Tensions between the ASX and the CHESS Replacements Stakeholder Group (CRSG) — whose members include shareholder associations and registry businesses — are burning red hot as the parties argue over the market impact of the proposed Distributed Ledger Technology (DLT)-based replacement to CHESS.

A letter sent by ASX Chairman Rick Holliday-Smith to the CRSG on Tuesday, which Which-50 has obtained, reveals a breakdown of trust between the parties over accusations of conflict of interest and a lack of faith over the confidentiality of any discussions.

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At the heart of the debate are the rules over regulations once the CHESS replacement goes live.

The ASX has said the current approach with CHESS involves participants with many disparate databases that are expensive to support, upgrade and maintain, whereas under the DLT- based system participants’ databases will be harmonised with ASX and with each other — ensuring that applications written for one participant will work for other participants. This should further reduce risk, cost, and complexity, according to the company.

It also claims that DLT replaces multiple applications, in multiple versions, written in multiple languages, sitting on multiple databases, and governed by complex manual processes with the result that none of the participants’ systems can easily talk to each other. 

For its part, the CRSG has publicly said it does not oppose innovation, or even the idea of DLT — but instead cautions that the replacement system and its rules will entrench ASX’s market power, which it describes as monopolistic. 

We were unable to reach the CRSG prior to publication. However, in December last year in a submission to a Consultation Paper on Financial Market Infrastructure Regulatory Reforms, it argued “In our view, ASX — a publicly listed, for-profit company — is at risk of effectively further monopolising what will be a valuable piece of national infrastructure that it will continue to 100 per cent own, to which it will control access, and over which it will have rule-making authority.

“Without appropriate oversight, vertical integration by ASX through the distributed ledger on which the CHESS replacement system will reside could lead to a substantial lessening of competition in key market segments adjacent to ASX’s existing monopoly. This could include hampering, damaging, or even threatening the long-term survival of brokers, share registries, and other stakeholders.”

The group further suggested:

  • The regulatory regime is unprepared for the effects of the CHESS replacement project, which will permanently disrupt the market and regulatory landscape for market operators, benchmark administrators, clearing and settlement facilities and derivative trade repositories.
  • The Council of Financial Regulators must be given more defined and specific powers to enforce appropriate parameters around ASX’s use of its monopoly powers and ensure that competitive markets are maintained for the best outcomes for all Australians

Since then the parties have continued sparring over new rules.

Holliday-Smith’s letter is essentially a rejection of a request for a meeting to discuss regulation. That request was sent in a letter to the ASX from the group on 18 September.

He writes, “You refer to the governance framework proposed by the Governance Institute of Australia, on behalf of your group in a letter to ASX’s CEO, on July 3. However, I am surprised that you do not acknowledge the response ASX provided on 17 July in which we detailed significant concerns about why your proposal would diminish the effectiveness of the existing governance arrangements.

ASX Chairman Rick Holliday-Smith

“Our 17 July letter noted that your proposal would disenfranchise many CHESS members whose input to ASX is vital, especially as we plan for the operational readiness phase of the project.”

He writes that CHESS users carry primary responsibility to prepare for the new system, being ASX clearing and settlement participants, and that their back-office systems need to interact with CHESS in a series of complex workflows. 

“Moreover, our letter commented that your proposal fundamentally misunderstands the role of the Business Committee and the responsibilities for delivering the CHESS Replacement project.”

According to Holliday-Smith, “ASX is the Licensed Operator of the clearing and settlement facilities, and is solely responsible for its investments and decisions, including those related to the replacement of CHESS in a safe and timely manner.

“The obligations are ours as the licensee. The existing arrangements already provide for ‘best practice’ governance. These include input from the Business Committee, from multiple industry and customer-based forums (some featuring members of your group), our own Board, our internal subsidiary board arrangements, and our Audit and Risk Committee activities.”

Little trust

The ASX Chairman all but accuses the CRSG of leaking earlier correspondence to the media. While acknowledging that the group has denied responsibility for that, he writes, “But a private letter clearly was leaked and has been used to ferment [sic] unnecessary angst. Until we receive a satisfactory explanation, we can only take the position that there are likely to be serious and unaddressed conduct issues with your group.” 

Later in the letter, he notes “I do not feel the meeting you propose would serve any worthwhile purpose. Moreover I do not think it prudent to expose ASX to the risks of involvement with a group that is conducting itself in the manner it has, given the information that has come to our attention.”

Holliday-Smith also claims some members of the CRSG were commercially motivated to disrupt and delay the DLT project, calling out registry companies like Computershare, for example, and presumably other CRSG members like Link Services and Boardroom.

Loggerheads

The parties are further at loggerheads over just how negotiations should proceed. Holliday-Smith makes his views clear in his letter to the CRSG — that the ASX will negotiate with individual businesses. 

He writes “ASX has long-standing and productive working relationships with many of your group members. We have and will continue to engage with you individually in good faith on specific issues that relate to ASX’s relationships with you individually, or those of your underlying members.”

The CRSG, meanwhile, wants to counter the asymmetry of negotiating power between the ASX and individual organisations by putting up a collective front.

We asked the ASX to comment and to provide us with a copy of the July 17 letter which its chairman referenced. However, a spokesperson said “It would not be appropriate for us to share private correspondence.”

The CRSG could not be reached for comment by the time of publication.

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