Clearing is a risk management function that occurs between a trade and settlement which at present takes a maximum of two days. It earns the ASX about $47 million – about 7 per cent of its total income – a year in fees.

A year ago the ASX asked to keep its clearing monopoly for another five years to give it time to invest in new clearing and settlement systems in return for clearing fee cuts. Its move to invest in blockchain technology announced late last year saw it abandon that condition and it will make a 10 per cent cut in fees from July 2016.

Former ASX chief Elmer Funke Kupper has said if it replaces its settlement system with blockchain technology, there may be little need for clearing in future. With blockchain comes virtually instant settlement of trades, rather than the two day maximum now. Clearing only exists because there is a delay between trading and settlement.

By the middle of 2017, ASX will decide whether it will use blockchain. Under the government's proposals, the CFR has 18 months to set "minimum conditions" that must be satisfied by any competitors. It is understood any decision by ASX on blockchain will be coordinated with the finalisation of the conditions.

ASX executive chairman Rick Holliday-Smith said the decision to allow competition with ASX Clear gives the exchange certainty. Daniel Munoz

Mr Morrison said it is unlikely a competitor in clearing to the ASX would emerge in the short term, but insisted enabling such a move is important.

"What's important right now is that we ensure that our arrangements here are as tight as they can be, that I think provide the potential for competition and keep the tension ... with the ASX operating in a light competitive environment," Mr Morrison said in Sydney.

The minimum conditions will include rules that will ensure clearing and settlement of equities does not move offshore. This has been a major stumbling block for the only viable competitor at the moment, LCH.Clearnet, which currently competes with ASX on clearing over-the-counter interest rate derivatives.


Mr Morrison said the national interest test would remain on any move to buy more than 15 per cent of the ASX.

Competition is highly unlikely to appear in the short term, [but] regulators will have the legislative teeth to impose conditions on ASX. — John Fildes

"You've got to look at every case on its merits and its impact more broadly," he said of potential purchases of stakes in the ASX. "We're also saying here there's an 18-month period where we wouldn't be contemplating anything of that nature. At least, I should stress."

ASX has argued that if it loses its monopoly, it should be allowed to seek additional capital, including mergers, so it can compete on an equal footing with any other competitors that emerge.

Removal of its ownership restrictions, which limit any one shareholder to 15 per cent of ASX Ltd, was recommended by the Murray Financial System Inquiry to boost competition and flexibility across markets.

The restriction will remain, but the ASX will have the same conditions as banks where the 15 per cent restriction can be waived by the Treasurer rather than requiring parliamentary approval.

ASX executive chairman Rick Holliday-Smith said it gave certainty to the exchange.

"The announcement recognises that the operation of markets changes as new technologies are developed. The government's decision gives certainty to ASX to continue to assess solutions for the Australian equity market using distributed ledger technology or blockchain."


Stockbrokers Association chief, Andrew Green said the move was "long overdue" but is worried competition will increase their compliance costs.

"There is a concern for us in the possibility of ASIC having to increase its market supervision. It is the Aussie battler stockbrokers that are paying the $18 million annual cost of that. Offshore hedge funds and investors don't pay a cracker for market supervision costs."

Mr Green has called on the government to copy Hong Kong's move to introduce a fee for all market participants to cover the cost.

The ASX's only competition comes from 4 ½-year-old trading exchange Chi-X Australia. Chief executive, John Fildes, claimed the ASX clearing business has not given it equal treatment to the ASX itself and the new regime will for the first time give Chi-X an independent arbitration process overseen by the competition regulator.

"We're very pleased and very excited by the Treasurer's announcement. Competition is highly unlikely to appear in the short term, [but] regulators will have the legislative teeth to impose conditions on ASX," he said.

"The Council of Financial Regulators will publicly set out conditions for ASX conduct. Instead of ASX managing their code of conduct, now the financial regulators will. If we are not satisfied we can go to the ACCC and implement a binding arbitration. This is truly going to open up Australia's financial markets and create a vibrant and innovative market."

An ASX spokesman, however, disputed Mr Fildes claims. He said it is already subject to ACCC oversight and provides clearing for Chi-X on exactly the same terms.

"ASX provides access to clearing and settlement services for Chi-X for free and on a non-discriminatory basis. The system availability for the clearing of trades executed on ASX's market is identical to the system availability on Chi-X's market," he said.


The government will make changes to legislation to allow regulators to set expectations for ASX's conduct when operating its equity clearing and settlement facilities until competitors emerged.

Regulators will also be able to impose requirements on ASX's clearing and settlement facilities and give the ACCC the ability to arbitrate disputes over the terms of access.

George Boubouras, chief investment officer at ASX investor Contango Asset Management, said the new regime will have little impact initially, but sets up a "framework for competition" which will reduce the exchange's "pricing power".

He is an advocate for the ASX to explore merger opportunities. "There remains strong merit in global exchanges to be aligned as they will be more competitive. There should be some take-over premium for ASX."