The report stated that the ASX’s “priorities of minimizing the impact on participants and maintaining commitments made to the market” in relation to the design and delivery of the new system “are not consistent with the strategic objectives for the ASX were compared”.
Analysts at major investment banks said the decision to defer the CHESS upgrade has increased the risk of introducing competition in clearing and settlement functions, behind-the-scenes shifting ownership of stocks after trade, and risks in paying reduce stocks. ASX holds a monopoly over the statutory functions, making CHESS the sole proof of ownership for Australian equities.
UBS analyst Scott Russell cited “potential new competition in clearing and settlement” as new concerns for the ASX, on which UBS has a sell rating.
Andrei Stadnik, an analyst at Morgan Stanley, said ASX’s decision to fully write-off the cost of the CHESS project could have a wider impact on shareholders given the heightened regulatory scrutiny, which “could also lead to more competition in the Australian market.” .
Next Friday’s hearing is also expected to examine the performance of regulators in regulating the ASX clearing functions and the impact of a lack of competition in this market.
One of the members of the joint committee, Senator Paul Scarr, said Thursday that Accenture’s independent CHESS replacement report raised concerns about “an inconsistency between the priorities of the CHESS replacement project for market participants and the strategic goals of the ASX.”
“The Accenture report also raises issues related to the conflict between the ASX’s role as a stock market operator and its responsibility for providing clearing and settlement processes,” he said.
The renewed interest in Canberra over whether the ASX is doing its job of clearing the market comes after the Turnbull government endorsed and announced the recommendations of a 2015 review of competition in cash clearing by the Council of Financial Regulators (CFR). has to legislate to support regulatory expectations on the ASX.
But the legislation never materialized after ASX announced in 2016 it would use blockchain technology to create a new infrastructure that would make Australia one of the most innovative in the world.
For the fiscal year ended June 30, ASX earned a total of $153 million from the settlement and clearing of the cash equity market, representing 15 percent of the ASX Group’s total revenues. Brokers operating in multiple markets say Australian clearing fees are relatively high.
After Accenture uncovered widespread issues with ASX’s ability to manage the technical upgrade to CHESS, some settlement participants suggested that the role could potentially be filled by a mutual broker. It remains unclear how this structure would support innovations in the market that regulators want to see.
UBS cut its share price target by $5 to $68 on the ASX and continued to urge investors to sell the stock, citing the risk that more competition would enter the market.
“While not unexpected as the independent review was ongoing, this news adds to a number of other challenges we believe the Company is facing, including soft-core market activity, increased cost inflation, personnel turnover, regulatory reviews and potential new competitors in clearing and settlement,” Mr Russell said. “We see downside risks for now.”
Mr. Stadnik, who maintained a neutral rating on the stock, said the $245 million to $255 million in pre-tax writedowns taken by ASX will result in “greater regulatory scrutiny of other large ASX technology projects.” [which] creates strategic uncertainty and could also lead to more competition in the Australian market.”
However, Macquarie is more optimistic and maintains its outperformance recommendation and price target of $90, with ASX’s expectation for operational growth this fiscal year remaining unchanged at 10% to 12%, with capital spending on hold given the cancellation of the CHESS project will drop by $15 million. “We view ASX earnings as very defensive against a weakening macro outlook, with upside risk for FY24 consensus interest earnings,” the broker said.
ASX shares rose 2.5 percent to $72.80 on Friday despite competition concerns. According to UBS, the CHESS disaster is one of many concerns for the ASX, which include that year-to-date cash activity is down 9 percent, future volumes are down 6 percent, secondary fundraising is down 32 percent and the IPO market was effectively closed.
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