![Under pressure: ASX chief executive Dominic Stevens.](/content/dam/images/g/t/q/f/y/r/image.related.afrArticleLead.620x350.gtqf2i.png/1484249751001.jpg)
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When the ASX, the world's most profitable major stock exchange, said it would replace its decades-old clearing and settlement software, it was presented as an ideal opportunity to adopt distributed ledger technology such as blockchain.
But four months after the ASX started a consultation process to replace the CHESS post-trade processing platform, there is palpable anger among its stakeholders about its cavalier approach to the technology upgrade.
CHESS is a critical piece of financial market infrastructure. It is an effective monopoly owned by the ASX with the implicit approval of federal Treasurer Scott Morrison.
Morrison recently extended the ASX monopoly on settlement and clearing for another 18 months. That extension gave the market confidence that the ASX would be able to maintain its global-leading high profit margins.
A comparison of the profitability of large global exchanges published this month by Global Technology Partners found that the ASX is the most profitable out of 14 exchanges.
ASX was ranked No.1 with a forecast profit margin of 77 per cent for fiscal 2017. It was ahead of CME group and Hong Kong Exchange and Clearing, which both have a forecast profit margin for 2017 of 71 per cent.
ASX chief executive Dominic Stevens is under pressure from shareholders to maintain the company's high profit margins while also maintaining the high dividend payout ratio, which has made ASX attractive to retail investors and self-managed super funds.
There is a suspicion among the stakeholders who use ASX's services that Stevens will be under intense pressure to skimp on technology investment to preserve margins.
Whether or not that happens, stockbrokers are ropeable about the way the ASX has approached one of the most important software platform upgrades to have occurred in more than 20 years.
Brokers are concerned that ASX is moving down a path designed to suit itself, including the use of technology developed by its technology partner, a company in New York called Digital AssetĀ Holdings (DAH).
ASX has invested about $30 million in DAH, which is developing a distributed technology solution to post-trade processing for the cash equity market.
No decision will be made by the ASX about the use of the DAH technology until the end of this year. But brokers believe that the work being done by DAH has not incorporated what the brokers want in terms of new functionality and services.
The brokers believe that the ASX has ignored their long-standing demands for the first phase of the CHESS replacement to include automation of processes that are currently done manually, particularly in relation to corporate actions.
Another stakeholder, the alternative cash equities trading platform Chi-X Australia, is concerned that as part of the CHESS upgrade the ASX is thumbing its nose at the regulatory expectations imposed on ASX by the Council of Financial Regulators (COFR).
COFR comprises the Reserve Bank of Australia, which chairs the council, the Australian Prudential Regulation Authority, the Australian Securities and Investments Commission and the Australian Treasury.
Chi-X Australia chief executive John Fildes says that COFR made clear in a policy last year that the ASX must be responsive to users and give them "a strong voice in strategy setting, operational arrangements and system design, and to make ASX's monopoly cash equity CS services directly accountable to users".
Fildes says that COFR has ordered the ASX to adopt a comply or explain approach to its governance of any changes to clearing and settlement processes.
"This has absolutely not been the case," Fildes says.
He says that the replacement CHESS system presents an opportunity to set up a world class clearing and settlement system that will last for the next 20 years.
Fildes says it should not be an opportunity for the ASX to force the technology solutions developed by DAH on to the industry.
Brokers have concerns about the way in which the ASX has approached the consultation process for the CHESS replacement. These concerns have been raised at the highest levels within the ASX.
An ASX spokesman said the consultation process for the CHESS replacement had only just started and the ASX was listening to the feedback from stakeholders.
Disclosure: The author's super fund owns shares in ASX.