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ASX CHESS replacement may face a rocky road



As the ASX draws closer to replacing Australia's equity clearing and settlement system, it has left a number of market participants fearing disruption to their entire business models.


Equity issuers, company secretaries, stockbrokers and providers of share registry services have all express concerns, specifically that the ASX CHESS Replacement will allow the ASX to extend its clearing and settlement monopoly into other areas.


The Road to CHESS Replacement

The road for ASX in achieving a full implementation of the CHESS Replacement, has been far from smooth, as it has undergone significant industry engagement, including a stakeholder consultation in September 2016, and a consultation in 2018 titled, 'New Scope and Implementation Plan'. This consultation paper set out the changes to the CHESS replacement system, implementing a distributed ledger technology solution by Digital Assets.


The ASX undertook a two and a half year assessment of DLT prior to releasing its 2018 consultation paper.


The new ASX CHESS Replacement system incorporates a permissioned distributed ledger, allowing users to choose to connect and transact by sending and receiving messages in a similar way as today. Users may also choose to take a DLT node and interact directly. The ASX also plan to implement the DAML Software Development Kit (DAML), (offered by digital assets) enabling stakeholders to develop DAML based applications that integrate directly with a DLT node.


According to ASX, this provides them with the opportunity to leverage data and services they are permissioned to access and facilitate real time and deeper integration into their existing processes.


Response to Replacement


However, there is rarely innovation without resistance. A group calling itself the CHESS Replacement Stakeholder group has been lobbying the offices of Treasurer Josh Frydenburg and Finance Minister Mathias Cormann, as well as the chairman of the Parliamentary Joint Committee on Corporations and Financial Services, James Patterson, and shadow Treasurer Jim Chalmers.


The stakeholder groups's founding members are the Australian Investor Relations Association, Governance Institute of Australia, Australian Shareholders Association, Stockbrockers and Financial Advice Association, Link Group, BoardRoom and Computershare.


The group wants the Federal Government to:

  • accelerate the implementation of legislation that would allow the Council of Financial Regulators to enforce "appropriate parameters around the ASX's use of its monopoly powers"

  • for the DLT to be declared a piece of national infrastructure and opened up to other FinTech innovators; and

  • a "parliamentary review to examine the scope, consultation and industry impacts of ASX's CHESS replacement program."

The key concern is that this decentralised (somewhat) CHESS replacement may end up concentrating power and control even more firmly in the hands of ASX and ASX alone.


ASX remain steadfast in their position that the ASX CHESS Replacement as planned is good for Australia, with ASX Chief Executive Dominic Stevens reinforcing to Chanticleer that he was in Canberra only a week ago with the ASX board of directors to provide a regular update on the CHESS replacement for federal government ministers, senior public servants, and members of the opposition.


In this presentation, he did not pull any punches in expressing the disruptive power of the DLT/blockchain functionality of the new system, and stated that about $22.4 billion in costs associated with administering the superannuation system could be slashed by removing legacy systems and building innovative services (controlled by ASX in the CHESS replacement as opposed to being a more open system).


Stevens added:

This is a company that is actually creating jobs and believes in technology, believes in the future, and believes that's a good thing for the country.

He believes that critics are turning the DLT/blockchain element of CHESS replacement into some sort of "voodoo".


Stevens also stated:

Its actually updating software, updating hardware, updating security, updating functionality, updating messaging and also saying to the industry: we're not going to take more data

On the significance of DLT in the implementation of the Replacement initiative, he emphasized:

We're not going to charge you any more money. We're going to pay for the capital expenditure. It would be remiss of us not to put in a distributed ledger at the bottom, because if we're building a technology system for the next 20, 30 years, you may have made a massive mistake in five years when you look back and say we haven't done this.

It is feasible the ASX's blockchain-based distributed ledger technology could be used to replace the work done by share registries entirely, as other leading global share exchanges are experimenting with DLT and Blockchain technology to move securities to more automated and decentralised systems (including Six in Switzerland and Boston Securities Exchange in the USA). Current registries have revenue of approx AUD$500M under the current system and a shift to a direct access model would plainly threat this income.


Australia has long been an economy of oligopolies and monopolies, and the strategic direction taken by the ASX CHESS replacement DLT will be important in either enabling greater cost savings for one of the largest retirement investment pools in the world, or potentially locking in those investors to a greater level of costs than would be the case.


It is likely that ASX will retain the trusted position as the source of truth for share ownership and be given the responsibility to drive these greater cost savings for investors, to the detriment of its current stakeholder partners. Over time it seems likely that the system will increasingly come under pressure to be more open to innovators and distruptors as middlemen like traditional share registries and even brokers themselves, are increasingly required to earn their fees from adding value rather than facilitating transactions.


The importance of this project to Australia's reputation as a leader in blockchain and as a banking centre of South East Asia should not be underestimated.