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Good morning, and welcome to ASX' 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 are 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' 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 all First Nations people present today.
Today's presentation will focus on three 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 two 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. A half year results are 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 results and there have been significant changes in our external environments. 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 d-recognition of capitalized software in relation to the CHESS replacement projects. This non-cash 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 AUD0.01162 per share is therefore comparable to the first half of FY 2022, 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 markets. 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 seven million trades in a day amongst a number of days of approximately five million, meaning that we still have headroom to manage volume surges.
With the enhancements we've made to the system's 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 is a 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 provide a progress update on CHESS Replacement. As we announced in November, we pause the execution phase of the project and reassess the solution design. This is a significant reassess 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 engagements, and strengthening project governance. We've 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 projects. And we have accepted and they're addressing the recommendations made in the independent review of the previous CHESS Replacement projects.
Further to this, you may have seen the announcement from our Chair, regarding continued progress on our Board Renewal program with the appointments 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 on board 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 mentioned, our solution design reassessments 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 assessments 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 the ASX Strategy Day in June. Once we've determined the solution design, we'll develop in our implementation plan and the key driver retiming 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 replacements. 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 engagements 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 two mechanisms. There'll be direct rebates of $16 million for participants to be paid in August this year, based on each participants clearing and settlement fees paid to ASX. And a development incentive facility about the $55 million will be available to key stakeholders who are building to 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 about $70 million is a substantive contribution that takes into account the extended timeline of the project and the lines all of us towards achieving a successful outcome for the market.
To recap, we’ll continue to invest in current CHESS. We've taken important steps to progress the CHESS replacement project. We 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. 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 six months. Underlying profit for 1H 2023 was $250 million and is consistent with the 1H 2022 results. 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 pre-tax amounts of $251.9 million consists of derecognized capitalized costs of $248.4 million and related project wind down costs of $3.5 million. And it's within the guidance range of $245 million to $255 million that we announced in November last year when we pause the CHESS project.
Operating revenue in 1H 2023 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 as cash balance.
The increase in expenses relative to the revenue outcome resulted in our EBIT margin falling from 67.5% in 1H 2022 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 results 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 AUD 109.7 million. The annual listing fee, which is set based on 1H 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 2023, 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 2022, with $30.2 billion raised in the half compared to $60.6 million in 1H 2022.
As you may be aware, we recognize the revenue derived from initial and secondary listings over five years and three 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 2022. We saw 1.6% decline in futures volumes with falls in a three and 10 year bond contract volumes, partially offset by significant growth in the 30 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 2022. However, as outlined in a 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 that ASX data centre, known as the Australian Liquidity Centre drove this revenue increase, with the number of customer cabinets increasing from 369 in 1H 2022 to 388 as 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 2022. 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 HIN’s, 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 2022.
The total on-market value cleared for the half was $773.3 billion, compared to $849.2 billion, in 1H 2022 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 5.8% growth in holding balances to just under $3 billion at 31 December and 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 continue to make significant developments and operational milestones in the half, and we recorded a loss of $6.8 million, compared to $5.5 million in 1H 2022.
Turning now to expenses. Total expenses for the half were $173.9 million, representing growth of $10.9 million, or 6.8%, compared to one 1H 2022. Operating expenses increased by $18.4 million. And this was partially offset by a declining depreciation and amortization costs of $7.5 million. The largest growth and expenses was in relation to the staff, which was up by $10.8 million, or 12.5%, with average full time equivalent headcount increasing from 749 in 1H 2022 to 809 in 1H 2023. Resources were added to key areas of the business including technology, risk management and cost reflective 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 2022 with $32.1 million related to the CHESS projects. 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 buildout of technology, risk management and customer activities, combined with increased assurance cost in relation to current CHESS and solution design cost for CHESS replacements, 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 2023 expense guidance range of 10% to 12% growth compared to FY 2022.
In terms of FY 2023 capital expenditure, we've previously communicated our revised guidance down to a range of $100 million to $150 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 rebound -- rebates for our participants, and a development incentive facility for eligible stakeholders.
The rebate component of the program will cost $50 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 2023, which consists of the $50 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 as 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 2022.
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 2022 to $12.1 billion in 1H 2023. And the investment spread on the total collateral balances remained consistent at 10 basis points given the significant levels of excess capital in the financial system.
However, the average participant balances 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 double AA minus reconfirmed during the period and a nominal amount of debt for working capital purposes.
Of note, amounts owing to participants they'll buy approximately $2.5 billion over the past six months, reflecting a decrease in open positions held in interest rates and equity index futures. This decline also drives the level of cash and other financial assets held at balance state. 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 2022. And as I mentioned earlier, the board has determined an interim fully franked dividend of $0.01162 per share, in line with our dividend policy to pay out 90% of underlying NPATs.
In summary, the 1H 2023 result reflects the strength of ASX’ diversified business. ASX has delivered a resilient outcome against the 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've 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 multi-year 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 centre of everything that we do. We're focusing on improving the way that we engage with customers, because good two 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 six months, I've personally met with many of our key customers to discuss ways that we can further enhance our partnerships. This process has been valuable and will 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 ASX Report 708 that outlines the regulator's expectations to 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 here's 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 products and service offerings, including the launch of our new issuer services pricing model at the beginning of this half. This structure was more straightforward and transparent for our issuers, with lower overall costs 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 projects. This diverse group will play a key role in ensuring strong two-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've further expanded our single stock options offering by launching another seven 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 aims 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 a standard requires 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 example 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 work streams 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 investment 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 elements of this new platform has been the upgrade to the Signal B trade, which provides critical trade confirmation data, and is now using international standard protocols also with improved stability. 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’re 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 of values and our culture. And this has been 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 six months. And retiring of course is Chief Financial Officer, Blair Beaton as the Group Executive of Listings. Daniel Moran, as our Chief Compliance Officer, and Johanna O'Rourke is 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 commitments of sourcing 100% renewable energy this financial year, and a targeting net zero Scope 1 and 2 emissions by FY '25.
We're also looking at ways to further reduce our carbon footprints. We're working with the industry to encourage take up of CHESS e-statements to reduce paper usage and that 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 investments 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 glow -- 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 and interest rates futures continue to increase early in the second half, particularly in the 90 day bank bill and three 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 replacements, 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 results 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 scenes discussed earlier at our strategy day in June.
And we'll now take your questions. So I'll hand back to the moderator.
Thank you. [Operator Instructions] Your first question comes from Ed Henning from CLSA. Please go ahead.
Thank you. I've got a few questions. Just to start with, you touched on the new issue of 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 services or technical services? And have these been below CPI levels? And when these are effective? As a first question.
Thanks for the question Ed. Look there are few areas where we review these on a regular basis, what I think they expect, we review these for everything that we do on a regular basis. Some of those, we're just in line with CPI. But it really is very, it really is very business specific. So perhaps that some more details, one that we can pick up if there are particular areas that you're particularly focused on. What I would say about issue of 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 than link 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 comes in at 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 that it's not that springs to mind.
Yeah. Nice. That's fine. Just some other clarification points you talked about an achievement of future product milestones in that 55 million of the 70. 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 give a bit more detail on that on what we'll pull out the 55 million? And just in regards to that, you've put this below the line or as a significant item? How you're going to account for the next the replacement of the CHESS project? Is that going to be included, 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 that 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 -- 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 to $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 CHESS 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 two other small or one clarification 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 the through the cycle of 20 to 30 basis points of that investment spread, does that still hold once comps liquidity moves through the market? How should we think about that investment spread moving forward?
Well, 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 will be very aware of is obviously there's still a loss 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 clearing houses, the cap the rates of return on that portfolio, 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 DSA 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 luck on one final one. You took that 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?
I might grab that one as well. We're really pleased as we called out today with the operational milestones and simply, we've had some really strong connections over the half interoperability legislations move through New South Wales, which we're really pleased.
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 the round sort of forward guidance for the business as we get to invest today and your results as well.
Okay, thanks.
Thanks Ed.
Thank you. Your next question comes from Andrei Stadnik from Morgan Stanley. Please go ahead.
Good morning. Can I ask -- my first question is around cost? So, you committed to that guidance of total cost between 10% and 12%, but OpEx is clearly going higher than that. And it seems to be there just the earlier write-down of the CHESS replacement is helping with low level amortization. So, how should we think about OpEx in the second half and into 2024, should we be thinking about 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 by 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 outlook around the expense levels.
Thank you. Can I ask just a question around the rate futures volumes continue to be subdued, what kind of feedback are you getting from your clients and what steps you need to take into help improve the liquidity and turnover?
Thanks, Andrei. I'll take that one. So it looks like they suddenly 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 three-year treasury bonds, future contracts, some adjustments there, which I think has been helpful in terms of driving improved liquidity.
What we're hearing from customers, if I look at the tenure, we saw very elevated tenure 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 the issuance activity. And 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 tenure declines are part of that picture is driven by that.
And, of course, the other thing I call out is that what 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 they 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, certainly been good to see the ongoing strength in the short data futures contracts. And I would definitely suggest you, I'm sure you do keep an eye on those monthly activity reports and to see if that growth continues.
Thank you. And can I just come back? My last question is just around costs. So you spoken about CapEx reducing, but when we compare CapEx guidance today of 100 to 115, and better last guidance was given in November, December of 100 to 110. That went about AUD5 million at the other end. And you're talking about, obviously, there's more CHESS have open what to happen on 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's outline this morning the timeline around that solution design and the last quarter of this calendar year in terms of announcing the ultimate designs to the market that will be informative about 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.
Thank you.
Thanks, Andrei.
Thank you. Your next question comes from Matt Dunger from Bank of America. Please go ahead.
Yes, thank you very much, Helen and Andrew. Andrew just picking up on that last point, understanding you trying to walk away from giving FY 2024 forecast guidance, but are there any parameters around what CHESS could cost? And -- know, where will the investment be funded? Will it be funded from OpEx, or how are you thinking about what was -- the scale of investments 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 we'll go through the operating P&L.
Understood. And could I just clarify that 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 were 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 call that 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 derivatives clearing platforms.
Thank you very much.
Thank you. Your next question comes from Kieren Chidgey from Jarden. Please go ahead
Good morning, guys. Just a couple of questions if I can. Maybe just going back to the discussion, Helen around futures activity, provide a bit of color across the different sort of contract types and terms. Just wondering, if you could talk to sort of broad trends you are seeing from a participants 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 sort of been pretty quiet from the futures point of view. And just wondering if you're seeing any evidence of that starting to come back in more recent months?
Yeah, I can give you some sense of that. So I think, certainly, as I mentioned earlier, with a 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, you know, for the most part more your directional users or the people who are actually taking those bonds in 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 [indiscernible] where there's a distinct change.
Look we're certainly seeing some change in the mix of different participants and different participants can have some significant participants coming in and others decreasing their activity. Look, I think that that's just -- that's normal though. You know, that's what we see that -- 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 three month basis to take sort of the quarterly impacts, we seem to be still sitting 20% -- 25% below pre-COVID levels from a volume point of view futures, what – what needs to change in your mind to drive that recovery up to that level?
Yes, look, I think that there are definitely a few things in there. I think that the, you know, 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 impacts of that had on the market. You know, those have been – those have been significant and had material impacts on the Australian market. And 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 aspects 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. Now, we do need to take into account some of those stresses that we've seen. And those do, you know, those do have an impact in terms of risk appetite as well. So I think that will, you know, 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 first sort of rollout of 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 presents.
All right. Thanks. And just sort of on the $70 million payment or program that’s 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 got that one, it will not impact the dividend policy, it will be classified as a significant item. So I won't go into underlying profit. And therefore as you know, we pay dividends out of our underlying profit.
Okay, thanks. And finally, just on the sort of CHESS replacements. I know you’re sort of flagging. You’ve 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 timeout period type set to go through implementation, are we looking at sort of a further two to three 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 simple 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 you know, there's a set of interface specifications that were – that we were previously working with, that there is a scenario where those don't change. So the work that needs to be done is – 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 must say, Kieren.
Okay. And if that sort of if there's a greater degree of change required to participants, will that $70 million pool be reassessed, or is that sort of one-self that we're unlikely to see getting 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 they're the up to sort of reflects the fact that there are varying degrees of outcomes. So no 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 the cap in the $70 million?
That's correct.
Perfect. Thanks, fellas.
Thank you. Your next question comes from Nigel Pittaway from Citi. Please go ahead.
Good morning. 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 perhaps to stay pretty slow moving forward?
Yes, thanks, Nigel. That is correct. It's in relation to trading platforms in the main from prior periods. So it's 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 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 I'm looking at over the next six months, it's probably about the same. And if I if I cast my mind out, based on a CapEx program that we've also announced this year, it's probably going to have a similar amount going into next year. But beyond that, it will be determined by sort of future CapEx program including CHESS ultimately.
Sure, sure. Okay. Thanks for that. That's clear. Secondly, just maybe picking up on the sort of comments about the difference in sort of participants in terms of the futures market, I mean, obviously, what we have seen, or we certainly saw in second half with lower principal traders and an improvement in the fee margin that seems to come back again, this period. So I think that there was a mix issue last time as well with electricity. So can you make just some comments from 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. That's -- 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. So 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 flat this period or actually down a little bit, that's an 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 it in the monthly activity reports. But what we've seen 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 and funding pressures there, which I think we've seen reflected in sort of slightly lower activity.
Okay. Thank you for that. And then just moving on to the issue of services. I mean, obviously, that was done. I think 22% I mean, the initial guidance when you were talking about the re-pricing was to revenue to be done 5% to 7%, or no activity is also an influence. But is that guidance still stand? And is that sort of 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 flows 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'm in terms of sort of the initiatives that you've – you've got on an 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? Is on the cusp of delivering that, or is it still sort of work in progress with probably still a few years away?
You know, it's piece I would point out, we're already seeing growth in some information services. And I do think that the investments that we made in data, say, we talked today about the yield broker data coming in there. And I think that data generally is an area where we see significant customer demands, and further opportunity for the kind of data that we both can provide from ASX, but also comes consolidate from other sources. So I think that that continues to be a really interesting area of growth.
And then beyond that, I was 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.
Okay. Great. Thanks very much.
Thank you. Your next question comes from Andrew Buncombe from Macquarie Group. Please go ahead.
Hi. Thanks for taking my questions. Just two from 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 2024? Thanks,
You want to take?
Yes. Thanks, Andrew, for the question. So what we've called out today is that that will be tie 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 will be longer than one 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 2023, 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 they're one off regulatory costs? Some color on that would be great. Thanks.
Yeah. Thanks, Andrew 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 mismanagement, technology and customer activities for the group, but also you're probably aware of increased assurance activities as well. So if you think about our responses to the to the CHESS replacement program, and the current CHESS system, there's level of work that will be undertaken in the second half of the year, which will lead to increase the cost there as well.
I'd also call out the fact that some of the early solution design activities, some 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 know is that, all of those activities are within our guidance range of 10% to 12%, which is the original guidance that we quote out at the start of the year.
I think, there's maybe one other thing that I'd call out on, so when you thinking about or access that an intensive accounting treatments, or some technology. There was a change of accounting treatment that we talked about last year around software-as-a-service.
And given the, -- 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 seeing that we're actually expensing and I expect that that to be a continuing thing.
Great, that's it for me. Thank you.
Thank you. Your next question comes from James Eyers from the Financial Review. Please go ahead.
Hi there, Helen. My questions related to the RBA and ASIC letters that were sent in mid-December. So two questions like, the RBA was asking you guys to give a public undertaking that you've got the resources and capability to support the existing CHESS.
So I just wonder, like if you've provided that in these results today, or is that some kind of separate documents. 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.
But I think that was to 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 the good public confidence in that, too. So yes, we're absolutely working on that special report that ASIC have asked for. And I'm working to the timeline for use in public later on. We'll be generating that report.
And in April, it's getting audited, 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 that everyone will be able to read that. But yeah, absolutely, that's an important piece of work. And that will also be a key vehicle for addressing the RBAs 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, we put publicly responded to the RBAs response at the time and confirm that we'd be doing all of that and all of what they requested.
Okay. Thank you.
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.