Assessment of ASX Clearing and Settlement Facilities 4. Special Topic – CHESS Replacement

4.1 Introduction

CHESS is the system used by ASX to facilitate clearing, settlement and other post-trade services for the Australian cash equities market. It is a critical piece of national financial market infrastructure. The services that ASX Clear and ASX Settlement provide enable the management of clearing and settlement risks in that market and allow for the record of title to be maintained. The Australian cash equities market could not function effectively without the services this system provides. Although the current system has generally performed well – maintaining system availability of 100 per cent during the assessment period – the CHESS software was developed more than 25 years ago. The age of the legacy system makes it harder to maintain, and this risk increases the longer it remains in use.

ASX began a process of evaluating replacement options for CHESS in 2015. In 2017, it selected Digital Asset (DA) as the vendor to provide the distributed ledger technology-based (DLT-based) platform that will replace CHESS. In 2019, ASX and DA partnered with VMware, a large US-based technology firm. Under this arrangement, VMware is responsible for designing the ledger component of the new system, leaving DA to focus on delivery of the CHESS replacement application software.

ASX's use of DLT in the CHESS replacement system differs significantly from the use of such technology by systems such as Bitcoin. It will operate a private, permissioned network application of DLT. ASX will be the only entity that can write to the ledger and it will control access so that users can only see elements of the ledger relevant to them. By contrast, Bitcoin is an example of a public, permissionless DLT system.

4.1.1 Key areas of supervisory engagement

The Bank is working closely with the Australian Securities and Investments Commission (ASIC), the Australian Competition and Consumer Commission (ACCC) and the Treasury to monitor ASX's conduct against the Council of Financial Regulators' Regulatory Expectations for Conduct in Operating Cash Equity Clearing and Settlement Services in Australia as it implements the CHESS replacement program.[33] The Bank also works closely with ASIC as co-supervisor of licensed CS facilities in Australia under Part 7.3 of the Corporations Act. In October 2020, ASIC and the Bank publicly outlined their expectations of ASX.[34] ASIC and the Bank expect ASX to replace CHESS as soon as this can be safely achieved by ASX and users of CHESS, and that the new system should meet the requirements that CHESS currently meets for system availability, resilience, recoverability, performance and security.

In November 2021, additional conditions were imposed on the CS facility licences of ASX Clear and ASX Settlement following the conclusion of ASIC's investigation into the November 2020 ASX market outage (the 2021 Licence Conditions).[35] The 2021 Licence Conditions require:

  • The CS facilities to appoint an independent expert to assess whether ASX's assurance program for the replacement of CHESS is fit for purpose, identifying any shortfalls, and reporting regularly to ASIC
  • The independent expert to oversee any remedial actions relevant to CHESS replacement from recommendations arising from IBM's review of the ASX Trade Refresh project that resulted in the November 2020 ASX market outage (IBM review recommendations). The independent expert is also required to regularly report to ASIC on the status and implementation of these remedial actions.
  • ASX senior executives to provide attestations to ASIC on matters including adequacy of testing and readiness for implementation.
  • ASX directors to attest to the adequacy of controls and procedures to address remediation actions recommended by the independent expert and that sufficient resources have been made available for this work prior to go-live.

The Bank is engaging closely with ASIC and ASX on the matters set out in the 2021 Licence Conditions. This includes regular engagement with EY as the independent expert appointed by ASX.

4.1.2 The Bank's assessment of CHESS replacement

The Bank's regulatory role in respect of CHESS replacement includes providing advice to the Minister or the Minister's delegate on the changes to ASX Clear and ASX Settlement Operating Rules that support the introduction of the new system, and performing a broader assessment of whether the new system and its supporting arrangements satisfy the requirements of the FSS.[36] The Bank's joint engagement on CHESS replacement with ASIC, ACCC and Treasury has covered many of the matters required to perform this assessment.

The Bank has assessed how well ASX Clear and ASX Settlement will likely observe the FSS both for the replacement system once it is in production (i.e. assuming it is delivered to specifications), and how well the CS facilities are observing the FSS in their management of the change program required to deliver the replacement system into production. It focuses on ASX's governance arrangements, management of operational, settlement and legal risks, and how the new system supports ASX's management of clearing risks. The Bank's assessment against the central security depository and exchange-of-value standards covers both the current CHESS system as well as the replacement system. This reflects the large degree of overlap between the design of the current and replacement CHESS systems on these points, as well as the importance of reviewing the current CHESS system against these standards in light of the delay to delivery of the replacement system.

The remainder of this chapter provides an update on recent delays to the go-live date, summarises the Bank's assessment and discusses the further work that will be required to complete the Bank's assessment between now and go-live.

4.2 Go-live delay

ASX announced in August that the April 2023 go-live date for CHESS replacement would be delayed until late 2024 at the earliest, as a result of delays in the delivery of the CHESS replacement application software being developed by DA. This follows several earlier delays from the original go-live date of late 2020. While the Bank understands that the current version of the software is able to process present-day transaction volumes in normal circumstances, ASX has identified a number of scenarios that could create bottlenecks or latency issues. These issues need to be resolved in order for the system to meet its performance and scalability requirements.

ASIC and the Bank have communicated to ASX their expectations that ASX consult broadly with stakeholders on its replan of the CHESS replacement program, build adequate contingency into the plan so that any further delay is extremely unlikely, and have its revisions to new plan validated by an independent expert. ASX has appointed Accenture to review the new CHESS application that DA is developing, and has commissioned EY to review its replanning process and assess whether the plan provides sufficient time for ASX and its users to prepare for go-live. ASX is consulting with stakeholders on the timing of user readiness activities, and a feasible window for go-live. ASX is aiming to release the findings of the Accenture review by the end of the year and announce a new go-live date following this.

The regulators are disappointed by the extent of the delay at an advanced stage of the program, and welcome the Accenture review as an important step in providing assurance that the new CHESS application software will be fit for purpose (see section 4.4.2). Given the extended delay, the regulators expect ASX to continue to invest in and maintain the current CHESS system so that it continues to service the market reliably until the CHESS replacement can go live.

4.3 Governance

4.3.1 Program governance arrangements

As described in section 2.1.2, the Bank recommended in the 2021 Assessment that ASX should document governance arrangements that set out clear and direct lines of responsibility and accountability. Such arrangements ensure that issues are addressed or escalated in a timely way and that decision-making is aligned with the objectives of the program. Responsibility for the CHESS replacement program ultimately rests with the ASX Limited and CS Boards. The CS Boards have responsibility for ensuring that the new system is delivered in a way that complies with the licence obligations of ASX Clear and ASX Settlement, including the FSS.

Two Board sub-committees play an important role in overseeing the program on behalf of the Boards: the Audit and Risk Committee (ARC) and a newly created Technology Committee (TC). The formation of a board-level technology committee was recommended in the 2021 Assessment (Recommendations 2021-11 and 2021-12). The TC held its first meeting in May 2022 and is tasked with overseeing ASX Group's technology and data operations, strategic initiatives and risk management. As such the TC has the primary oversight responsibilities at the Board committee level for the CHESS replacement program. The ARC, which previously oversaw the CHESS replacement program, continues to provide oversight of ASX Group's overall risk management of operations, programs and projects (with the exception of those matters carried out by the CS Boards and the Technology Committee), and response to significant operational incidents. ARC can refer issues to the TC that are within the scope of the TC's role and responsibilities for advice as necessary. The TC reports on its activities to the ASX Limited and CS Boards, and may escalate matters to these boards or refer them to another Board committee as appropriate.

The TC and ARC have significant responsibilities beyond CHESS replacement in the management of technology and other risks affecting the CS facilities. It is important that these committees, the CS Boards and ASX management are able to devote sufficient resources and attention to managing these risks despite the large amount of resource and effort dedicated to CHESS replacement. The establishment of the TC as a separate committee from ARC should assist in enabling these committees to oversee other risks in addition to CHESS replacement. ASX should ensure that sufficient resources are dedicated to the management of all of its risks, not just those relevant to CHESS replacement.

The Executive Steering Group (ESG) is the key executive level governance forum within ASX for the CHESS replacement program. The ESG meets monthly and consists of the key members from the program's leadership team and other key ASX executives, including the Chief Executive Officer (CEO), the Chief Risk Officer (CRO) and the Chief Technology Officer (CTO). Representatives from DA and VMware can be invited to attend. The Executive Sponsor of the CHESS replacement program chairs the ESG and has overall accountability of the execution and delivery of the CHESS replacement program. The Executive Sponsor is supported by the Group Executive, Technology and Data and CIO as the Technology Executive Owner for the CHESS replacement program. Additionally, the ASX CRO is accountable for the assurance program for the CHESS replacement and reports directly to the ARC on this program.

4.3.2 Risk management framework

The FSS require FMIs to have a clear, documented risk management framework. ASX's overarching approach to risk management is set out in its ERMF (see section 2.2). A key element of the ERMF is the identification and assessment of risks and controls. Project management of the CHESS replacement program falls under the ASX Project Risk Management Framework, which is designed to be aligned to the ERMF.

ASX's stated tolerance for operational and technology risk is ‘very low’. ASX's enterprise risk management team has assigned a ‘high’ inherent risk rating for the CHESS replacement program, taking into account the complexity of the program, the need to integrate internal and customer systems to a new technology solution, and the need to ensure the new system meets regulatory requirements, including the FSS. ASX has identified a range of mitigants to bring down residual risk in the program, including in the areas of program resourcing, migration and integration testing. However, as at 30 June the program was operating outside risk appetite, in particular due to the delivery delays discussed in section 4.2.

4.3.3 Assurance

The FSS require that an FMI's operations are subject to internal audit and, where appropriate, independent expert reviews. Consistent with the expectations communicated by ASIC and the Bank, and the 2021 Licence Conditions, ASX has developed an assurance program for the CHESS replacement program. The program consists of around 40 individual reviews relating to program governance, the technical solution and design, operational processes and controls, and industry readiness and implementation. Around two-thirds of the reviews are tied to specific milestones in the program, such as the opening of testing systems, operational readiness, go-live and post implementation. ASX will need to review its assurance program in light of new delivery timelines when they are determined.

The reviews are conducted by either an external independent reviewer, a specialist external expert embedded in specific workstreams, or by ASX Internal Audit. ASX has selected external reviewers where needed to assess new or specialist technologies or for critical activities, whereas internal reviews are likely to be used in areas where ASX Internal Audit has experience (such as in reviewing processes carried over from the existing CHESS system and other ASX systems). Where reviews are undertaken by embedded experts, ASX requires that a separate independent team also conduct a review as part of pre-go-live testing. The results of the reviews are provided to the program team, the ESG, the CS Boards, Technology Committee, and ASIC and the Bank. Any actions from the reviews are tracked by the assurance program workstream, with reporting to the ESG and the Technology Committee.

ASX has appointed EY as the independent expert required under the 2021 Licence Conditions. In February, EY reviewed the design of ASX's Assurance Program, concluding that it is fit for purpose, while making 3 recommendations for further improvement.[37] In June, EY completed the first of its six-monthly progress reports, confirming that the recommendations from its February review had been addressed while recommending improvements to the tracking and closure of remedial actions from the assurance program.[38]

Recommendation: Consistent with the 2021 licence conditions, ASX should make any necessary adjustments to the assurance program for CHESS replacement as part of its broader replan of the program and to take into account lessons learned from the delays to program timelines. ASX should implement the revised assurance program and address findings from assurance reviews.

4.3.4 Engagement with stakeholders

The FSS require CS facilities to engage with relevant stakeholders to ensure that an FMI's design and strategy appropriately reflect the interests of its participants. This is critical for the replacement of a system such as CHESS, which is relied upon by a broad range of stakeholders in the Australian equities market – extending beyond the direct clearing and settlement participants to end investors, issuers, share registries and the banks arranging transfer of funds in the CHESS batch (payment providers).

ASX established a number of forums for engagement with stakeholders on CHESS replacement, including:

  • working groups focusing on software provider readiness, CHESS user readiness, market-wide implementation and transition activities, an ISO 20022 messaging Technical Committee, and focus groups on functional changes
  • public consultations on matters including the business requirements of the CHESS replacement system, changes to the project timeline to go-live, amendments to the operating rules that will be required to implement and support the operation of the new system, and changes to netting and settlement workflows designed to enable greater processing capacity in the new system
  • to seek the views of stakeholders during the 2020 and 2022 replans of the program; industry feedback that more time was required for industry testing and vendor preparedness was a contributing factor to the length of the delay in go-live from the 2020 replan (see section 4.2 on the 2022 replan)
  • a Business Committee, which comprises representatives of cash equity clearing participants, settlement participants, AMOs, share registries, and other relevant stakeholders and their associated industry organisations (including in representing issuers and shareholders), with a view of securing user input into ASX's governance framework and on the provision of clearing and settlement services (see Appendix B.1).

The 2021 Assessment included two recommendations focused on improving the focus on stakeholder management and documenting these expectations in a Stakeholder Charter (for progress see Recommendations 2021-16 and 2021-17, Table 6 in Appendix A).

4.3.5 Management of intra-group conflicts of interest

The FSS require that CS facilities have measures in place to manage conflicts between the obligations and interests of the CS facility and those of other entities in the group, or the group as a whole.

With respect to the CHESS replacement program, a key potential conflict of interest is commercial in nature: ASX Clear and ASX Settlement provide CS arrangements to approved market operators (AMOs) that are competitors to ASX Limited. This conflict is recognised by the ASX Cash Equities Clearing and Settlement Code of Practice that was introduced in 2017 in accordance with the Council for Financial Regulators' Regulatory Expectations for Conduct in Operating Cash Equity Clearing and Settlement Services in Australia (Regulatory Expectations). Among other things, ASX has committed to provide access to its CS services on transparent and non-discriminatory terms (including pricing).

In the CHESS replacement system, all market operators using the Trade Acceptance Service – including ASX Limited – will access CHESS on a materially equivalent basis and agreements with AMOs for that service will be subject to common legal terms and standards. ASX will consult with market operators on proposed changes to its legal terms and standards.

While the ASX Limited and CS Boards typically discharge their responsibilities for oversight of CHESS replacement as part of a concurrent meeting of both boards, there are circumstances in which conflicts may arise between the regulatory obligations of the CS facilities and the commercial interests of the broader ASX Group. For example, this may arise because the technology underpinning the replacement system has been designed to enable ASX Group to offer services in addition to the core cash equities CS services provided by the current CHESS. There may be scenarios where a decision that enhances the resilience of CS services in CHESS replacement limits the potential for ASX to offer these non-core services.

As set out in the Regulatory Expectations, the ASX Clear and ASX Settlement Boards have arrangements in place that allow its non-ASX Limited directors to meet separately if required to address potential intragroup conflicts of interest. While these arrangements were originally instituted to address commercial conflicts arising from competition between ASX Limited and other AMOs, the Bank has been discussing with ASX how these arrangements would be used to address the broader range of intragroup conflicts of interest described above (see section 2.1.1).

Area of supervisory focus: The Bank will continue to engage with ASX, working closely with ASIC, on the effectiveness of ASX's arrangements for managing any intragroup conflicts of interest in the CHESS replacement program between the CS facilities and the wider ASX Group.

4.4 Operational risk

4.4.1 Identification, management and monitoring of key operational risks

The FSS require a CS facility to have appropriate systems and processes to identify, manage and monitor operational risks, especially when significant changes are occurring. These requirements are particularly relevant given the extent of the changes that will be required to support implementation of the CHESS replacement system. The following sections set out how ASX is identifying, managing and monitoring key operational risks in three key areas: testing, cutover and migration and go-live decision-making.


The purpose of testing is to verify whether the system is working as intended (including meeting non-functional requirements such as system capacity and availability), that other ASX and user systems are properly integrated with the CHESS replacement system, and that the plan to migrate ASX and users from the current to the replacement system can be successfully implemented.

ASX's testing approach covers each of these areas:

  • The system is tested over a series of overlapping stages including:
    • unit testing (ensuring that individual components run without error)
    • system testing (verifying whether system components meet acceptance criteria)
    • system integration and end-to-end testing (examining how the integration of multiple components work together)
    • non-functional testing (for requirements in areas such as performance, availability and security).
  • Software providers (both vendors providing software to multiple CHESS users and those users developing in-house systems) must seek technical accreditation to demonstrate that their systems can connect and interact with the CHESS replacement system. Software providers are also provided with an enviroment allowing them to complete their own testing and support testing by CHESS users utilising their software.
  • CHESS users will take part in mandatory, industry-wide end-to-end testing. This testing will be undertaken in a simulated, production-like working environment to ensure that CHESS users can perform their business-related functions (such as batch settlement, corporate actions and exception handling).
  • Migration testing will be performed to check the integrity of migrated data and that business processes in the target platform perform as expected with the migrated data. Inflight migration testing allows software providers and CHESS users to test workflows that are affected by the cutover to the CHESS replacement system when it goes live.

ASX's cutover approach does not include parallel testing with industry ahead of go-live, or parallel operation in production, since ASX has judged that supporting compatibility between the two systems is impractical (see ‘Cutover and migration’ below). This magnifies the risks of cutting over to the replacement system at go-live. ASX is mitigating these risks in a number of ways and will conduct three phases of dress rehearsals ahead of go-live (cross refer to migration and cutover section).

Next steps

ASX is in the process of reviewing its testing approaches and strategies for the CHESS replacement program. Some of this work will be carried out as part of ASX's Delivery Excellence Program, which is implementing the recommendations from the IBM review of the ASX Trade Refresh project. As of May, ASX had completed implementation of 24 of the 59 IBM recommendations at an organisation-wide level, although it had only completed four of the 22 recommendations related to testing. ASX had closed 19 of the 49 recommendations that are relevant to the CHESS replacement program. As part of its assurance program for CHESS Replacement, ASX will also commission an independent assessment of its test approach and strategy. Part of that review will compare ASX's approach with leading testing practices for comparable infrastructure.

Recommendation: Consistent with the 2021 Licence Conditions, ASX should continue to address findings from the IBM review of the ASX Trade Refresh project, ensuring that any relevant steps are taken to apply lessons learned to its clearing and settlement operations, and in particular to the CHESS replacement program.

Cutover and migration

Cutover is the process of removing the current CHESS system as the production system and replacing it with the CHESS replacement system. The cutover process carries significant risks in any system replacement. The risks are heightened for CHESS replacement because ASX intends to cutover to the replacement system over a single weekend ahead of go-live.

In July, ASX released an information paper that set out its rationale for choosing a single weekend cutover rather than a phased migration (where part of all of the old and new systems run in production during a transition period).[39] The key reason in support of a single weekend cutover is that phased migration would require interoperability between the current and new systems. This is difficult to achieve because the two systems use different message formats (the CHESS replacement system incorporates international standard ISO 20022 messaging, whereas the current CHESS system uses proprietary messaging). Running both systems in parallel would either require participants to send dual messages to each system – running the risk that conflicting messages could be sent – or for ASX to build temporary message translation systems that allow a single message to be routed to each system. ASX has indicated that building such translation systems would in itself be a multi-year project.

Utilising a phased approach would require three separate changes to the production environment: changes to current CHESS to support interactions with the new system; transition to concurrent operation of the two systems; and transition to sole operation of the replacement system. ASX's view is that no new business processes or data models could be introduced in the two interim phases, and that the last change would itself require a single cutover because of the change in business processes between the current and final replacement system.

ASX also believes that the necessary data migration activities can be performed in a single weekend. ASX can limit the amount of data that needs to be migrated on the cutover weekend by migrating some data (such as historical data) ahead of the cutover weekend.

ASX has commissioned KPMG to provide it with a data migration platform to extract the data from the current system and migrate it to the replacement one. ASX has cutover readiness plans that are intended to ensure that ASX and the market is ready to cutover to the replacement system. A review of ASX's data migration plans has been undertaken as part of the assurance program and two additional reviews are scheduled.

Dress rehearsals

ASX will conduct three phases of cutover dress rehearsals prior to go live:

  • ASX technical dress rehearsals will rehearse the technical aspects of the go-live plan to ensure that ASX's technical cutover tasks are stable. CHESS users will not participate in these rehearsals.
  • ASX dress rehearsals will test whether the ASX's cutover activity can be executed within the cutover window. In addition to the technical aspects that were rehearsed in the technical rehearsal, ASX will rehearse the go-live governance model, including escalation groups, incident management support and rollback rehearsal. CHESS users will not participate in these rehearsals.
  • Market dress rehearsals tests the full scope of the go-live cutover, including all ASX and external participants. Participation by CHESS users is mandatory.

ASX will make the ‘to be’ production environment available to CHESS users on the Monday following each of the market dress rehearsal weekends. CHESS users will be able to test various business workflows using production data.

Go-live decision-making

The decision authority and the final point of escalation for go-live and the related checkpoints is the Implementation Governance Group (IGG), which is made up of a subset of ESG members.

The cutover weekend (and dress rehearsals) is subject to a number of checkpoints:

  • ASX will hold an internal go/no go readiness checkpoint facilitated by the IGG around two weeks before the rehearsal or actual cutover event to determine the readiness of ASX and participants.
  • There is an internal go/no go checkpoint on Saturday night for the IGG to sign off on ASX's migration activities that occurred that day
  • There is a final go/no go checkpoint scheduled for Sunday for the IGG to seek the final go-live decision based on, among other things, a readiness confirmation from each CHESS user, who by that stage will have connected to the replacement system and performed verification checks on the migrated data.

The formal checkpoints on the Saturday and Sunday consist of a number of Critical Success Factors (CSFs), each of which must be passed to proceed. Each CSF is owned by a specific IGG member.

Recommendation: ASX should prepare for cutover, migration and go-live of the CHESS replacement system, including by:

  • having comprehensive and effective contingency plans in place for dealing with an issue on the go-live weekend or subsequent to go-live
  • successful execution of migration dress rehearsals
  • effective arrangements for go-live decision-making, including ASX's compliance with relevant 2021 Licence Conditions.

4.4.2 Engagement with service providers and vendors

The FSS require a CS facility to identify, monitor and manage the risks posed by third-party service providers – including software vendors such as DA and VMware that are responsible for providing critical elements of the replacement system. The Bank expects a CS facility to have access to relevant information to effectively monitor the products and services that its vendors provide and have systems in place if a vendor does not perform as expected. The CS facility ultimately remains responsible for any products and services that are provided by external providers, and ensuring that these vendors deliver to a standard that is consistent with the requirements of the FSS.

As noted in section 4.2, the recently announced delay from the April 2023 go-live date raises questions about whether ASX's management of vendors in the program has been consistent with the expectations of the FSS. The regulators are engaging with ASX to better understand: the Board's oversight of vendor relationships; the way that the original design specifications were communicated, and subsequent engagement between ASX and vendors on any challenges developing to these specifications; and ASX's contingency plans if its current vendor arrangements required changes.

Recommendation: ASX should engage with the Bank and ASIC on its plans to address findings from a planned external review of its key vendor dependency on DA for delivery of the CHESS replacement application.

4.4.3 Operational reliability and business continuity

The FSS require a CS facility to have clearly defined operational reliability objectives and business continuity plans. The key requirements and how ASX intends to meet them are:

  • System availability. The replacement system has a target availability of 99.95 per cent.
  • Scalable capacity adequate to meet its current stressed requirements. System will target the capability to process a peak 15m trade day, which gives 100 per cent headroom over peak trade registrations experienced to date. The system has a target capacity of 10m trades per day on a sustained basis (equivalent to current CHESS), without compromising other non-functional requirements such as system latency. The system is required to allow capacity to be expanded beyond this level in the medium term.
  • Comprehensive physical and information security policies. The replacement system will be hosted in secure data centres. Access to the replacement system will be controlled and data will be encrypted. There will be mechanisms that can prove the origination of a transaction is genuine. Auditability will be provided through a full history of the complete ledger.
  • Business continuity plans and two-hour recovery time objective. The nodes that support updates to the ledger will be hosted across four data centres and the system is designed to be able to return to operations within two hours of a disruption.

ASX will demonstrate that it meets these requirements through system testing, disaster recovery and incident management playbooks, and specific reviews in the broader assurance program that cover performance, scalability and security.

Area of supervisory focus: The Bank will continue to engage with ASX, working closely with ASIC, on evidence that key non-functional requirements have been met, including through testing and the broader assurance program.

4.5 Central securities depositories

The FSS require an SSF that operates a central securities depository (CSD) to have appropriate rules and procedures to ensure the integrity of securities issues and manages the risks associated with safekeeping and transferring securities.

ASX Settlement is not a traditional CSD but performs many of the key functions of a CSD by maintaining a record of ownership and movement of securities for the securities that are held in CHESS (the CHESS sub-register). The CHESS sub-register forms part of an issuer's primary securities register. ASX Settlement conducts reconciliation of securities issues it maintains by sending daily information on the movement of securities to share registries to enable them to accurately maintain a listed entity's registers. Annual audits of the controls used in ASX Settlement's systems are conducted by an external auditor, with the resulting reports published on the ASX website.

ASX Settlement also issues a monthly CHESS holding statement to securities holders to report changes in their holdings of securities on the CHESS sub-register. While investors can use this information to identify any errors in ASX's records of securities holdings, the daily reconciliation of securities is the primary means for ASX to meet its obligations under SSF Standard 9.1, and the Bank does not consider that holding statements play a role in meeting this requirement.

ASX Settlement is subject to a number of additional FSS requirements related to its CSD function:

  • Transfer of title. Securities settled by ASX Settlement are dematerialised (that is, they are held only as electronic records) and held in CHESS, with transfer of title given effect by electronic book entry.
  • Claims of creditors. ASX Settlement is not the legal owner of any participant or client assets. ASX Settlement's rules and arrangements for title are designed to provide a high degree of assurance that participants' securities would be protected from claims by ASX Settlement's creditors if ASX Settlement was insolvent. ASX plans to update legal analysis confirming the effectiveness of this protection once changes to the operating rules supporting the replacement system have been finalised.
  • Overdrafts and debit balances. ASX Settlement does not allow securities accounts to be overdrawn or have a debit balance.
  • Protection against custody risks. ASX Settlement has identified potential custody risks arising from negligence, misuse of assets, fraud, poor administration, or inadequate record-keeping and has operational controls in place to mitigate these risks.
  • Segregation of FMI's and participants' assets. CHESS provides an account structure that is designed to ensure the legal and operational segregation of ASX Settlement's assets from those of its participants, and of participants' securities from those of clients. However, there is a period during settlement when securities are held in a separate settlement account with no operational segregation between participant and client securities. ASX has arrangements in place to mitigate the risks from these arrangements by ensuring that clients remain beneficially in possession of their securities or the corresponding funds for all but a brief window during the settlement period.
  • Ancillary activities. ASX Settlement does not perform any ancillary activities (such as providing a securities lending facility) that may pose a risk to the operation of its CSD function.

Area of supervisory focus: The Bank will engage with ASX, working closely with ASIC, on updates to legal analysis confirming the effectiveness of arrangements to protect securities holdings from creditor claims in the event of ASX Settlement's insolvency.

4.6 Settlement

4.6.1 Exchange-of-value settlement systems

The FSS require that a CS facility eliminate principal risk by making the final settlement of one obligation conditional upon the final obligation of the other. ASX Settlement achieves this by performing both its cash and securities settlements in a multilateral net batch on a DvP Model 3 basis, and this will continue in the CHESS replacement system.[40] ASX Settlement also currently has functionality to settle individual transactions on a DvP Model 1 basis (CHESS RTGS), although this functionality has never been used.[41] The CHESS replacement system will provide an updated DvP Model 1 settlement function.

In the current CHESS system, not all novated trades are eligible for netting.[42] For those that are, the system generates a single batch instruction – the Net Broker Obligation (NBO) – in each line of stock on the night of the trade date and cancels the underlying gross transactions. Transactions that are not eligible for netting are not included in the NBO and are settled on a gross basis in the batch. In the CHESS replacement system all trades that are novated to ASX Clear will be netted. The system will determine a Novated Net Delivery Position (NNDP) at the beginning of batch settlement and send a daily report to CS participants on their NNDP at the start of each day prior to settlement.

The DvP processes for both the multilateral net batch and CHESS RTGS are designed so that securities are transferred within CHESS if and only if the corresponding cash payments are made in RITS. In order to achieve this, the securities are locked in CHESS until confirmation is received that the cash leg has settled in RITS, at which point the securities are released to the accounts of the purchasing participants. This process typically takes around 15 minutes. However, given that settlement of each leg is not strictly simultaneous, it is possible for the payments leg to be completed but for something to occur (such as an operational incident) that prevents the securities leg from being completed.

If such an incident occurred and ASX was unable to resolve the issue on the day, ASX's most likely option would be to defer settlement of securities to the following day. Such a disruption occurred in November 2020 resulting in a delay in the settlement of securities of several hours, but settlement was concluded by the end of the day. The 2021 Assessment recommended that ASX undertake analysis of the legal certainty of powers that would be used to support the deferral of the movement of cash securities in such circumstances, and the Bank has been engaging with ASX as it completes this work.

Recommendation: ASX should complete its analysis of the legal certainty of powers used to support deferral of the movement of cash securities if this cannot be achieved on the same day as the transfer of cash.

4.6.2 Settlement finality

The FSS require that an SSF ensure clear and certain final settlement. The finality of settlement in ASX Settlement is protected by its approvals as a multilateral netting arrangement under Part 3 of the Payment Systems and Netting Act 1998 (PSNA) and as an approved RTGS system under Part 2 of the PSNA. The extensive changes to the ASX Settlement operating rules required to support CHESS replacement mean that it is necessary to confirm that these protections will continue to apply once the new system is in place. In particular:

  • ASX will need to provide legal analysis demonstrating that the existing multilateral netting approval continues to apply to the CHESS batch following the proposed amendments to the ASX Settlement operating rules. This is required to provide certainty that Part 3 of the PSNA continues to protect the finality of batch settlement. If this certainty cannot be provided then ASX Settlement will need to apply for a new multilateral netting approval and provide evidence that it meets the necessary criteria for approval.
  • Since the new CHESS RTGS service has been substantially redesigned compared to the existing service, ASX Settlement will be required to apply for a new approval of CHESS RTGS as an approved RTGS system. This approval provides protection from the ‘zero-hour’ rule in the event of a participant entering external administration by making all transactions settled on the day of an insolvency irrevocable and unable to be unwound simply because of the event of external administration.

Recommendation: ASX Settlement should apply for approvals as an approved RTGS system and as a multilateral netting arrangement under the PSNA, or in the case of the multilateral netting approval provide the Bank with legal analysis demonstrating why its existing approval remains valid once changes to the ASX Settlement operating rules required to support the introduction of CHESS replacement have been made.

4.7 Clearing risk enhancements

CHESS is the core clearing system for ASX Clear, and supports key risk and default management functionality. The new system should retain this functionality and in some areas enable ASX Clear to enhance its management of clearing risks.

4.7.1 Back-out algorithm

In the current CHESS system, if there was a clearing participant default and ASX Clear had insufficient prefunded liquidity to be able to meet the payment obligations of the defaulting participant (that is, the defaulting participant is a net purchaser of securities), ASX Clear would enter into offsetting transaction arrangements (OTAs) with its participants in order to fund any remaining liquidity requirements. An OTA is a rules-based repo transaction with non-defaulting participants used to generate liquidity from securities that the defaulting participant was due to purchase.[43] ASX Clear would use its back-out algorithm to identify which securities are subject to an OTA (and in net terms removed from settlement in that day's batch).

The objective of the back-out algorithm is to maximise the number and value of units settled and minimise the impact of any changes in settlement obligations to other clearing participants, provided that the defaulting participant's net payment obligation can be brought to zero and any increase to the payment obligations of non-defaulting clearing participants can be avoided. However, there is limited documentation on how the back-out algorithm is designed, which makes it difficult to accurately model or predict precise outcomes for specific participants.

The back-out algorithm in the replacement CHESS system has been redesigned to address some of the limitations in the current system. The new arrangements will include a default scenario simulation tool, which will allow the back-out algorithm to be run in simulations with production data. The default scenario simulation tool will be available for use in default management fire drills from go-live. ASX is also investigating whether the default scenario simulation tool can be used during an actual default to assist with decision-making and ‘what-if’ scenario analysis.

4.7.2 Segregation and portability

Under current arrangements, ASX Clear utilises a structure that commingles house and client positions and collateral for cash market transactions. However, the standard on segregation and portability (CCP Standard 13) sets out that a CCP should maintain client positions and collateral in individually segregated accounts or in omnibus client accounts (or equivalent) to enable the segregation of positions and collateral of a participant's clients from that of the participant. ASX Clear currently makes use of an exception in the FSS guidance that permits the use of alternative means to provide protection for clients' assets if this protection is materially equivalent to full segregation of client and house positions and collateral. This exception is limited to cash markets and subject to the CCP demonstrating to the Bank that the alternative protections are materially equivalent to full segregation.

The CHESS replacement system has been designed in a way that it can be configured to support segregation of client and house positions and collateral. The Bank's recent assessments have recommended that ASX conduct an assessment of whether the protections from existing client protection arrangements remain materially equivalent to those provided by individual client or omnibus segregation, which should include engagement with industry on the impact of different client segregation operating models. ASX should consult with the Bank and ASIC on the outcome of this assessment within 12 months of the CHESS replacement going live.

Recommendation: ASX Clear should conduct an assessment of whether the protections from arrangements utilising a commingled house/client account structure remain materially equivalent to those provided by omnibus or individual client segregation. ASX should provide the Bank with a plan for implementing omnibus or individual client segregation, or a satisfactory explanation of how any alternative arrangements satisfy the requirements of the FSS, after consulting with industry stakeholders and within 12 months of the CHESS replacement system going live.

4.7.3 Intraday margining

Currently, margining in cash markets is carried out using end-of-day positions and determined overnight, and collected the following morning, and CHESS does not support the capability to calculate and call margin for changes in intraday cash market exposures. The CHESS replacement system will be able to provide the data required for the determination of netted trade obligations for participants intraday from go-live. This functionality is required to support any future changes to provide intraday margining of cash market positions.

Recommendation: ASX Clear should report to the Bank ahead of the CHESS replacement system going live on how it intends to introduce the intraday margining of cash market positions.


See CFR (2017), ‘Regulatory Expectations for Conduct in Operating Cash Equity Clearing and Settlement Services in Australia’, Policy Statement, September. [33]

See RBA (2020), ‘ASIC and RBA Announce Expectations for CHESS Replacement’, Media Release No 2020-23, 1 October. [34]

See ASIC (2021), ‘ASIC Imposes Additional Licence Conditions on ASX and Issues Expectations to Improve Market Resilience’, Media Release No 21-313MR, 24 November. [35]

The Minister has delegated relevant powers under Part 7 of the Corporations Act to Commissioners or senior staff within ASIC. [36]

See ASX (2022), ‘Independent Expert Report: Independent Assessment of ASX's Assurance Program for its Implementation of the CHESS Replacement Program’, Design Report, 28 February. [37]

See ASX (2022), ‘Independent Expert Report: Independent Assessment of ASX's Assurance Program for its Implementation of the CHESS Replacement Program’, Progress Report, 30 June. [38]

See ASX (2022), ‘CHESS Replacement: Assessment of Implementation Options for Cutover’, Information Paper, July. [39]

DvP settlement on a model 3 basis refers to settlement of both securities and funds on a net basis, with final transfers of both securities and funds occurring at the end of the processing cycle. [40]

DvP settlement on a model 1 basis refers to settlement of both securities and funds on a trade-by-trade (or gross) basis. [41]

For example, some trades that are reported after markets have closed and through options exercise, and trades without settlement dates. [42]

Under the first leg of the OTA, ASX Clear would re-deliver the stock to a non-defaulting participant that was due to sell the securities in question in return for payment equal to the amount of the payment obligation of ASX Clear to that participant. ASX Clear would agree to repurchase the stock the next business day under the second and final leg of the transaction. [43]