Welcome to the Fear and Greed daily interview. I'm Sean Aylmer. I've spoken before about the debacle at the ASX and the handling of its CHESS clearing and settlement replacement project. After seven years and $ 250 million, the modern blockchain- based platform was dumped last month. The move hasn't just sparked criticism of ASX, but also brought fresh attention to the system's underpinning financial markets. One of the other players in this space is FinClear, Australia's leading independent technology and infrastructure provider for financial market access. FinClear has used the same technology that would have replaced CHESS to develop FCX, Australia's first unlisted company securities platform. David Ferrall is the founder and CEO of FinClear, and my guest this morning. David, welcome to Fear and Greed.

Welcome to the Fear and Greed daily interview. I'm Sean Aylmer. I've spoken before about the debacle at the ASX and the handling of its CHESS clearing and settlement replacement project. After seven years and $ 250 million, the modern blockchain- based platform was dumped last month. The move hasn't just sparked criticism of ASX, but also brought fresh attention to the system's underpinning financial markets. One of the other players in this space is FinClear, Australia's leading independent technology and infrastructure provider for financial market access. FinClear has used the same technology that would have replaced CHESS to develop FCX, Australia's first unlisted company securities platform. David Ferrall is the founder and CEO of FinClear, and my guest this morning. David, welcome to Fear and Greed.

Thanks very much, Sean. Great to be here.

Thanks very much, Sean. Great to be here.

Just before we get on to FinClear, and particularly investing in unlisted companies securities, which I think is a fascinating area for investors, just some of the basics, how does the CHESS system work?

Just before we get on to FinClear, and particularly investing in unlisted companies securities, which I think is a fascinating area for investors, just some of the basics, how does the CHESS system work?

Yeah. Look, CHESS regretfully is a very complicated system, and it's made up of a number of components. Everyone talks about clearing and settlement, and that's part of it. But clearing and settlement are two defined pieces, but CHESS is the underlying ledger, if you want to think of it that way, that records individual ownership onto HIN, and reports back that or communicates to registries and/ or custodians around that. Clearing and settlement are very mechanical pieces. Clearing in particular, and settlement is what we do in terms of settling transactions to investors that ultimately then get registered onto HIN, being that subregister.

Yeah. Look, CHESS regretfully is a very complicated system, and it's made up of a number of components. Everyone talks about clearing and settlement, and that's part of it. But clearing and settlement are two defined pieces, but CHESS is the underlying ledger, if you want to think of it that way, that records individual ownership onto HIN, and reports back that or communicates to registries and/ or custodians around that. Clearing and settlement are very mechanical pieces. Clearing in particular, and settlement is what we do in terms of settling transactions to investors that ultimately then get registered onto HIN, being that subregister.

Okay. The ASX issue, and it's like a $ 3. 5 trillion market or something like that, what kind of happened in a snapshot? I don't really want to go into it too much. Is it the fact that the current technology is old and needs to be replaced, is that the nub of it?

Okay. The ASX issue, and it's like a $ 3. 5 trillion market or something like that, what kind of happened in a snapshot? I don't really want to go into it too much. Is it the fact that the current technology is old and needs to be replaced, is that the nub of it?

Yeah. Look, that was the founding proposition seven years ago that ASX came out with, that CHESS was getting old. It needed to improve its speed, its throughput, its redundancy, and also needed to move to a more modern technology. They were not able ... Greater connectivity between participants. And that was the original logic of moving to a distributed ledger, DLT technology, but also it was around speed throughput and recoverability as well.

Yeah. Look, that was the founding proposition seven years ago that ASX came out with, that CHESS was getting old. It needed to improve its speed, its throughput, its redundancy, and also needed to move to a more modern technology. They were not able ... Greater connectivity between participants. And that was the original logic of moving to a distributed ledger, DLT technology, but also it was around speed throughput and recoverability as well.

Okay, so you are involved in the up ... Well, you certainly, you're involved in clearing some of the retail investor transactions, is that right? As in, FinClear is involved?

Okay, so you are involved in the up ... Well, you certainly, you're involved in clearing some of the retail investor transactions, is that right? As in, FinClear is involved?

Yeah. Look, we either directly execute clear and settle or our infrastructure, being our technology, is used by other big large counterparts, retail and institutional, for clearing and settling their trades. We like to think that we touch on any one day up to 50% of retail transactions, but we do also transact some institutional business as well.

Yeah. Look, we either directly execute clear and settle or our infrastructure, being our technology, is used by other big large counterparts, retail and institutional, for clearing and settling their trades. We like to think that we touch on any one day up to 50% of retail transactions, but we do also transact some institutional business as well.

Okay. What is the technology you use, and please, David, dumb it down for me.

Okay. What is the technology you use, and please, David, dumb it down for me.

Yeah. Look, by all means, I'm not a technologist by background so that's easy for me. We're using distributed ledger technology, DLT technology, and a language called Daml. It's actually exactly the same as the infrastructure and provider that the ASX was looking to use or is using for CHESS replacement, but we're using it in a far more pointed or discreet manner to solve a particular problem, rather than applying it to CHESS, which was a much more complicated proposition. So the distributed ledger it, if you think of it this way, it's just another form of ledger, but it's what's called an immutable ledger. And meaning that once you get a record of ownership on the ledger and agreed, it can't be altered or changed in any way. So it's agreed by counterparts. But importantly, what it allows you to do is start to put smart contract capability over the top of it because as soon as you have a security on ledger, being a share ownership, and then potentially have, say, cash or liquidity on ledger, you can then put a smart contract over it. And that's where the Daml language comes in to automate functions. And that's where you start to see what we talk about, atomic settlement. But really, it's where you start to see the blurring of lines between what is a market transaction and what is post- trade, because everything happens atomically same time. A trade and settlement happens at the same time, there's no real distinguishing between the two.

Yeah. Look, by all means, I'm not a technologist by background so that's easy for me. We're using distributed ledger technology, DLT technology, and a language called Daml. It's actually exactly the same as the infrastructure and provider that the ASX was looking to use or is using for CHESS replacement, but we're using it in a far more pointed or discreet manner to solve a particular problem, rather than applying it to CHESS, which was a much more complicated proposition. So the distributed ledger it, if you think of it this way, it's just another form of ledger, but it's what's called an immutable ledger. And meaning that once you get a record of ownership on the ledger and agreed, it can't be altered or changed in any way. So it's agreed by counterparts. But importantly, what it allows you to do is start to put smart contract capability over the top of it because as soon as you have a security on ledger, being a share ownership, and then potentially have, say, cash or liquidity on ledger, you can then put a smart contract over it. And that's where the Daml language comes in to automate functions. And that's where you start to see what we talk about, atomic settlement. But really, it's where you start to see the blurring of lines between what is a market transaction and what is post- trade, because everything happens atomically same time. A trade and settlement happens at the same time, there's no real distinguishing between the two.

Stay with me, David. We'll be back in a minute. My guest today is David Ferrall, founder and CEO of FinClear. Okay, so this has implications certainly in the public space, so I get what you are saying in the public space. Does it also open the way for other asset classes to be more easily traded?

Stay with me, David. We'll be back in a minute. My guest today is David Ferrall, founder and CEO of FinClear. Okay, so this has implications certainly in the public space, so I get what you are saying in the public space. Does it also open the way for other asset classes to be more easily traded?

Yeah, absolutely. And that's what FCX is all about. We've launched FCX as a solution to a known problem, and that is unlisted shares. We're an unlisted company. We've been around for seven odd years. We've been through three or four capital raises. There's no, in Australia, centralized platform to manage unlisted. And so we've really built it as a solution to problem for unlisted shares, but we've also built it being asset class agnostic. And by that we mean we could put any asset class on there. We already have debt instruments on there. We've had a lot of inquiry from unlisted funds that may look to also list on there, but likewise, you could put anything on there as well. Commodities property, really, whatever you wanted to put on there from a ledger perspective.

Yeah, absolutely. And that's what FCX is all about. We've launched FCX as a solution to a known problem, and that is unlisted shares. We're an unlisted company. We've been around for seven odd years. We've been through three or four capital raises. There's no, in Australia, centralized platform to manage unlisted. And so we've really built it as a solution to problem for unlisted shares, but we've also built it being asset class agnostic. And by that we mean we could put any asset class on there. We already have debt instruments on there. We've had a lot of inquiry from unlisted funds that may look to also list on there, but likewise, you could put anything on there as well. Commodities property, really, whatever you wanted to put on there from a ledger perspective.

Okay. Now given what we're seeing in public investment markets, so what equities has done, what bonds have done, when I talk to people, they're regularly saying alternatives, where you got to go. Now alternatives is a very generic term for all sorts of asset classes. But I mean, in a sense, if people have to get out of that 60/40 mindset, if people have to get out of the equities, bonds mindset, this is the sort of technology presumably that means my super fund, if I'm doing it myself, can potentially access assets that I wouldn't have been able to otherwise.

Okay. Now given what we're seeing in public investment markets, so what equities has done, what bonds have done, when I talk to people, they're regularly saying alternatives, where you got to go. Now alternatives is a very generic term for all sorts of asset classes. But I mean, in a sense, if people have to get out of that 60/40 mindset, if people have to get out of the equities, bonds mindset, this is the sort of technology presumably that means my super fund, if I'm doing it myself, can potentially access assets that I wouldn't have been able to otherwise.

Yeah, absolutely. And that's what we're hoping is the end result here, that you start to see more product and better access to asset classes that have traditionally been reserved for only big fund managers, or sophisticated or highly sophisticated investors. So as soon as you see more products being listed on this as a more efficient ecosystem, then that opens up to investors to access alternates, as you call them.

Yeah, absolutely. And that's what we're hoping is the end result here, that you start to see more product and better access to asset classes that have traditionally been reserved for only big fund managers, or sophisticated or highly sophisticated investors. So as soon as you see more products being listed on this as a more efficient ecosystem, then that opens up to investors to access alternates, as you call them.

I'm going to sound really dumb here, can you actually access the ASX via a system like yours and bypass the CHESS system? You can't because you need a HIN. I think I've answered my question.

I'm going to sound really dumb here, can you actually access the ASX via a system like yours and bypass the CHESS system? You can't because you need a HIN. I think I've answered my question.

Well, yes, yes. Sort of. Look, first and foremost, if you think about what FCX, it's a registry. It's a registry, much like the big name registries, like a computer share or a link or others. In this case, we've built it specifically for unlisted companies, but there's no reason, for example, why a listed company potentially couldn't also sit on FCX. We haven't connected FCX to CHESS and that publicly traded market infrastructure, but there's no reason why we couldn't. And it could potentially be an alternate way for listed companies, but that's not our priority at this stage.

Well, yes, yes. Sort of. Look, first and foremost, if you think about what FCX, it's a registry. It's a registry, much like the big name registries, like a computer share or a link or others. In this case, we've built it specifically for unlisted companies, but there's no reason, for example, why a listed company potentially couldn't also sit on FCX. We haven't connected FCX to CHESS and that publicly traded market infrastructure, but there's no reason why we couldn't. And it could potentially be an alternate way for listed companies, but that's not our priority at this stage.

Yep, yep. I've been focusing on the benefits to me, which is not unusual on this show, David, but how about the owners of the assets themselves? If you want to raise money, and suddenly you may have a whole new area where you can go and find some cash, that's not the three (inaudible) that have already bought into you.

Yep, yep. I've been focusing on the benefits to me, which is not unusual on this show, David, but how about the owners of the assets themselves? If you want to raise money, and suddenly you may have a whole new area where you can go and find some cash, that's not the three (inaudible) that have already bought into you.

Yeah. Look, again, what we're hoping here is to start to build an ecosystem where companies can come and sit on this as a far more efficient ecosystem than going to a public listing. If you think about it from a corporate perspective, to sit on the ASX, it costs, we think, somewhere between one and a half million to $ 2 million a year in terms of legal fees, compliance, regulatory conditions. So it's a big undertaking. And if you look at the companies that, say, sit on the ASX, half the companies that sit on the ASX are less than $ 50 million market cap. So if you are less than $ 50 million, let's say you're a $ 20 million market cap and you're paying away one and a half or $ 2 million a year just to sit on the ASX, that's a lot of your free cash, or potential free cash, and a lot of cost for a small company. So really what looking to do here is to build an ecosystem which takes a company from very early stage, providing an ecosystem for them and a cheaper ecosystem to them, to more efficiently raise capital and have liquidity in a marketplace or a platform, rather than going to a very high- cost, continuous disclosure regime of sitting in an always- on trading platform like the ASX. And obviously, once you've built that ecosystem and attracted those companies and investors on there, then it starts to broaden out. And the actual investors sitting on platform then start to see other investment opportunities, other companies sitting on platform, and have the ability to deploy and to diversify their investments into other companies.

Yeah. Look, again, what we're hoping here is to start to build an ecosystem where companies can come and sit on this as a far more efficient ecosystem than going to a public listing. If you think about it from a corporate perspective, to sit on the ASX, it costs, we think, somewhere between one and a half million to $ 2 million a year in terms of legal fees, compliance, regulatory conditions. So it's a big undertaking. And if you look at the companies that, say, sit on the ASX, half the companies that sit on the ASX are less than $ 50 million market cap. So if you are less than $ 50 million, let's say you're a $ 20 million market cap and you're paying away one and a half or $ 2 million a year just to sit on the ASX, that's a lot of your free cash, or potential free cash, and a lot of cost for a small company. So really what looking to do here is to build an ecosystem which takes a company from very early stage, providing an ecosystem for them and a cheaper ecosystem to them, to more efficiently raise capital and have liquidity in a marketplace or a platform, rather than going to a very high- cost, continuous disclosure regime of sitting in an always- on trading platform like the ASX. And obviously, once you've built that ecosystem and attracted those companies and investors on there, then it starts to broaden out. And the actual investors sitting on platform then start to see other investment opportunities, other companies sitting on platform, and have the ability to deploy and to diversify their investments into other companies.

It's early days, but certainly a huge potential there, particularly in that small cap area.

It's early days, but certainly a huge potential there, particularly in that small cap area.

Look, yeah, absolutely in the small cap, but increasingly or interestingly as well, for example, FinClear today we're about a ... Last time we raised capital, we're about a half a billion- dollar company in terms of valuation. We happily sit on FCX today as a capped table and a means for liquidity, and we think we'll happily sit on FCX for quite some time. But there's definitely a trend that companies are looking to stay private longer for a whole raft of reasons. And so you see some very high valuation companies in Australia today, probably the best known, for example, being Canva, that happily still sit in a private environment. And we think that that trend is only going to continue.

Look, yeah, absolutely in the small cap, but increasingly or interestingly as well, for example, FinClear today we're about a ... Last time we raised capital, we're about a half a billion- dollar company in terms of valuation. We happily sit on FCX today as a capped table and a means for liquidity, and we think we'll happily sit on FCX for quite some time. But there's definitely a trend that companies are looking to stay private longer for a whole raft of reasons. And so you see some very high valuation companies in Australia today, probably the best known, for example, being Canva, that happily still sit in a private environment. And we think that that trend is only going to continue.

Good luck with it, David, and thank you for talking to Fear and Greed.

Good luck with it, David, and thank you for talking to Fear and Greed.

Thank you very much. It's been a pleasure.

Thank you very much. It's been a pleasure.

That was David Ferrall, founder and CEO of Fin Clear. This is the Fear and Greed daily interview. Join us every morning for the full episode of Fear and Greed, australia's most popular business podcast. I'm Sean Aylmer, enjoy your day.

That was David Ferrall, founder and CEO of Fin Clear. This is the Fear and Greed daily interview. Join us every morning for the full episode of Fear and Greed, australia's most popular business podcast. I'm Sean Aylmer, enjoy your day.