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SYDNEY, Dec 20 (Reuters) – In a Sydney hotel conference room in May, Tim Hogben, head of securities and payments at ASX Ltd, which runs Australia’s stock exchange, told traders, share register operators and clearing house representatives what they were. hoping to hear.

The overhaul of the stock exchange’s outdated software using blockchain-based technology is largely complete after seven years in development, putting the ASX on the verge of a world-first transformation that will allow it to increase trading volumes and compete more aggressively with global rivals.

“96 percent of the software is currently in production and testing environments. 96 percent of that software works,” Hogben said at the Stockbrokers and Investment Advisers Association conference, seen by Reuters. “If it didn’t work out, you would have heard about it, let me tell you.”

In November, ASX abandoned the project, citing inefficient management, concerns about product complexity and scalability, and difficulty finding experts to support it. The revelation came after new CEO Helen Lofthouse commissioned a review of Accenture, which found the refactoring was only 63% complete, with nearly half the code to be rewritten.

More than a dozen brokers, other market participants and people directly involved in the blockchain project told Reuters the failure had shaken confidence in the Australian exchange operator. Some expressed concern about the time and cost they contributed to the doomed effort and the ASX’s repeated assurances that all was well with the retrofit, which has faced five delays since an originally planned 2020 launch.

The experience has also raised questions about the mismatch between the promise and reality of the technology behind cryptocurrencies. The use of a distributed ledger in Australia’s critical financial infrastructure would be one of the most important applications of blockchain-based systems in a mainstream corporate environment.

“ASX could have chosen a stable and robust clearing and settlement system (but) chose advanced technology that was unproven, untried,” said Michael Soames, Cboe Australia’s principal adviser on securities and derivatives exchanges. the project.

“The ASX election has resulted in one of the biggest highlight service lines seen in global financial markets.”

In addition to the A$245 million to A$255 million ($164 million to $171 million) the ASX plans to take on for the failure, market players estimate they have collectively spent about that again preparing for the rollout, including software on renewal, air tickets and hours spent by employees. attend webinars and consultations.

At a parliamentary hearing this month, the ASX apologized for the failure but denied it had misled the market or regulators. President Damian Roche, when asked by lawmakers about a statement in the company’s 2021 annual report that the project had “moved from design and construction to testing and delivery,” said the lawsuit related to “functional” parts of the software, not “non-functional parts such as are security and scalability.

An ASX spokesman told Reuters by email that the company provided project updates based on the latest information available and some challenges “only become apparent when we’ve reached the final stages”.

FRAME COLD

The ASX’s push to replace its trade facilitation platform, known as CHESS, for the Clearing House Electronic Subregister System began under then-CEO Elmer Funke Cooper in 2015, when there was a global fascination with cryptocurrency and blockchain.

After New York start-up Digital Asset Holdings showed ASX executives a test transaction on its blockchain software, the ASX signed the little-known company in early 2016 to begin exploratory work on the overhaul. ASX bought 5% stake in Digital Asset.

Two months later, Funke Cooper resigned due to bribery allegations related to the previous role; he was cleansed. The ASX continued its restructuring and increased its holdings in digital assets to 8.5%. Under Funke Cooper’s successor, Dominic Stevens, the exchange operator went from no market consultation to extensive consultation, a person involved in the project told Reuters on condition of anonymity because of concerns about professional implications.

The scope was also expanded. From an initial plan to run about 12 of CHESS’s 400 data transfers per transaction on the blockchain, the ASX decided the new system would include all 400 transfers, the person said.

People working on the project raised concerns that Digital Asset lacked aftermarket support and that the ASX had bought the company without testing the scalability of its product, the person said, adding that the concerns went unanswered. Ultimately, ASX had 300 people working on the CHESS replacement project, about a third of its staff.

“To try and put something untried in Australia, I think, was pretty reckless,” said William Slack, managing director of Morrison Securities, which had two staff partially dedicated to the ASX project and three or four staff on each ASX consultation. for several years.

Funke Cooper did not respond to requests for comment. Efforts to reach Stevens were unsuccessful. When he announced his retirement in February, he told the Australian Financial Review that his successor would get the blockchain project up and running and that “the next phase of the exchange is complete”.

When CHESS launched in 1994, it was considered innovative because it combined trading, clearing and settlement on a single platform. But over time it has become obsolete and more difficult to maintain. When a surge in trade in March 2020 led regulators to restrict trade due to processing delays, the Reserve Bank of Australia said replacing CHESS with “more modern technology” was essential.

However, by seeking to replicate all the functions of CHESS in a single system, ASX risked undermining the benefit of blockchain, which is supposed to reduce touchpoints that are slow to process, people involved in the project said.

“I think it would be easier to build a new version of CHESS in a modern language other than blockchain,” said Rami Aziz, the former ASX chief financial officer who oversaw budgets, governance and timelines for the project. in its initial stages.

“Maybe blockchain needs to evolve a bit more before it can do what they want for CHESS. It may never be able to do that.”

Digital Asset declined to comment beyond a statement on its website agreeing with part of Accenture’s report, which highlighted “the need to streamline the design of consistent business requirements (and) solutions.”

“Clear requirements, meeting objectives and manageable milestones with defined success criteria are paramount,” the report said.

An ASX spokesperson told Reuters that distributed ledger technology could be transformative and the company selected Digital Asset after a “robust global” search.

Shortly after the ASX shelved the project, AP Moeller-Maersk A/S ( MAERSKb.CO ) and IBM ( IBM.N ) pulled the plug on the blockchain-powered shipping platform, citing a lack of global cooperation.

FALLOUT:

The accusations were swift. The Australian Securities and Investments Commission, which regulates the exchange, called the late disclosure of the problems “inadequate” and demanded a special report to the ASX Commission explaining its plans for CHESS, while the Reserve Bank of Australia called the failure “very disappointing”. Lawmakers want to expand ASIC’s powers over the ASX.

Analysts at Morgan Stanley cut their valuation on the ASX stock by 10%, citing strategic uncertainties.

ASX users, meanwhile, want compensation for the project they lost time and money they say they can’t afford to give up.

“The ASX’s public statements on that trip have certainly been shown to be inaccurate, some might say misleading,” said Daniel Spokes, director of client support services at Brisbane brokerage Morgans. Vendors that have invested in the technology should “have some right to compensation,” he said.

The CEO of a small brokerage that runs its own trading software, who spoke on condition of anonymity so as not to damage relations with the exchange, told Reuters he had employed four software developers full-time for three years at a cost of more than $1. million to keep up with the frequent updating requirements of the ASX.

The RBA and ASIC have said they expect the ASX to cover the industry’s write-downs related to the failure. An ASX spokesperson said the company was “very aware of the investment that customers and other stakeholders have already made (and) we will take this into account when considering what work can be used in the new solution”.

The exchange “has offered discounts to customers in the past,” the spokesperson added, without elaborating.

For some companies, costs were difficult to quantify. One major third-party trading provider, FinClear Pty Ltd, has delayed the integration of its software system with an acquired company to 2021, based on one bad ASX change date.

“It means our decision-making process around other technology projects, which are all interconnected,” said David Ferrall, CEO of FinClear.

“The ASX may have misled the market, either inadvertently or on purpose. I’d like to think so.”

Chris Burrell, CEO of Burrell Stockbroking, says he has employees who have delayed retirement after learning of the project’s launch schedule, “and then the dates came and got pushed out.”

Going forward, the ASX has yet to decide how to update its core platform. Its spokesman told Reuters there was “no solution available to meet the needs of the Australian market”.

Aziz predicted the exchange would tread more carefully in its next attempt.

“They’ll probably go and build just a new version of CHESS in a regular programming language, not within the blockchain,” he said. “That’s all they can really do.”

Reporting by Byron Kay; Editing by David Crawshaw

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