The fallout from Australia Stock Exchange’s failure, over seven years, to replace its aging post-trade processing system, is leading to surprising repercussions.
One is the possibility that ASX will lose its coveted monopoly and securities clearing and settlement – the function handled by its processing system, called Chess.
This may not mean rival securities bourses such as Cboe or Sydney Stock Exchange will stop sending trades to Chess to finalize.
Instead, fintech players are picking up the ball and running.
DigFin recently covered the bifurcation of the Australian blockchain-based industry, with the traditional banks shrinking from plans for stablecoins while startups plan to launch licensed bitcoin spot ETFs.
Elsewhere, another company is developing private markets, and this is where it hopes to create a new business by marrying its own distributed ledger with a license to compete against Chess.
Private markets
That company is FinClear. Two years ago, it launched a platform called FCX using a DLT to create a private-markets platform. Finclear considers itself a financial services business, not a fintech: the DLT is just part of an underlying infrastructure – a company registry – to get stuff done.
When FinClear first decided to tackle private markets, it saw itself as limited to providing a better way for private companies to manage their liquidity; it took seriously ASX’s plans to replace Chess with a DLT solution using language provided by vendor Digital Asset.
That’s still the plan, given the inefficiencies in private markets, where there is no formal register of companies and investors rely on spreadsheets to keep track of who owns what.
But events have now raised the possibility that FCX could clear for publicly listed companies too.
“There’s a lot of noise about real-world asset tokenization, but there’s little activity within the regulated environment,” said David Ferrall, FinClear CEO. “We already transact billions of dollars a year. We’ve built FCX for atomic trading and settlement. It took us two years to build this, while for the past seven years ASX fialed to deliver a solution for Chess. Could we deploy this infrastructure for public markets? I think yes, with the right partners.”
From private companies to public
FCX has been live for about one year. Farrell says there are more than 50 companies on the registry, and “six to twelve” have arranged transactions over the platform. In private markets, so long as there’s just an advisor arranging transactions among a few parties, FCX can continue.
But if it wants to host deals based on a bid/offer and book-building process, then it’s a marketplace and requires a license. Finclear has applied for one from Australia Investment Securities Commission and Ferrall says he expects to get it in the coming months.
Unlike other exchanges in Australia, however, Finclear initially requested it be exempted from having to clear and settle through Chess.
Private transactions on FCX settle atomically (near-instant delivery and payment), so there’s no need for Chess’s infrastructure which is designed to facilitate reconciliations among many participants. ASIC wasn’t convinced, though, and asked Finclear to map out what it would do in the event a trade fails in the microseconds between clearing and settling.
Taking on ASX
This led FinClear to amend its license application: now it wants a full clearing-and-settlement facility license of its own. ASIC is considering the application. Farrell says this is the regulator’s way of obliquely signaling interest. “The regulators are telling us they want someone to compete with ASX,” Ferrall said.
Where this will lead depends firstly on Finclear getting the license. Farrell says securities tokenization is one obvious direction. FCX uses an internal stablecoin to serve as the cash leg in transactions and settle transactions. There are no share certificates used in the private market, but FCX runs a wallet to hold tokens that represent securities, and to hold its stablecoins.
But demand and supply for a tokenization market in Australia is limited. It would be difficult to create a liquid market. Illiquidity is fine for private companies trading in a gray zone, but not for tokens that are meant to represent public companies. And the ASIC license will limit FCX to handling Australian-domiciled companies.
Therefore Ferrall is in talks with partners in the US. These include Digital Asset and the financial institutions in Canton, a network of bank blockchains that interoperate through the DAML code. The goal is to build a global market, with Finclear either as a vendor or a partner.
FinClear isn’t the only player taking advantage of ASX’s stumble, however. In fact, an alternative solution is taking form, built by former employee of Finclear – and it’s not going the licensed route. That’s a story for another day.
