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In December 2017, the Australian Securities Exchange (ASX) announced its intention to update the over 25-year-old Clearing House Electronic Subregister System (CHESS) with an innovative distributed ledger solution which has been referred to as “CHESS Replacement”. The ASX had initially planned for a go-live date of April 2021 to allow for consultation with the industry and regulators.

Due to the impact of COVID-19, the ASX has announced that it is postponing some of the project milestones to a later date that is yet to be determined.

The ASX has advised that it is currently consulting with stakeholders, via their Implementation & Transition Working Group, to determine a revised implementation timetable. This consultation is being conducted by webinars during the course of July.

The merits of CHESS Replacement

The CHESS system that clears and settles trading in Australia’s equity markets has served the ASX well for over 25 years, however, with new and exciting technology innovations occurring over recent years, the ASX has for some time been eyeing off a replacement for CHESS.

CHESS Replacement will modernise and upgrade ASX’s current clearing and settlements platform by utilising distributed ledger technology (DLT) to improve the availability, reliability and performance of CHESS. The DLT that the ASX is planning to implement will be comprised of two elements: a shared, replicated ledger; and a distributed database synchronisation. These two elements will result in CHESS Replacement having the capacity to maintain the entire clearing and settlements platform synchronised in real time, which will overcome the delays associated with current message-based technology, and simultaneously improve the integrity of the data that the ASX will store.

One of the main features of the DLT system that differs from standard database technology is the removal of centralised administrators and data stores. These are replaced with a digital record of ownership that can be securely shared with, and updated by, multiple organisations. A perceived benefit of this feature is that users can be confident that what they see is what their counterparties will also see in near real time.

Unlike more commonly publicised examples of marketplace DLT usage, the ASX has advised that it intends to keep CHESS Replacement private to ensure that only regulated participants can provide input into the privately-operated ASX network of systems. This will allow for a more secure system to assist in providing accurate ownership validations and greater resilience to sophisticated cyber-attacks. This style of system is also credited with providing capacity for users to better control how their data is handled, which is an increasing concern for stakeholders.

Benefits of implementing CHESS Replacement

It is anticipated that there will be some other key benefits associated with implementing CHESS Replacement, beyond enhancing the current clearing and settlement process, including:

  • An update to the messaging protocols required to engage with CHESS. The CHESS messaging system used by users to connect with CHESS will be upgraded to the ISO 20022 standard. This upgrade will change various features, including file format and field values of messages, and will place the system and its users in a more ideal position to interact with global financial institutions that are also planning to implement the ISO 20022 standard. These institutions include the US Federal Reserve Banks, the European Central Bank and the Bank of England; and
  • The provision of a CHESS Replacement API connection, which will allow for a variety of FinTechs and industry related developers to create and offer services which will interact with the pre-existing CHESS Replacement functionality. This increased interaction combined with greater data control could result in innovative products and features being developed, which could redefine the handling of corporate actions.

How to connect with CHESS replacement

While the current CHESS system procedures and operations remain unchanged, users of CHESS will need to consider one of the three potential methods that will allow for connection with CHESS Replacement. These options are:

  1. A direct integration via software, which will allow for individual users to connect to CHESS Replacement via an API with no need for messaging protocols.
  2. Sending messages in a similar manner to how messages are currently sent, through now using either AMQP over ASXNet or SWIFTNet due to their conformity with the ISO 20022 messaging standard.
  3. Using a new secure browser-based solution, although the ASX has not yet provided detailed information on this option.

Like many advisers, issuers and investors alike, KPMG Law will be eagerly awaiting a further timing update from ASX on the CHESS Replacement roll-out, including any news on consequential changes to the ASX Listing Rules.

This article was prepared with the assistance of consultant Alex Moss.

 

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