Tag: ASX

JP Morgan To launch ASX OTC Clearing Agency For AUD/NZD Denominated OTC Derivatives.

From Investor Daily.

After successfully clearing a trade for one of its underlying clients, JP Morgan will be the first to launch the service for the Australian dollar.

The ASX operates the largest listed interest rate derivatives market in Asia with an annual turnover of $53 trillion and has a fully developed OTC Clearing service.

ASX executive general manager derivatives and OTC markets Helen Lofthouse said ASX had invested in a capital efficient clearing infrastructure and JP Morgan’s access demonstrated its commitment to clients.

“It also shows ASX’s determination to develop services valued by the market, which includes local clearing that’s open throughout the Australian and New Zealand time zone,” she said.

The launch underscores JP Morgan’s commitment to clearing, said Head of Asia clearing David Martin.

“This investment underlines our commitment to the Australian and New Zealand marketplace, and the Asian marketplace in general,” said Mr Martin.

Mr Martin said that the OTC derivatives clearing market was continually changing and JP Morgan needed to offer greater choices.

“Clients need a clearing broker whose business model continues to evolve and a product offering that continues to expand,” he said.

Mr Martin said that, globally, JP Morgan was broadening products for their clients and wanted to provide the local market support for investors.

“JP Morgan’s approach also allows our clients to use the depth of our local markets franchise and our ability to make markets at the ASX,” he said.

Futures & Options and OTC Clearing manager at JP Morgan David Stinson said that by using the ASX services, it allowed them to extend benefits to more clients.

“By supporting the cross-margining facility that ASX offers across its cleared interest rate derivatives, we are extending this benefit to buy-side clients and allowing them to access funding and margin efficiencies,” he said.

The Blockchain is Reinventing Business

From The Conversation.

Bitcoin may be the most famous example of a blockchain in use, but it is actually a rather unimaginative way to use it.

The blockchain is finally starting to fulfil its promise as a game-changing technology, a kind of infrastructure for record-keeping. To facilitate movement of value (such as money) and changes in ownership (shares, for example), and even to manage online identities.

The Australian Stock Exchange (ASX) has announced that it will use a blockchain-based system to record who owns shares of listed companies, and to keep track of transactions and settlements when people buy and sell shares.

The move comes as the price of Bitcoin has risen more than US$14,000 in the past year. Yet Bitcoin does not really exploit the new databases and record-keeping infrastructure that blockchain technology makes possible.

The blockchain is also called a “public” or “distributed” ledger. Think of a spreadsheet that is publicly available to view, and simultaneously held on numerous computers. When someone transfers a Bitcoin, it is verified by the system, encrypted, and a new line (or “block”) is added to the spreadsheet.

The ASX’s blockchain will replace the ASX’s CHESS (Clearing House Electronic Sub-registry System) system. Currently, the ASX requires each trade to be verified against the ASX’s centralised database of ownership records and reconciled with payments.

So while trades take place in fractions of a second, the actual clearance (making sure who owns what) and settlement (the transfer of money and shares) is cumbersome, slow, expensive, and prone to human error.

The ASX’s blockchain will greatly simplify this process. Instead of having to reconcile trades against a centralised database, the verification of ownership and settling of accounts can be done directly between participants (as is done with Bitcoin trades). This is much simpler, faster and more secure.

A monumental shift

The fact that the ASX’s blockchain announcement made headlines around the world shows what a big leap forward this is.

The ASX’s blockchain will streamline the settlement process, improving productivity and therefore reducing costs in the Australian stock market. This means that our financial markets will work better, offering an immediate benefit to Australia’s economy.

Exchanges are also a global business, and the adoption of blockchain technology in Australia’s major exchange means that it has a competitive edge over other exchanges.

Companies choose where to list, based on a variety of factors including the quality of the exchange technology. More business for the ASX will translate into more local jobs.

One potential downside of the ASX adopting the blockchain, however, is that some workers who currently process settlements on the ASX may lose their jobs. Some financial companies that currently benefit from the slow settlement process, such as brokerage firms, will also lose out.

But the ASX’s move is just scratching the surface of what blockchain technology can do to the Australian financial sector.

The same argument that applies to the ASX – that the blockchain is more efficient and productive than existing record-keeping and transaction processes – can also be extended to other exchanges, such as bond markets.

In other words, the ASX’s blockchain is just the beginning of a technological transformation of Australia’s financial markets.

Blockchains will also make these exchanges more attractive to build services on, such as for managing wealth. This is a further benefit for consumers and the broader finance industry, not purely from lower prices also from the possibility of new products and services.

But how is any of this even possible in the first place? Part of the credit must go to Australian regulators. They created the environment for this huge shift in technological practice.

Australia is now leading the adoption of the blockchain, despite it being a US-built technology. It is similar to how African telecommunications companies are leading the way in mobile payments, even though Finland created modern mobile phones with companies like Nokia.

Even if you’re not excited about new technology in the Australian finance industry, its global competitiveness, or even our regulatory agility, the ASX announcement is a harbinger of what adoption of blockchain technology will increasingly look like.

Author Jason Potts , Professor of Economics, RMIT University

ASX ‘Monopoly’ Tipped to Continue Thanks to Blockchain

From Investor Daily.

According to Morningstar analysts, the ASX’s decision to move its cash equities clearing and settlement system (CHESS) to distributed ledger, or blockchain, technology would further strengthen the exchange’s “strong competitive position”.

“Although DLT has enormous potential, few real-world examples of DLT use have emerged which makes ASX somewhat of a leader in the space, being the first stock exchange to commit to DLT in a meaningful way,” the report said.

The new system would have a number of benefits for stakeholders and stockbroking firms in the form of administrative savings as well as “richer, more timely and more accurate data”.

“ASX currently generates around AUD 100 million or 13 per cent of group revenue from clearing and settlement of cash equities which we expect to benefit from the new system via the monetisation of new functionality and services.”

The adoption of blockchain technology would further cement the ASX’s protection against competition, identified as “regulation and network effects”, the report said.

“The federal government and regulators have sought to increase competition for nearly a decade, but the process of regulatory reform is slow and still has many obstacles to overcome.

“A government report found that even if competition were allowed in cash equities clearing, competitors are unlikely to emerge, as the regulatory requirement to maintain operations and regulatory capital in Australia reduce potential synergies for overseas clearinghouses.”

And even if the regulatory barriers were removed, a ‘network effect’ would still provide the ASX protection against competition, the report indicated.

“Competitors can easily create the technology required for a rival exchange, but investors are unlikely to switch to a less liquid market.”

The report pointed to the attempt of the “sole viable alternative exchange to the ASX”, Chi-X, to launch a rival equities exchange in 2011, which only attracted market share of 10 per cent and “appear[ed] to plateau due to a lack of market depth”.

Furthermore, the technical aspect of integrating local market participants such as stockbrokers would then create “switching costs”, which would also dissuade them from moving to another securities exchange.

However, the report also signalled that lack of competition had served to somewhat “undermine” the ASX as it led to “a culture that lacks innovation and efficiency”, and that blockchain could serve to pose a “material threat”.

Nonetheless, the ASX’s willingness to explore the implications of new technologies, capital-light business model, high dividend payout ratios, lack of appetite for acquisitions, debt-free balance sheet and strong cash conversion all meant it had secured a “monopoly in the Australian primary listed equity market”.

ASX Selects Distributed Ledger Technology to Replace CHESS

The ASX has announced its intention to replace CHESS using distributed ledger technology (DLT) developed by its technology partner Digital Asset (DA).

This is an excellent example to highlight that distributed ledger is so much more than just the Bitcoin bubble.

Distributed Ledger technology combines a number of different core elements that support the transfer process and recordkeeping:

  • Peer-to-peer networking and distributed data storage provide multiple copies of a single ledger across participants in the system so that all participants have a shared history of all transactions in the system.
  • Cryptography, in the form of hashes and digital signatures, provides a secure way to initiate a transaction that helps verify ownership and the availability of the asset for transfer.
  • Consensus algorithms provide a process for transactions to be confirmed and added to the single ledger.

CHESS (Clearing House Electronic Subregister System) is the system used by ASX to record shareholdings and manage the clearing and settlement of equity transactions in Australia. It was world-leading when introduced in the 1990s, providing name-on-register functionality, electronic communications and removing paper share certificates. It continues to be a robust and reliable system. ASX is now taking the opportunity to replace CHESS with a next generation post-trade platform using contemporary technology.

Today’s decision follows the successful build of enterprise-grade DLT software for core equity clearing and settlement functions, and the completion of extensive suitability testing by ASX and DA over the past two years. The testing confirms ASX’s confidence in the functional, capacity, security and resilience capabilities of DA’s application of DLT to meet the needs of Australia’s financial marketplace and maintain the highest regulatory and operational standards. The testing included two independent third party security reviews of DA’s technology.

The testing was conducted in parallel with a stakeholder consultation program, which included briefing of regulators, to enable ASX to develop a comprehensive understanding of what the market wants in replacing CHESS.

ASX will now work with stakeholders on finalising the scope of Day 1 functionality for the new system, drawing on its extensive consultation that will continue in 2018. Day 1 functionality and the proposed timing for transition are expected to be released for market feedback at the end of March 2018.

The new system will be operated by ASX on a secure private network where participants are known, ‘permissioned’ to have access, and must comply with ongoing and enforceable obligations.

The system will be designed without access barriers to non-affiliated market operators and clearing and settlement facilities. It will also give ASX’s customers choice as to how they use ASX’s post-trade services. Customers will be able to connect in a similar way they do today, with the addition of using contemporary global ISO 20022 messaging, or they may interact directly with the distributed ledger. The transition period to the new system will be determined in consultation with stakeholders.

Dominic Stevens, ASX Managing Director and CEO, said: “ASX has been carefully examining distributed ledger technology for almost two-and-a-half years, including the last two years with Digital Asset, in order to understand its potential application. Having completed this work, we believe that using DLT to replace CHESS will enable our customers to develop new services and reduce their costs, and it will put Australia at the forefront of innovation in financial markets. While we have a lot more work still to do, today’s announcement is a major milestone on that journey.”

Peter Hiom, ASX Deputy CEO, said: “ASX has consulted extensively on the needs and priorities for replacing CHESS, including with customers, share registries, software vendors, other exchanges and industry associations. I am very grateful for their input and support. We’ve given over 80 DLT system demonstrations to more than 500 attendees, and conducted over 60 CHESS replacement workshops for more than 100 organisations from the global financial services industry.
“ASX has also formed a strong partnership with Digital Asset over the past two years, and we’re confident we have chosen the right partner. Together, we look forward to continuing to work with the industry as we finalise the requirements and the roadmap for implementation of the new system.”

Blythe Masters, Digital Asset CEO, said: “After so much hype surrounding distributed ledger technology, today’s announcement delivers the first meaningful proof that the technology can live up to its potential. Together, DA and our client ASX have shown that the technology not only works, but can meet the requirements of mission critical financial infrastructure.”

Coinciding with today’s decision, ASX will exercise its pro-rata right to participate in DA’s recent Series B fundraising and subscribe for US$3.5 million convertible notes. ASX and DA have agreed to work exclusively on DLT in Australia and New Zealand. This agreement applies while the Day 1 functionality of the new system is being finalised, and will continue subject to agreement of the full contractual arrangements for the development and support of the new system. These decisions underscore ASX’s strong commitment to working with DA to unlock the benefits of DLT.

Bank platforms ‘squeezing’ fund managers

From InvestorDaily.

Too much fund manager value is being “eaten up” by the high administration service fees of the major platforms, argues the ASX.

Speaking to InvestorDaily, ASX senior manager for investment products Andrew Campion said the investment management value chain should be more aligned with the people who actually generate wealth for investors – fund managers.

“We feel that presently too much value is eaten up by administration services. It’s not the actual person or firm that’s generating wealth for the end client,” Mr Campion said.

“If you squeeze the fund manager they just have less money to spend on research and less money to incentivise their staff,” he said.

This conviction is reflected in the relatively low fee ASX charges fund managers for inclusion on the mFund settlement service: 1.4 basis points (bps), or 0.014 per cent.

“If you look on a PDS for a fund manager and you see their expense ratio is 70 bps, 1 per cent or 1.2 per cent – they might be getting far less when they’re on a platform. Sometimes less than half as much,” Mr Campion said.

Sometimes a fund manager using larger platforms can be “squeezed” down to a fee of as low as 15 basis points “even though their direct retail fee structure is 70-80 bps or 1 per cent”.

“When we talk to managers, they’re staggered that they get to keep all of their fees,” Mr Campion said.

“We don’t feel like having a website that you can log into and have statements generated should cost 100 bps.”

There are now 170 products available on the mFund settlement service, with total funds under management (FUM) amounting to $250 million (up from $110 million 12 months earlier).

The ASX recently received approval from ASIC to include longer-form PDS products on mFund, in addition to shorter-form PDS products.

Longer-form PDS products, which include hedge funds, make up 20 per cent of the approximately $300 billion Australian retail fund management sector and are likely to be attractive to the mostly self-directed investors who use mFund, Mr Campion said.

“Although it’s only 20 per cent of the overall pie, we think as these funds come onto the platform it will be much more than 20 per cent of the mFund business,” he said.

Of the total $250 million in FUM on mFund, 40 per cent of it is self-directed and 60 per cent comes through advised channels, Mr Campion said.

Eighty per cent of the users of mFund are SMSFs, he added.

ASX To Administrate BBSW From 1 Jan 2017

Last week, the Australian Financial Markets Association (AFMA) announced that it will transfer administration of the BBSW benchmark rate to ASX. It is the intention of both parties that ASX will administer BBSW from 1 January 2017.

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ASX was selected following a highly competitive process, which began in July 2016 with a public invitation for interested parties to register their interest as a potential alternate benchmark administrator for BBSW.

Ernst & Young provided financial advisory services to AFMA for the externalisation process, while Mills Oakley acted as AFMA’s legal adviser.

“AFMA is delighted to have found in the ASX an organisation with strong credentials to take responsibility as administrator for BBSW,” said AFMA’s CEO, David Lynch. “ASX has the appropriate attributes as a benchmark administrator and it has a strong and unique capability to continue the work underway to transition the BBSW methodology to a VWAP process.”

For further details on the methodology transition process, please refer to AFMA Market Notice 2016_5.  AFMA will support the future evolution of BBSW by working with ASX, market participants and the Council of Financial Regulators to promote the market infrastructure and practices required to support widespread trading at outright prices in the underlying market. AFMA will also operate as the calculation agent for ASX until the systems required to support the new methodology go live in 2017.

Today’s announcement will allow AFMA to focus on its core activities in policy advocacy, market development and industry education and ensure that it supports its members and Australia’s financial markets in an optimal way. In May 2016, AFMA had announced its intention to step away from the function of being a benchmark administrator for this purpose – see AFMA Market Notice 2016_3.

ASX FY16 Result Strong, Blockchain Experiments Progress

The ASX released their results for FY16, with revenue of $746.3m, up 6.5%, and Net Profit of $426.2m, up 5.7%.

ASX-FY16Mr Rick Holliday-Smith, ASX Chairman, said: “ASX delivered strong financial results in FY16, with growth in all key business areas, supported by higher market activity. This was driven by a rise in secondary capital raisings within the financial sector and increased trading activity due to heightened volatility, particularly in the second half of the year, culminating in the surprise of Brexit. Revenue was up 6.5% to $746.3 million and profit after tax rose 5.7% to $426.2 million.

“ASX continued to invest in the infrastructure critical to Australia’s financial markets throughout the period. This included successfully introducing T+2 settlement, significant progress on the delivery of a new futures trading platform, and the assessment of distributed ledger technology or ‘blockchain’ as a potential post-trade solution for the equity market. These initiatives aim to improve market efficiency and reduce risk and complexity for investors, intermediaries and other market stakeholders. They help keep Australia at the forefront globally of innovative market developments”.

ComputerWorld reported on the Blockchain initiatives.

ASX has completed the first phase of work on a potential blockchain-based replacement for its CHESS system, which providers clearing and settlement services.

The operator of the Australian Securities Exchange announced earlier this year that taken a stake in US company Digital Asset Holdings with an eye to potentially developing technology inspired by the distributed ledger that underpins the Bitcoin cryptocurrency.

“We’ve completed our initial analysis of the technology and have begun work on the next stage of this journey,” ASX CEO Dominic Stevens said today during a full year results presentation.

“We’ve made good progress” in exploring the use of distributed ledger technology over the past year, said deputy CEO Peter Hiom.

“The initial phase of development has been completed,” Hiom said. “We’ve increased our investment in Digital Asset Holdings and we have commenced the next development phase. Over the next 18 months ASX and Digital Asset Holdings will build an industrial strength platform that could be used as the basis to replace CHESS over the longer term.

“ASX is now commencing engagement with customers and stakeholders on the requirements for that platform, with a final decision by ASX on whether to use the technology being made later in FY18.”

Hiom said that there were some key differences between the “permissioned disturbed ledger technology” ASX is experimenting with and the public blockchains employed by cryptocurrencies.

“The main difference I want to highlight is public blockchains are operated largely in unregulated marketplaces where anyone can join and access those markets anonymously via a public, or unpermissioned, network,” he said.

“Network security is public to scrutiny and if compromised it could allow someone to anonymously and unilaterally transfer cryptocurrency on the public network. This is clearly unacceptable in the types of highly regulated markets within which the ASX operates.”

“Not withstanding this, the underlying blockchain technology has inspired new applications that can be tailored for use in highly regulated markets such as those operated by ASX,” he added. “It is the database architecture, or distributed ledger technology, which interests us.”

He said that ASX didn’t seek to change the existing regulatory framework it operates in.

“What we do change is the way that data is authenticated, authorised, accessed and stored,” Hiom said. “It is this that creates the single source of truth that could remove complexity and deliver significant benefits to the industry.”

The deputy CEO said that there had so far been no “red flags” around scalability or performance.
Read more: Blockchain is useful for a lot more than just Bitcoin

ASX reported growth in its operating expenses for FY16 of 6.5 per cent to $170.6 million, which the company attributed in part to investment in its technology transformation program.

“We’re in the midst of a major transformation,” Stevens said. “Specifically we’re replacing or upgrading our trading, monitoring, risk and clearing systems, exploring post-trade innovation through the use of distributed ledger technology, [and] improving connectivity for our customers, here and abroad.”