The ASX’s new post-trade processing system, based on distributed ledger technology, promises to lower transaction costs and facilitate a wide range of new solutions for market participants.
The Australian Securities Exchange (ASX) has a long track record of being ahead of the curve. Its Clearing House Electronic Sub-Register System, known as CHESS, led the world in the efficiency it brought to post-trade processing when it was developed over 25 years ago. Since then it has been a critical and reliable piece of infrastructure to the Australian economy.
Now the ASX is in the midst of developing a CHESS replacement system based on distributed ledger technology (DLT), putting it at the forefront of a new trend among stock exchanges globally.
BNP Paribas Securities Services has been an active participant in the development of the CHESS replacement system. In a recent roundtable discussion hosted by the ASX, David Braga, CEO of BNP Paribas Securities Services Australia and New Zealand, said the new system would lead to a wide range of new solutions for market participants.
Players like custodians, retail brokers and fintech companies are all putting their minds to finding better solutions for their clients on the back of the capability of the new system.
Significantly, it will use international messaging standards rather than local proprietary standards which were developed with CHESS almost 30 years ago, allowing global participants in the custodial industry to integrate it seamlessly into their global systems.
“The new platform will allow us to move to a global messaging standard at the very least.”
“The question then becomes what is possible on the back of the distributed data which is available to everyone.”
David Braga said.
The ASX announced in 2016 that it would transition to Distributed Ledger Technology (DLT) – commonly referred to as blockchain technology – and partnered with Digital Asset Holdings to build a prototype post-trade platform for cash equity clearing and settlement processes.
DLT brings the promise of real time distribution of information, allowing for faster transactions and reliable, up-to-date data.
DLT will also allow for new services and advantages that haven’t been conceived or developed yet. The ASX plans to provide tools so providers can build new services over the top of the distributed ledger and write new applications for it.
It will facilitate better data on the whole listed ecosystem and help listed ASX companies better understand their investors and provide them with more accurate information, as well as be more responsive during capital raisings.
It will streamline transactions and reduce “frictional costs” that are caused by multiple intermediaries being involved in exchanges between the share issuer and investor.
And it will deliver data with high integrity and with an audit trail that ASX executive general manager for equity post-trade services, Cliff Richards, described as “virtually bulletproof”. Data centres backing the system are in geographically distinct areas, and the system can continue to work if part of it becomes unavailable due to unforeseen events.
The ASX expects the new system to go live in 2021. Consultations with the market have led to 50 high-level business requirements for the CHESS replacement, some of which will go live with the system while others will be phased in later.
Braga said market participants had been through market changes before, for example the transition to moving from T+3 settlements to T+2.
“Because this is a full replacement system, there’s a lot more work that has to be done to validate and verify it”. “But because of its design, participants can choose their level of engagement and make it as low impact as moving from T+3 to T+2.”
“One of the reasons it’s been successful so far is that it’s focused on being a CHESS replacement project, it’s not a hobby on the side.”
“This has a real underlying requirement that must be addressed. That’s given it a focus which has been helpful for ASX and the industry.”
David Braga said.