The report accuses the ASX of not providing a business case setting out all the costs and benefits. It says “mechanisms to manage conflicts of interest and use of market power have not been addressed in a transparent manner”.
The report says no principles have been established to describe how any created value from the blockchain project will be shared and ultimately be delivered to issuers and investors.
It says the design of the CHESS replacement project governance functions “has been done with the intent to avoid reasonable challenge to the committed course of action”.
“This can be observed through exclusion of certain parties from working forms where they have clear nexus to the subject matter, and through the significantly limited scope of market consultation.”
The report’s conclusion said: “The work has found basis for concerns that the project owner has placed commitment to the replacement’s design above the concerns that have been raised to the project owner and that the projects scope and plan may not be best suited to issuer and investor outcomes.”
‘We are trying to build a system for tomorrow’
But ASX deputy chief executive Peter Hiom came out swinging on Monday night when he heard that the report by Deloitte audit partner Jonathan Perkinson was partly funded by the country’s two biggest share registries, Computershare and Link Administration Holdings.
The fight quickly got nasty as Hiom slammed the share registry companies for resisting technological change and accused Deloitte of being incapable of producing an independent report.
He says the share registry companies operate “ancient” technology and it is in their interests to hold back technological change because they “profit from fixing up the mess created by share transactions”. He claimed they did not want to bear the cost of updating their technology to meet the new technology standards being implemented by the ASX.
Hiom said Deloitte’s shareholding in a potential clearing and settlement competitor to the ASX called SETL meant that its report could not be regarded as independent.
He said the ASX had run a completely transparent consultant process and was now implementing the 50 requests made by market participants. “We are trying to build a system for tomorrow,” he said.
Hiom points to the ticks of approval for the CHESS replacement project from the Council of Financial Regulators, as well as the RBA and ASIC as proof that it is working in accordance with its regulatory obligations.
The ASX has committed to the Australian Council of Financial Regulators and the ACCC that it will ensure that its new platforms and technology will not be designed in such a way as to raise barriers to access to operators of other markets, or to any competing CS facilities that might emerge in the future.
Perkinson, who wrote the Deloitte report, said he canvassed the views of many market participants apart from those who funded the report. Other funders apart from Computershare and Link include the Australian Shareholders Association, the Governance Institute and the Australasian Investor Relations Association.
Perkinson says there is a concern that the project will attract high implementation costs across the financial markets but deliver low levels of benefits directly back to the issuer and investor community.
“There’s the viewpoint that CHESS currently operates as a natural monopoly,” Perkinson says.
“But there’s a concern that monopoly market power is being used to extend that natural monopoly into other currently competitive post-trade settlement spaces.
“The project has been ongoing for several years and there’s been governance forums and engagement by the ASX with the financial market sector on a regular basis.
“However, established forums have fallen short of acknowledging and addressing many of the concerns raised by the sector.
“There’s a bit of frustration that these concerns have not been dealt with in previous conversations.”
Issues not new
Perkinson asked a senior executive of Link, Trevor Dixon, to meet the ASX and convey the concerns uncovered by the Deloitte review but the ASX refused to meet. Hiom says the exchange is open to hearing concerns.
Perkinson says Deloitte’s role was to listen to the concerns, research them and determine whether there was observable evidence of the viewpoints. “That is what forms the substance of the document,” he says.
Chanticleer understands that Link invited ASX CEO Dominic Stevens to attend an industry forum to discuss the contentious issues but he refused.
Perkinson says it is clear from the responses to previous consultations that issues raised in the Deloitte paper are not new.
“It seems if the ASX receives feedback that’s outside of the narrowly defined matters that the consultation asked for it seems to be ignored,” he says.
“The question is, what is the appropriate governance forum for dealing with that type of feedback if not those consultations?
“If replacement of this asset is, as the ASX says, a once-that-generation opportunity to benefit financial markets the question then becomes in the current design, does the benefit accrue to the broader investor community, or do the benefits of features and replacements accrue to the project owner?
“From what we’ve been able to see there’s some evidence to suggest that the bias and benefit is occurring to the project owner rather than the investor community and its position as a national asset.”
Perkinson rejected the suggestion by Hiom that he had written a biased report. He says Deloitte UK has a very nominal amount of interest in SETL but Deloitte Australia has never been engaged in any work related to SETL.
The CHESS replacement project involves replacing a post-trade clearing and settlement system developed 25 years ago with a blockchain technology called DLT or distributed ledger technology.
According to the RBA, the ASX would operate, and control access to, the network according to ASX rules, creating a trusted network of nodes.
“The distributed ledger would provide the single source of truth regarding transactions on the market, with ASX providing access to users allowing each to see elements of the ledger relevant to them,” the RBA said.
“Users would have a choice of connecting using a DLT node or by using a messaging solution based on the XML ISO 20022 format, which will replace the proprietary CHESS message protocol that is used in the current system.”
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