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CHESS mess: The ASX’s costly journey to modernisation

The Australian Securities Exchange (ASX:ASX) has unveiled a $445m budget for its revised attempt to replace the Clearing House Electronic Subregister System (CHESS), after its original blockchain-based project failed in 2022. The revamped system, set to be rolled out in two phases by 2029, will cost significantly more than the $250m lost on the initial effort.

A troubled history

The CHESS system, first introduced in 1994, has long been considered outdated. In 2016, ASX initiated plans to modernise the platform. By 2017, the exchange committed to building a blockchain-based replacement in partnership with Digital Asset, intending to lead global markets in post-trade innovation. However, the project suffered from excessive customisation, stakeholder dissatisfaction, and major defects uncovered during testing. In November 2022, ASX abandoned the initiative after investing $250m and taking a significant write-down.

ASX’s handling of the failed project drew legal scrutiny. The Australian Securities and Investments Commission (ASIC) filed proceedings in August, alleging that ASX misled investors in February 2022 by stating the project was “on track for go-live” in April 2023 and “progressing well.” ASIC claims these statements lacked a reasonable basis and undermined trust in the integrity of market disclosures. ASX has denied wrongdoing, arguing its statements were based on available information at the time.

Costs and timeline for the new project

The revised CHESS replacement will adopt a modular, cloud-based platform developed by Tata Consultancy Services and will be implemented in two stages:

  • Release 1 (Clearing services): Set for 2026, with costs estimated between $105m and $125m.
  • Release 2 (Settlement and subregister services): Expected in 2029, with costs ranging from $270m to $320m.

ASX CEO Helen Lofthouse attributed the higher costs to extended timelines, allowing for extensive industry testing and preparation. “We are committed to safe delivery and reliability, ensuring the system meets the market’s needs today and in the future,” Lofthouse said.

T+1 and future readiness

The updated system will initially maintain the current T+2 settlement cycle, where trades settle two business days after execution. ASX has stated that transitioning to a shorter T+1 cycle, where settlement occurs within one business day, will only be considered after CHESS Release 2 is fully implemented in 2029. The move to T+1, already adopted in the US, reduces counterparty risk and improves liquidity but requires significant system upgrades and industry-wide readiness, making it a complex transition. ASX noted that T+1 could not go live before 2030, at the earliest.

Market reaction 

The announcement has not alleviated investor concerns, with ASX shares closing 4.3% lower at $66.18. The price tag was higher than expected, and analysts have flagged risks associated with the protracted timeline and high costs, particularly in light of the project’s complexity.

Despite these challenges, ASX remains committed to its strategy. “This is critical market infrastructure,” Lofthouse said, “and we need to make the appropriate investment to ensure it can serve the market effectively.”

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