ASX to accelerate development of blockchain technology in 2H16

The Australian Stock Exchange (ASX) expects its 2016 full year guidance operating expenses will grow by approximately 5.5 percent as it plans to accelerate its assessment of using distributed ledger technology.

At the start of the year, the ASX announced that it will contract US-based firm Digital Asset to develop blockchain technology, the underlying system that facilitates transactions such as bitcoin trading, to replace or upgrade its main trading and post-trade platforms.

ASX injected AU$14.9 million into Digital Asset, giving them a 5 percent equity interest in the startup, as well as the right to purchase further equity and appoint a director to the board.

Phase one of the program will involve replacing the ASX's existing trading and risk management system, which is expected to run to the end of 2016. Meanwhile, phase two will focus on the revamp of the ASX's post-grade services, including clearing and settlement of the cash equities market.

The initial development will take six to 12 months, when the solution is expected to demonstrate the benefits for a range of users including investors, listed companies, and intermediaries.

The ASX said a final decision on market design will be made by mid-2017, and will include a decision on the future of Clearing House Electronic Subregister System (CHESS), which is expected to continue to operate as normal during the development of the blockchain technology. CHESS is the computer system that the ASX uses to record shareholdings and manage settlements of share transaction.

ASX managing director and CEO Elmer Funke Kupper said in a statement that using distributed ledger technology on Australia's equity market will change the way it operates.

"We believe that distributed ledger technology has the potential to change the way our market operates end-to-end, reduce risk and costs for our clients, speed-up the settlement process for investors, and support new services for listed companies. It provides a unique opportunity for Australia to be a world leader in the adoption of innovative market solutions," he said.

The guidance comes as the ASX reported on Thursday a statutory profit after tax of AU$213.1 million, up 7.3 percent for the half year to December 31, 2015.

Operating revenue jumped 7.9 percent to AU$376.2 million, with the ASX attributing the growth to an increase in listings, trading services, and post-trade services. The organisation recorded 22 companies from the tech sector, including IPOs and backdoor listings, listed during 1H16, taking the total tech entities listed on the ASX to 146.

Meanwhile, operating expenses was up 4.4 percent to AU$85.1 million during the six-month period. Specifically, depreciation and amortisation expenses increased 12.2 percent to AU$20.8 million. The ASX said this was due to the increased capital investment in prior periods in new services, as well as ongoing technology maintenance and refresh of existing platforms.

Staff expense grew by 1.5 percent, with ASX expecting this number to increase in the second half and into FY17 as it plans to grow headcount to develop its data business, support Asian sales, and accelerate the design for the blockchain technology with Digital Asset.

The group also incurred AU$18.7 million on capital expenditure during the half year, compared to AU$13 million in the previous corresponding period. ASX said the expenditure was focused on the company's technology transformation program, which involved replacing its futures and cash marketing trading platform that is currently underway, as well as enhancing its risk management platform. The enhancements are due to be completed, according to the ASX, during the calendar year.

Kupper boasted that during the six-month period ASX opened an office and established a technology hub in Hong Kong to connect its Asian customer base with Australia's financial market, saying the group now has presence in USA, Europe, and Asia.

The opening fell under the company's trading services business that saw revenue jump 8.1 percent to AU$91.4 million, which accounted for 24 percent of the group's total revenue. This was made up of a 14.9 percent rise to AU$20.3 million of its cash marketing trading revenue, a 10.8 percent increase to AU$40.6 million of its information services revenue, and a 1 percent boost to AU$30.5 million in technical services revenue.

The company also reported the size of the financial markets community utilising ASX's main data centre, the Australian Liquidity Centre (ALC), grew from 93 to 99, and the number of cabinets hosted in the ALC increased from 179 to 219.

ASX added that it will establish a dedicated team to expand its data and analytic services in the second half of the year.