australian stock exchange (ASX:ASX) announced a $445 million budget for a revised attempt to replace the Clearinghouse Electronic Subregister System (CHESS) after the original blockchain-based project failed in 2022. The improved system is scheduled to be rolled out in two phases by 2029 and will cost significantly more than the $250 million lost in the first effort.

history of hardship

The CHESS system was first introduced in 1994, but has long been considered outdated. In 2016, ASX began a plan to modernize its platform. By 2017, the exchange has committed to partnering with Digital Assets to build blockchain-based alternative services and aims to lead the global market in post-trade innovation. However, the project suffered from over-customization, stakeholder dissatisfaction, and serious flaws discovered during testing. In November 2022, the ASX abandoned the initiative after investing $250 million and taking a significant writedown.

The ASX’s response to the failed project came under legal scrutiny. The Australian Securities and Investments Commission (ASIC) filed the lawsuit in August, saying the ASX had stated in February 2022 that the project was “on track to be operational” and “on track” to be operational in April 2023. He claimed that the company had misled investors. ASIC argues that these statements lacked a reasonable basis and undermined confidence in the completeness of market disclosure. ASX denied any wrongdoing and insisted its statements were based on information available at the time.

New project cost and schedule

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

• Release 1 (Clearing Services): Set in 2026 and estimated to cost between $105 million and $125 million.
• Release 2 (Payment and Sub-Registration Services): Scheduled for 2029, cost will range from $270 million to $320 million.

ASX CEO Helen Lofthouse said the cost increase was due to an extended timeline to allow for extensive testing and preparation in the industry. “We focus on safe delivery and reliability, ensuring our systems meet current and future market needs,” Lofthouse said.

T+1 and future preparedness

The updated system will initially maintain the current T+2 settlement cycle, which will settle trades two business days after execution. ASX says a move to a shorter T+1 cycle, where settlement takes place within one business day, will only be considered after CHESS Release 2 is fully implemented in 2029. The transition to T+1, which has already been adopted in the US, will reduce the number of counterparties. It reduces risk and improves liquidity, but requires significant system upgrades and industry-wide preparation, making the transition complex. ASX pointed out that T+1 would not be operational until 2030 at the earliest.

market reaction

The announcement did not allay investor concerns, with ASX shares closing 4.3% lower at $66.18. Prices were higher than expected, and analysts pointed to risks associated with a longer schedule and higher costs, especially given the project’s complexity.

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