ASX Limited, the operator of the Australian Securities Exchange, has released new details of the system inspired by Bitcoin’s blockchain technology that will replace CHESS: The ASX’s Clearing House Electronic Subregister System.
CHESS provides clearing, settlement and other post-trade services for the exchange. ASX in early 2016 revealed that it had acquired a stake in New York-headquartered Digital Asset Holdings, which develops blockchain-inspired distributed ledger technology (DLT). The intention was to explore whether a DLT-based system could potentially replace CHESS, which was originally rolled out in 1994.
Although the exchange operator has emphasised that CHESS is stable and continues to function effectively, ASX says that replacing it with a blockchain-style system will offer a range of benefits. Those include, according to a new consultation paper on the scope of the CHESS replacement and an implementation plan, “more efficient clearing, settlement and other post-trade services through improved record keeping, reduced reconciliation, more timely transactions, and better quality data”.
Unlike Bitcoin’s public blockchain, which is used to provide a record of transactions involving the cryptocurrency, the distributed ledger outlined by ASX will be a permissioned system, with a managed on-boarding process for participants.
In order to ensure a degree of backwards compatibility, ASX said that although the new system will allow market participants to run a DLT node, there will also be the option to conduct message-based transactions in a similar fashion to CHESS.
Digital Asset’s DAML SDK can be used by market participants to create applications for the new system. DAML is Digital Asset Modeling Language — the name given by Digital Asset to the “smart contract-like” language and tools it obtained in April 2016 through its acquisition of Elevence. Unlike smart contract platforms, DAML-written agreements don’t need to be shared across multiple nodes in a network and their terms can remain private, according to Digital Asset.
CHESS currently uses a propriety messaging protocol, but ASX intends to replace it with ISO 20022.
Permissioned users will have access to an API to request and access data.
ASX has described the rollout of the CHESS replacement as a “once in a generation opportunity to deliver material benefits for the securities industry and the broader economy”.
The exchange is currently planning to have the new DLT-based system in production sometime between the final quarter of 2020 and the first quarter of calendar 2021, but indicated that timeline may be subject to change.
ASX said that it is striving to balance the need for stakeholders to prepare for the CHESS replacement — including preparing their own systems to interact with the new platform — ensuring the delivery of the new system takes place in a reasonable timeframe, and including as much Day 1 functionality as possible.
Day 1 functionality will be finalised following the end of the current consultation, but features being considered include issuing a Common Investor Number (CIN) as an investor identifier, a number of settlement message enhancements, settlement in foreign currencies, optional early settlement, and an auto-borrow feature.
In total, ASX said that around 50 new business requirements for the CHESS replacement were identified through stakeholder consultation over the last year and a half.
“These new business requirements relate to areas as diverse as: account structures and information; pre-settlement; settlement; and corporate action processes,” the consultation paper states.
“In addition, the replacement system will need to meet high non-functional and technical requirements in relation to: availability and resilience; recoverability; performance; scalability; and security.”
ASX is proposing a single cutover weekend to the new system.
ASX is planning to begin the release of software testing tools from Q2 2019. Migration testing is expected to begin in June 2020. A further update on timing of the rollout is expected in late July 2018.