ASX Reassess CHESS Blockchain Replacement

by Arthur · November 17, 2022

Important points

ASX will reassess all aspects of the CHESS replacement project following the completion of an independent review, conducted by Accenture, and its own internal assessment.

The independent report identifies significant challenges with the solution design and its ability to meet ASX’s requirements.

Current activities on the project have been paused while ASX re-looks at the solution design.

Current CHESS remains secure and stable, performing well. The ASX will continue to invest in its capacity and resilience.

CHESS replacement-enabled software will be written off in light of the resolution uncertainty, resulting in a charge of $245-255 million pre-tax ($172-179 million post-tax) in 1H23. This will have no impact on dividends.  A project director with extensive technology transformation experience has been appointed for the next phase of the CHESS replacement project.

ASX remains committed to providing the best long-term clearing and settlement solution for the Australian financial market.

The independent report is available here.

ASX Chairman Damian Roche said: “We started this project with the latest information available at the time, determined to deliver to the Australian market a post-trade solution that balanced innovation and state-of-the-art technology with security and reliability. After further review, including consideration of the findings of the independent report, we have concluded that the path we were on will not meet the ASX’s and the market’s high standards.There are significant technology, governance and delivery challenges that need to 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.

“On behalf of the ASX, I apologize for the disruption experienced in connection with the CHESS replacement project over several years. The ASX always tries to act in the best interests of the market and I thank our customers and other stakeholders for their patience and support. Today’s decision has been made by ASX Limited and the Clearing and Settlement Boards, and it is not taken lightly.”

The ASX provides critical market infrastructure. What we do matters. We have to do it right, and we will. Importantly, our current CHESS system is performing well and investment in it will continue, giving us the flexibility to reassess the various pathways for final replacement, Roche concluded.

Economic impact

Given the reassessment being undertaken and the uncertainty of future financial benefits from the CHESS replacement solution that has already been developed, all activated software in relation to the development will be written off in 1H23. The non-cash write-off charge is estimated to be in the range of $245-255 million pre-tax ($172-179 million post-tax) and will be classified as a significant item in the 1H23 results.

The ASX intends to maintain its existing dividend policy, with dividends based on 90% of underlying net profit after tax.1 The company’s FY23 operating cost growth outlook remains unchanged at 10-12%. Our FY23 capital expenditure forecast is expected to decrease by approximately $15 million as the CHESS replacement team is reduced to focus on solution design.

Independent report findings

Accenture was commissioned by ASX to review aspects of the CHESS replacement project, mainly focused on the scalability, robustness and supportability of the application, and to advise on confidence in executing the application delivery plan. The findings of the review provide an important input to ASX’s own continuous assessment.

ASX considers this independent report underlines the scale and complexity of the CHESS replacement project and raises significant issues, including:

Application Readiness – The report estimates that application software is 63% complete (ie, delivered and mostly tested) when considering both functional and non-functional requirements, and the timeline for completion is uncertain.

Complexity in the integrated solution – the report identifies complexity in the integrated solution design, including in the way ASX requirements interact with the application and underlying ledger. These complexities contribute to challenges in achieving the necessary supportability, scalability and stability for settlement and settlement.

Project management – the report identifies supplier management issues in the way teams from ASX and delivery partner Digital Asset operate and interact, which presents challenges in project delivery. The report observes a number of inefficiencies in the delivery lifecycle up to testing, with siled execution and reporting resulting in misaligned views of the status of delivery progress, risks and issues.

ASX Managing Director and CEO Helen Lofthouse said: “Replacing CHESS is a large and complex undertaking. While ASX is keen to embrace technology that benefits the market, it is clear that we need to revise the solution design as well as validate and test the feedback from the independent review to assess changes required to bring the project to market safely, efficiently and over a long period of time.-concept.

“The independent report, combined with our own assessment work, confirms a number of significant challenges relating to aspects of the CHESS replacement project. These findings provide valuable input to help us find a revised solution. We have some work to do before we update and consult stakeholders in more depth.

“To be clear, write-off fees reflect the uncertainty about 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 that there are adjustments we can make to our current design that will able to meet the high standards of the ASX and the market.

“Our clearing and settlement licenses are critical. We take feedback seriously and investigate it carefully. We aim for the best solution for the Australian market and will be comprehensive and thoughtful in our analysis of the options.

“In the meantime, our priority is to continue to maintain the stability of the existing CHESS system, which underpins the smooth operation of our financial markets. In recent years we have increased our investment in the capacity and resilience of the existing system and are confident that it will continue to serve the Australian marketplace well into the future,” Lofthouse concluded.

Improvements to governance and industry input

Effective today, ASX has appointed Tim Whiteley, a highly experienced technology transformation leader, as Project Director for the next phase of the CHESS replacement project (see brief biography at the end of this announcement). Mr Whiteley will report to the CEO. He will focus on revising the solution design, establishing new project management arrangements, strengthening supplier management and positioning the project for the next delivery phase. This will include a process to select delivery partners to help address the capacity gaps, including those identified by the independent review.

ASX will also establish an industry forum to provide input and receive regular status reporting on the project. This forum will complement the existing business committee,

Next step

Further planning needs to be undertaken by ASX to understand and evaluate the solution design options for CHESS replacement and their potential impacts. All stakeholder activity on the project will be paused and the test environment in the industry will be closed. Stakeholders will be updated on progress at ASX’s half-year results presentation in February 2023.

The ASX continues to engage and work constructively with the Government and regulatory bodies, including any regulatory action in response to today’s announcement.

Release of market notice approved by:

Johanna O’Rourke

Acting CEO and company secretary

Source: ASX