T Skevington and M Bacina
Australian Stock Exchange details billions of efficiency in distributed ledger deployment
Following the closure of written submissions to the Senate Select Committee on Fintech and Regtech, the Australian Stock Exchange (ASX) was invited to expand on its written submissions before the Committee in person with the Senators on the committee showing particular interest in the ASX's distributed ledger (don't say Blockchain) based CHESS Replacement project.
The ASX was represented by Peter Hiom, Deputy Chief Executive Officer, Cliff Richards, Executive General manager, Equity Post-Trade Services and Dan Chesterman, Chief information Officer.
One of the first questions, asked by Deputy Chair of the Committee Senator Marielle Smith, was about the economic benefits that could be generated by the real-time transfer and reconciliation of shareholdings, capital raising and the payment of dividends via the new DLT system.
The ASX suggested that it already operates the process of clearing and settlement for a cost of "approximately $50 million for the entire Australian equity market", and that marginal efficiency gains in that space may not justify the investment necessary.
However, Peter Hiom went on to identify the more interesting implications of real time settlement in terms of the payment of dividends, and the associated savings for investors, in particular superannuation funds. In particular:
... the time it takes for dividend payments to leave a company and be received by the investor can be anything from 10 days to two weeks before an investor receives those dividend payments. A simple calculation you can think of is if a superannuation fund were to receive those dividend payments in two days twice a year for 40 years for a superannuant, we think that starts to become something a little bit more material.
The superannuation system costs roughly $20 billion to $30 billion a year... Let's say $10 billion of that is available for greater efficiency... If you think about it in those terms, if we could improve the efficiency of superannuation administration by 10 per cent then we would start to talk about $1 billion of savings on top of that.
When asked to explain what prompted the ASX to invest in distributed ledger technology, Mr Hiom said:
we just saw an opportunity for us to take the information that we hold today, which we provide to the direct users of our market, and push that our further into the financial system and start solving a problem that we see the financial system has had for some time—and not just in Australia. That is, we're operating on 1980s, 1990s or in some cases 1970s technology, upon which we're trying to build the next generation of financial services and reduce costs for customers.
Of particular interest was the Senator's interest in advocating Australia's innovative capability to the rest of the world. When Senator Scarr asked whether the ASX has received interest from other international exchanges on the CHESS replacement project, Mr Hiom said unequivocally that (emphasis added):
If my chief executive were here, he would tell you that, every time he's offshore talking to another exchange, the first question he is asked is about the technology project called CHESS replacement. We are not the only exchange in the world looking at this technology. In fact, I would hazard a guess that all exchanges are looking at this technology, in one form or another, but certainly not as profound a piece of technology infrastructure as the one we're replacing.
The ASX CHESS replacement has long been seen as a piece of leading innovation in the Australian financial and blockchain (sorry, distributed ledger technology) world. The ASX's leadership in this initiative has not been without bumps, as current parties to the settlement systems have raised concerns new efficiencies may threaten their businesses models, but the system continues
The committee is expected to present its final report on or before the first parliamentary sitting day in October 2020.