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How do you solve a problem like CHESS?

If you have CHESS fatigue, you are not alone. You have been hearing about the ASX’s attempt to upgrade its clearing and settlement system with distributed ledger technology on and off for seven years now. After recent developments, the case looks more challenging than ever. Why is the CHESS replacement project so frustrating for everyone – including the ASX itself?

The CHESS upgrade is entangled with wider market issues due to its current monopolistic nature. It is not just an upgrade – it currently represents changes to Australia’s only clearing and settlement agency, that could restrict any other entrants and so dictate and limit our infrastructure for years to come.

There are two common denominators to the current situation:

1. Sensible industry participants, FinClear included, are supporters of the upgrade and want a similar solution that scales and will not cause mass disruption and (further) costs to the industry.

2. It is undeniable that competition will bring innovation and efficiencies (including cost reduction) to the market. See evidence for this in “From Laggard to Leader” Mandala Group research report commissioned by FinClear.

These market needs must be separated in order to succeed. The priority for ASX must be upgrading critical market infrastructure as quickly and smoothly as now possible, making it scalable and with some incremental enhancements, but no fundamental changes.

The ASX should not simultaneously be leading industry discussion around how to bring competition into the Australian settlement and clearing market. What is needed instead is an impartial industry body to write a framework mandating open standards for clearing and settlement, which ASX’s upcoming CHESS upgrade must abide by, as well as any potential new entrants or innovation that will be made possible by such standards.

Below we explain the benefits of such a framework, the standards it must cover, and the potential areas it could bring competition, innovation, and efficiencies.

Interoperability is fundamental

The ASX’s plans to use ISO20022 messaging won’t bring competition to clearing and settlement. It will allow participants to use a wider variety of back-office systems to work with CHESS, bringing competition and flexibility to that one component. But this won’t address CHESS as the single clearing and settlement agency in Australia.

To have a pathway to competition we need a set of interoperable interfaces open to anyone (with the correct licencing agreements) – and not bespoke to CHESS. CHESS needs to work within these open and interoperable frameworks – which would form a set of guardrails for the Australian clearing and settlement eco-system – alongside any other market participants or potential competitors.

The ASX should not be leading this discussion, but CHESS upgrades should conform to these guardrails so that the Australian market has a single set of principles for all, to open up clearing and settlement functions to other parties in future. These should be set before the next CHESS replacement project starts, so that it can conform to – not dictate – these principals.

If we plan and build these open interfaces now, we will pave the way for potential competition in the future. More importantly, if we fail to do so, we will cement the ASX CHESS monopoly for the next twenty years, shutting out the possibility of innovation, price reduction, and optimisation via competition.

Click here to continue reading the full article as featured in SIAA.