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S P E C I A L ]
First mover advantage
The Australian Securities Exchange (ASX) has been the first adopter of blockchain
technology for its equity post-trade infrastructure. Will this move resonate with other
clearing houses, and is this the time to embrace blockchain?
B
lockchain had its first major foray into the clearing
and settlement process with the announcement last
December that the Australian Securities Exchange (ASX)
will replace its legacy CHESS equity clearing platform with
distributed ledger technology (DLT) developed by Digital
Asset. Full deployment is set to go live by 2021 but partici-
pants are already taking note.
While Digital Asset’s technology has not yet been proven
to scale, the potential benefits are many. According to ASX,
the technology should provide greater market efficiencies
through better record keeping, reduced reconciliation, more
timely transactions and enhanced data quality.
“The changes ahead will lead to innovation in new prod-
ucts being available to investors opening up further offer-
ings and the potential for further offshore investment into
Australia,” says Johann Palychata, head of blockchain, BNP
Paribas Securities Services, which is an investor in Digital
Asset and consulted on the ASX project.
“This will provide the opportunity to challenge the inef-
ficiencies in the end-to-end value chain and the removal
of redundant processes making the market a lot more
streamlined, efficient and flexible, especially in terms of
timings and ability to change.”
Palychata believes the project could set off “a wave of
similar projects elsewhere if the promises of the new tech-
nology are confirmed.”
A legitimate claim?
Beyond improving efficiencies—therefore reducing cost—
proponents believe that the implementation of blockchain
could enable central counterparties (CCPs) to develop new
revenue generation opportunities.
“The immediate benefits of DLT to the mitigation of
system risk, and the reduction of costs associated with the
reconciliation process are just the beginning,” says Chris
Church, chief business development officer of Digital Asset.
“As DLT solutions move into production, we could start to
see market operators and participants examining revenue
generating opportunities, such as the creation of new
products and services, which are only possible because of
shortened trade processing and settlement times.”
Church says that Digital Asset is working with several
other central security depositories (CSDs) and CCPs on de-
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ploying more blockchain projects. It is the “single source of
truth” that blockchain provides which, he hopes, will reduce
systemic risk. The push to blockchain is also likely to come
from investors using central clearing houses.
Palychata says institutional investor interest will grow
when they have analysed how the new system could allow
them to optimise their trading strategies and funding mod-
els, and how they can interact with exchanges to provide
them with the available data in the quickest timeframe.
The idea of cost reduction through an improvement in
efficiency makes sense, but it has to be balanced with
considerations of implementation expenditure.
Significant costs
According to Suresh Kandula, director of technology at
Sapient Global Markets, the initial costs of ASX’s DLT im-
plementation are likely to be significant.
“If I have to compare this to equivalent North American
platforms and what it would take to modernise those, it
would be between three to five years and it could cost up to
$150 million, possibly more,” says Kandula.
“That figure does not include all the settlement banks,
intermediary technology platforms and whole set of eco-
system of vendors to make changes to their own platforms,
supporting newer interfaces and messaging standards. For
example, as part of this project ASX is considering ISO2022
along with replacing or augmenting more expensive SWIFT
messaging.”
Furthermore, there is a likelihood of continued external
costs. “Because blockchain is based on open source, it can
be less expensive,” says Monica Summerville, senior analyst
at Tabb Group. “However, a lack of in-house expertise raises
risks as the entity is more reliant on its outside providers,
whether these are suppliers or consultants.”
Large and complex project
But it is not a panacea. While at a conceptual level, the
function of netting and clearing could be carried out using
DLT, the cost and risk considerations of the ledger model
need to be balanced against the existing efficiencies of
current infrastructure, which for many is highly robust and
cost-efficient, says Peve. Indeed, the application of block-
chain technology to clearing and settlement will need to
mature in order to meet the requisite volume demands and