ASX releases consultation paper outlining scope and implementation timetable of DLT system to replace CHESS; submissions due 22 June 2018
Estimated go-live between Q4 2020 and Q1 2021
Is DLT gaining momentum as a credible technology for post-trade services?
Point of View
The Clearing House Electronic Sub-register System (CHESS) is ASX’s core system for clearing, settlement and performing other post-trade activities for the Australian equities market. CHESS effects these processes through ASX Clear and ASX Settlement.
Once a trade has been executed on ASX Trade, CHESS sends messages to ASX Clear and ASX Settlement. Trades are cleared in real time, while settlement occurs two days later (T+2) in a multilateral net batch. Payment obligations are settled in the single daily CHESS batch within the Reserve Bank Information and Transfer System and securities are contemporaneously transferred by ASX Settlement. This uses the delivery-vs-payment model 3, which is final and irrevocable. ASX Settlement also operates a central securities depository (CSD) that maintains a record of securities holdings and movements, through the CHESS sub-register. As such, the immutable nature of distributed ledger technology means it is ideal to perform these activities.
ASX first mooted the possibility of a DLT solution back in 2015, but it was not until December 2017 that it made a final decision to go ahead with a DLT system to replace CHESS. ASX is working with Digital Asset Holdings to develop the system. The move has been welcomed by the Treasurer, Scott Morrison, who noted that it is “…consistent with the Government’s agenda to put Australia at the forefront of financial technology and efficient financial markets.”
ASX has sought to balance demand for rich functionality on Day 1 against the need to deliver the new system within a reasonable timeframe. Consequently, ASX will take a phased approach to delivering system requirements: on Day 1, post launch and further features not critical to replacing CHESS functions.
Day 1 functionality will be finalised once ASX has considered stakeholder input from the consultation process. ASX requests that stakeholders provide feedback on the proposed testing and release management strategy and submit any new business requirements not already captured. Submissions close on 22 June 2018.
Back in May 2017, the Deputy Governor Carolyn Wilkins of the Bank of Canada (BoC) and Gerry Gaetz of Payments Canada concluded, based on work done in Project Jasper, that ‘too many hurdles’ had to be overcome for a blockchain-based infrastructure to be viable. The authors did add, nevertheless, that it may be possible to use blockchain technology ‘one day’ in the future for the country's payment technology backbone.
However, since then more promising indicators have emerged that blockchain may be gaining favourable momentum as a long-term solution for settlement activities. A number of other clearing and settlement facilities, CSDs and trade repositories around the world are developing platforms based on DLT. Most are in proof-of-concept or experimental stages.
Subsequent to earlier comments, the BoC and Payments Canada are now working with TMX, Toronto’s securities exchange, to develop a securities clearing and settlement proof-of-concept, in Phase 3 of Project Jasper. Results are expected to be published in mid-May.
In Singapore, the central bank and local exchange intend to investigate use of DLT for fixed-income securities settlement, as part of Project Ubin. Deutche Böerse is testing a hybrid platform, introducing DLT for settlement in commercial bank money, but retaining current clearing arrangements. And DTCC is creating a new platform for its credit derivatives Trade Information Warehouse using DLT, with the next phase of the service due to launch in late-2018.
SWIFT signed a Memorandum of Understanding in January 2018 with seven CSDs, including Nasdaq Market Technology in the US, Russia’s National Settlement Depository and the Swiss SIX Securities Services. The group will investigate how blockchain can be used for post-trade processes such as proxy voting.
In February 2018, the European Commission launched the EU Blockchain Observatory and Forum. Valdis Dombrovskis, Vice-President responsible for Financial Stability, Financial Services and Capital Markets Union said: “Among the many technologies that are driving digital innovation, blockchain has the potential to be truly transformative for financial services and markets. The Blockchain Observatory and Forum will monitor developments and also inform our policy making.”
Furthermore, in March 2018, the Bank of England announced it was undertaking a proof-of-concept as part of its RTGS Renewal Programme, to understand how the RTGS system could be capable of supporting settlement in systems using innovative payment technologies such as DLT. Findings will be published later in 2018.
Significant interest is also being driven in Australia. Development of common standards for blockchain interoperability was a key topic at the APAC Blockchain Conference, held in Melbourne last month. Australia chairs the working group on international blockchain standards ISO/TC 307. Nick Cliff, Emerging Tech Lead, represented AusPayNet at the conference.