An ageing model in a changing world
CHESS is over thirty years old, and its replacement will be a much-needed technology upgrade. But its ways of operating, and the processes and rules relating to collateral, margining and capital, will remain unchanged.
In the meantime, the pace of change in global markets is accelerating. BlackRock CEO Larry Fink declared that he believes “we’re just at the beginning of the tokenization of all assets,” and since that statement almost every major global exchange has declared it is exploring, partnering, or developing real-time 24/7 trading and settlement capabilities. In other words, the T+2 infrastructure that CHESS now supports could be obsolete by the time it is delivered.
The cost of standing still
As a result, ASX could fall out of step with global markets while continuing to operate a capital structure ‘stack’ that is paid for through fees and charges by Australian investors and risks entrenching capital inefficiencies that will, over time, weaken the competitiveness of Australian markets.
ASX and its commitment to further develop CHESS is its own business, and regulatory oversight leaves them with little choice. But the cost to the industry, including lost opportunity and future competitive positioning, should be something we all care about. A recent independent report by the DFCRC, Unlocking Australia’s $24 Billion Digital Finance Opportunity, found that modernising financial system infrastructure through technologies such as tokenisation and distributed ledgers could unlock AUD$24 billion in annual economic gains across three core areas: better markets ($10 billion annually), better payments ($8 billion annually) and better assets ($6 billion annually). Critically, on its current trajectory, Australia is on track to capture just $1 billion a year of those gains by 2030.
This is not just a commercial issue. Market infrastructure is systemically important. Where a single operator has historically dominated, regulators have a role in promoting resilience through competition, interoperability and innovation rather than reliance on a single pathway.
Call for a new focus
Focusing on CHESS may be the easiest path but may not be the only answer. What needs to happen now is regulatory and industry encouragement to promote innovation and different ways of operating, including enhanced processes and capital rules. Australia and the ASX have a history of leading market innovation, from the introduction of electronic trading in the 1990s to ASX’s self-listing in 1998 as the first exchange in the world to demutualise and quote its own shares. CHESS was revolutionary when it was delivered in the late 1990s but has not materially advanced in subsequent years.
A dual-track future
A new dual-track approach now needs to be considered, one that allows a more progressive solution to be delivered alongside CHESS. Logically ASX would lead this initiative, but the regulatory scrutiny and conditions placed on ASX will make this difficult in the short term. Other operators should be encouraged and not constrained by current infrastructure and processes to bring solutions to market. Competition at the trading layer alone (for example, Cboe) will not address the underlying structural issue. Further competition for trading ASX-listed securities risks reinforcing concentration at the back end, where clearing and settlement remain dependent on CHESS. Without addressing this layer, inefficiencies will persist regardless of front-end competition.
Innovation is already emerging
Over three years ago FinClear began a process to build a new market (FCX) and new way of operating, based on DLT/tokenisation and real-time trading and settlement capabilities — capabilities that deliver the operational and capital efficiencies generated by removing T+ infrastructure and moving to real-time settlement. As Larry Fink observed, the standardisation of instant settlement across global markets would reduce counterparty risk, while digitising post-trade processes, lower costs and improve trade efficiency.
A practical example
FCX operates as an alternative (non-public) market. It obtained the required licenses from ASIC and the RBA to operate this market and to provide clearing and settlement services for the market. It demonstrates how next-generation infrastructure including native tokenisation of real-world assets and atomic trading and settlement via integration with Australia’s New Payments Platform can operate within the current regulatory framework.
FCX represents a credible alternative pathway, demonstrating how next generation infrastructure can operate alongside and, over time, complement legacy systems. The focus now should be on how such capabilities can be scaled and extended alongside existing public markets infrastructure to ensure Australia remains aligned, interoperable and competitive with global developments.
Today, with the scale that our FinClear technology and trading, clearing and settlement capabilities support, we are looking to deliver through FCX the efficiencies that tokenisation and real-time trading and settlement can bring to Australian markets. FinClear and our technology capabilities today either directly service or touch up to 50% of all retail (CHESS HIN) transactions every day, including clearing and settling for 30% of all ASX trading participants and trading, clearing and settling for 200+ intermediaries including some of Australia’s largest wealth platforms and fintech innovators.
Partnership
Yesterday’s AFR article on the ASX highlighted: “ASX is looking for partners that can bring the tokenisation technology and expertise to the ASX when it builds the bridge to tokenisation, and this could include FCX”
As an existing partner to the ASX the opportunity to extend our partnership and ensure Australia remains at the forefront of markets innovation and capabilities is an exciting proposal. FCX can provide not only infrastructure efficiencies, but its alternate market positioning can provide broader infrastructure and liquidity capabilities for companies and funds away from continuous trading/disclosure requirements.
Broader and more efficient capabilities are after all what should be everyone’s priority, to ensure Australia maintains its position in financial markets.
David Ferrall
David is the Founder, Managing Director and CEO of FinClear Group which operates FCX