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Australian Stock Exchange Blockchain Failure Burns Market Confidence By Reuters

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© Reuters. FILE PHOTO: A man looks at the main board at the Australian Stock Exchange building in central Sydney, Australia, February 6, 2018. REUTERS/Daniel Munoz

Written by Byron Kay

SYDNEY (Reuters) – In a Sydney hotel conference room in May, Tim Hogben, head of securities and payments at ASX Ltd, which operates the Australian Stock Exchange, told traders, share registry operators and clearinghouse representatives what they had hoped to hear. .

A rebuild of legacy stock exchange software using blockchain-based technology was pretty much ready after seven years of development, bringing the ASX on the verge of a world-first transformation that would enable it to increase trading volumes and compete more aggressively with global competitors.

“Ninety-six percent of the software is currently in a runtime and test environment. Ninety-six percent of that software is working,” Hobbin told a conference of the Association of Securities and Investment Advisers, in a video seen by Reuters. “If it doesn’t work you’ll hear about it, let me tell you.”

In November, the ASX abandoned the project, citing dysfunctional management, concerns about product complexity and scalability, and difficulty finding experts to support it. The cancellation came after new CEO Helen Lofthouse commissioned a review of Accenture (NYSE: ) which found that the rebuild was only 63% delivered and that nearly half of the code needed to be rewritten.

More than a dozen brokers, other market participants and people directly involved in the blockchain project told Reuters that the failure has shaken confidence in the Australian exchange operator. Some have expressed dismay at the time and costs they have contributed to the ill-fated bid and ASX’s repeated assurances that all is well with the upgrade, which has faced five delays since its tentatively scheduled launch in 2020.

The experience also raised questions about the mismatch between the promises of the technology that supports cryptocurrencies and their reality. The use of distributed ledgers in Australia’s critical financial infrastructure may be one of the most important applications of blockchain-based systems in the mainstream corporate setting.

said Michael Soames, general counsel of Cboe Australia, a securities and derivatives exchange involved in the project.

“ASX’s selections have led to one of the largest and most significant services operations seen in financial markets globally.” On top of the $245-255 million Australian dollars (US$164-171 million) that the ASX plans to take on, market players estimate they have spent around that all together again in preparation for the offering, including software upgrades, airline tickets and employee hours spent. Attend webinars and consultations online. At a parliamentary hearing this month, the ASX apologized for the failure but denied misleading the market or regulators. Chairman Damien Roche, when asked by lawmakers about a statement in the company’s 2021 annual report that the project “has moved from the design and build phase to the testing and delivery phase,” said the claim referred to “functional” parts of the software, not “non-functional” parts. functionality” such as security and scalability.

An ASX spokesperson told Reuters in an email that the company gave project updates based on the latest available information and that some challenges “only became apparent as we got to the final stages”.

Scoop crepe

The ASX’s quest to replace its deal-facilitating platform — better known as CHESS, for the Clearing House Electronic Sub-Registry System — began under then-CEO Elmer Funke Kupper in 2015, when there was a global fascination with cryptocurrencies and blockchain.

After New York startup Digital Asset Holdings offered ASX executives a test deal on its blockchain software, the ASX in early 2016 signed the little-known company to begin exploratory work on the overhaul. ASX has bought a 5% stake in the digital asset.

Two months later, Funk Cooper resigned over allegations of bribery relating to a previous role; He was acquitted. Pressed to rebuild, ASX raised its stake in digital assets to 8.5%. Under Funk Cooper’s successor Dominic Stephens, the exchange operator has gone from a lack of market consultation to an extensive one, a person involved in the project told Reuters on condition of anonymity due to concerns about the professional ramifications.

The range has also expanded. From an initial plan to run about 12 of CHESS’s 400 data transfers per transaction on the blockchain, the ASX has decided that the new system will involve 400 transfers, the person said.

People working on the project have raised concerns that the digital asset lacks post-market support and that the ASX has recruited the company without testing its product for expansion, the person said, adding that concerns have not been addressed. In the end, the ASX had 300 people working on the CHESS replacement project, about a third of its staff.

“To try to put something that hasn’t been tried and tested in Australia, I think it was a little unwise,” said William Slack, managing director of Morrison Securities, which had two staff partly dedicated to the ASX project and three or four in each ASX advisory. for several years.

Funke Kupper did not respond to requests for comment. Efforts to reach Stevens were not successful. When he announced his retirement in February, he told the Australian Financial Review that his successor would find the blockchain project delivered and up and running, and that “the next phase is over.”

When CHESS was launched in 1994, it was seen as innovative because it combined trading, clearing and settlement on a single platform. But as time went on it became old and difficult to maintain. When a trading boom in March 2020 prompted regulators to cap trades due to processing delays, the RBA said replacing CHESS with “more modern technology is critical.”

However, by seeking to replicate all of CHESS’s functionality on a single system, ASX risked undermining the advantage of the blockchain, which was reducing nodes slowing down processing, said the people involved in the project.

“It would have been easier, I think, to create a new version of CHESS in another modern language, rather than a blockchain,” said Rami Aziz, a former CFO at ASX who oversaw budgets, governance and timelines related to the project. in its early stages.

“The blockchain probably needs to develop a bit more before it will be able to do what they want it to do for CHESS. It will probably never be able to do that.”

Digital Asset declined to comment other than a statement on its website approving of the portion of the Accenture report that highlighted “the need for consistent business requirements (and) simplification in solution design.”

“Clear requirements and alignment of manageable objectives and milestones with established success criteria are of paramount importance,” she said.

An ASX spokesperson told Reuters distributed ledger technology could be transformative and the company chose the digital asset after “strong global” research.

Shortly after ASX put the project on hold, AP Moeller-Maersk A/S and ibm (NYSE:) has terminated its blockchain-enabled shipping platform, citing a lack of global collaboration.

Countercharges were swift. The Australian Securities and Investments Commission, which regulates the exchange, called the late disclosure of the problems “unsatisfactory” and the ASX commission called for a special report explaining its plans for CHESS, while the Reserve Bank of Australia called the failure “extremely disappointing”. Lawmakers want to expand ASIC’s powers over the ASX.

Morgan Stanley (NYSE:) analysts cut their rating on ASX shares by 10%, citing strategic uncertainty.

Meanwhile, ASX users want compensation for wasted time and money on a project they say they can’t pull out of.

“Certainly the public announcements made by the ASX on that flight were inaccurate and, some would say, misleading,” said Daniel Spokes, director of customer support services at Morgans, a Brisbane-based brokerage. He said sellers who invested in the technology should have “some kind of entitlement to compensation.”

The CEO of a small brokerage that runs its own trading software, who spoke on condition of anonymity to avoid damaging relations with the exchange, told Reuters he had hired four full-time software developers for three years, at a cost of more than A$1. million, to keep up with ASX’s frequent update requirements.

The RBA and ASIC said they expect the ASX to cover industry writedowns linked to the failure. An ASX spokesperson said the company was “very familiar with investment clients and other stakeholders who have already done so (and) will keep this in mind when we consider what work could be leveraged for a new solution”.

The spokesperson added that the exchange “has offered discounts to customers in the past,” without elaborating.

For some companies, the cost has been difficult to measure. FinClear Pty Ltd, one of the largest third-party trading service providers, has delayed integrating its software system with that of a company it bought in 2021 based on a single failed ASX change history.

“This is what our decision-making process is about other interconnected technology projects,” said David Ferrall, CEO of FinClear.

“It is possible that the ASX has misled the market, whether inadvertently or deliberately. I would like to think inadvertently.”

Chris Burrell, managing director of Burrell Stockbroking, said he had employees delay retirement after learning of the project’s launch schedule, “then dates came in and they got pushed back.”

In the aftermath, the ASX has yet to decide how to update its core platform. “There is no ready-made solution available to meet the needs of the Australian market,” a company spokesperson told Reuters.

Aziz expected that the stock exchange would proceed more cautiously in its next attempt.

“They will probably go and just build a new version of CHESS on a regular programming language, not inside a blockchain,” he said. “That’s all they can really do.”

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Stock, bond and cryptocurrency investors remain on edge after a rough year for the markets

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This version is for personal, non-commercial use only. Distribution and use of this material is subject to our Subscriber Agreement and copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.

https://www.wsj.com/articles/stock-bond-and-crypto-investors-remain-on-edge-after-brutal-year-for-markets-11672403124

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Dow Jones losses are heading towards the closing bell as US stocks approach their worst year since 2008

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US stocks were trimming losses heading towards the closing bell on Friday, but were still on track to post their worst annual loss since 2008, as the harvest of tax losses combined with concern over the outlook for US corporate and consumer earnings took its toll.

How are stock indices traded?
  • Dow Jones Industrial Average
    DJIA,
    -0.22%

    It fell about 182 points, or 0.6%, to 33,039 points.

  • S&P 500 index
    SPX,
    -0.25%

    It fell nearly 26 points, or 0.7%, to about 3,824.

  • The Nasdaq Composite Index fell 72 points, or 0.7%, to about 10,406 points.

Stocks posted their biggest gains of the month on Thursday, with the Dow Jones rising 345 points, or 1.05%, to 33,221 as major stock indexes rebounded after losses incurred earlier in the week that pushed the Nasdaq Composite to a new closing low for the year. . The S&P 500 was on track on Friday to wrap up its fourth consecutive losing week, the longest streak of weekly losses since May, according to FactSet data.

What drives the markets

US stocks traded lower on Friday afternoon, on pace to close the last trading session of 2022 with weekly and monthly losses.

Stocks and bonds have been crushed this year as the Federal Reserve raised its benchmark interest rate more aggressively than many expected, as it sought to crush the worst inflation in four decades. The S&P 500 is on track to end the year with a loss of nearly 20%, its worst annual performance since 2008.

“Investors were on edge,” Mark Heppenstahl, chief investment officer at Penn Mutual Asset Management, said in a phone interview Friday. “It seems as if being able to bring prices down might be a little easier given how bad the year has been.”

Stock indices have fallen in recent weeks as the recent rally inspired by hopes in the Fed’s policy focus faded in December after the central bank indicated it would likely wait until 2024 to cut interest rates.

On the last day of the trading year, the markets were also hit by selling to capture losses that could be written off from tax bills, a practice known as tax harvesting, according to Kim Forrest, chief investment officer at Bouquet Capital Partners. .

Forrest added that an uncertain outlook for 2023 has also weighed in, as investors worry about the strength of corporate earnings, the US economy and consumer as the fourth-quarter earnings season approaches early next year.

“I think the Fed, and then earnings in mid-January — they’ll set the tone for the next six months. Until then, it’s anyone’s guess.”

The US central bank has raised its benchmark interest rate by more than four percentage points since the start of the year, pushing borrowing costs to their highest levels since 2007.

The timing of the first Fed rate cut will likely have a significant impact on markets, according to Forrest, but the outlook remains uncertain, even as the Fed tries to signal that it plans to keep interest rates higher for longer.

On the economic data front, the Chicago PMI for December, the latest major data release for the year, Came stronger than expected. Climbing to 44.9 from 37.2 in the previous month. Readings below 50 indicate contraction.

In the coming year, Heppenstahl said, “we are likely to shift toward concerns about economic growth rather than inflation.” “I think the decline in growth will eventually lead to an even greater drop in inflation.”

Read: Stock market investors face 3 recession scenarios in 2023

Eric Sterner, chief information officer at Apollon Wealth Management, said in a phone interview on Friday that he expects the US to fall into a recession next year and that the stock market could see a new bottom as companies likely review their earnings. “I think the earnings outlook for 2023 is still very high,” he said.

The Dow Jones Industrial Average, S&P 500 and Nasdaq Composite were all on pace Friday afternoon posting weekly losses of around 1%, according to FactSet data, at last check. For the month, the Dow was down about 5%, the S&P 500 was down about 7% and the Nasdaq was about to crash down about 10%.

Read: Value stocks are outperforming growth stocks in 2022 by a large margin historically

As for bonds, Treasury yields rose on Friday as the US sovereign debt market was set to post its worst year since at least the 1970s.

The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.879%

It rose about four basis points on Friday at 3.88%, according to FactSet data, in the latest check. Ten-year yields jumped about 2.34 percentage points this year through Thursday, on track for the biggest annual gain ever based on data going back to 1977, according to market data from Dow Jones.

Meanwhile, the yield on the two-year note
TMUBMUSD02Y,
4.423%

Up about 3.64 percentage points in 2022 through Thursday to 4.368%, 30-year return
TMUBMUSD30Y,
3.971%

It jumped 2.03 percentage points over the same period to 3.922%. That marks the largest increase in a calendar year for each based on data going back to 1973, according to market data from Dow Jones.

Outside the US, European stocks capped their biggest percentage drop in a calendar year since 2018, with the Stoxx Europe 600
xxxp,
-1.27%
And the
It is an index of euro-denominated stocks, down 12.9%, according to market data from Dow Jones.

Read: A downturn in the US stock market is trailing these international ETFs as 2022 draws to a close

Companies in focus

Steve Goldstein contributed to this article.

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Fed’s reverse repo facility reaches $2.554 trillion by Reuters

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© Reuters. FILE PHOTO: The Federal Reserve Building in Washington, US, January 26, 2022. (Reuters)/Joshua Roberts/File Photo

Written by Michael S Derby

NEW YORK (Reuters) – A key facility used by the Federal Reserve to help control short-term interest rates saw record inflows on Friday, the last trading day of the year.

The New York Fed said its reverse repo facility took in $2.554 trillion in cash from money market funds and other eligible financial firms, beating the previous high seen on Sept. 30, when inflows totaled $2.426 trillion.

The cash rally was almost certainly tipping into record territory in the usual end-of-quarter pattern that could worsen further towards the end of the year. On those dates, for a variety of reasons, many financial firms prefer to deposit money in the central bank rather than in the private markets.

The Fed’s reverse repo facility has been very active for some time. After seeing almost no absorption for a long time, money began to gravitate toward the central bank in the spring of 2021 and then grew steadily. Daily reverse repo usage has been steadily above the $2 trillion mark since June.

The reverse repo facility takes cash from qualified financial firms in what is an actual loan from the Federal Reserve. The current rate is 4.3%, a yield that is often better than rates for short-term private sector lending.

The reverse repo facility is designed to provide a soft floor for short-term rates and the federal funds target rate, and is the Fed’s primary tool for achieving its function and inflationary mandates. To mark the higher end of the range, the Fed is also pushing deposit-taking banks to deposit cash at the central bank, where the interest rate on reserve balances is now 4.4%.

The federal funds rate is currently set between 4.25% and 4.5% and is trading at 4.33% as of Friday, sandwiched between the reverse repo rate and interest on reserve balances.

There are no signs of shrinkage

Even with the heavy use of reverse repo, Fed officials have always remained unconcerned about large outflows, even as some in financial markets worried about the potential for the Fed to drain the borrowing and lending lives of private money markets.

Fed officials also expected that as the central bank continues to raise interest rates with the goal of bringing down very high levels of inflation, the use of the reverse repo facility should decrease. But that hasn’t happened yet, and some in the markets now believe that the consistently high utilization of the Fed facility will be around for some time to come.

Research by the Federal Reserve Bank of New York indicated that banking regulation issues make demand for the Fed’s reverse repo instrument high. Meanwhile, the Kansas City Fed added its view that large inflows are related to limited private market investment opportunities and policy uncertainty.

Strong cash flows to the central bank may not have alarmed central banks, but they have driven their operations to an actual loss. The Federal Reserve finances itself through interest on the bonds it owns as well as the services it provides to the financial community. It usually makes a noticeable profit and by law returns it to the treasury.

Currently, the cost of paying interest on reverse repo agreements and reserve balances outweighs income. The Fed reported Thursday that as of Dec. 28, the accounting metric it uses to track losses was $18 billion. Many observers expect that the Fed’s plans to raise interest rates further and keep them at high levels will mean fairly large losses for the central bank over time, even if these losses will not affect the action of the Fed’s monetary policy.

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