Support for DLT replacement for CHESS

The Australian Securities Exchange (ASX) appears to be making good progress in replacing its CHESS system with distributed ledger technology (DLT).

It says no significant concerns about using DLT were raised by respondents to a consultation paper released in September 2016.

‘Respondents were generally supportive of ASX investigating DLT as a potential replacement technology for CHESS,’ ASX says in its recently published summary of feedback it received.

However, it adds: ‘There was widespread interest expressed by respondents in being provided with more information on DLT, including how it works and what its potential application to post trade processing might enable.’

CHESS is the system that performs the functions of clearing and settlement and a range of other services. According to ASX, CHESS continues to operate well, with an average monthly service availability of 99.99 per cent for the past five years, and can continue to do so for several more years. Nonetheless, ASX plans to upgrade CHESS with a next generation platform that helps reduce costs and risks, and enables innovation.

It won’t be the first exchange using DLT. In October 2015, for example, Nasdaq announced it would use the technology, which was partly inspired by Bitcoin’s blockchain, to power its US market for shares in private companies. It has also been testing the technology to run proxy voting for companies listed on its exchange in Estonia. Similarly, the operator of the Toronto Stock Exchange said this month that it had developed a blockchain-based prototype for electronic shareholder voting.

ASX says it will now build the functionality to test the enterprise-grade capabilities of DLT (for example, scale, speed, persistence and security). Its aim, it says, is to decide on the roadmap for a CHESS replacement at the end of 2017.

ASX received 36 written submissions to its consultation paper, including one from Governance Institute. It also held several roundtable follow-up discussions and bilateral meetings and organised over 50 demonstrations and more detailed workshops with users and other stakeholders to showcase DLT’s capabilities.

ASX says most respondents were supportive of the adoption of international messaging standards (ISO 20022). Clearing and settlement participants also showed strong support for the new system to provide for a suite of ‘Day 1’ functional changes aimed at significantly reducing their costs.

However, respondents had differing views on the coexistence of CHESS and ISO 20022 messaging for a transition period and whether the system that replaces CHESS should provide settlement period choices.

The ASX feedback paper also outlines the exchange’s next steps. These include further engagement with users, forming six specific user working groups to identify, define and prioritise business requirements and ongoing demonstrations of the DLT prototype. ASX also promises plenty of further consultations throughout 2017.

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