Transparency The Key As Asx Stirs Up Registry Scene
The Age
Wednesday May 3, 2000
Earlier this week, the Australian Stock Exchange and Perpetual Trustees announced that their share-registry joint venture would proceed after the rival registry services provider, Computershare, dropped plans to seek an injunction to freeze the deal.
That presumably means ASX Perpetual Registrars will now be able to proceed with their plans to attack Computershare's dominant position in registry services.
Computershare has about 55 per cent of the domestic market for share registrations, compared with Perpetual's 35 per cent, and is one of the world's leading providers of registry services.
Computershare responded aggressively to the original ASX/Perpetual announcement. It issued proceedings against Perpetual, which uses Computershare software for its existing business, alleging breaches of confidential information.
Perpetual has flagged a counterclaim alleging breaches by Computershare of the Trade Practices Act.
In other words, this is a messy and nasty stoush between the ASX and Computershare and one given extra spice by their recent history of antagonism. The two clashed over their rival bids for the Sydney Futures Exchange last year, a contest neither won. Computershare, at the time, made known its ambition of challenging ASX's dominance of equities trading within Australia.
Apart from the legal action, Computershare is also known to have complained to the Australian Securities and Investment Commission, and perhaps also the Australian Competition and Consumer Commission, about ASX's entry to its industry through the joint venture - although it doesn't appear ASIC has been convinced it should or can take any action to prevent or restrict the ASX/Perpetual joint venture.
The motivation for the complaint is obvious and obviously self-interested. With the ASX's support, the Perpetual business is a far more formidable competitor than it has been as a Computershare customer.
The grounds for the complaint are, however, interesting and raise some complex questions about the extent to which the ASX is able to leverage off its effective monopoly in equities clearance and settlement systems.
There are two core sets of related issues. The ASX has a dual role, through its CHESS settlement system, as the effective monopoly provider and the regulator of settlement processes.
The ASX has designed and built the CHESS system, although CHESS was effectively funded by the market through the ASX's access to funds in the Securities Industry Development Account. That account was part of the guarantee fund arrangements that protect funds held within brokers' trust accounts.
The ASX also develops and enforces the rules that support its settlement system. Those rules apply to the listed companies but, because the companies rely on their share registrars to help them comply with their obligations - and the rules require the companies to ensure third-party providers comply with the rules - also brings the registrars indirectly into the regulatory net.
The ASX's position, therefore, creates two positions of potential market power and advantage. It controls CHESS and its development, and it writes the rules for the settlement process.
It should be stressed that there is no suggestion the ASX would deliberately abuse the position that history, and its own technological innovation, has provided it with.
It is also worth noting that Computershare is big enough and aggressive enough to look after its own interests and that its global scale provides it with its own competitive advantages.
There are probably at least two levels at which the combination of ASX roles could create problems for Computershare's ability to compete.
ASX's ability to write the business rules that govern the settlement process and its knowledge of its plans for further development of CHESS could, if there were a free flow of information to the joint venture, represent a major competitive advantage for ASX Perpetual.
It would, for instance, be a major commercial advantage for ASX Perpetual if it had forewarning of ASX's system development plans.
Any changes to CHESS or settlement processes - if the settlement period were reduced, for instance - require complementary changes to the technology and software of the share registrars.
A lead in preparation for change could therefore represent a major commercial advantage.
The situation isn't without remedy or counterbalances. Indeed, there may already be some remedies and counterbalances in place.
The obvious way to deal with the potential for conflict is to make sure that systems development plans and any prospective changes to the CHESS rules are known to all the interested parties. The ASX in the past has been quite open about its technological plans and objectives.
More importantly, it is actually in ASX's larger interest to continue to be open about them and, indeed, to make sure that Computershare and any other registrars or potential registrars are at least as well informed and serviced as its own joint venture.
ASX's investment in the joint venture is a not-insignificant $50million. Next to its investment in CHESS and the smooth functioning of the sharemarket, however, that $50 million doesn't register.
It would be completely contrary to ASX's long-term value and ambitions if it were to abuse its position by deploying its potential market power against a competitor registrar.
ASX's operation of CHESS is covered by a Trade Practices Act authorisation and a series of undertakings to the ACCC, which means it has an incentive, if one were needed, to avoid any controversy in relation to CHESS's operations.
There are some suggestions it has given specific, voluntary undertakings to the ACCC in relation to ASX Perpetual to alleviate any concerns about the vertical integration of its operations. If it has, it probably didn't need to - its own self-interest is sufficiently large to discipline its behavior.
The ASX's entry into the share registry business ought to be good for competition and innovation. While that might be uncomfortable for Computershare, the ASX shouldn't be discouraged from providing that competition and stimulus to the sector.
The ASX's complex role as regulator, systems developer and competitor does, however, require a greater than normal level of transparency and sensitivity to the potential for conflict. Which no doubt the ASX itself already appreciates, if only because of the damage that an actual conflict would do to its core business.
bartho@theage.fairfax.com.au
© 2000 The Age