ASX considers blockchain for clearing and settlement
26th October 2015
Bitcoin's decentralised transaction record blockchain is being considered to replace the Australian Securities Exchange's CHESS clearing and settlement system.
Managing director Elmer Funke Kupper said the ASX, which is in the middle of replacing its trading systems, had a once-in-a-generation opportunity to install the best technology, and blockchain could reduce cost, save time and cut complexity in the clearing and settlement of trades, now done by a system known as the Clearing House Electronic Subregister System (CHESS).
"We have set up our equities post-trade systems as a separate business headed by Cliff Richards, who has just joined us from NAB trade," Mr Funke Kupper said. "We are engaging with firms domestically and overseas about the new technologies that are available to get cost out of the equity market.
"We are looking at what we can do to bring end-to-end efficiencies, and we have people looking very closely at blockchain to see if we can create efficiencies for our clients, investors and companies."
The blockchain and similar decentralised ledgers use computers with advanced encryption to keep track of transactions, bypassing traditional banks or clearing houses.
Major banks in global project
All the major Australian banks have joined 20 global banks on a project being run by global financial innovation company R3. It is designing protocols around a system banks might use to transfer funds or information to each other at lower cost and without having to rely on central banks.
"We see CHESS replacement as a one-in-20-year opportunity," Mr Funke Kupper said. "We're thinking about whether there are smarter ways to do things – to remove a lot of administrative costs and reconciliation costs from the back end of investment banking and broking, and this is where blockchain could be potentially quite helpful."
The upgrade of the ASX clearing and settlement system – which has been identified as vital national risk-management infrastructure by the Council of Financial Regulators – will begin by the end of 2016.
But Mr Funke Kupper has tied the upgrade of CHESS to the ASX being granted five more years' monopoly over clearing and settlement, which accounts for about 7 per cent, $45 million, of ASX's annual revenue.
After a six-month review, the Council of Financial Regulators recently handed its verdict to the government on whether competition should be allowed in clearing. The government was to release its decision in September, but the toppling of Tony Abbott has delayed the response. "We are replacing all our systems; we would like five years of peace to do all of that.," Mr Funke Kupper said. He said if competition is allowed in clearing the ASX will then spend the next couple of years working out how to do that and installing the extra connections with a new clearing house.
Blockchain is an electronic general ledger that serves as a record of transactions. It is a "distributed ledger", which means it is held on the computers of all those who use it rather than be in a central location. This makes it theoretically safer than a central ledger and cheaper to maintain.
Collapse of broker BBY
Mr Kupper said it could also speed up the resolution of major disruptions, like the recent collapse of broker BBY.
"We have had real issues with BBY in terms of transferring clients from BBY to other brokers. The way we record people's investments using [holder identification numbers] has been designed 20 years ago. We think there is a better way that puts the power in the hands of clients.
"Imagine if you could use your tax file number or a derivation of your TFN to record your investments in a version of CHESS. We can then pre-populate everybody's tax return. Once you can do that we can record centrally whether someone is a sophisticated investor as opposed to having to prove it time and time again."
As well as payments, he said companies in the US are looking at whether they can use blockchain to record transactions in the syndicated loan market.
"The syndicated loan market is very large; the processes that sit behind it to create, to record it, to transfer, incredibly expensive. It could be incredibly helpful."
To maintain confidence in the clearing and settlement systems, however, he said a central record of transactions would still need to be maintained.
"As a private investor I would not want to rely on a distributed ledger as the ultimate source of truth. But I quite like the idea of a distributed ledger as a way to cut my costs.
"The government will want something it can put its foot on. But it is actually the combination of the two that can be very very powerful and make things more efficient."