More than five years and A$250 million later the ASX has binned its controversial blockchain-based replacement settlement system in the wake of a scathing independent report.
The Australian stock exchange hired US firm Digital Asset in 2016 to build a new settlement engine using the-then new-fangled blockchain, or distributed ledger technology (DLT) to replace the aging CHESS platform.
But last week, after multiple missed launch deadlines, the ASX admitted defeat as findings of an independent report issued by consultancy firm Accenture pointed to serious design, technical, managerial and implementation failings across the project.
Australian Securities and Investments Commission (ASIC) chair, Joe Longo, said the regulator was “closely monitoring” the Australian exchange to ensure the critical clearing and settlement services continues to function.
“The independent report has found significant gaps and deficiencies in ASX’s program delivery capabilities and that there are significant challenges in the technology design. That these findings can be made at this late stage of a critical replacement program is altogether unsatisfactory,” Longo said in a joint release from the regulator and bourse.
“ASX has failed to demonstrate appropriate control of the program to date, and this has undermined legitimate expectations that the ASX can deliver a world-class, contemporary financial market infrastructure.”
In a separate release, the ASX confirmed it would “reassess all aspects of the CHESS replacement project” while writing off between A$245 million to $255 million of capitalised software in the first half of next year.
“This will have no impact on dividends,” the ASX statement says.
Former Commonwealth Bank and Westpac senior technology executive, Tim Whiteley, has joined as ASX project director to reboot the CHESS replacement effort.
Damian Roche, ASX chair, said the group “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”.
“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,” Roche said. “There are significant technology, governance and delivery challenges that must be addressed.”
The Accenture report found six “core issues” in the botched blockchain system including “Holdings, Batch Settlement, Bulk Process Support and Resiliency, Bilateral Matching, Issuer (HIN) Notifications, and Support for Ex-Transactions”.
As well as possibly fatal technical flaws, the independent report identified managerial and communication problems across the CHESS redesign program.
“Accenture’s assessment of the current delivery model and execution plan found deficiencies in execution rigour and the lack of a clear understanding of progress, compounded by misalignment of expectations between ASX and DA [Digital Asset],” the report says. “… Evolution to siloed management and execution structures and tooling has impeded collaboration with inefficient escalation- processes that has resulted in friction at the working team level and resulted in misaligned views of accountability.”
ASX partner firm in the CHESS refresh, Digital Asset, said in a statement that the company was “in alignment” with the Accenture findings, especially the recommendations for consistent business rules, simplification and the appointment of a new tech director. The ASX took a 5 per cent stake in Digital Asset in 2016.
“Executing large-scale implementation projects is extremely complex, regardless of the underlying technology. Just like any project, clear requirements, alignment on the objectives, and manageable milestones with defined success criteria are paramount,” the Digital Asset release says.
“We support ASX’s decision to commission this study and the next steps for the CHESS replacement program that ASX deems necessary. We will continue to work with ASX and our other enterprise customers to drive the successful innovation and adoption of distributed ledger technologies.”
The Digital Asset statement also notes that the ASX report found the group’s ‘smart contract’ Daml software was a “capable smart contract modeling language that provides flexibility for defining business rules and processes”.
However, the Accenture report concludes that “Daml may not be the most appropriate to solve for all business process, logic, and data”.
As well, the independent analysis found “there are 2383 DA-related defects; 174 of which are pending resolution”.
“Based on the data received from the ASX test team on September 28th, 2022, 103 defects are with DA, 48 are with ASX testing, and 23 require further clarification,” the Accenture report says.
While blockchain was heralded as a cure-all for administrative inefficiencies in the financial system, the DLT dream has yet to materialise at scale.
Last year the US-headquartered global securities back-office giant, DTCC, unveiled plans for a blockchain-based system as the industry targets T+1 or quicker settlement times.