The Australian Securities Exchange will protect itself against disrupters by redesigning its technology systems to use a "blockchain" that will allow near real-time settlement of equities trades and slash administration costs.
ASX is working with Digital Asset Holdings to build a "distributed ledger" that could ultimately replace the clearing and settlement systems provided by the ASX through its CHESS platform. ASX has paid $14.9 million for a 5 per cent equity stake in the New York-based company.
"The work we have done with ASX to date indicates that Australia has a unique opportunity to be a world leader in the adoption of distributed ledger technology," said Digital Asset Holdings chief executive Blythe Masters, who played a key role creating the modern credit default swap when she worked at JP Morgan.
Distributed ledgers, also known as blockchains, can be thought of as a secure network of computers which continuously maintain the records without intervention from an outside third party. The ledgers contain complete histories of the transactions and are updated in close to real time.
Blockchain is the technology that underpins the cryptocurrency bitcoin but while bitcoin's blockchain is a public ledger, banks and market operators are looking to build private networks. It is envisaged the members of the ASX system will be the same trading firms who currently plug into the CHESS.
"This is not an experiment. It is not a trial. It is about seeing if can work with our clients and the regulators to actually build a national scale solution that will work," ASX chief executive Elmer Funke Kupper told Fairfax Media on Friday.
"We think if we can get this right, we can get very close to real-time settlement. You should be able to sell shares at your desk right now and walk to the nearest ATM to get your money. That is our mission. The moment we are able to do that, we remove a lot of risk from the system."
Mr Funke Kupper has been an enthusiastic proponent of using blockchain for some months, saying in October the ASX was seriously considering replacing its clearing and settlement systems with a distributed ledger. ASX is currently replacing its existing trading and risk management systems.
ASX will make a decision mid-way through next year about whether the blockchain technology would ultimately be adopted and whether CHESS should be switched off, Mr Funke Kupper said.
ASX and Digital Assets will engage with regulators and government agencies "to assess the benefits that a new solution could deliver to them", the exchange operator said in a statement. The Reserve Bank of Australia and the Australian Securities and Investments Commission are both "showing a deep interest from the highest levels because they recognise some of these technologies can lead to a better regulated environment", Mr Funke Kupper said.
The ASX's announcement comes just a day after Commonwealth Bank of Australia completed a successful test with ten other global banks using a blockchain for trading with each other, part of a project being co-ordinated by R3 CEV. Along with share tradings, banks believe the technology could transform trade finance and international payments.
In his end of year interview with The Australian Financial Review in December, RBA governor Glenn Stevens said if banks could demonstrated that using the blockchain was more efficient and cheaper, it would rapidly drive wider adoption. "Various organisations, which are in that business are grappling with that question even now, as we speak. So that is fascinating, and I think, important," he said.
Mr Funke Kupper said on Friday there had been very little innovation in post-trade equity services for the past 20 years. But blockchain technology could result in near real-time settlement of trades which would reduce systemic risk, and also slice back-office administration and compliance costs for market participants.
Twelve other global financial services companies had also made investments in Digital Asset Holdings, including JP Morgan and ABN Amro. Deutsche Börse Group and DTCC, which does clearing in the US, are also working with Ms Masters' company.