ASX commenced a process of evaluating replacement options for CHESS in 2015.
ASX is planning for the replacement of the system that underpins post-trade processes of Australia's cash equity market, known as CHESS (the Clearing House Electronic Subregister System).
The development of CHESS by ASX over 20 years ago enabled the successful dematerialisation of the cash equity market (the conversion of physical shares into an electronic format); a move to T+5 settlement (which was lowered to T+2 in March 2016); and improved the general efficiency and effectiveness of post-trade processing in Australia. CHESS was world-leading and led to the development of a proprietary electronic messaging standard because existing standards lacked the message sophistication to accommodate CHESS's functionality.
ASX performs these post trade functions on transparent and non-discriminatory terms of access, under the supervision of the Australian Securities and Investments Commission (ASIC) and the Reserve Bank of Australia (RBA).
Today, CHESS is the core system that performs the processes of clearing, settlement and asset registration, which are critical to the orderly functioning of the market. CHESS continues to be stable and to effectively deliver these services. This is demonstrated by CHESS's average monthly service availability over the last five years of 99.99%. While there is nothing to indicate that CHESS will not continue to provide this service level, ASX is evaluating whether replacing CHESS with more contemporary technology will provide a broader range of benefits to a wider cross section of the market. While ASX assesses the requirements and potential technical solutions for the replacement of CHESS, it will continue to support and invest in maintaining the high performance and availability of CHESS.
ASX commenced a process of evaluating replacement options for CHESS in 2015. In January 2016, ASX selected Digital Asset Holdings LLC as a technology partner to develop, test and demonstrate to ASX a working prototype of a post-trade platform for the cash equity market using distributed ledger technology (DLT, an example of which is commonly referred to as ‘blockchain'). This initial phase of work was completed in mid-2016. From this work, ASX concluded that DLT:
- has met initial capacity tests for ASX's scalability, security and performance requirements for a replacement system when deployed in a permissioned private network. Further testing of the technology will be conducted as part of the next phase of development
- offers potential benefits for issuers, investors, intermediaries and regulators through improvements and innovations in operational processes
GUIDING PRINCIPLES FOR THE REPLACEMENT OF CHESS
Operate for the benefit of issuers and end investors
Provide issuers and end investors with greater control over, and enhanced confidence in, their market activities through timely, secure and simplified access to the register of holders (for issuers), financial assets (end investors) and associated information.
Take future needs into account
Meet and respond to changing local and global markets, and promote further innovation through new levels of functionality, open standards and flexible technology.
Be readily available to those who are authorised to use it in a non-discriminatory manner.
Ease of integration and global interoperability
Ensure capacity to integrate with upstream and downstream business systems, and embrace global standards and openness to competition through interoperability in a cost-efficient way.
Availability, reliability and performance
Provide users and regulators with confidence that the solution will be available and transactions performed as and when expected.
Privacy and security
Provide users with confidence that the system is traceable and secure, and that it won't expose them to new risks as a result of information being fraudulently obtained or corrupted.
Streamline functions and workflows, remove embedded paper-based processes and mitigate manual errors, and be effective and cost-efficient to operate, support and enhance.
Comply with relevant laws, regulations and licences relating to the operating entities.
ASX has commenced the business requirements gathering and definition phase of this project and commencing a process of industry consultation to inform the definition of the business requirements, including software demonstrations and a series of workshops with stakeholders.
Stakeholder engagement forums and communication media will include:
- A public consultation paper
- Demonstrations of the CHESS replacement software prototype in ASX's acceler8 space
- Business requirement workshops between ASX and CHESS user organisations
- Technical Committee meetings between ASX and CHESS user organisations
- Webinar industry updates
- Website, email and market notice updates, where necessary
While ASX will keep customers and industry stakeholders updated throughout the project, there will be times where greater engagement will be important to ensure the new system is developed in a way that meets the needs of the market and is implemented smoothly. ASX will notify customers and industry stakeholders when this is required.
If you would like to be added to ASX's contact list for this project, please email ASX.
Consultation Paper – ASX's replacement of CHESS for Equity Post Trade Services:
On 19 September 2016, ASX released a consultation paper seeking views of stakeholders on their requirements for the system to replace CHESS.
The deadline for submission of responses is 28 October 2016.
ASX's pathway for the replacement of CHESS is outlined below.
Develop a prototype platform using DLT technology
January 2016 – July 2016
Formal gathering of business requirements for a replacement system – to perform all current core functions of CHESS, with limited introduction of new features initially
Build out the prototype to an ‘industrial scale' platform using DLT technology
Commenced August 2016
Key decision point: commitment to implement DLT or alternative technology for the purpose of replacing CHESS
Implement replacement system
Following a positive decision at end-2017, ASX will provide further information on the implementation schedule
Investigate opportunities for leveraging technology to further increase operational efficiency
Ongoing consultation with stakeholders
As part of the CHESS replacement project, ASX is evaluating the use of distributed ledger technology - DLT.
DLT uses an append-only database of transactions that has two key elements:
- a shared, replicated ledger and
- a distributed database synchronising mechanism. Each transaction must reference a balance received from a previous transaction and must be cryptographically signed by the legal approver of the transaction. The solution forms an exact chain of title over time.
ASX will be implementing a DLT solution that is not open or public. This is because regulated markets require participants to be appropriately licensed and known to regulators - for there to be rights of reversal and error correction, and high levels of privacy and security; and for the operational benefits of net settlement to be retained in a system in which legal entities are responsible for the perfection of title to, and legal standing of, financial assets.
The replacement of CHESS with any DLT solution would be within ASX security perimeters on a private, permissioned, secure network where only known, licensed participants would be authorised to access the system, much like today. Private contractual information will be segregated and will not be shared with all participants, encrypted or otherwise. The shared and replicated aspect of the solution serves as a transaction notification and synchronisation mechanism and includes only hashes (one way cryptographic functions). This is very different to the open Internet-based, 'permissionless' blockchains such as Ethereum and Bitcoin.
Public Blockchain vs ASX Private Permissioned Ledger
|Public Blockchain||ASX Private Permissioned Ledger|
Not applicable to highly regulated markets
Similar to today, but an enhanced database architecture
ASX's use of a DLT solution would be in conjunction with other ‘traditional' technologies to ensure that the most appropriate technical solution is applied.
You can contact the ASX CHESS Replacement project team on the following email address:
Distributed Ledger Technology
Acceler8 is the innovation space where ASX and Digital Asset Holdings are developing distributed ledger technology (DLT), sometimes called blockchain, for the Australian equity market.
Frequently asked questions about blockchain
- What is blockchain?
- What is distributed ledger technology (DLT)?
- What does this mean for my business with regard to CHESS, and equities clearing and settlement?
- Is ASX using bitcoin?
- Will ASX give everyone access to the blockchain?
- What is ASX's involvement with Digital Asset?
- How did ASX come to partner with Digital Asset?
- How will ASX stakeholders participate fully in the innovation process?
- What are the potential benefits?
- When will a final decision be made on CHESS replacement?
- Are government and regulators involved?
What is blockchain?
Blockchain is a type of Distributed Ledger Technology (DLT). These terms are often used interchangeably. Not all distributed ledgers employ blocks or chain transactions.
What is distributed ledger technology (DLT)?
A distributed ledger is a digital record of who-owns-what. But unlike traditional database technology, there is not necessarily a central administrator of the ledger, nor is there the need for a central data store.
What does this mean for my business with regard to CHESS, and equities clearing and settlement?
The CHESS system and its procedures and operations remain unchanged. ASX is exploring the potential of DLT alongside CHESS. The existing equities clearing and settlement arrangements will continue to operate normally.
Is ASX using bitcoin?
No. ASX is not using the bitcoin or any cryptocurrency in any part of its investigation of the blockchain.
Will ASX give everyone access to the blockchain?
No. ASX does not intend to investigate the use of a publically available implementation of DLT. ASX is investigating the use of a permissioned system where ASX clients – that meet the necessary regulatory requirements - are permissioned to access the network, just as they do today when connecting to CHESS.
What is ASX’s involvement with Digital Asset?
ASX's relationship with Digital Assets is twofold:
i) as a shareholder with a director appointed to Digital Asset’s Board
ii) as a joint development partner to produce a candidate replacement system for CHESS
How did ASX come to partner with Digital Asset?
ASX conducted a global search for DLT companies working on applications of DLT for financial services. Viability workshops were then conducted with a shortlist of firms. The list was further narrowed, with some firms invited to Sydney for an intensive development and analysis workshop. At the conclusion of this process, Digital Asset was selected as the successful partner.
How will ASX stakeholders participate fully in the innovation process?
As ASX progresses its work with Digital Asset, it will invite relevant stakeholders to review, provide feedback and help shape developments.
What are the potential benefits?
ASX believes that DLT has the potential to lower risks and associated costs while unlocking further innovation in the post trade processing functions of the market.
When will a final decision be made on CHESS replacement?
ASX intends to make a decision and notify the market of the system to replace CHESS towards the end of 2017. CHESS will be replaced when an industrial strength system that meets all business, technical and regulatory requirements is delivered and after all relevant stakeholders have had the opportunity to provide input into the process.