The ASX CHESS Replacement: Will the excruciating wait finally be over by the end of the 2020s?

The long-promised ASX CHESS replacement has been a saga that likely has more twists and turns to come. Despite prior hopes we could’ve had it in April 2023, it may not be until the end of this decade.

So, why have things gone so wrong, will we ever see it and where are things at as of mid-2024?

What is the CHESS system?

The ASX’s CHESS (Clearing House Electronic Subregister System) is a system that has been used in Australia since the mid-1990s. It is used for the settlement of trades and the management of shareholdings. It was first introduced in 1994.

CHESS was developed by the ASX to provide a secure, efficient and transparent marketplace for investors. The system was originally designed to streamline post-trade activities such as the settlement of trades, clearing and registration of transactions, and transfer of ownership.

It has been successful in its purpose, but over time has become outdated and limited in its capabilities. As a result, the bourse has sought to replace the CHESS system for over a decade now, but there has been little to show for those efforts.

The ASX CHESS Replacement: Where is it at?

To say things are off the rails would be an understatement. The ASX formally dumped the first attempt in November 2022, writing off $250m. After long touting a blockchain-based replacement system, it may not be blockchain based and may facilitate the shift over time as opposed to all at once.

Politicians and regulators (including the RBA and ASIC) have heavily scrutinised the exchange, with the latter investigating whether or not ASX management has breached legal obligations throughout the process.

But at its recent investor forum, the company told investors it had made some progress. Back in November 2023, the ASX formally kicked off Attempt 2, led by TATA Consultancy Services. The aim is for the new clearing system in 2026 and a new settlement system in 2028 or 2029. This would be 13-14 years from when the bourse began looking into the system under the tenure of Elmer Funke Kupper.

Why is it taking so long?

Let’s play devil’s advocate for a minute. Yes, mistakes may have been made, but it was never going to be a quick process.

The main issue with replacing CHESS is that it is an integral part of the Australian market infrastructure, meaning that any changes must be carefully planned so as not to disrupt trading. There has been (and will continually need to be) extensive consultation with all stakeholders including brokers, custodians, registries and issuers before implementation can take place.   

Tech and regulators

In addition to this complex process, there are also technical challenges related to building a new system from scratch, which must be overcome before any replacement can be put in place. In particular, any replacement would have to meet certain legal requirements, including privacy protections for shareholders and compliance with anti-money laundering laws.

And even though regulators have criticised the ASX, they cannot be blameless in this saga either. A Parliamentary inquiry in April 2024 found that ASIC, the RBA and the Treasury should have identified and monitored the risks more carefully and that all stakeholders in this saga (including the aforementioned regulators as well as the ASX) should enhance their own skills and expertise rather than outsourcing their responsibility to contractors. The committee called for increased supervision and enforcement over the ASX, nothing has come of that recommendation as of yet.

What does all this mean for investors?

Investors in ASX shares likely won’t notice an impact to their trades…unless of course they are investors in the ASX itself. In the latter case, they may well be set to suffer for some time yet. The company also announced last week that it expected ~15% expenses growth to be reflected in its FY24 results and for another 6-9% growth in FY25, a move that led to shares falling 8% on that day.

ASX (ASX:ASX) share price chart, log scale (Source: TradingView)

Ultimately, it is not as if the current CHESS system urgently needs fixing. But the new system should be better and it should have gotten off the ground well before now, given the time and money that has been put in it to date.

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