With glorious sandy beaches and an exciting outback, Australia has little resemblance to its neighbours in the Asia Pacific area. Not only is it different in looks, but its financial service industry is quite the contrast too. Australia is dominated largely by its growing superannuation industry, which is now the second-largest pensions market in Asia Pacific, after Japan. Over the next few years, industry experts predict Australia’s superannuation industry will continue to grow and further consolidate at a rapid pace. CLS’ Margaret Law recently predicted that firms will also continue to grow in-house management capabilities and reduce outsourced mandates.
Elsewhere on Australia’s financial services’ landscape, the role of the custodian is continuing to evolve and the demand for custodial services in this space is rising. This is based on institutional investor demands for support in implementing sophisticated investment strategies, timely and complete information, greater efficiency and risk mitigation and continual regulatory change.
With this backdrop, the Australian Securities Exchange (ASX) is working to replace the Clearing House Electronic Subregister System (CHESS) to create more efficiency.
A recent whitepaper from the Australian Custodial Services Association stated: “The current ASX CHESS replacement project is an example of how custodians are engaged in consultation, advocacy for positive change, technology build and workflow redesign in the interests of overall market efficiency and robust change management.”
CHESS is the computer system, based on distributed ledger technology, 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+5 settlement—which was lowered to T+2 in March 2016—and improved the efficiency and effectiveness of post-trade processing in Australia. However, CHESS was set to be replaced with distributed ledger technology (DLT) in April 2021, but this is now expected to be pushed back. ASX said the new DLT will provide a “broader range of benefits to a wider cross section of t he market”.
Peter Hiom, deputy CEO of ASX, says: “The exchange has undertaken a comprehensive, risk-based approach to the replan of the CHESS replacement project. We have listened to the diverse views of stakeholders and accommodated feedback on timing, user readiness and changes to functionality.”
“At its core, the new CHESS system will deliver existing services, new and enhanced functionality, high availability, reliability and performance, and will underpin Australia’s financial markets for the next decade and beyond. We have made great progress in challenging circumstances and are focused on delivering the solution in a safe and timely manner.”
With ongoing challenges surrounding the pandemic interfering with the original implementation date, ASX opened a consultation on a new go-live date of April 2022, 12 months beyond the original target go-live date. Feedback from the consultation, at the start of August, revealed that 91 percent of CHESS users can meet the revised go-live date for CHESS replacement of April 2022.
ASX received 88 submissions, which represented 92 percent of the 96 CHESS users. Those who have not been able to confirm readiness have asked for more information on particular issues, which ASX will assist in the near-term.
The new proposed deadline remains subject to a detailed review of all submissions and any other relevant considerations before being finalised by ASX. Meanwhile, ASX is following up with CHESS users that haven’t responded to ensure as much input as possible is received. ASX explained that CHESS users are those organisations that plan to connect to the new system, including clearing and settlement participants, product issuer settlement participants, approved market operators, back-office software developers, payment providers and share registries.
To discuss ASX’s CHESS replacement and other themes in Australia’s financial services industry, AST sits down with Nadia Schiavon, head of securities services, Australia and New Zealand, J.P. Morgan, to find out more.
How would you describe the current climate for asset servicing business in Australia?
Australia is a highly complex market for asset servicing and taxation, and because of this complexity is unique in comparison to its global counterparts. Technology disruption, a rapidly changing asset owner environment – including the consolidation of superannuation funds – ongoing regulation and market volatility are a few of the many factors shaping the current and future climate for asset servicing in Australia.
The end to end asset servicing process is completely manual and while a small number of improvements have been made in recent years, corporate action announcements are still made via PDFs, instructions submitted via fax and payments are needed by cheque. Given that CHESS is not a true depository corporate action, events are run and managed by the issuers share registry. Each share registry has their own set of processes and policies which, while similar, are not always the same. This results in the same type of event having small variations which may impact on the end investor.
Due to this, asset servicing in Australia carries a significant amount of operational risk and requires skilled teams to manage complex processes for a variety of events, each of which may have their own nuances. The need for standardisation of events, the introduction of electronic communication channels and removal of paper-based processes are long overdue in the market.
What trends are you currently seeing in this space?
The market has seen a trend towards increasing levels of non-standard information being required to facilitate corporate action events. This is most prevalent within capital raising events where the requirement to provide beneficial owner details has been seen as a condition of acceptance of an offer. From a custodian perspective, it is a highly manual and time-consuming process to collect this information given that omnibus accounts are standard within the market and the multiple intermediaries who may sit between the legal owner and the beneficial owner. Unfortunately, there does not appear to be a near term solution to this issue and this will not be supported in the CHESS replacement system.
Some progress has been made to standardise the announcement of corporate action events through the ASX corporate action straight-through processing (STP) project which currently provides ISO 20022 announcements for four event types. In time this will be expanded out to cover 13 event types with issuers directly inputting details into a portal which will generate market announcements. This will not cover all events, however, it will enable a degree of standardisation for the events that are supported.
How will the delay of ASX’s CHESS replacement impact the industry? Was this expected with the ongoing pandemic?
The significant spike in trading activity seen in March and the inability of CHESS to cope with the volumes has brought into focus the fact that the current system is approaching its end of usable life and a replacement is needed. Following these spikes, ASIC stepped into the market and capped the number of trades large brokers were able to execute each day. The increased time until implementation provides an extended window in which trade limit restrictions could be re-imposed and the potential flow on the financial impact of this. From a custodian perspective, the most significant impact of the delay is the removal of a clear implementation date for functionality that will bring automation, efficiency, risk reduction and resiliency to asset servicing in Australia. This functionality will have many benefits and with the implementation delayed these benefits will take longer to be realised.
What opportunities will the new CHESS system deliver?
The use of DLT provides an opportunity for greater connectivity between issuers and investors in the Australian market reducing the points of failure in the chain of custody. There are over AUD 2 trillion of assets held on the current CHESS platform and the migration of this to the new platform using new technology poses a significant risk. For this reason, many participants are utilising trusted and enterprise-grade connectivity methods to communicate with the new system on day one.
How will the new system alter Australia’s financial markets in the future?
The implementation of the CHESS replacement system will provide an updated platform to perform clearing and settlement in Australia with the associated benefits of any new system including better capacity and greater connectivity options. We do not, however, see this as having a revolutionary impact on the Australian financial markets with the initial implementation being akin to a messaging upgrade. The implementation of corporate action functionality will also bring Australia up to a good international standard. The use of distributed ledger technology provides a platform on which other services could be provided.
What changes do you expect to see within the next five years in the Australian asset servicing space?
Given the delayed implementation of the CHESS replacement system, opportunities are opening up for new entrants to provide systems that reduce risk and add efficiency. One such company, Proxymity, has already come into the market looking to streamline the flow of meeting and proxy voting information by connecting issuers with investors. Once the CHESS replacement system is fully implemented it is expected that debt securities will be migrated to the platform removing the need to support the Austraclear depository.
From a custodial and fund services perspective, the development of end-to-end workflow integration designed to interact with multiple order management systems and the wide ecosystem is a key development in the coming years. At J.P. Morgan, we are not taking a vertical integration approach and have opted for an open architecture model because clients generally use multiple best in class providers. Data will continue to be at the forefront of this space. Robust, real-time data will allow providers to integrate more front-office services and provide a full platform solution.
Over the next five years, there will be an increasing emphasis on the governance and controls concerning tax oversight in relation to asset holdings and income processing. The Australian taxation office’s justified trust programme (derived from an Organisation for Economic Co-operation and Development concept) in part requires asset owners and managers to independently assure themselves of the completeness and accuracy of tax records under their purview, even if these are managed day to day by third party providers.
There is expected to be increased demands for tax-related data to allow all participants in the system to fulfil the obligations under this programme.
