The Australian Securities Exchange (ASX) is developing a blockchain-based post-trade system that could underwrite real-time settlement and dividend payouts.


Cliff Richards photoWhile in its early stages, the system could radically overhaul the exchange of legal title and payment following a security’s trade and open up new services such as streamlined tax reporting.

It marks one of the first mainstream applications for the technology which is still associated with cryptocurrency bitcoin but increasingly attracting attention from mainstream financial institutions.
 
“We convinced ourselves early on that the technology was real, notwithstanding that it was quite nascent and that there aren't many industrial strength applications in production at the moment,” ASX general manager, equity post-trade services, Cliff Richards, said.

The ASX is working with Digital Asset Holdings to build the blockchain beta system after acquiring a 5 per cent stake in the US-based firm for $14.9 million in January. The test system will run in parallel with the ASX’s current post-settlement system, CHESS, which was itself upgraded in March to allow for two-day settlement times (compared to three previously).

“We have high confidence hypotheses that a blockchain system does work but over the next year or so we will build it and remove all the conjecture so that we really get a decent set of data to make a more informed decision,” Richards said.

A radical alternative gaining acceptance

A successful blockchain system would replace the centralised CHESS platform for clearing and settling trades using a distributed ledger that would enable significant efficiencies, cost saving and perfect audit trails. The distributed ledger would record transactions through this closed distributed network, boosting efficiency and making near instantaneous settlement an option.

The exact business model has yet to be determined, including who pays to process transactions and how the cost savings will be shared (a relevant question particularly for brokers), although Richards says eliminating reconciliation tasks represents a significant benefit to the industry.

“That's one of the main advantages of the technology which we believe we can provide the industry with: the ability to lower operational costs, and risk and capital requirements for our clients.”

Australia’s big banks dominate the online broking market. Earlier this year, the Commonwealth Bank of Australia (which also runs Australia’s largest online brokerage, CommSec) took part in a successful blockchain trial which allowed simulated trading between 11 major banks.

Richards says the ASX is discussing distributed ledger technology with Australian banks although they are exploring the technology for different purposes.

“We agreed we will share information about certain elements of what we're doing but we have different focuses at the moment: the banks tend to be looking at trade finance, payments and syndicated loans.” 

Separately, Australia’s big four banks are also building a New Payments Platform which will allow near real-time retail payments although that system is being built with traditionally-connected infrastructure. BPAY, the publisher of Banter, will offer the first overlay service.

Questions to be answered

The ASX blockchain beta system will allow it to test three objectives:
  • Non-functional requirements such as through-put capacity, scalability, resiliency, redundancy, privacy and security.
  • Functional requirements which include the business logic to determine exactly how data can be used during the settlement process.
  • The ability to include new data, such as identifiers like tax file numbers, which could create new services for clients. While the open nature of blockchain has raised some concern among financial institutions more used to keeping transaction data in-house on a centralised system, Richards says the ASX is comfortable with privacy and security under the new proposed structure as any ASX implementation would be over a private network much the same as the CHESS system is today.

“The nature of the technology that we're looking at applying has advanced cryptography through every part of it,” he said.

“Data in transit, data in storage, and data in transaction assembly is all encrypted. With the systems that operate today in nearly all financial services companies, the data is not encrypted in all those states and often stored in disparate databases. There’s a lot of reconciliation activity that therefore needs to go on both intra financial services firms and between financial services firms.”

Digital Asset Holding chief executive Blythe Masters, speaking at SIBOS just before the ASX announcement, said the public nature of distributed ledgers doesn’t make them available to everyone.

“You have the ability to share but on the other hand you have sophisticated credentialising techniques that essentially ensure that the digital identity of the entities in question can be established with a high degree of confidence and only those with a need to know have access to the information.”

While financial institutions are exploring the potential commercial uses for blockchain, regulators around the world are also becoming more comfortable after early concerns about transparency and the challenge of complying with laws such as anti-money laundering.

In December last year, RBA governor Glenn Stevens said businesses exploring whether blockchain offered a more efficient way of conducting business represented an important trend.

The ASX will make a final decision on its post-trade technology in 2017.
This article represents the views and opinions of the author and do not necessarily reflect the opinions of BPAY.
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