The ASX want to replace its CHESS system but what will that mean for investors?

In two years time, the ASX anticipates that its CHESS (Clearing House Electronic Subregister System) will be replaced. CHESS is the system through which share trading occurs and has been for 25 years.

But the ASX is now ready to replace CHESS. ASX CEO Dominic Stevens outlined their plans at the Stockbrokers and Financial Advisers Conference today telling the audience: “It is not a platform for the 2020s and beyond.”

“So CHESS replacement is not an ASX indulgence or vanity project. CHESS has to be replaced. It’s our job to refresh and upgrade our systems. Our customers and regulators demand it.”

With what?

The ASX will implement a new clearing system based on Java and Digital Asset Modelling Language, which is used in the OTC derivatives world. It will include all existing CHESS functions and 35 new ones.

While this morning’s conference did not go into specifics, the new functions were requested by major financial institutions and can be used in a DLT (distributed ledger technology) node – also known as blockchain.

The systems will be tested early next year in the industry, through a development style mode which will allow brokers to test the new system before it goes public. The DLT node will go public around March-April 2021 – and it will be among the first of its kind for stock exchanges everywhere.

“The eyes in this room and around the world are watching us,” Stephens said. “Our progress is an important bellwether for the technology’s adoption internationally.”

The ASX have denied there will be more service costs or red tape. For blockchain skeptics, they will have the option of a traditional message-based connection to their system.

“We could have simply settled for building a new system – Chess Mark II – with a contemporary messaging protocol that replaced the legacy technology and provided the same, or slightly upgraded, clearing and settlement services on offer today,” said Stevens.

“Instead we’re building an open infrastructure solution that offers the comforts of CHESS Mark II with the added option of permissioned [sic], source-of-truth data, in real time. This is a chance for Australia to ‘leap forward’, like we did when CHESS was first implemented in the 1990s.”

He promised the new system will cut costs and increase efficiency. While Stevens could not give an exact figure he said: “Even if 1 per cent [efficiency gain] is correct, ASX would be adding value to the industry that are multiples of the current settlement fees.”

“All holdings [will] be seen on the one system with perfect trust and in real time.”

What else is happening?

But replacement of CHESS is not the only technological change taking place. The ASX will build a second data centre by the end of this year and offer its own data analytics software that is currently being trialled internally.

Stevens also told attendees he was proud there had been 126 foreign IPOs – noting the most recent one, US family networking app Life360 (ASX: 360). He was keen to attract more listings both domestic and foreign, particularly technology.

‘The eyes in this room and around the world are watching us’

“There is no doubt that technology will play a greater role over time in both Australia and the world economy,” he said.

“We now have approximately 200 listed tech companies – our second largest sector behind resources. This is delivering diversity to Australian investors who have been traditionally more weighted to resources and financial services.

“Consider the alternative: should the ASX shut the door to tech listings? Should we leave this industry to other exchanges? If we did, capital, companies, investors and exciting growth opportunities would go elsewhere and our public market would become less relevant.

“It’s our job to facilitate the listing of suitable Australian and foreign companies which are bought to us by banks, brokers and underwriters.”

While he was proud that some tech stocks had performed, he made it clear that the ASX did not just take anyone. In three years, the ASX rejected 80 applications because they failed to meet listing requirements.

Of course, that number does not account for interventions from ASIC.

Stevens concluded by reminding attendees of the role they had to play in the quality of the market.

“There is a key role to play for those here today too, ensuring the quality of the companies you promote and bring to the market, and the advice you give your clients and investors.”