full capacity.

The Big Bang questioned

There are also widespread concerns in the market over ASX’s ‘big bang’ approach to switching to the new system over the weekend, as other markets like Singapore operated parallel systems for several years during their migration to a new clearing infrastructure.

Stockbrokers have complained about a range of additional issues, including complex new rules for data and messaging, which impact well-known workflows.

ASX declined to answer questions about the causes of the latest delay and told the market more information would be provided at a briefing on April 7.

“ASX underestimated the scale and complexity of this project and all stakeholders will be looking for more answers,” said Paul Williams, CEO of Automic Group, which developed registry services in the test environment. ASX.

“We are all now waiting for more information, and it is important that we get it, so that we can understand what the plan and the extension of the schedule are, and what this means for our business, our development plans and the restructuring of our pipeline.”

“We recognize the impact these changes will have on our customers’ programming activities and apologize for any inconvenience caused,” ASX said Monday.

ASX did not disclose project costs which are believed to be around $250 million. A brokerage industry source suggested that the rest of the industry would have spent between $100-150 million to prepare for the new CHESS and that this could increase by perhaps another $50 million as deadlines are getting longer.

The new delay has raised questions about the ability of ASX, which holds a virtual monopoly on stock markets, to complete such a massive IT project. The senior executive who oversees him, former deputy chief executive Peter Hiom, resigned from the ASX last year.

“You have a big company trying to implement a whole new infrastructure, blockchain, which is in its infancy. Large companies are generally not nimble and are not good allocators of capital when it comes to big projects like this. They are overwhelmed,” said John Winters, CEO of Superhero, a stock trading platform.

Dave Curran was announced as the new director of the ASX last week. The ASX says he has “a relevant agenda and technical background, hence his appeal to our board.” oscar colman

“They committed to this project and found they couldn’t deliver it on time and on budget. For some industry players, this will undermine trust.

The further delay comes just six weeks after ASX CEO Dominic Stevens assured the project was on track by announcing it would leave the exchange as soon as a replacement was found.

Some in the market are now wondering if the new CEO will come up with a plan B for the replacement of CHESS, which could see the Digital Asset project replaced with a ready-made system from Nasdaq, or another exchange. Some people close to the project, however, say ASX has gone too far to completely change course, given the amounts already invested in the industry.

Other brokers said the delay could make it harder for the ASX to encourage market participants to “take a node” on the new blockchain, which will allow ASX to sell them new data services, a core revenue growth strategy. But most brokers are expected, at least initially, to keep existing messaging techniques with the new system.

The ASX blockchain is a centralized, controlled version of the technology that restricts access to certain market participants. This is different from open and public blockchain systems where ledgers are available to everyone.

The new delay will increase pressure on the Australian Securities and Investments Commission to keep a close watch on the project, after a CHESS outage in late 2020 forced further scrutiny of ASX for its own. ensure that it meets its licensing requirements.

“ASIC is aware of the changes in workflows at ASX who are well aware of their responsibilities and the importance of this project,” an ASIC spokesperson said Monday.

“It’s important that they err on the side of caution, and if that means flagging a possible delay, that’s prudent and wise. There’s no point putting it online if it’s not ready, but how they handle it is ASX’s business.

Market sources pointed to other issues in the ITE1 test environment, including a lack of full functionality and long delays in fixing bugs and issues with the code. A particular complaint is that test data is deleted when ASX reinstalls new versions. Questions were also raised about the sequence of plans to be incorporated into the new system.

The delay will delay preparations for CHESS user testing and accreditation. ASX needs updated software before it can accredit users. ASX also said the software update delay would push “migration dress rehearsals” beyond October.

ASX said it will work with the market “to assess impacts on project milestones, industry testing, operational readiness and implementation, migration dress rehearsals, and go-live date. “.

“We remain committed to meeting industry and stakeholder expectations for implementing the new system in a way that appropriately balances efficiency and safety,” ASX said.

Using blockchain to upgrade CHESS was originally proposed by ASX CEO Elmer Funke Kupper in late 2015. ASX invested in Digital Asset in early 2016. The system was originally to be enabled in April last year.

When the coronavirus hit in March 2020, ASX said the initial start-up date of April 2021 would be delayed.

After a short consultation he said he would push it back a year to April 2022. Then in October last year he pushed it back to April 2023 saying the market needed more time to test the new technology.

Market participants raised numerous concerns over the details of the project as recently as last December.

The Australian Financial Markets Association is concerned about plans to cancel batch settlement notices and wants clarity on getting real-time deficit information before settlement closes. He also questioned indemnification provisions and key terminology changes at the end of the project.

Meanwhile, the Stockbrokers and Investment Advisers Association criticized changes to the operating rules requiring participants to take “all reasonable steps”, “as soon as reasonably possible” to obtain correct holder records, opening them up to possible sanctions in the event of non-compliance.

He also raised concerns about the creation of two different process flows between issuers and participants and proposed process changes for “bilateral on-demand messages” that will lead to a significant increase in canceled instructions by brokers.

Last week, ASX released an expert report to reassure regulators that the project was on the right track. EY, in a heavily redacted report, said the program was fit for purpose and no significant shortcomings were identified.

Automic’s Mr Williams said he had spent the money to train developers in DAML, the computer language facilitating the new technology, and would have been ready to launch, but “further delay means that we will have to restructure our development pipeline accordingly”.

“We have a team and resources focused on integrating with DLT and with that pushed further, we will need to reallocate resources to facilitate what the ASX does. It’s disappointing, from our point of view.

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