ASX playing a game of CHESS

ASX playing a game of CHESS

Twenty years ago, the ASX introduced a system for post-trade processes of Australia's equity market, known as CHESS (the Clearing House Electronic Subregister System). When implemented, it was revolutionary in its sophistication in improving the efficiency of matching and settling trades.

Contrast this to other markets that either still deal in certificate based trades or manual matching and you can see how far ahead of the times CHESS was. About a decade ago, I was working for a UK broker that discovered discrepancies in the system that resulted in thousands of unmatched trades worth millions of pounds.

The ASX has recently released a response to a discussion paper that called for submissions regarding the future of CHESS and whether it requires an update for the next 20 years.

Key to this proposed upgrade is the introduction of distributed ledger technology (DLT), an example of which is commonly referred to as 'blockchain'. The introduction of DLT has the potential to improve the security of trades as well as speed of execution.

Interestingly, there are a few areas of the response that may have a wider impact on the market and ASX in general.

Part of the upgrade is designed to allow a second licensed central counterparty to access settlement services as a competitor. While the introduction of a competitor to CHESS may reduce transaction costs through competition, it also opens up the potential for the Federal Government to privatise CHESS in the future.

The second area of interest is the implementation of International Standards Organisation 20022 messaging as part of the CHESS upgrade or replacement. Put simply, it standardises the language and processes used in other markets, allowing seamless trading between markets and assists market participants that operate in several markets. It also makes it a lot easier for the ASX to merge with another market down the track if the systems and processes are aligned.

Thirdly, with the implementation of the Government's New Payments Platform (NPP), which will allow instantaneous financial transactions, there is the potential for the traditional delayed settlement timeframe (currently T+2) to be changed to shorter periods, including on the day of trading (T+0).

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