In a big shift, the Australian Securities Exchange [ASX:ASX] has announced a partnership with TATA Consultancy Services (TCS) to develop a new share settlement and clearing system.
This decision comes after the ASX abandoned its plans for a blockchain-based system. Its failure had put the exchange under regulatory scrutiny and market disarray.
The ASX scrapped its blockchain idea in November 2022 after a review identified ‘significant challenges’ in the plans. The report concluded that a large rework would be necessary after its four years of development.
For now, the old CHESS system limps on. CHESS, which stands for Clearing House Subregister System, provides clearing, settlement, asset registration, and select post-trade and issuer services for the Australian stock market.
Upon news of the selection, the ASX share price has risen by 1.8% to $58.19 per share today. Today’s gains have failed to dent the -20% fall the stock price has seen in the last 12 months.
New Direction for CHESS
The CHESS system is vital for handling millions of daily trades in Australia. Now, it’s set for a significant overhaul with a ‘product-based solution’from TCS.
TATA Consultancy (TCS) is a prominent Indian technology group that has worked on other countries’ trading systems. ASX has also enlisted Accenture to support project delivery as a solution integrator.
Replacing the 29-year-old CHESS infrastructure will be an important step for the exchange. It will also be significant for ASX Ltd as it attempts to regain investor trust.
The failure of the previous system meant a $245–255 million impairment charge for the ASX, which began its replacement efforts in 2015. The project was delayed five times before the decision to abandon it.
ASX plans to implement the new CHESS in two main releases. The first is on the clearing service, with an estimated cost between $105–125 million, with completion targeted for 2026.
The second phase, upgrading the settlement and subregister function, is set for 2028–29. The costs for this phase will be decided after stakeholder talks in late 2024. ASX will finance the overhaul by issuing a $200–300 million bond.
The Australian Securities and Investments Commission (ASIC) and the RBA have closely watched the changes.
ASIC Chairman Joe Longo emphasised the need for a realistic approach, saying:
‘It will be critical for ASX to now focus on engaging with the market on the detailed design of the CHESS Replacement program with a realistic and achievable timeline for implementation.’
RBA Governor Michele Bullock stressed addressing past issues to avoid repetition.
Outlook for the changes to ASX
The departure from a blockchain-based system is a mixed result. Its failure highlights the difficulties in implementing the complex system into trading systems.
The ASX was almost the first exchange to adopt blockchain technology. The change could have sparked innovation for fintech companies.
It would have also brought a radical level of transparency into the trading of securities within Australia.
However, its problems were evident from day one. Market participants expressed fears around a sudden change in transaction software and systems.
Ultimately, the system failed because of its complexity. The ASX is now taking the safe road and adopting a piecemeal, out-of-the-box product.
ASX’s decision to adopt a ‘modular architecture’ for its new system should offer several advantages.
It allows for interoperability with non-ASX market operators, enhancing market reach. The approach also aligns with the industry’s needs for a scalable and reliable platform.
This is a basic overview of the system the ASX will be sticking with:
Source: Trade Finance Global
TCS’s trading products are already used in Finland, South Africa, and New Zealand’s exchanges.
The project’s next phase will be a detailed design and implementation over multiple years.
The time taken for all these changes highlights the complexity and scale of the transformation.
The ASX’s partnership with TCS marks a pivotal moment in its modernisation strategy.
The changes couldn’t come soon enough as the need to change the ageing CHESS system becomes more apparent. It’s time to catch the ASX up with other markets at the forefront of technology in financial markets.
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For Fat Tail Daily