ASX announces plans to adopt blockchain technology for equity clearing and settlement
Australia’s primary securities exchange, ASX, has announced its intention to replace its clearing and settlement system, CHESS, with distributed ledger technology (DLT or blockchain) developed by its technology partner Digital Asset (DA).
CHESS (Clearing House Electronic Subregister System) is the system used by ASX to record shareholdings and manage the clearing and settlement of equity transactions in Australia (exchanging the title or legal ownership of financial products for money when buying or selling the financial products is referred to as settlement). The press release says that CHESS was world-leading when introduced in the 1990s, providing name-on-register functionality, electronic communications and removing paper share certificates. It continues to be a robust and reliable system. But ASX is now replacing CHESS with a next generation post-trade platform using contemporary technology.
The decision to replace CHESS with the blockchain-based system follows the successful build of enterprise-grade DLT software for core equity clearing and settlement functions, and the completion of extensive suitability testing by ASX and DA over the past two years.
The testing was conducted in parallel with a stakeholder consultation program, which included briefing of regulators, to enable ASX to develop a comprehensive understanding of what the market wants in replacing CHESS. The process included two independent third-party security reviews of the technology.
The testing confirms ASX’s confidence in the functional, capacity, security and resilience capabilities of DA’s application of DLT to meet the needs of Australia’s financial marketplace and maintain the highest regulatory and operational standards.
ASX has revealed that it will now work with stakeholders on finalising the scope of Day 1 functionality for the new system, drawing on its extensive consultation that will continue in 2018. Day 1 functionality and the proposed timing for transition are expected to be released for market feedback at the end of March 2018.
The new system will be operated by ASX on a secure private network where participants are known, ‘permissioned’ to have access, and must comply with ongoing and enforceable obligations.
The system will be designed without access barriers to non-affiliated market operators and clearing and settlement facilities. It will also give ASX’s customers choice as to how they use ASX’s post-trade services. Customers will be able to connect in a similar way they do today, with the addition of using contemporary global ISO 20022 messaging, or they may interact directly with the distributed ledger. The transition period to the new system will be determined in consultation with stakeholders.
Dominic Stevens, ASX Managing Director and CEO, said, “ASX has been carefully examining distributed ledger technology for almost two-and-a-half years, including the last two years with Digital Asset, in order to understand its potential application. Having completed this work, we believe that using DLT to replace CHESS will enable our customers to develop new services and reduce their costs, and it will put Australia at the forefront of innovation in financial markets. While we have a lot more work still to do, today’s announcement is a major milestone on that journey.”
“ASX has consulted extensively on the needs and priorities for replacing CHESS, including with customers, share registries, software vendors, other exchanges and industry associations. I am very grateful for their input and support. We’ve given over 80 DLT system demonstrations to more than 500 attendees, and conducted over 60 CHESS replacement workshops for more than 100 organisations from the global financial services industry. ASX has also formed a strong partnership with Digital Asset over the past two years, and we’re confident we have chosen the right partner. Together, we look forward to continuing to work with the industry as we finalise the requirements and the roadmap for implementation of the new system,” commented Peter Hiom, ASX Deputy CEO.
Blythe Masters, Digital Asset CEO, said, “After so much hype surrounding distributed ledger technology, today’s announcement delivers the first meaningful proof that the technology can live up to its potential. Together, DA and our client ASX have shown that the technology not only works, but can meet the requirements of mission critical financial infrastructure.”
Coinciding with today’s decision, ASX will exercise its pro-rata right to participate in DA’s recent Series B fundraising and subscribe for US$3.5 million convertible notes. ASX and DA have agreed to work exclusively on DLT in Australia and New Zealand. This agreement applies while the Day 1 functionality of the new system is being finalised, and will continue subject to agreement of the full contractual arrangements for the development and support of the new system.