ASX share price slides amid $250 million CHESS replacement bombshell

The CHESS replacement project began way back in 2015.

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Key points

  • The ASX share price is down 2.5% in early trade
  • The securities exchange has halted its blockchain-based CHESS replacement system
  • The replacement system’s capitalised software is being derecognised at a cost of  $245–$255 million

The ASX Ltd (ASX: ASX) share price is in the red in early trade, down 2.5%. This comes after Australia's largest securities exchange said it is reassessing all aspects of its CHESS replacement project.

ASX said it had conducted its own internal assessment of the CHESS replacement project, which you may recall commenced way back in 2015.

An independent review was also conducted by Accenture.

Accenture was brought in to review the project in early August this year, when the ASX reported yet another delay with its blockchain-based system upgrade plans.

At the time, the company reported the new system, being developed by application provider Digital Asset, wouldn't be up and running until 2024.

Now it appears the hyped ledger technology may be off the cards entirely.

What is the ASX CHESS system?

CHESS, if you're not familiar, stands for Clearing House Electronic Subregister System. In a nutshell, the system enables the transfer of ownership of any ASX shares you buy or sell. It also provides an electronic subregister for shares in listed companies.

Why is the exchange sticking with CHESS now?

In this morning's release, ASX said that significant challenges with the solution design and its ability to meet the exchange's requirements had been identified.

The company has halted all development activities on the blockchain system upgrade. It said the current CHESS system "remains secure and stable and is performing well".

In a financial blow, the replacement system's capitalised software is being derecognised at a cost of $245–$255 million (pre-tax) in the first half of 2023. The ASX added that this will not impact dividends.

Commenting on the decision, ASX chairman Damian Roche said, "We began this project with the latest information available at that time."

However, seven years down the road, he noted, "There are significant technology, governance and delivery challenges that must be addressed."

Roche continued:

ASX provides critical market infrastructure. What we do matters. We must do it right and we will. Importantly, our current CHESS system is performing well and investment in it will continue, giving us flexibility to reassess the various pathways for its ultimate replacement.

Addressing the roughly $250 million non-cash derecognition charge, ASX CEO Helen Lofthouse added:

To be clear, the derecognition charge reflects the uncertainty of the future value of the current solution design. It does not prevent us from using parts of what we have already built if we determine there are adjustments we could make to our current design, which will enable it to meet ASX's and the market's high standards.

The ASX will update shareholders on further developments with its CHESS system at the company's half-year results presentation in February 2023.

ASX share price snapshot

The ASX share price has underperformed the benchmark this calendar year, down 25% compared to a 6% loss posted by the S&P/ASX 200 Index (ASX: XJO).

Over the longer term, ASX shares are up 26% in five years.

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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