Government report rings death knell for ASX monopoly – but new life for Aus finfrastructure

Last week the bipartisan ‘Standing Committee on Economics’ released the ‘Better Competition, Better Prices Report‘ the result of an inquiry into competition and economic dynamism in the Australian ecosystem. It highlighted that competition holds prices down and service quality up, and has a symbiotic relationship with economic dynamism. Together they “drive innovation and long-term productivity growth”.

The report covers a wide range of areas, from mortgage loans to airports. But our particular interest and expertise is on interoperability and competition in financial market technology. FinClear is quoted in these sections of the report, having appeared before the Committee last year to contribute to hearings on the same.

The FinClear Group told the Committee that there was clear evidence that moving from a monopolistic arrangement in settlement and clearing services to a competitive market would lead to more efficient technology capability and lower pricing. The FinClear Group added that ‘it’s important that when you look at this you look at promoting competition in a proportionate way that doesn’t put the financial infrastructure at risk’.

We are very proud to have contributed to this report and to the ongoing industry dialogue.

A push for greater competition

One of the reports key findings states – The committee supports efforts to increase innovation in financial services, reduce unnecessary delays in approval times for new market entrants, and reduce monopolistic regulatory arrangements.

Why is this important?

Due to the failure of ASX to replace CHESS in a timely fashion (see our previous articles for the full story), Australian financial services and its customers remain at its mercy for another extended timeframe and unspecified technology solution. But since the ASX is the only provider of equities clearing in Australia, we also remain at risk of falling behind global markets – resulting in turn in more capital outflows to other (more competitive and progressive) global markets.  This is already playing out with two of our most successful homegrown technology companies – Atlassian and Canva – electing to list offshore.

The key recommendation from the report speaks directly to this dynamic.

Recommendation 44 – That the Government examine removing barriers to entry of providers of settlement and clearing services for equities, to boost competition in the sector.

Recommendation 44 received unanimous bipartisan support from the Committee and demonstrates that the political winds in Canberra have shifted towards promoting stronger competition. For the first time, our regulators and policymakers have now been given clear direction: encourage competition and break the ASX monopoly or risk Australia falling further behind. However, barriers to competition remain, including the size of our market (relatively small revenue) and high regulatory barriers to entry.

Competition will enable Australia to stay financially competitive with more options for private companies to keep their liquidity and trading events onshore. Right now, Australia risks major capital flows either going overseas or simply withdrawing from the ASX.

We believe this a key microeconomic reform opportunity for the government that will have lasting legacy impacts on our financial system as well as creating new market opportunities and making Australia a more attractive option for international investment. This is why FinClear advocates competition in a proportionate way that doesn’t put the financial infrastructure at risk.

Guardrails for a robust system

What this means in practice is encouraging competition and innovation to flourish, but with sensible thresholds to protect financial markets. We are also proud to have contributed to this discussion with a recent proposal to lift the Financial Stability Standard relating to clearing and settlement from the current very low $200m to $40bn (which represents around1% of the of the annual settlement for Australian equity securities).

Existing alternatives

FinClear has also been developing its own markets infrastructure, FCX, which promotes efficiencies and reduces much of the friction and touchpoints that ASX/CHESS continues to require. FCX is a platform for companies that want to remain private while availing themselves of regular liquidity events – what we call Liquidity on Demand – instead of having to enter the burdensome (and costly) constraints of continuous traded/continuous disclosure public markets.

Although this technology is used on FCX for private markets, and to give companies an alternative to listing on a stock exchange, it is technology that could also be applied to listed stock exchanges. What we have built within the space of two years is lightyears ahead of public markets infrastructure and what the ASX have been attempting to replace for over eight years!

Could this infrastructure become the competition that government and regulators have now been directed to stimulate?

We would say it already is: it gives companies an alternative avenue and capability to “stay private for longer” rather than list on the ASX. And with the right partners, FCX and its technology could extend into public markets. For now, what is needed is for regulators to recognise what the market wants and needs – today.

As noted in the report, FCX has applied to ASIC for a tier 2 financial market licence. This application is well progressed and we hope to have our own market and clearing settlement facility license in the very near future. This should not only open the door to competition in this vital area for Australia (boosting efficiency/productivity and competitive pricing) but could well place Australia back at the forefront of global financial markets.

Author: David Ferrall Group CEO & Managing Director, FinClear