ASX dumps blockchain-based CHESS replacement, hit with $250m charge

The Australian Stock Exchange (ASX: ASX) has today announced it will dump its planned blockchain-based replacement of the 25-year-old CHESS settlement technology after about four years of planning.

The latest decision, guided by the advice of an independent review conducted by Accenture, means the ASX will be hit with an impairment charge of between $245 million to $255 million pre-tax in light of the solution uncertainty.

According to Accenture, the review identified ‘significant challenges’ with the solution design and its ability to meet the ASX’s requirements for the software.

CHESS, which stands for Clearing House Electronic Subregister System, provides clearing, settlement, asset registration and select post-trade and issuer services for the Australian stock market, and was originated around 25 years ago.

The move to replace the current CHESS system dates all the way back to February 2015, when management at the time declared it would upgrade all of its major trading and post-trade platforms over the following three to four years.

The CEO at the time, Elmer Funke Kupper, said the investment in new technology would create a more flexible exchange and deliver innovation to Australian financial markets.

"The program has been developed over the last twelve months and has involved extensive benchmarking of alternative solutions for the Australian market," said Kupper at the time.

Nearly one year later the ASX announced it had selected US-based firm Digital Asset Holdings (DAH) to develop solutions using distributed ledger technology - a process it hoped would be completed by 2017. Simultaneously, the company said it acquired a 5 per cent equity interest in DAH.

"The initial phase of work is designed to bring the benefits to life and to test if Distributed Ledger Technology can work at the scale of the Australian equity market," Kupper said in January 2016.

"By building a solution alongside the CHESS system, all stakeholders can participate fully in the innovation process and have confidence in the clearing and settlement process that underpin one of the top 10 equity markets in the world."

In 2018, the ASX commenced the ‘CHESS Replacement Program’, which aimed to modernise and upgrade the software using distributed ledger technology to improve the overall availability, reliability and performance of the system.

“We began this project with the latest information available at that time, determined to deliver the Australian market a post-trade solution that balanced innovation and state-of-the-art technology with safety and reliability,” said ASX chairman Damian Roche, who was appointed to his current role in April 2021 but has served as a director since 2014.

“However, after further review, including consideration of the findings in the independent report, we have concluded that the path we were on will not meet ASX’s and the market’s high standards. There are significant technology, governance and delivery challenges that must be addressed.

“We are committed to providing the Australian market with the very best and most viable long-term solution. I am proud of our ambition but believe we should now pause to reassess our solution for the future.”

This Replacement Program has faced numerous delays over the past four years, which the chairman has apologised for today.

“On behalf of ASX, I apologise for the disruption experienced in relation to the CHESS replacement project over a number of years. ASX always endeavours to act in the best interests of the market, and I thank our customers and other stakeholders for their patience and support,” Roche said.

“Today’s decision has been made by the ASX Limited and Clearing and Settlement Boards, and it has not been made lightly.

“ASX provides critical market infrastructure. What we do matters. We must do it right and we will. Importantly, our current CHESS system is performing well and investment in it will continue, giving us flexibility to reassess the various pathways for its ultimate replacement.”

The ASX maintains the current CHESS software remains secure and stable, and is ‘performing well’.

As a result of today's decision, all of the capitalised software in relation to the development will be derecognised in 1H23 by the ASX, resulting in a non-cash charge of approximately $250 million on a pre-tax basis.

According to Accenture, there were three main issues with the replacement project, specifically a lack of application readiness, heightened complexity in the final integrated solution, and inefficiencies in project governance.

The review specifically pointed out that there were a number of inefficiencies in the delivery lifecycle, resulting in misaligned views of status on delivery progress, risks and issues.

However, ASX management seems intent on replacing CHESS in some form, with managing director and CEO Helen Lofthouse noting it was clear the exchange needed to revisit the solution design and test feedback from the review in order to bring the project to market.

“The independent report, coupled with our own assessment work, confirms a number of significant challenges associated with aspects of the CHESS replacement project. These findings provide valuable inputs to helping us determine a revised solution. We have some work to do before updating and consulting with stakeholders more deeply,” said Lofthouse, who was appointed in June this year.

“To be clear, the derecognition charge reflects the uncertainty of the future value of the current solution design. It does not prevent us from using parts of what we have already built if we determine there are adjustments we could make to our current design, which will enable it to meet ASX's and the market's high standards.

“Our clearing and settlement licences are critical. We take feedback seriously and examine it carefully. We are aiming for the best solution for the Australian market, and will be wide-ranging and thoughtful in our analysis of the options.”

In light of today’s news, the ASX has appointed technology transform executive Tim Whiteley as project director for the next phase of the CHESS replacement project.

Whiteley will report directly to Lofthouse, and will focus on revisiting the solution design, establish the new project governance arrangements, strengthen vendor management and position the project for the next delivery phase.

Shares in ASX are down 1.50 per cent to $70.06 per share at 11.56am AEDT.