ASX Limited, operator of the Australian Securities Exchange (ASX) has recently decided to use Distributed Ledger Technology (DLT), commonly associated with Blockchain, to upgrade its post-trade clearing and settlement system. The ASX currently uses the CHESS system to record shareholdings and manage the settlement of share transactions.
The replacement of the ageing CHESS system with DLT aims to reduce trading costs for users of the ASX and promote higher security and efficiency overall. This decision places Australia at the forefront of digital innovation in financial markets as the ASX is one of the first global equity exchanges to implement the new technology.
The DLT system will operate as a decentralised private ledger that digitally records and verifies all transactions, distributed over a global network of computers, each having to verify the occurrence of a transaction. It is important to note that the ASX ledger will run on a private, permissioned, secure network where only known, licensed participants would be authorised to access the system. This is vastly different to the open Internet-based public blockchains used by Bitcoin and other cryptocurrencies.
While there is nothing to indicate that the current CHESS system is unstable or ineffective, ASX is confident that the DLT will provide a wider range of benefits across the market. Issuers and end investors will have greater access to accurate information on their market activities because there will be no need for a reconciliation process between different systems. Furthermore, the replacement of the T+2 Settlement Cycle through CHESS means that investors can ideally see an instantaneous change in the legal ownership of their shares once trades occur.
ASX has extensively tested and analysed a working prototype over the past two years with Digital Asset Holdings, a start-up company founded by former JPMorgan Chase executive, Blythe Masters. The exchange operator confirmed that the new DLT platform successfully passed two independent third-party security reviews. The testing also confirmed ASX’s confidence in the ‘functional, capacity, security and resilience capabilities’ of the implementation of DLT to meet the needs of Australia’s financial marketplace whilst maintaining the highest regulatory and operational standards.
There will be a public consultation at the end of March 2018, which will provide more information on the ASX’s plans and timeline for implementing the new DLT system. Consistent with the firm’s approach to Smarter Law, we look forward to following the consultation phase and continuing to engage on this new technology, which is only one of many great advances emerging to make doing business in Australia more efficient and competitive with our international competitors.