Settlement and the role of CHESS
When equities are bought or sold in Australia, title or legal ownership of those equities is exchanged for money. This exchange is called settlement. The diagram below shows the relationship between Australia's trading, clearing and settlement services:
Settlement is effected by a world-class computer system called CHESS, which stands for the Clearing House Electronic Sub-register System. Usually, three business days after a buyer and seller agree to a trade, CHESS effects the settlement of that trade. It does this by transferring the title or legal ownership of the shares while simultaneously facilitating the transfer of money for those shares between participants via their respective banks. This type of settlement is called Delivery versus Payment (DvP). It is irrevocable.
CHESS achieves DvP settlement through a Model 3 multilateral net batch settlement mechanism (for an explanation of Model 3 settlement and how it differs from other models please see Section 5.1 of the RBA's 'Review of Settlement Practices for Australian Equities').
This batch settlement completes at around 11:30am each day and involves the determination of each participant’s net funds and security delivery obligations and the net funds obligations of all participants’ payment providers. This maximises the efficiency of settlement by:
- netting settlement obligations (buys and sells) in each individual equity into one net buy or sell
- netting all payment obligations (pays and collects) into one net pay or collect.
It does this while minimising the risk of settlement failing.
Funds settlement (the transfer of money) occurs across the Exchange Settlement Accounts of those payment providers in the Reserve Bank of Australia’s Information and Transfer System (RITS). Once completed, this triggers the movement of securities from delivering to receiving settlement participants within CHESS. These multilateral payment netting arrangements, which are key to the settlement efficiency of the system, are approved under the Payment Systems and Netting Act.
The CHESS sub-register
To facilitate settlement between participants on a delivery versus payment basis (DvP), CHESS electronically registers the title (ownership) of shares on its sub-register. Investors can choose to have their holdings registered in one of two ways:
- on an Issuer Sponsored Sub-register or
- on the CHESS Sub-register.
The two types of sub-register provide alternative forms of registration for shareholders and the shares they own. Every ASX-listed company manages its own Issuer Sponsored Sub-register for the registration of shares in their company alone. This form of registration is also referred to as being ‘Issuer Sponsored’.
Alternatively, shares in any listed company can be registered in the CHESS Sub-register. This form of registration is held within the CHESS system and allows brokers to manage their sponsored clients' shareholdings, while the client retains legal title to those shareholdings. This form of registration is also referred as being 'Broker Sponsored'.
An investor who is Broker Sponsored can include a variety of different shares in a single registration held in CHESS under that investor's name. This has the advantage of simplifying the administration of a portfolio by consolidating all shareholdings into a single account. It also provides investors with comfort and confidence that their holdings are secure and can only be affected through receipt of proper instruction from them. CHESS Holding Statements are also generated directly from the sub-register and sent to investors to provide a form of independent validation of their share purchases, sales, transfers and holdings. There may also be benefit for frequent share traders during the settlement process since their details will already be registered with CHESS.
For brokers, holdings being maintained on the sub-register also has the advantage of reducing their risk in facilitating settlement of market and client transactions through expediting both the movement of securities in preparation for settlement and the timely allocation of shares to client accounts post settlement. Finally, for issuers, the CHESS sub-register provides both a cost effective manner to maintain a register of shareholders and an efficient and accurate mechanism to process corporate actions.
This service is unique to the Australian equity market, as is its inclusion within standard settlement fees.