The Australian Securities Exchange (ASX) will spearhead the use of blockchain to settle trades by offering the service free as an initial inducement to banks, instead of using industry-standard connections via Swift and AMQP.

The exchange, which has been working to replace its creaky Clearing House Electronic Subregister System (Chess), would offer the teaser rate on blockchain beginning in the first half of 2021 for three years, WatersTechnology’s sibling publication Risk.net has learned.  

The project is viewed as a litmus test for installing distributed ledger technology (DLT) – an encrypted straight-through-processing tool – at scale inside a large financial infrastructure.

Customers would get into the ledger via a “node”. Access beyond the initial three-year period will be discussed with participants at least 12 months before it ends.

Alongside the roll-out of blockchain will be the introduction of the ISO 20022 messaging system, an industry standard for electronic data interchange and itself a break from ASX’s current 25-year-old communications system based on the External Interface Specification standard. The coming ISO option will permit AMQP and Swift messaging, and will go live at the same time as ASX’s blockchain option.

Those using the AMQP protocol will pay a monthly fee of A$495 (US$349.6) to connect to ASX’s own telecommunications network, ASX Net. AMQP is an open-source protocol developed by JP Morgan Chase in 2003 that is supported by banks including Barclays, Credit Suisse and Goldman Sachs.

The second option is Swift, the world’s biggest financial messaging system – but this will cost more. Besides an administration fee, any costs ASX incurs in meshing with the Swift platform will be passed on to its users on a pro-rata basis. They may also be charged a setup and connection fee if they connect via Swift after the go-live date.

The details of ASX’s pricing model for connecting to its new DLT platform have not been previously reported. 

Cliff Richards, executive general manager for equity post-trade services at ASX, and the person in charge of the Chess transition, tells Risk.net that “AMQP is every bit as good as Swift, but it doesn’t carry the message costs that Swift charges to use SwiftNet”.

“Chess sends a lot of messages, as will its replacement,” he says. “If a client chooses a Swift connection, they will be picking up a tab from Swift charging them for the messages that they send. And when Swift charges us, we will be passing that cost back to the relevant client.

“If they choose a node, there are none of those costs.”

The head of clearing at a top-tier investment and custodian bank in Australia, and currently a big Swift user globally, says it will instead connect through AMQP – and try out a node.  

“First, there is the unknown of what ASX will pass on for having to set up Swift infrastructure. Second, AMQP will not be a massive buildout for us,” he says. “Also, the bank is a big user of Swift messaging globally, and this would put the Australian operations at a higher level – so we would have to pay for a bigger allocation of the global Swift costs.”

He adds that his back office is “pretty wedded” to the ISO 20022 format, but it will take a node “for experimental purposes”: “We will use it at first on a test mode and start to get more comfortable, so that over time that might become the primary way that we do things.”

Stephen Lindsay, Swift’s head of standards, says he welcomes the different options for connectivity, while arguing that ISO 20022 formats can bring significant advantages to back-office and downstream processes. Swift, he says, is keen to support ASX, “to ensure that the implementation of ISO 20022 conforms to best practice and is aligned where possible with implementations in other markets”.

The head of clearing, however, reckons Swift will be “extremely annoyed at the ASX costing outcome, as they spent a couple of years mapping their messaging to ASX”.

Of the coming charges to Swift, Lindsay comments: “We hear that participants are quite happy with reverse billing arrangements.”

Regarding the threat from AMQP, which might be more economical than Swift, he says that “we don’t know enough about AMQP to be able to compare the option with SwiftNet. For the Swift option, the same benefits exist for our members who use us to connect with hundreds of counterparts and market infrastructures”.

On savings from blockchain, ASX has floated some large numbers. Consultancy Rice Warner has estimated the industry as a whole spends a yearly A$23 billion on back-office processes

In January 2016, ASX began reimagining its post-trade platform for cash equities, envisioning real-time reconciliation of data if banks plugged directly into its new system. ASX believes direct connection through a node will obviate the need for firms to run siloed databases outside the ledger – drastically cutting the number of reconciliation messages crisscrossing the industry.

On savings from blockchain, ASX has floated some large numbers. Consultancy Rice Warner has estimated the industry as a whole spends a yearly A$23 billion on back-office processes currently paid by superannuation funds, 2,300 listed companies and several million investors – as well as A$100 million of yearly costs paid by the clearing and settlement industry – some of which could be targeted.

ASX also argues that widespread adoption of its blockchain will allow for new value-added services.

Other banks are curious to test out ASX’s new proprietary technology. Designed by financial technology firm Digital Asset, it will use Digital Asset Modeling Language (Daml), a code for smart contracts written in so-called functional programming. This form of programming is said to be elegant in execution, but remains somewhat under the radar.

Portfolios could be updated in real time throughout the day, bringing advantages in risk management and client reporting, says the head of cash equities execution at a global custodian.

“If you take a Daml node and if you’re a scale player, you want to see efficiencies in terms of cost savings,” he tells Risk.net. “But you can also start to think of some interesting things to do with real-time data.”

The custodian speculates that real-time data could make possible a dynamic share registry, updated near-instantaneously, as well as cutting the time needed to execute or deliver any number of services, such as dividend payments.

Real-time data could “remove transactional friction”, says the innovation head of a third global custodian.

The Australian exchange is one of a number of platforms looking into the cost and business advantages of blockchain, among them Deutsche Börse, the Swiss Digital Exchange and the Depository Trust & Clearing Corporation.  

In April, ASX will grant free access to showcase a small portion of what will be the system’s full functionality. Other products listed on the exchange, including derivatives and bonds, could move eventually to the new Chess system if it is deemed a success.

Asked what targets ASX has set itself to gauge the success of the roll-out, Richards says: “The timeline will be measured by many milestones, including the release to production, consumption of new services and the use of direct ledger connections by users over time.

“It is important to note this project starts with clearing and settlement, but does not stop there.”