Australia
21 Jul 2021
As Australia’s asset servicing industry has gone from strength to strength, industry participants are busy preparing for the CHESS replacement system due to go live in 2023 and are excited about the benefits it will bring
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In October 2020, the Australian Securities Exchange (ASX) confirmed the new go-live date for the Clearing House Electronic Subregister System (CHESS) replacement system was to be pushed back to April 2023, with increased project scope and a 12-month extension to the proposed date consulted on mid-year. CHESS is the computer system used by ASX to manage the settlement of share transactions and to record shareholdings.
It was developed by ASX more than 25 years ago and enabled the dematerialisation of the cash equity market, a move to T+3 settlement—which was lowered to T+2 in March 2016—and improved the efficiency and effectiveness of post-trade processing in Australia. In April 2023, CHESS will be replaced with distributed ledger technology (DLT). ASX says the new DLT will provide a “broader range of benefits to a wider cross section of the market”.
The extension for the CHESS replacement system was welcomed by most industry participants. A consultation revealed that, although most users indicated that they could meet the new proposed go-live date of April 2022, extra time would be valuable. Many asked for extra industry testing as well as more time to prepare for the new system and additional functionality that reduces manual processes, such as electronic corporate action elections, to be delivered as soon as possible.
The impact of COVID-19 on the industry, in areas including collaboration and productivity, and the need to further reduce cutover risk to the new CHESS system were also taken into consideration. Almost a year on since this decision was made, market participants are saying the new timeframe is achievable and the project will help bring about efficiencies in the market.
Bringing in the benefits
The new timeline for CHESS also brought about opportunities to review the process. Martin Carpenter, head of securities services at Citi Australia, says: “We do not have any concerns about this time frame or the overall engagement process by the ASX — it has been extensive at every step through the process and it has allowed for market participants to fully engage and understand what was planned, and what was the impact on themselves.”
He explains: “We also saw this project and the related consultation process as a unique opportunity to put forward some much needed efficiency improvements in the way we interact with other counterparts and the level of electronic versus manual activities — for this was a rare situation that the all key stakeholders (i.e. custodians, brokers, registries and representatives from the issuer community) all came together in the one place.”
Weighing in on the push back, Robert Brown, CEO of the Australian Custodial Services Association (ACSA), comments: “The ASX CHESS replacement project will remain an integral part of ACSA’s agenda for the foreseeable future as key players continue to work with the ASX to build and test the new platform.”
As the CHESS replacement represents a generational change to a key piece of market infrastructure, ACSA continues to engage with the ASX on its CHESS replacement project to ensure smooth day one implementation and beyond. In terms of the new benefits the CHESS replacement could bring, AST finds that the transition to DLT has the capability to offer an abundance of opportunities.
Sally Surgeon, head of client services for asset servicing and head of the Sydney office at Northern Trust, affirms: “Northern Trust is a strong believer in the potential of DLT. We remain engaged with the changes as industry participants and look forward to ongoing conversations with the market, our partners and other stakeholders as we near day one of implementation of the CHESS replacement project.”
In terms of benefits more directly related to the platform change, this is an exciting development for the commercialisation of DLT in financial services and, not surprisingly, it is being watched very closely by local and global financial services organisations.
Carpenter states: “The ASX project plays well into Citi’s suite of solutions relating to DLT and digital assets and ultimately positions us to deliver enhanced services to clients.”
Meanwhile, from the perspective of Lewis Moreline, head of fund services product, securities services, Australia and New Zealand, J.P. Morgan, the biggest benefits will result from the automation of manual processes that lead to risk reduction, along with more timely delivery of information to clients.
Technology and beyond
Technology and automation are set to propel further growth within Australia’s asset servicing industry going forward, and the market is working towards leveraging technology to increase efficiency. The market is looking for new ways to increase operational efficiency with a trend towards better data management helping to automate processes, necessitating the consolidation of disparate systems, data sources and providers. Indeed, the majority of custodians, asset managers and super funds understand that legacy and aging technology will not support them this decade.
“The days of cobbling together incompatible and inefficient solutions with materially risky workarounds is over. The pandemic has definitely shone a bright light into a dark corner on this aspect of investment operations,” says Matthew Baldwin, global business development, Financial Risk Solutions (FRS).
Similarly, J.P. Morgan’s Moreline notes: “Ongoing technology investment is paramount to growth within the sector, both in terms of automation delivering efficiencies, as well as the development of solutions for funds that allow for actionable insights into data.”
The days of using fax or email as the primary operational communication tool are gone and a more system-to-system environment will be integral in dealing with the volume of information that will pass across organisations.
According to Moreline, the move to portals for managing information flow and for funds to perform their necessary oversight activities will continue, alongside large global re-platforming of traditional custodial services. This is complemented by strategic technology partnerships; for example J.P. Morgan’s partnership with AccessFintech, to leverage and maximise the value of the data.
Additional examples include Northern Trust’s ongoing work with BondEvalue on the provision of fractionalised bonds and its partnership with Standard Chartered to develop Zodia, a cryptocurrency custodian for institutional investors.
Over at Citi, Carpenter identifies that as clients wish to generate better insights across their data, we are seeing a need to provide a more intuitive client interface with enhanced data capabilities and transparency. This way, clients can access large data sets, across a range of data domains, such as custody, fund accounting, performance analytics, environmental, social and governance (ESG) and so forth.
Additionally, there is an increasing need for on-demand and near real-time data sets throughout the day. This is especially applicable for custody positions and transactions. ACSA’s Robert Brown concludes: “Overall the industry is highly automated, but a small proportion of asset types present challenges in normal times which are amplified through recent pandemic interruption. ACSA remains engaged with all parties in the service chain to improve efficiency and weed out residual manual processes.”
The ASX CHESS replacement will bring opportunities and additional features to the market that can be adopted to enhance core custody operating models. Moreover, Australia’s asset servicing and investment administration has a track record as both an innovator and early adopter of technology.
It was developed by ASX more than 25 years ago and enabled the dematerialisation of the cash equity market, a move to T+3 settlement—which was lowered to T+2 in March 2016—and improved the efficiency and effectiveness of post-trade processing in Australia. In April 2023, CHESS will be replaced with distributed ledger technology (DLT). ASX says the new DLT will provide a “broader range of benefits to a wider cross section of the market”.
The extension for the CHESS replacement system was welcomed by most industry participants. A consultation revealed that, although most users indicated that they could meet the new proposed go-live date of April 2022, extra time would be valuable. Many asked for extra industry testing as well as more time to prepare for the new system and additional functionality that reduces manual processes, such as electronic corporate action elections, to be delivered as soon as possible.
The impact of COVID-19 on the industry, in areas including collaboration and productivity, and the need to further reduce cutover risk to the new CHESS system were also taken into consideration. Almost a year on since this decision was made, market participants are saying the new timeframe is achievable and the project will help bring about efficiencies in the market.
Bringing in the benefits
The new timeline for CHESS also brought about opportunities to review the process. Martin Carpenter, head of securities services at Citi Australia, says: “We do not have any concerns about this time frame or the overall engagement process by the ASX — it has been extensive at every step through the process and it has allowed for market participants to fully engage and understand what was planned, and what was the impact on themselves.”
He explains: “We also saw this project and the related consultation process as a unique opportunity to put forward some much needed efficiency improvements in the way we interact with other counterparts and the level of electronic versus manual activities — for this was a rare situation that the all key stakeholders (i.e. custodians, brokers, registries and representatives from the issuer community) all came together in the one place.”
Weighing in on the push back, Robert Brown, CEO of the Australian Custodial Services Association (ACSA), comments: “The ASX CHESS replacement project will remain an integral part of ACSA’s agenda for the foreseeable future as key players continue to work with the ASX to build and test the new platform.”
As the CHESS replacement represents a generational change to a key piece of market infrastructure, ACSA continues to engage with the ASX on its CHESS replacement project to ensure smooth day one implementation and beyond. In terms of the new benefits the CHESS replacement could bring, AST finds that the transition to DLT has the capability to offer an abundance of opportunities.
Sally Surgeon, head of client services for asset servicing and head of the Sydney office at Northern Trust, affirms: “Northern Trust is a strong believer in the potential of DLT. We remain engaged with the changes as industry participants and look forward to ongoing conversations with the market, our partners and other stakeholders as we near day one of implementation of the CHESS replacement project.”
In terms of benefits more directly related to the platform change, this is an exciting development for the commercialisation of DLT in financial services and, not surprisingly, it is being watched very closely by local and global financial services organisations.
Carpenter states: “The ASX project plays well into Citi’s suite of solutions relating to DLT and digital assets and ultimately positions us to deliver enhanced services to clients.”
Meanwhile, from the perspective of Lewis Moreline, head of fund services product, securities services, Australia and New Zealand, J.P. Morgan, the biggest benefits will result from the automation of manual processes that lead to risk reduction, along with more timely delivery of information to clients.
Technology and beyond
Technology and automation are set to propel further growth within Australia’s asset servicing industry going forward, and the market is working towards leveraging technology to increase efficiency. The market is looking for new ways to increase operational efficiency with a trend towards better data management helping to automate processes, necessitating the consolidation of disparate systems, data sources and providers. Indeed, the majority of custodians, asset managers and super funds understand that legacy and aging technology will not support them this decade.
“The days of cobbling together incompatible and inefficient solutions with materially risky workarounds is over. The pandemic has definitely shone a bright light into a dark corner on this aspect of investment operations,” says Matthew Baldwin, global business development, Financial Risk Solutions (FRS).
Similarly, J.P. Morgan’s Moreline notes: “Ongoing technology investment is paramount to growth within the sector, both in terms of automation delivering efficiencies, as well as the development of solutions for funds that allow for actionable insights into data.”
The days of using fax or email as the primary operational communication tool are gone and a more system-to-system environment will be integral in dealing with the volume of information that will pass across organisations.
According to Moreline, the move to portals for managing information flow and for funds to perform their necessary oversight activities will continue, alongside large global re-platforming of traditional custodial services. This is complemented by strategic technology partnerships; for example J.P. Morgan’s partnership with AccessFintech, to leverage and maximise the value of the data.
Additional examples include Northern Trust’s ongoing work with BondEvalue on the provision of fractionalised bonds and its partnership with Standard Chartered to develop Zodia, a cryptocurrency custodian for institutional investors.
Over at Citi, Carpenter identifies that as clients wish to generate better insights across their data, we are seeing a need to provide a more intuitive client interface with enhanced data capabilities and transparency. This way, clients can access large data sets, across a range of data domains, such as custody, fund accounting, performance analytics, environmental, social and governance (ESG) and so forth.
Additionally, there is an increasing need for on-demand and near real-time data sets throughout the day. This is especially applicable for custody positions and transactions. ACSA’s Robert Brown concludes: “Overall the industry is highly automated, but a small proportion of asset types present challenges in normal times which are amplified through recent pandemic interruption. ACSA remains engaged with all parties in the service chain to improve efficiency and weed out residual manual processes.”
The ASX CHESS replacement will bring opportunities and additional features to the market that can be adopted to enhance core custody operating models. Moreover, Australia’s asset servicing and investment administration has a track record as both an innovator and early adopter of technology.
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