ASX Reviews CHESS Replacement Timeline as Coronavirus Bites

The Australian Securities Exchange (ASX) will rethink its CHESS replacement implementation timetable in light of uncertainties created by the coronavirus.

In a statement, the ASX said the new schedule will also allow market participants to focus on day-to-day operations.

In June, the exchange will seek user input on potentially moving the go-live date of the distributed ledger technology (DLT)-backed replacement of CHESS, its equities clearing and settlement platform.

“In light of recent events, ASX is replanning the implementation of the CHESS replacement system,” said Peter Hiom, deputy chief executive officer at the ASX, in a statement. “We are conscious of the importance of providing a new schedule, and the need to get the valuable input of CHESS users. Right now, however, in this environment of heightened volatility and activity levels, the industry needs to focus on day-to-day operations. We will therefore wait until June to consult on the new timetable, when we expect everyone will have more time to consider the replan and better assess the implications of Covid-19. We will then announce the new schedule.”

However, its target of opening an industry test environment (ITE) is on track for July. The replan will give users additional time to complete their operational readiness activities and to consider the rule changes that accompany the new system.

The ITE will optionally open for developers in July, and then to all users in October 2020, subject to the June consultation. The ASX has also moved the consultation deadline for Tranche 2 of the new post-trade system rule development timeline from April 3 to the end of May. Tranche 2 covers rule amendments to corporate actions, mFund (the ASX’s managed funds), and real-time gross settlement payment aspects for day-one implementation of the CHESS replacement system’s functionality.

Other key milestones will be decided after the June consultation.

The ASX also said the new plan will increase the time available for back-office software developers to familiarize themselves with key aspects of the new system in a production-like testing environment, and allow them and the exchange to complete software development and testing.

The fear is that the ASX’s continued delays and uncertainty make it increasingly likely that the CHESS replacement will just be another blockchain buzzword instead of the decentralized future.

Prash Puspanathan, Caleb and Brown

Hiom added that consultation has been thorough throughout the project, and said the ASX will continue to listen to all its stakeholders. “Our priority is to ensure the orderly and safe completion of this project with the continued close oversight of our regulators,” he said.

He stressed that the exchange remains fully committed to the CHESS replacement. “We continue to progress the project, including system development and testing, supporting back-office software developers, and assisting users in their readiness activities. The investments we are making in the new system and in distributed ledger technology are for the long-term benefit of the financial services industry and the Australian economy,” he said.

The ASX did not respond to further queries.

Dr. Prash Puspanathan, chief executive officer of digital currency brokerage Caleb and Brown, tells WatersTechnology that the ASX’s decision to rethink the CHESS replacement timeline is not surprising.

He said it is ironic that the ASX is delaying its blockchain-based solution, as blockchains are a significant structural improvement on traditional centralized technologies, being more functional during so-called black swan events, such as the coronavirus.

“The fear is that the ASX’s continued delays and uncertainty make it increasingly likely that the CHESS replacement will just be another blockchain buzzword instead of the decentralized future,” Puspanathan says. ”That would be disappointing, considering that the current legacy systems the financial ecosystem is based on, and the resultant usage metrics that apply to the end-user, remain hugely outdated when compared to the technological boundaries that the disruptors are pushing.”

An operations and trading manager at a digital asset and brokerage firm based in Australia says the ASX has always been a conservative, yet highly-regarded, organization within the country’s corporate world. Given that historical conservatism and status, it’s unsurprising that it would delay implementing a new system in a difficult time.

“They would likely view anything but a flourishing success as potentially problematic, and given that, they are probably more than ready to do this when the time is right,” he says.

The exchange has been looking for a solution to replace CHESS since 2015. It began developing a prototype platform using DLT the following year. At the end of 2017, the ASX formally announced its decision to replace CHESS with a DLT platform developed by Digital Asset. The platform was initially set to go live by the end of 2020 but was later extended to the end of its proposed timeline, April 2021.

Now this date may be extended yet again, depending on the results of the consultation with stakeholders and market participants in June.

The CHESS replacement is not the only big industry-important project to be slowed down as a result of the coronavirus. The US Securities and Exchange Commission (SEC) released a no-action letter for the Consolidated Audit Trail. April 20, 2020, was to be the production go-live date for large industry members and small OATS reporters. (OATS is the precursor to the CAT.) While the CAT will be functional for reporting on April 20, according to Finra CAT, the plan processor, industry participants will not face punishment if they are not ready to report until at least mid-May, though that date could be pushed back.