Australian Securities Exchange considers blockchain as alternative clearing and settlement system

According to Australian media SMH, the Australian Securities Exchange (ASX) is seriously considering using the blockchain technology behind Bitcoin as an alternative to its clearing and settlement system.

ASX CEO Elmer Funke Kupper said the stock exchange is in the process of replacing its trading systems because blockchain can reduce the cost, complexity and time of clearing and settling trades, which were previously done by the Clearing House Electronic Subregister System ( CHESS ).

“We think that the replacement of the CHESS system will be a once-in-20-year opportunity.” — Elmer Funke Kupper

“We have established our equities post-trade system as a separate business, which will be led by Cliff Richards, who has just joined the company (from the National Australia Bank trading department),” Mr Kupper said. “We want to achieve efficiency in end-to-end trading, and to do this we have people looking at blockchain technology and what benefits it can bring to our customers, investors and the business.”

Blockchain and similar distributed ledgers use advanced cryptographic computer technology to track transactions, thus bypassing traditional banks or clearing houses.

At the end of 2016, the clearing and settlement system upgrade began

Currently, all major Australian banks have joined the blockchain project run by global financial innovation company R3, and 22 global banks have participated in the project so far. R3 has designed a protocol that banks may use to transfer funds or information at a lower cost and without having to rely on the central bank.

“We think that a replacement for CHESS is a once-in-20-year opportunity,” said Mr. Kupper. “We’re thinking about whether there is a better solution that can remove a lot of the administrative costs and reconciliation fees behind investment banking and brokerage operations, and that’s where the potential of blockchain lies.”

It is understood that the ASX has confirmed that the upgrade of its clearing and settlement systems will begin to be implemented at the end of 2016.

Mr Kupper also mentioned that the process of upgrading the CHESS system to the ASX would take five years and cost 4500万澳元, which is about 7% of the ASX's annual revenue.

After a six-month review, the Australian Council of Financial Regulators recently handed its decision on whether to allow clearing competition back to the Australian government, which had originally planned to announce its decision in September but was delayed in responding because of the ouster of Tony Abbott.

"We are replacing all our systems and it will take five years for all of this work," Mr Kupper said, but he also said if clearing competition was allowed then the ASX would take a few more years to sort it out and build additional links with new clearing houses.

The blockchain is an electronic ledger that records all transactions. It is also a distributed ledger, which means that everyone who uses it can maintain it, rather than through a centralized computer. In theory, this makes the blockchain system more secure and more economical to maintain than a centralized ledger.

The collapse of brokerage BBY

Mr Kupper said blockchain technology would also accelerate disruption, such as the recent collapse of brokerage BBY.

“We did have problems with BBY, like helping customers move from BBY to other brokers. The way we record people’s investments is through the holder’s ID, which is an old-fashioned method that has existed for 20 years. We think there is a better way that can transfer power to the hands of customers.”

"Imagine if you could use your tax file number, or your own TFN derivation, to record your investments in a system like CHESS. Then we could pre-populate everyone's tax return. Once you can do that, then we can centrally record whether someone is a sophisticated investor, rather than having to prove it over time."

Turning to payments, he said companies in the United States are exploring whether blockchain can be used to record transactions in the syndicated loan market.

“The syndicated loan market is a very large market, and the processes behind it, including record keeping and transfers, are incredibly expensive. Blockchain can help with this.”

In order to maintain trust in the clearing and settlement system, he also said that centralized transaction records still need to be maintained.

“As a private investor, I don’t really want to be dependent on a distributed ledger. However, I like the idea that a distributed ledger can cut costs.

What the government wants is that distributed ledgers can solve the problem, however, in fact the combination of the two can be very powerful and make things more efficient.”

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Original article: http://www.smh.com.au/business/banking-and-finance/asx-considers-blockchain-for-clearing-and-settlement-20151024-gkhs46.html
By Shaun Drummond
Compiled by: Satuoxi
Editor: Satuoxi
Source (translation): Babbitt Information