In today’s IRMatters post, Antony Tolfts, listings director at Sydney Stock Exchange Limited, shares his thoughts on the CHESS replacement system's potential effect on your company as well as your investors.
There has been a great deal of anticipation around the CHESS replacement system, to date the focus has been on the technical makeup of the replacement system, but how do we think listed companies and their investors will be impacted by the change?
Today, the matching of share buy and sell orders (trading) completes near immediately on the markets of every Tier One Australian exchange (namely: the ASX, NSX, SSX and Chi-X). This trading system is unaffected by the replacement system.
The system being replaced is called CHESS and presently facilitates the post-trade delivery (clearing and settlement) of shares and money. CHESS’ initial design started during a different technology landscape in 1989 [1] and is expected to be replaced somewhere between: the final quarter of 2020 and the first quarter of 2021.
Holding the Data
While the shareholder register (including investor bank and tax details) is ultimately owned by listed companies, most listed companies rely on specialist third parties to maintain their share register, like: Computershare, Link, Boardroom, Security Transfers, Automic, Advanced, Registry Direct and Next.
Throughout the present trading day CHESS processes transfer messages to and from banks and brokers with each party required to separately and continuously reconcile their share and money records, each on their own proprietary platforms. After the day’s trading concludes, CHESS sends a change summary to each Issuer’s registry and the registries then update and reconcile each of their registers of shareholders.
The proposed system is a permissioned but distributed database uniting all market participants around a single source of truth, maintained within the replacement system. In the same way that CHESS sends a daily report to share registries, the proposed system requires the registries to send a daily update to the replacement system (assuming all privacy and competition matters can be sorted out).
The integration of exchange and registry promises to be a significant platform as the exchange’s system will also hold the most current, complete register of shareholders for all listed companies. The replacement system is a significant change to the way financial markets will and could operate.
Earlier settlement is optional
The existing (clearing and settlement) of shares and money usually takes a full two business days (T+2), the replacement system may be able to provide for an earlier settlement through an intermediary (ref [3], section: 2.2.14). At this time, we do not know if the intermediary fees required to expedite settlement will make most trades uneconomic to settle faster.
A single Investor Number
In the current market, investors can receive many investor numbers, for example: through using multiple brokers, personal/super-funds and employee shares, the replacement system will allow investors the option to match a unique identifier across all their holdings.
In the future, the new number could show investors a consolidated portfolio view of all their holdings across brokers and registries, which would nice to have without generate any obvious revenue for the industry.
Monthly Transaction Statements to be emailed
Today, CHESS physically posts investors a monthly statement to cover share movements from each of the four Australian exchanges. The replacement system should allow Investors to receive this monthly statement by email, which is better for the environment with better security and speed of delivery.
Although unconfirmed we would expect to see a cost saving to companies approximating to the postage costs saved. We are also awaiting confirmation as to the sourcing of email addresses for these statements.
Settlement in foreign currencies: Allowing a variety of currencies may have limited appeal in the present Australian market but may be useful in the longer-term.
Cost
The elephant in the room, there will be considerable industry cost and disruption to adapt legacy systems or create platforms, while many of the broker network outsource connectivity to third party the registries will need to reinvent a process to securely transfer an enormous amount of data every day.
At the time of writing we have not seen any expected costing and while technology usually becomes cheaper over time, the replacement system’s additional scope of services could be used to justify a cost increase.
Conclusion
Until we understand the cost impact it is impossible to confirm whether the replacement system looks like better value for Issuers and their investors. Hopefully the next replacement system update (due at the end of this month) will confirm the replacement system to be a value accretive project.
This is a critical project for all industry participants, and we wish the project team well in their implementation.
Over to you
Please feel free to contact Antony with any comments regarding the above on: +61 (437) 353 908 or Antony.Tolfts@ssx.sydney. You can also read more about the CHESS replacement system in the links below:
https://www.asx.com.au/about/history.htm
https://www.asx.com.au/documents/public-consultations/overview-of-cp.pdf
https://www.asx.com.au/documents/public-consultations/chess-replacement-new-scope-and-implementation-plan.pdf
https://www.digitalasset.com/technology
https://www.aira.org.au/images/AIRA_Submissions/AIRA_Submission_Chess_Replacement_Final.pdf
http://www.shareregistry.com.au/
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