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).
(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
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
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
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.