ASX deputy CEO Peter Hiom has a long technology checklist these days. The stock and derivatives exchange is transitioning to a new trading platform from Cinnober. It is also looking to be among the first exchanges to implement blockchain technology as part of its equity clearing facility, perhaps in the next few months. John Lothian News spoke with Hiom last month at the FIA IDX conference in London about the next steps for the exchange.
Q: Let’s look back over the past year. What has ASX been working on?
A: A lot of our focus has been on technology. We’re going through a significant technology program at present. Plus our trading platform is being transitioned, and the first to be transitioned is our futures business. That is due to be completed in November. We’ve spent the last 12 to 18 months preparing for that transition. We will then move our equities onto that same technology and then we’ll move our post trade businesses, our agency and futures clearing.
And then we’re looking at the post equities clearing, and everyone’s favorite subject, which is utilizing blockchain technology.
Q: So what is coming up in terms of new products and services in the second half of the year?
A: A lot of it surrounds competing for futures business and OTC clearing business around the Australian dollar market. We compete heavily with the London Clearing House (LCH) for that business. And that is progressing well for us. We’ve built an OTC clearing service offering and have customers connecting to that service and building liquidity. That’s a key focus for us in the next 12 months. We’ll look at new products as well.
We’ve recently added a new office in Hong Kong. That opens us up to China, Taiwan and areas that ASX has not traditionally spent time in building our distribution. In doing that, there are some product opportunities as well. We think there are some opportunities in the metals space, and recently signed an MOU with the Perth Mint, which presents some interesting opportunities as well for Asian investors.
Q: How is ASX approaching the US market?
A: We’re the largest interest rate derivatives exchange in the Asia Pacific and the fifth largest in the world. We’re an interesting place to trade. The yield curve actually has a shape in Australia which is not the case in other jurisdictions. So the US is a key market for us.
And we’re expanding our listings business in the tech sector. There are tech companies in the US that would be considered too small to raise capital in the US market. But some are now turning to the Australian market, where we are building a reputation for helping start-up companies.
Q: ASX has been among the first to push into blockchain technology for its operations. What are you doing in that space with it?
A: In the middle of last year, we were thinking about our clearing and settlement for cash equities, called our CHESS platform. It is a 20-year old platform and we were looking to replace it. It was in examining the choices available to us that we came across blockchain. We’ve been looking at it for a while and we think we see the application for the Australian market. Australia is interesting because we have a fully dematerialized equity market. We don’t have share certificates sitting anywhere today, everything is digitized. We have a relatively non-fragmented infrastructure. We have two exchanges, one clearinghouse and one CSD, so we can contemplate solutions in Australia that would be hard to contemplate in other jurisdictions. And we have the investor’s name on the register on the CHESS platform. That takes us a long way to using blockchain as well.
We spent a long time engaging with the tech sector to find companies that could help. We spoke with a bunch of them and 15 firms became eight, and that became three that we invited to Sydney to build us a blockchain solution for a couple of use case for equities, corporate actions, and paying dividends. Of those, the one we chose was Digital Asset. We’re now building a beta version of a clearing and settlement platform for equities in Australia. We think the opportunity to reduce costs for customers, simplify and radically alter the way our markets operate, is significant for us. Collapsing settlement times, if customers want that. These are really interesting opportunities and they solve problems our customers want us to solve. Their revenues are under pressure. Their cost of doing business is going up and the capital they need to run their business is also increasing.
We’re right in the middle of building that platform and experimenting with that technology. It is the new black that everyone is talking about. We’re already focused on a particular construct for us. So we think we’re one of the first exchanges to do that.
Q: Where do you go from here?
A: We said six to 12 months from the start of the initiative, which we began in January. So we’re six months or so into that process. We’re about to start exposing the technology to our customers. We’ve built a space in our offices specifically to expose that technology to them and show how that might be used in the next couple of months.
Q: Ultimately, how much could blockchain save customers?
A: If you take the Australian market as an example, there are about $4 billion to $5 billion of cost in the system. Those are paid for by listed companies and investors. In that number, I’m adding up the exchanges, clearinghouse, CSDs, the registries, the depositories, data vendors, platform providers, technology providers – everybody in the system. We think there is an opportunity to look at that cost and ask ourselves if there is a better way for the market to be operating.
We think there is a way of addressing what I described as a structural problem for our customers – creating a source of truth on which everyone can rely and therefore look to their back office processes as a place where they could simplify and reduce costs, and try to automate some processes that frankly should be automated.
The post trade environment has not had the investment in innovation that the trading environment has had over the last five to 10 years. We’re still sitting on 20- and 30-year-old systems. We think it’s time to see what we can do there.
Q: It’s going to be a busy time for ASX on the technology front.
A: We think there is an opportunity for innovation. When I think about internet technology being applied, the vast majority of the companies that use the internet are beneficiaries of that technology. There is no doubt some business models will lead to change, ours included. We’ve been very clear that the role of clearing will not disappear, but it will diminish if we implement a solution that will allow us to collapse the settlement times. But there will also be opportunities. It’s beholden to exchanges to think about how it changes their business model and changes the business model with others as well.
We have a full agenda of technological change we need to take ourselves and our customers through. For us that means this year and the following years as well. This will take some time to implement. They will be really important for us, setting the infrastructure for us and our customers. This will set us up for the next phase of our growth.