ASX Limited (ASX) Earnings Call Transcript & Summary

Good morning, and welcome to ASX's financial results briefing for the first half of the financial year ending 30th of June, 2023. Thank you for taking part in this virtual presentation. I hope you are safe and well wherever you're joining us. My name is Helen Lofthouse, and I'm the Managing Director and CEO of ASX. I'm delighted to be presenting these results. And joining me today is ASX's Chief Financial Officer, Andrew Tobin. Before we start, I'd like to acknowledge the Gadigal people of the Eora Nation, who are the traditional custodians of the country where I'm speaking today. We recognize their continuing connection to the land and waters, and thank them for protecting this coastline and its ecosystems. We pay our respects to elders, past and present, and extend that respect to First Nations people present today. Today's presentation will focus on 3 main topics; our financial performance for the first half of this financial year, CHESS, and an update for each of our key strategic themes. I'll address the first 2 topics before Andrew presents our financial performance in more detail. And then I will return with an update on our strategic themes and outlook, before we take questions. So first to financial performance; our half year results saw a resilient underlying performance across the Group with operating revenue coming in at $499.5 million. While this is fractionally down when compared to the prior period, it's a pleasing underlying performance, given that the comparative period was a near all-time record result, and there have been significant changes in our external environment. This includes the Russian conflict with Ukraine, a sharp increase in global inflation and the swift tightening of monetary policy. This performance demonstrates the strength and diversity of our business through market cycles. Operating revenue for listings and technology and data was up, as was net interest income, and this was offset by declines in markets and securities and payments. Despite the increase in our total expenses, we saw underlying net profit after tax, or NPAT, almost flat for the period, down just 0.1%. This is a strong underlying result given the uncertainty in our markets. In November last year, we announced the derecognition of capitalized software in relation to the CHESS replacement project. This noncash charge of $176.3 million after-tax is recorded as a significant item in these results. We also announced that we were maintaining our existing dividend payout ratio of 90% of underlying NPAT. And our interim dividend of $1.162 per share is therefore, comparable to the first half of FY '22, down just 0.2%. Andrew will provide a detailed discussion of the results shortly. Turning now to CHESS; maintaining the security and stability of current CHESS is very important. Current CHESS has demonstrated a high level of performance, as it continues to meet all regulatory requirements and reliably service the market. Following ongoing investments, it's been tested to handle up to 10 million trades a day, which is well above the current daily average of 2.8 million. During the COVID pandemic, we saw an all-time peak of 7 million trades in a day, amongst a number of days of approximately 5 million, meaning that we still have headroom to manage volume searches. With the enhancements we've made to the systems' capacity and resilience in recent years and the investments that we will continue to make, ASX aims to ensure that current CHESS remains reliable, robust and supportable. There has been some interest in why we're replacing CHESS if the current platform is performing effectively. What we intend to do, is build a new contemporary platform that provides the flexibility and the further scalability to evolve and grow with the Australian market. And now I'll provide a progress update on CHESS replacement. As we announced in November, we paused the execution phase of the project to reassess the solution design. This was a significant reset of the project, and we've rapidly shifted into a new mode. We've taken important steps, including the appointments of key personnel, uplifting stakeholder engagement and strengthening project governance. We have appointed Tim Whiteley, who has deep experience in technology transformation as Project Director for the CHESS Replacement Solution design. Tim reports directly to me and has already made strong headway in developing and progressing our roadmap, which I'll outline shortly. Stakeholder engagement has been uplifted for the project. We've established the CHESS Replacement Technical Committee, made up of key participants, industry associations, software vendors, approved market operators and share registries. This is the industry forum that we signaled in our announcement in November. It has wide stakeholder membership, and we'll meet monthly starting next week to encourage even deeper industry participation in the project. And we have accepted and are addressing the recommendations made in the independent review of the previous CHESS replacement project. Further to this, you may have seen the announcement from our Chair, regarding continued progress on our board renewal program, with the appointment of Vicki Carter and Luke Randell as Non-Executive Directors. Vicki's significant experience in organizational transformation, and Luke's insights drawn from contemporary customer relationships will deepen our Board experience and support the delivery of the next phase of CHESS replacement. I now want to talk about the next steps in the CHESS replacement project. We're considering a broad range of options, including the use of some existing assets that have already been developed as well as potential vendor solutions. And we're taking onboard learnings from our experience with the project so far. We've developed the first phase of our roadmap, with the key milestone being the announcement of the solution design. Our targeted timing for this announcement is the December quarter of 2023. I'll explain more about what's involved in the process, and particularly the exploration of new vendor solutions, which is driving this timeline. As I've mentioned, our solution design reassessment includes existing assets and vendors such as digital assets. We've also reviewed the world's top 20 exchanges and central securities depositories, to update our view of relevant technology providers for clearing and settlement. And we'll be issuing Requests For Information or RFIs to a list of relevant vendors very shortly. We're aware that there's no off-the-shelf vendor solution that can meet all of the requirements of the Australian market, such as the name on register ownership model. So we will need to conduct a detailed assessment of vendor solutions, to understand the customization and integration requirements. This will take time, and it will also be dependent on vendors availability to carry out this assessment work. You can expect our next progress update to be at our Strategy Day in June. Once we've determined the solution design, we'll develop an implementation plan, and a key driver of our timing in this phase will be the stakeholder feedback on elements such as integration and migration. Stakeholder engagement is a key part of this project, and as I mentioned earlier, we'll be actively seeking feedback from the CHESS Replacement Technical Committee. The committee will provide inputs on important topics, such as revalidating the business requirements, stakeholder readiness activities and the migration approach. This will ensure that our industry stakeholders have good visibility of progress, and are involved in our decisions and processes. ASX is the licensed operator of cash market clearing and settlement, and is responsible for delivering CHESS replacement. But delivering this project successfully will need the combined efforts of many stakeholders to achieve the best outcome for the market. And as you can see from our roadmap, there's still some way to go, and we need industry engagement for longer than we originally expected. In recognition of this, we've established the CHESS replacement partnership program, which will give up to $70 million to stakeholders to support their efforts in meeting project milestones through 2 mechanisms. There will be direct rebates of $15 million for participants to be paid in August this year, based on each participant's clearing and settlement fees paid to ASX. And the development incentive facility of up to $55 million will be available to key stakeholders who are building the platform. These incentives will be paid, based on the achievement of project milestones, noting an initial pool of approximately $10 million will be paid to eligible stakeholders within this financial year. The final size of the development incentive facility will depend on the chosen solution design. This partnership program of up to $70 million is a substantive contribution, that takes into account the extended time line of the project and aligns all of us towards achieving a successful outcome for the market. To recap, we'll continue to invest in current chess. We have taken important steps to progress the CHESS replacement project. We've set out a roadmap for the announcement of the solution design, and established the CHESS replacement partnership program. This is a once-in-a-generation reset of this technology, and it's important that we get it right. I'll now hand over to Andrew to cover our financial performance.

Thanks very much, Helen, and good morning. Our first half 2023 operating result demonstrates the resilience of ASX in what has been a volatile and uncertain macro environment over the past 6 months. Underlying profit for 1H '23 was $250 million and is consistent with the 1H '22 result. However, ASX's statutory profit was $73.7 million, down significantly compared to the prior corresponding period, impacted by the CHESS project derecognition charge of $176.3 million after tax in the half. The pretax amount of $251.9 million consists of derecognized capitalized costs of $248.4 million, and related project wind-down costs of $3.5 million, and is within the guidance range of $245 million to $255 million that we announced in November last year, when we paused the CHESS project. Operating revenue in 1H '23 of $499.5 million was down marginally by 0.4% on the PCP, with increased revenue from technology and data and listings being offset by declines in the securities and payments and markets business lines. Expenses were $173.9 million, up 6.8% on PCP, mainly reflecting increased staff and administration costs as further resources were added to our technology, customer and risk management activities, partially offset by a lower depreciation charge. We saw a strong rebound in net interest in the period, up 50.4% to $32.6 million, supported by RBA cash rate increases on ASX's cash balance. The increase in expenses relative to the revenue outcome resulted in our EBIT margin falling from 67.5% in 1H '22 to 65.2% in the current period, while underlying earnings per share was broadly consistent with the PCP at $1.291 per share. Reflecting this underlying earnings result, the Board has declared a dividend of $1.162 per share for this half. Now turning to the business line revenue outcomes; our total listings revenue was 5.4% higher than PCP, at $109.7 million. The annual listings fee, which is set based on each listed company's market capitalization, increased by 1.4% to $53.9 million, and this makes up nearly half of the total listings revenue. As noted earlier, the volatile macro environment has contributed to lower initial and secondary capital raising activity. There were 40 new listings, raising $2 billion in 1H '23 compared to 150 new listings, raising $29.7 billion in the PCP, representing a 93% decline in initial capital raised. Secondary market capital raise fell by just over 50% relative to 1H '22 with $30.2 billion raised in the half compared to $60.6 billion in 1H '22. As you may be aware, we recognize the revenue derived from initial and secondary listings over 5 and 3 years, respectively. And so despite the lower activity in the current period, the revenue outcomes reported mainly reflect prior period outcomes. This is shown in the bar charts on the slide. Therefore, initial listing revenue recognized in the half was $11.8 million, up 6.5% compared to PCP and secondary revenue was $39.5 million, up 12.6%. Moving now to the Markets business; the Markets business generated revenue of $138.8 million, down 2.2% compared to 1H 22. We saw a 1.6% decline in futures volumes, with falls in a 3-year and 10-year bond contract volumes, partially offset by significant growth in the 30-day and 90-day bank build contracts. Overall futures and OTC revenue was $98.1 million, down 2.7%. Cash market trading revenue was $32.4 million, down 4.9% on PCP, impacted by overall ASX traded market value of $732.8 billion in the half, compared to $805.3 billion in 1H '22. However, as outlined in the chart on the lower right of the slide, we did see an increase in both the Auctions and Centre Point values traded in the period, which generate higher marginal revenue compared to the open trading activities. With increased equity market volatility in the half, we also saw higher index option volumes, leading to an 18.9% increase in equity options revenue to $8.3 million. Now looking at the technology and data business; Technology and Data had another strong half with total revenue of $117.5 million, increasing by 8.3%. Information Services generated revenues of $70.4 million, up 10.7% on PCP, supported by strong growth in demand for equities and futures data, as well as benchmark and index volumes. Technical Services was also up, with revenue coming in at $47.1 million, 4.8% more than PCP. Growth in customer infrastructure and connections at ASX's data center, known as the Australian Liquidity Centre, drove this revenue increase, with the number of customer cabinets increasing from 369 in 1H '22 to 388 at 31 December. The number of service connections between ALC customers also increased, up 9.2% to 1,314 connections by the end of the half. And finally, moving on to our fourth business, Securities and Payments. The Securities and Payments business generated revenue of $133.5 million, down 9.1% compared to 1H '22. Issuer Services revenue was $32.7 million, down 22.8%, impacted by a significant fall in CHESS statements issued and primary market facilitation activities in the half. Issuer Holder Identification Numbers, or HINs, increased by 5.9% compared to PCP, but the decline in revenue reflected lower overall listing and capital raising activity. Equity post-trade services include cash market clearing and settlement activities. Revenue from these services declined by 10.2% to $69.5 million compared to 1H '22. The total on-market value cleared for the half was $773.3 billion, compared to $849.2 billion in 1H '22 and total settlement messages, driven by the movement and settlement of securities, fell by 13.9% in the period. Our Austraclear business provides settlement, depository and registry services, with revenue of $31.3 million, up 15.8% compared to PCP. Austraclear saw a 5.8% growth in holding balances, to just under $3 billion at 31 December, and a 28% increase in transaction volume, reflecting the elevated interest rate environment in the half. The Austraclear revenue also includes the net operating contribution from Sympli, ASX's property settlement joint venture. Sympli continued to meet significant development and operational milestones in the half, and we recorded a loss of $6.8 million compared to $5.5 million in 1H '22. Turning now to expenses; total expenses for the half were $173.9 million, representing growth of $10.9 million or 6.8% compared to 1H '22. Operating expenses increased by $18.4 million, and this was partially offset by a decline in depreciation and amortization costs of $7.5 million. The largest growth in expenses was in relation to staff, which was up by $10.8 million or 12.5%, with average full-time equivalent headcount increasing from 749 in 1H '22 to 809 in 1H '23. Resources were added to key areas of the business, including technology, risk management and customer and cost growth also reflected salary increases in the period. Other key areas of expense growth included equipment and administration activities, reflecting annual license fee increases, project-related consulting and assurance activities, higher insurance premiums and a rebound in travel and entertainment costs, post the ending of COVID restrictions. Capital expenditure for the half was $56.6 million, up from $54 million in 1H '22 with $32.1 million related to the CHESS project. And as you may have noted, the expense growth in the first half of 6.8% is tracking below the full year 2023 guidance of 10% to 12% that we provided to the market in August. However, given our ongoing build-out of technology, risk management and customer activities, combined with increased assurance costs in relation to current CHESS and solution design costs for CHESS replacement, we are expecting our second half costs to increase from here. We believe that we can still manage within our original expense parameters, and so today, we are reconfirming our FY '23 expense guidance range of 10% to 12% growth compared to FY '22. In terms of FY '23 capital expenditure, we've previously communicated our revised guidance down to a range of $100 million to $115 million, following our decision to pause the CHESS replacement project in November. And as Helen has mentioned today, we announced the CHESS replacement partnership program with a total cost of up to $70 million, which will be recognized as a significant item in our financials. It consists of rebates for our participants and a development incentive facility for eligible stakeholders. The rebate component of the program will cost $15 million and will be paid to clearing and settlement participants as a revenue rebate in August this year. The development incentive facility is estimated to cost up to $55 million with access for eligible stakeholders based on the achievement of future project milestones. Approximately $25 million will be recognized in 2H '23, which consists of the $15 million rebate payments and an initial payment of $10 million from the development incentive fund. The balance will be incurred over subsequent periods and be determined by the CHESS project solution design. Net interest income consists of interest earned on ASX' cash balances, less working capital facility and lease financing costs, and net interest earned from the collateral balances lodged by participants. Total net interest income for the half was $32.6 million, representing an increase of $10.9 million or 50.4% compared to 1H '22. The Group net interest income of $12.2 million was driven from the increase in the RBA cash rate over the half. Net interest earned on the collateral balances was $20.4 million, down 14.9% on the PCP. The average collateral balance increased from $11.8 billion in 1H '22 to $12.1 billion in 1H '23, and the investment spread on the total collateral balances remain consistent at 10 basis points, given the significant levels of excess capital in the financial system. However, the average participant balance is subject to risk management or interest rate haircuts declined during the half, and this was the key driver of the overall fall in the net interest earned on the collateral balances. The balance sheet of ASX is strong and positioned conservatively with the S&P long-term rating of AA- reconfirmed during the period and a nominal amount of debt for working capital purposes. Of note, amounts owing to participants fell by approximately $2.5 billion over the past 6 months, reflecting a decrease in open positions held in interest rate and equity index futures. This decline also drives the level of cash and other financial assets held at balance date. Also of note has been the reduction in the software balance, which mainly reflects the derecognition of the CHESS capitalized software, as noted earlier. From a shareholder perspective, underlying return on equity in the half was 13.4%, down 10 basis points compared to 1H '22. And as I mentioned earlier, the board has determined an interim fully franked dividend of $1.162 per share, in line with our dividend policy to pay out 90% of underlying NPAT. In summary, the 1H '23 result reflects the strength of ASX's diversified business. ASX has delivered a resilient outcome against a backdrop of an uncertain and volatile macro environment. We're also building additional organizational capability and capacity to address the current CHESS system and solution redesign activities, as well as ongoing technology, risk management and customer initiatives in the second half of this financial year. As I have noted, this increased activity is included in our operating expense and CapEx guidance metrics for the full year. And with that, I'll now hand back to Helen. Thank you.

Thanks, Andrew. At our FY '22 results, I outlined the key themes that will continue to be focus areas for ASX. And these are the importance of increased engagement and collaboration with our customers; our commitment to supporting financial system stability; our ongoing investments in technology; the importance of our people, capabilities and culture and our commitment to sustainability. Our multiyear strategic planning process is ongoing, and I look forward to sharing more with you at our Strategy Day in June and in the meantime, I'd like to update you on recent developments for each of these themes. Our customers are at the center of everything that we do. We're focusing on improving the way that we engage with customers, because good 2-way communication and understanding of our customers is vital for effective ASX operations. And I want to make sure I'm hearing our customers' feedback directly. So in the last 6 months, I've personally met with many of our key customers, to discuss ways that we can further enhance our partnerships. And this process has been valuable and we'll continue to inform the way we connect and respond to them. I'll give you some other examples of some customer engagement that's been happening, starting with the equity market management consultation. This work is in response to ASIC Report 708, that outlines the regulators' expectations for the industry in managing a market outage. We engaged with nearly 200 people, including direct participants, industry bodies, vendors, other market operators and wholesale investors. And this opportunity to consult was well received, and is an example of how we're providing customers and other stakeholders with a good line of sight on what we're doing, listening to their feedback and involving them in decisions that we're making. We also consulted with customers to make improvements to our product and service offerings, including the launch of our new Issuer Services pricing model at the beginning of this half. This structure is more straightforward and transparent for our issuers, with lower overall cost to the market. And I spoke earlier about the creation of the CHESS Replacement Technical Committee. This is an important industry forum, that was created through our ASX Business Committee, to engage more deeply with our customers and other stakeholders regarding the CHESS replacement project. This diverse Group will play a key role in ensuring strong 2-way communication as we move forward. Staying close to our customers also creates new growth opportunities for ASX. We want our customers to have the opportunity to access the right product for them when they need it. And we further expanded our single stock options offering, by launching another 7 stocks so far this financial year, bringing the total to 89. We also listed 24 new exchange-traded products this half, bringing the total to 276. And both of these initiatives have been in response to customer demand and market conditions. We expanded our DataSphere offering by partnering with Yieldbroker, to provide their end of day rate sheets on the platform. And this allows our customers to access additional OTC fixed income data, to help them with market monitoring, valuation and other analysis. We continue to look at opportunities to add more data products to our portfolio going forward. And we're listening to our customers and aim to provide an unmatched range of products and services for them. ASX plays a critical role in the financial ecosystem, by enabling a fair and dynamic marketplace for all. We have a strong risk management foundation that we continue to build upon. Our licenses are one of our most important assets, and we do not take them for granted. Our organization is supported by robust management frameworks, to ensure that we're operating at the standard required, as a provider of critical market infrastructure that supports the nation's financial stability. We monitor our performance against these frameworks, and regularly seek input from external experts. Important examples of these frameworks, is our conflicts management policy and protocols. Our licenses require us to manage conflicts effectively, and there are several mechanisms in place to achieve this, including separate clearing and settlement boards that include independent directors and an independent chair. We understand the importance of meeting or exceeding our regulators' expectations, given the significance of our role. These expectations continue to rise, as best practice advances, and we need to ensure that we're evolving to meet them. As you know, we've had additional regulatory expectations articulated, following the pause in the CHESS replacement project. These relate to learnings from that project, as well as other reviews, including the financial stability standards assessment. We have a number of workstreams in place to ensure that we're addressing these expectations fully. ASX is a provider of critical market infrastructure, and our customers rely on us to provide effective, efficient and resilient services and technology. To continue doing this, we need to make ongoing investments in our platforms, ensuring that they're contemporary, sustainable and scalable. One of our multiyear technology transformation projects has been the replacement of our equity data warehouses. We've built a new contemporary platform, which has significantly increased flexibility, scalability and resilience. And for customers, the first visible element of this new platform, has been the upgrade to the Signal B feed, which provides critical trade confirmation data, and is now using international standard protocols also with improved stability. So this new service is now live. And we've significantly uplifted enterprise-level capabilities in quality engineering and testing. This work supported the rollout of those updates and will continue to be an important benefit for future technology initiatives. We're also leveraging our technology to drive revenue growth. For example, our Australian Liquidity Centre or ALC data center, allows our customers to connect directly to ASX. And we're seeing an increasing number of cross connections between our customers, who use that service to drive cost savings and performance improvements. Like many firms across Australia, ASX strives to create an environment, which attracts and retains highly capable people. There's been a slight improvement in our overall staff engagement score in the annual engagement survey. And while there's still much more work that needs to be done, we have a strong foundation, with 86% of our employees saying that they're proud to work at ASX, as they recognize the privilege and responsibility that comes with our role in the financial ecosystem. Importantly, risk management remains at the heart of our culture, with 87% of our people saying that their team regularly discusses risks and controls. We've been listening to our people to understand what's important to them. Flexibility stands out as a key part of their employee experience, and we're investing in our workplace technology to enhance connectivity and the tools for collaboration. And we have a commitment to creating a safe and inclusive workplace. We are recognized as an employer of choice for gender equality by the Workplace Gender Equality Agency. As part of our strategic planning process, we're reviewing our purpose as an organization, our values and our culture. And this is being done in close consultation with our people, as they live our values every day. In addition, we're reviewing the core capabilities that we need, as our organization evolves. We've established function-specific models in a number of areas, supporting career development and delivering key capabilities for ASX. And leadership is a crucial part of organizational culture and performance, and I'm delighted to have made these very strong executive appointments in the last 6 months. Andrew Tobin, of course, as Chief Financial Officer; Blair Beaton is the Group Executive of Listings; Daniel Moran as our Chief Compliance Officer; and Johanna O'Rourke, as Group General Counsel. ASX supports sustainability in all its forms, and we remain committed to supporting corporate Australia in achieving its sustainability goals. We're on track to meet our commitment of sourcing 100% renewable energy this financial year and are targeting Net Zero, Scope 1 and 2 emissions by FY '25. We're also looking at ways to further reduce our carbon footprint. We're working with the industry to encourage take-up of CHESS e-statements to reduce paper usage and are developing our e-waste strategy that includes our hardware providers. We look forward to sharing more on this in due course. And we continue to look for opportunities to support the decarbonization of the Australian economy. Our electricity futures products are an important tool, supporting investment in decarbonization and we're continuing to develop our carbon futures products. We're also under consideration by the Clean Energy Regulator to operate the Australian Carbon Exchange and remain excited about this opportunity. And sustainability disclosures and reporting are also an area of focus, and we continue to support our issuers through education sessions to keep them up to date with emerging global standards in sustainability. I'll turn now to the outlook for the remainder of this financial year. Ongoing global economic conditions and inflationary pressures, combined with geopolitical tensions continue to create uncertainty. The IPO market remains subdued due to this ongoing uncertainty, which is also impacting cash market trading volumes. The rising interest rate environment has seen activity in interest rate futures continue to increase early in the second half, particularly in the 90-day bank bill and 3-year bond futures, as our customers manage their risk in this rising rate environment. Our expense growth guidance remains unchanged at 10% to 12%, reflecting the ongoing build-out of technology, risk management and customer activities. And we've also increased our assurance costs in relation to current CHESS and solution design costs for CHESS replacement, which impact the second half. CapEx guidance has been revised downwards to $100 million to $115 million, reflecting the pause in the CHESS replacement project. And we've established the CHESS replacement partnership program, which will be a total cost of up to $70 million and recognized as a significant item. Approximately $25 million is expected to be incurred in the second half of this financial year. To conclude, we've delivered a resilient underlying financial result, despite challenging market conditions. We have a roadmap for the reassessment of the CHESS replacement solution design, with an announcement targeted for the December quarter of 2023, and an implementation plan to follow. And we look forward to detailing our strategic plan, including the themes discussed earlier at our Strategy Day in June. And we'll now take your questions. So I'll hand back to the moderator.

[Operator Instructions] Your first question comes from Ed Henning from CLSA.

I've got a few questions. Just to start with, you touched on the new issuer services model that you implemented. Could you just remind us around where you're able to increase fees, whether it's in listings or information service or technical services? And have these been below CPI levels, and when these are effective? That's the first question?

Ed look, there are a few areas where we review fees on a regular basis. Well, as you'd expect, we review fees for everything that we do on a regular basis. Some of those we are just in line with CPI, but it really is very business-specific. So perhaps that's a more detailed one that we can pick up, if there are particular areas that you're particularly focused on. What I would say about Issuer Services is that, that was a significant change to the overall pricing model that we implemented from the 1st of July. So we made quite a big change to the overall structure of how we charge for our issuer services. And I think overall, the aim was to make that more clear and transparent, more linked to the value that we're adding for the customers and also, there was an overall cost reduction to the market.

And will that flow into -- comes in the 1st July last year, so that's already in this half. Is there anything that's come through as at the 1st of January?

I don't think from the 1st of January. We'll maybe double check that and come back to you, but not that springs to mind.

Yes. All right, that's fine. Just some other clarification points, you talked about an achievement of future product milestones in that $55 million of the $70 million. What are you talking about here, as in what future projects? Is this the actual development of the next CHESS platform or the replacement of CHESS? Can you just give a bit more detail on that, on what will pull out the $55 million? And just in regards to that, you've put this below the line or as a significant item, how are you going to account for the next -- the replacement of the CHESS project? Is that going to be included in your above the line continuing OpEx and CapEx?

So maybe I'll take the first question, and then I'll pass over to Andrew on the accounting treatment of the various components. So for the upcoming milestones that we're referring to, we're really talking about the fact that we still need to replace the CHESS system. And as we know, given the pause that we announced back in November and the fact that we've reset and we've gone back to solution design, there's still a fair way to go on that project. And of course, that's a really important system for the whole of the Australian financial market. And really, there's -- it's not just ASX, but it's a whole range of stakeholders, and we've all got work to do to get over the line successfully together. So when I talk about future project milestones, I'm really talking about the work that our customers will be doing to connect to the new CHESS platform in due course.

And Ed, I will pick up the second part of that question as well. Effectively, you asked about how we're treating the -- sort of the cost of the program. So we've called out this morning, the $70 million will be sort of classified as a significant item, $25 million this year and the balance of $45 million into future periods, subject to the timeline and solution design of the test replacement program. But the key component part there, is the future cost of development of CHESS. That will be capitalized, as capitalized software, like we've done in the ordinary course of business. At this stage, we're still in the sort of discovery phase or research phase. So there'll be a bit of operational expense in the second half, but that's also within our guidance that we've called out this morning. It's within that 10% to 12% that we've reconfirmed to the market this morning.

Okay. That's helpful. And then just 2 other small -- or one clarification one on the question. The investment spread of 10 basis points and you called out that, will likely continue into the next half. Historically, you've called out through the cycle of 20 to 30 basis points of that investment spread. Does that still hold, once kind of some liquidity moves through the market? How should we think about that investment spread moving forward?

Maybe I'll talk a little bit about that one. One of the challenges that people who are investing in short-term cash-like markets we'll be very aware of, is obviously, there's still a lot of cash in the system with the various quantitative easing measures that were taken. So actually, what we're seeing is that, for a very conservative investment mandate, like the one that we apply for the clearinghouses, the rates of return on that portfolio is still very constrained. So look, I think that in due course, that will likely change, but it's really a factor of how much excess cash is actually available in the system and obviously, that's what then drives the pricing. So that's something that I think we can all observe by looking at things like the SA balances that are being held with the RBA, for example, that kind of gives you a sense of some of the dynamics in that market. So those are sort of the things to look out for, for when that situation may start to change in the future.

No worries. And just to push my last and one final one. You talked about simply today making another loss. Can you just give us an update on where that is on interoperability, and also when you're potentially looking for that to breakeven?

And Ed, I may grab that one as well. We're really pleased, as we called out today with the operational milestones in Sympli. We've had some really strong connections over the half. Interoperability legislation move through New South Wales, which we're really pleased at. We're about to go through the next phase of business planning for the business, and we'll be in a better position to come back to you, with around sort of forward guidance for the business, as we get to Investor Day and our full year results as well.

Your next question comes from Andrei Stadnik from Morgan Stanley.

Can I ask it my first question, just around costs? So you committed to that guidance of total costs have been 10% and 12%, but OpEx clearly going higher than that. And it seems to me that just the earlier write-down of earlier write-down of CHESS replacement is helping with sharply lower amortization. So how should we think about OpEx in the second half and into '24? Should we be thinking that low to mid-teens range that was in the first half?

I might grab that one as well. We've reconfirmed our expense guidance this morning, that 10% to 12%. We haven't gone beyond this financial period, and as is the usual custom, we'll go through our budgeting process. We'll be better informed as we go through that process and provide an update at the full year results in August, as to the future sort of outlook around the expense levels.

Can I ask just a question around the rate futures volumes, it continue to be subdued. What kind of feedback are you getting from your clients and what steps are you -- are you taking, to help improve liquidity and turnover?

Andrei, I'll take that one. So look, they certainly have been more subdued in the first half, although you'll see from our monthly activity reports that we published that we are continuing to see some uplift there. The team have made some changes to some of the parameters for -- certainly, for example, the 3-year treasury bond future contracts, some adjustments there, which I think have been helpful in terms of driving improved liquidity. What we're hearing from customers -- if I look at the 10-year, we saw very elevated 10-year volumes around the COVID period and the year after that, which was very closely linked to the very significant government bond issuance that was happening during that period. And most of that was around that 10-year maturity point. And so we saw -- as that issuance was happening, very strong use of the 10-year futures to support hedging around that issuance activity. We've certainly seen that happen again, when there has been issuance, but obviously, there's a lot less of that issuance at the moment. So some of that 10-year decline, the part of that picture is driven by that. And of course, the other thing I'd call out is that -- that we're hearing from customers is that the volatility that we've seen in markets has had some impact on people's risk models. So there are also impacts in terms of how people are thinking of risk and the scale of risks that they're taking and how they're looking at stressed risk, for example. But nevertheless, as interest rates are moving, it's certainly been good to see the ongoing strength in the short-dated futures contracts, and I would definitely suggest you -- as I'm sure you do, keep an eye on those monthly activity reports and to see if that growth continues.

And can I just come back to my last question just around costs. So you have spoken about CapEx reducing, but when we compare CapEx guidance today of $100 million to $115 million, compared to the last guidance that was given in November, December of $100 million to $110 million, it's actually gone up by about $5 million at the upper end. And you're talking about -- obviously, there's more CHESS of [ open work ] to happen in the current CHESS system and the replacement. So how should we think about CapEx into the future?

And again, Andrei, we're in the solution design phase of CHESS. Helen has outlined this morning, the timeline around that solution design and sort of the last quarter of this calendar year, in terms of announcing the ultimate design to the market. That will be informative of our CapEx program beyond this year. So it's a bit early to talk about that at this point in time. And I suppose what we've published today is the current thinking of this year's CapEx guidance.

Your next question comes from Matt Dunger from Bank of America.

Yes. Andrew, just picking up on that last point, understanding you're trying to walk away from giving FY '24 cost guidance. But are there any parameters around what CHESS could cost, and where will the investment be funded? Will it be funded from OpEx or -- how are you thinking about -- what that scale of investment could be?

Matt, again, just to reiterate that, it's just too early to call that out. Effectively, we need to wait for the design process to complete, before we can sort of size up the capitalized software program or the capital spend going forward. But to your point around the capital treatment; again, as we've done in the past, we'll capitalize the software where we can. Once the system goes live, that will be amortized into the future periods in time, and we'll call that out, once we're closer to that time in terms of the design phase to be completed, the expected spend around the program of work, and then ultimately, the amortization charges that will go through the operating P&L.

Understood. And could I just clarify whether or not this existing review that you're undertaking around CHESS, is that likely to encompass some of the other equities and derivative platforms that you called out at the last presentation, we're starting to age or is this CHESS specific, this current review?

So the CHESS replacement solution design phase that's going on at the moment is specific to the CHESS clearing and settlement platforms. But in parallel with that, of course, as you'd expect, we have multiple technology projects underway in different areas. We called out a couple of them today. But you're right, derivatives clearing is also a focus, and we absolutely have a project going on, that is also looking at our derivatives clearing platforms.

Your next question comes from Kieren Chidgey from Jarden.

Just a couple of questions, if I can. Maybe just going back to the discussion, Helen, around futures activity provided a bit of color across the different sort of contract types and terms. Just wondering if you could talk to sort of broad transition from a participant point of view, in terms of sort of more, I guess, hedging type activity relative to trading activity, the feedback from a market point of view? Was last year a lot of sort of -- those global macro funds had sort of been pretty quiet from a futures point of view? I'm just wondering if you're seeing any evidence that that's starting to come back in more recent months?

Yes. I can give you some sense of that. So I think, certainly, as I mentioned earlier, with the 10-year contract, we did see a big part of the previous uplift being that hedging of the government bond issuance. So that would be more your -- for the most part, more your directional users or the people who are actually taking those bonds into their portfolio. So that piece is obviously a little bit more subdued, with the lower government bond issuance at the moment. So that's kind of one strand, where there's a distinct change. Look, we're certainly seeing some change in the mix of different participants. And different participants, kind of some significant participants coming in, others decreasing their activity. Look, I think that that's just -- that's normal though. That's what we see, that this market is very much a dynamic one, where the different types of participants do sort of change around a bit. I don't think there's anything kind of more structural or fundamental I'd call out, beyond that link that we've seen very strongly with the 10-year issuance.

So in your mind, I mean on a rolling 3-month basis to take out sort of the quarterly impacts, we seem to be still sitting 20%, 25% below pre-COVID levels from a volume point of view in futures. What needs to change in your mind to drive that recovery up to that level?

Yes. Look, I think there are definitely a few things in there. I think that the -- we shouldn't underestimate the impact that the COVID market volatility, the fixed income market changes, the various actions that were undertaken by the RBA and some of the impact that that had on the market, those have been significant and have material impacts on the Australian market. I don't think we should underestimate the time it takes for some of those impacts to unwind. Plus, as I mentioned earlier, there is an aspect of -- there's been some significant moves during that period of time, and as we're all updating our risk models, all of our customers as well as ASX, we do need to take into account some of those stresses that we've seen, and those do have an impact in terms of risk appetite as well. So I think that we'll continue to see some evolution in the market, but I just wouldn't underestimate the impact of the COVID period and the subsequent activities in terms of how the scale of impact that, that's had and the time that it will take for some of that to sort of roll out to the system. And for example, we can still see -- we touched on the question of interest income and earnings spreads earlier. And you can see by the high amounts of cash still in the system, that some of those impacts are really still very much clear and present.

All right. And just sort of on the $70 million payment or program out over the next 12 or 18 months. Can you just confirm whether or not that has any impact on dividends, or it's just going to be looked through, given it's being treated as a significant item?

Yes. Kieren, I might grab that one. It will not impact the dividend policy. It will be classified as a significant item, so it won't go into underlying profit. And therefore, as you know, we pay dividends out of our underlying profit.

Okay. And finally, just on the sort of cast replacement. I know you're sort of flagging. You probably have a better idea by the end of this calendar year. Given your knowledge of the array of potential solutions today, what is sort of the likely sort of [ tie-up period ] post that to go through implementation? Are we looking at sort of a further 2-year to 3-year period, or is there a risk it could take even longer than that?

So look, I really can't give you a steer on that right now. The next important milestone is the solution design, and then as soon as we've announced the solution design, we'll be working with the market on what the implementation timeframe looks like. And that's really going to be the important stage to inform that. And I guess one of the things to note is that, until we know what that solution design is, we also don't know how much change there actually is for market participants and other stakeholders who are connecting to the CHESS system. So there's a set of interface specifications that we were previously working with. There is a scenario where those don't change. So the work that needs to be done is our work internally. And of course, then there's also scenarios where there's a greater degree of change for the market. So all of those things are going to have an impact in terms of the market timeline. So really hard to give you more than that at this stage I'm afraid, Kieren.

Okay. And if that sort of -- if there's a greater degree of change required for participants, will that $70 million pool be reassessed or is that sort of a one-off that we're unlikely to see being repeated going forward?

Well, I think what we've articulated in that pool, it's up to $70 million, and that reflects the fact that the up to -- sort of reflects the fact that there are varying degrees of outcomes. So significant change, significant further work would certainly indicate towards the upper end of that range, if actually there really isn't any change to interfaces and specifications for our customers, then the picture would be different.

Okay. That's attached in the $70 million?

That's correct.

Your next question comes from Nigel Pittaway from Citi.

First of all, just a question on the lower depreciation. I mean my understanding is that's nothing to do with the write-down of CHESS, that's just other projects that were ending their period of depreciation. So firstly, is that correct? And secondly, does that suggest that the outlook is for that to stay reasonably low moving forward?

Yes. That is correct. It's in relation to trading platforms in the main from prior periods, that sort of reached the end of life and the end of the depreciation period. So nothing to do with CHESS in this current period. In terms of the forward outlook, it does depend on the CapEx program, and it's contained within our total expense guidance of 10% to 12% for this year. I suppose the way I think about that, looking out over the next 6 months, it's broadly probably about the same. And if I cast my mind out, based on our CapEx program that we've also announced this year, it's probably of a similar amount going into next year. But beyond that, it will be determined by sort of future CapEx programs, including CHESS ultimately.

Sure, sure. Okay. That's clear. Secondly, just maybe picking up on the sort of comment about the difference in sort of participants in terms of the futures market. I mean, obviously, what we have seen -- what we certainly saw in second half, with lower principal traders and improvement in the fee margin, that seems to have come back again this period. And I think there was a mix issue last time as well with electricity. So can you make just some comments on what's been happening there in terms of the fees?

Yes, I can talk a little bit about that. So you're right that we've seen some more of that principal trading activity come back in. So that's good to see. That's contributed towards the recent sort of monthly increases you'll have seen, particularly in the rates market. The equity derivatives have been really strong for that first half, both on the futures and the equity options. And that's been a real mixture of different types of participants. On the electricity side, that's been a strong area of growth for several years that we've called out. That's been flatter this period or actually down a little bit. That's -- and in terms of fee mix, that's one of the higher fee components. So that would be bringing down the average fee and really reflecting, and you'll have seen this in the monthly activity reports. But what we're seeing there is obviously electricity markets, the prices have been very high, there has been a lot of volatility. And certainly, that's been a challenging environment for all of the participants in the electricity markets more broadly well beyond the futures market, of course. And so there's certainly some sort of margin funding pressures there, which I think we've seen reflect in sort of slightly lower activity.

Okay. And then just moving on to Issuer Services. I mean, obviously, that was down, I think, 22%. I mean the initial guidance when you were talking about the repricing, was the revenue to be down 5% to 7%. I know activity is also an influence. But does that guidance still stand, and is that sort of a bigger drop dictated by activity, or what's going on there?

It really is exactly that. You're right, Nigel. So the guidance in terms of the decrease was kind of on a like-for-like basis. So the new pricing model did deliver lower cost to customers on a like-for-like basis, with the significantly lower equity market activity that we've seen. You've seen that sort of flow through to both clearing and settlement revenues and also impacting that Issuer Services line in a similar way.

Okay. Fine. And maybe just finally, I mean, just a sort of bigger picture question. But I mean in terms of sort of the initiatives that you've got on and ongoing at the moment, are there any -- or I guess, what's the most -- what will have the greatest potential in terms of driving a material improvement in revenue moving forward? Is there anything that you're feeling sort of optimistic about, that is on the cusp of delivering that, or is it still sort of work in progress with probably still a few years away?

The piece I would point to, we're already seeing growth in information services. And I do think that the investments that we made in DataSphere, we talk today about the Yieldbroker data coming in there and I think that data generally is an area where we see significant customer demand and further opportunity for the kind of data that we both can provide from ASX, but also consolidate from other sources. So I think that, that continues to be a really interesting area of growth. And then beyond that, I would really point to our Strategy Day in June. So we're going to talk in a lot more detail about what the strategy is and how we're looking at things. So maybe that's something we can pick up in more detail at that point.

Your next question comes from Andrew Buncombe from Macquarie Group.

Just 2 for me, please. The first one is on the $70 million or up to $70 million program. When do you expect that to finish? Is that just going to drag out over a series of years, or is that going to be closed in FY '24?

Thanks, Andrew, for the question. So what we've called out today is that, that will be tied to future milestones. And those milestones will be determined ultimately by the solution design that we get to in the December quarter this year. So it may go over multiple years, Andrew, but it's a bit hard to call that at this point in time. But my expectation, is it will be longer than 1 year, that's for sure.

Excellent. And then the second question I had was, obviously, there's a fairly significant step-up in OpEx growth implied in second half '23, just in relation to Slide 33. Can you give us some ideas on where those biggest moves are going to be? Is it all people or are there one-off regulatory costs? Some color on that would be great.

Yes. I won't go line by line, but what we have called out today, is an increased level of activity, not only around building out risk management technology and customer activities for the Group, but also you're probably aware of increased assurance activities as well. So if you think about responses to the CHESS replacement program and the current CHESS system, there's a level of work that we'll be undertaking in the second half of the year, which will lead to increased costs there as well. I would also call out the fact that the early solution design activity, sort of the research components of that will be expensed in the second half as well. So we are allowing for the increased expense in those activities also in those numbers. But the key point to note, is that all those activities are within our guidance range of 10% to 12%, which is the original guidance that we called out at the start of the year.

I think there's maybe one other thing that I'd call out on -- when you're thinking about OpEx, is that in terms of accounting treatment for some technology, there was a change of accounting treatment that we talked about last year, around Software-as-a-Service. And given the changes that we're seeing in technology and the kind of technology being used, we're also seeing a little bit of a change in mix of things that we're capitalizing, versus some of the projects that we're doing that we're actually expensing and I expect that to be a continuing theme.

Your next question comes from James Eyers from The Financial Review.

Helen, my question is related to the RBA and ASIC letters that were sent in mid-December. So 2 questions, like the RBA was asking for you guys to give a public undertaking, that you've got the resources and capability to support the existing CHESS. So I just wondered, like, have you provided that in these results today, or is that some kind of separate document? And secondly, in the ASIC letter, it was calling for a special report to be prepared by the clearing and settlement licensees on the capacity and security of existing CHESS audited by EY. I think that was due at the end of April. Have you started on that work, and is there any update that you could give us as to timing and maybe would it be finished before that deadline?

So maybe I'll take the second question first. So yes, we absolutely have started on that work. And remember that current CHESS absolutely remains reliable and robust. We've continued to invest in it. I'm very happy to be doing this work to make sure that we give public confidence in that, too. So yes, we're absolutely working on that special report that ASIC have asked for and working to the time lines that you've seen publicly, and we'll be generating that report in April. It's getting audited in -- during April, and we expect to publish a version of that report at some point during May, I think, is roughly the timeline when we'll actually have something that -- and that everyone will be able to read that. But yes, absolutely, that's an important piece of work, and that will also be a key vehicle for addressing the RBA's request to.

So the public undertaking isn't what you've said today, with respect to existing capability, that's something separate, is it?

Well, I think we've publicly responded to the RBA's response at the time, and confirm that we'd be doing all of what they requested.

There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.

Thank you.

Thank you.