The Australian Securities Exchange (ASX) has announced a revised launch date for its blockchain-based Clearing House Electronic Subregister System (CHESS), now scheduled for April 2023. Initially proposed for April 2022, this new delay accounts for increased scaling demands and feature additions, stemming from industry feedback and market dynamics exacerbated by the COVID-19 pandemic.
The blockchain-based CHESS aims to replace the existing settlement infrastructure, bringing enhanced scalability, efficiency, and functionality. However, the delay reflects the complexities involved in deploying distributed ledger technology (DLT) for high-volume financial markets.
Reasons Behind the Delay
1. Impact of COVID-19 on Trading Volumes
The COVID-19 pandemic caused unprecedented volatility in global markets, significantly increasing trading volumes on the ASX. The surge necessitated recalibrating the system’s scalability to meet heightened performance demands.
2. Feature Integration at Launch
The ASX has incorporated several features initially slated for post-launch updates, such as:
- Corporate Actions Management: Including dividend reinvestment plans (DRP) and bonus share plans (BSP).
- Instant Settlement: Introducing non-batch bilateral delivery versus payment (DvP).
These integrations align with stakeholder feedback but require extensive testing and development, contributing to the extended timeline.
3. Industry Pushback
Share registrars, including major players like Computershare, advocated for a longer timeline, emphasizing the need for comprehensive feature testing and integration. Their requests for an additional year appear to have been accommodated in the new launch schedule.
Key Features of the Blockchain-Based CHESS System
1. Distributed Ledger Technology (DLT)
The new CHESS system leverages DLT to offer a more transparent, secure, and efficient settlement process, enabling real-time tracking and auditability of transactions.
2. Instant Settlement (DvP)
With instant settlement capabilities, participants can execute trades and settle payments simultaneously, reducing counterparty risk and enhancing liquidity.
3. Enhanced Corporate Actions Management
The inclusion of DRPs and BSPs at launch ensures seamless handling of corporate actions, addressing a long-standing demand from industry participants.
4. Scalability and Resilience
Designed to handle surges in trading activity, the updated CHESS system ensures robust performance during high-volume periods, reflecting lessons learned from the pandemic-induced market fluctuations.
Challenges in Implementing CHESS on Blockchain
1. High-Volume Scalability
Handling large-scale trading volumes on a distributed ledger presents unique challenges, including latency, node synchronization, and data management.
2. Stakeholder Collaboration
The ASX must balance the diverse requirements of brokers, share registrars, and investors, making extensive consultations critical to success.
3. Regulatory Compliance
Ensuring the blockchain system aligns with Australia’s stringent financial regulations adds another layer of complexity to the implementation process.
Industry Reactions
Support from Share Registrars
The delay has been viewed as a victory by share registrars, who previously raised concerns about timeline pressures. The inclusion of corporate action features at launch has further solidified their support.
Market Concerns
Some market participants have expressed concerns over the repeated delays, questioning the ASX’s ability to deliver the system within the revised timeframe.
Broader Implications
The delay underscores the challenges of deploying DLT in traditional financial systems but also highlights the commitment to a thorough, industry-aligned rollout.
Global Context: Blockchain in Financial Markets
The ASX’s CHESS system is part of a broader trend toward blockchain adoption in financial markets. Other notable initiatives include:
1. Swiss Stock Exchange (SIX)
SIX launched its blockchain-based digital asset exchange, showcasing the potential for DLT in capital markets.
2. Hong Kong Stock Exchange (HKEX)
HKEX is exploring blockchain for post-trade settlement, aiming to enhance cross-border trading efficiency.
3. Depository Trust & Clearing Corporation (DTCC)
The DTCC has conducted pilots for blockchain-based settlement, demonstrating industry-wide interest in distributed ledger solutions.
Looking Ahead: What to Expect from CHESS in 2023
1. Extensive Testing Phase
The ASX has emphasized the importance of rigorous testing to ensure the system’s reliability and performance under real-world conditions.
2. Gradual Transition
The transition from the existing CHESS system to the blockchain-based version will likely be phased to minimize disruptions.
3. Industry Collaboration
The ASX will continue working closely with stakeholders to address concerns and refine the system before the launch.
Conclusion
The ASX’s blockchain-based CHESS system represents a bold step toward modernizing financial market infrastructure. While the delay to April 2023 highlights the complexities of implementing such advanced technology, it also reflects the ASX’s commitment to delivering a robust, feature-rich solution that meets industry needs.
With features like instant settlement and enhanced corporate actions management, CHESS has the potential to set new standards for blockchain applications in financial markets. As global exchanges continue to explore similar initiatives, the ASX’s success could serve as a blueprint for blockchain adoption in traditional finance.
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