ASX is in the midst of a significant renewal of its key information systems and infrastructure. A key part of this transformation is the replacement of its 25 year-old proprietary clearing and settlement system CHESS (the Clearing House Electronic Sub-register System) with a Distributed Ledger Technology (DLT)-based solution.
ASX’s CHESS replacement system, which is being developed with technology partner Digital Asset, offers a new solution built on contemporary and open technology. The DLT-based solution will provide the functionality and reliability of today, while also offering improved efficiency and standardisation, reduced operational risk, and new opportunities for growth and innovation for our customers.
DLT has the potential to provide significant benefits to financial market users. Therefore, there is global interest in understanding how and why ASX chose to use DLT to replace CHESS, as well as in the lessons we have learnt on the way. We are into the fifth year of our journey, and are on track for a March/April 2021 go-live of the DLT-based system.
CHESS is the system that supports the clearing, settlement, asset registration, and other post-trade services for Australia’s cash equity market. When implemented in 1994, it allowed for the subsequent de-materialisation of the Australian cash equity market and the shortening of the settlement cycle. CHESS is written in COBOL and uses a set of proprietary message formats (CHESS messages) for communication with market users. While the performance and availability of CHESS continues to serve the market well, the age of the application and the challenges associated with making application changes easily and safely led ASX to start evaluating replacement options in 2015.
The process of evaluating and selecting a solution and delivery partner commenced over four years ago. Throughout this process, ASX focused on finding a solution that would:
- meet the important non-functional requirements of CHESS, including stability, security, confidentiality, privacy, recoverability and availability;
- meet the functional requirements of CHESS; and
- address the challenges facing our customers, such as increased regulatory and operational requirements, technology costs and new competitors; and provide the opportunity for our customers to create new products and services for their clients.
At the same time as we were undertaking this process, DLT was beginning to emerge as a new technology and appeared to address some of the business problems we were seeking to solve. Given we replace this type of critical market infrastructure once every ~25 years, we wanted to explore whether DLT should form part of the new system.
To do this, and following a comprehensive global search and selection process, ASX chose Digital Asset as its technology partner to explore DLT in January 2016. Importantly, Digital Asset has deep expertise in DLT and financial markets and is working with some of the world’s largest financial institutions on implementing DLT solutions. Understanding the application of DLT in highly regulated markets proved critical in our decision making process.
This investigative period also included developing a working DLT prototype to perform the key functions of clearing and settlement for the cash equity market, and the creation of ‘enterprise-grade’ software that could demonstrate the technology’s ability to meet the non-functional requirements of the Australian market.
Through rigorous testing and extensive consultation, we were able to identify the technical design features that are essential for financial markets - a permissioned DLT with a security architecture that segregates data for each user. We also successfully concluded the non-functional testing of the technology, and at the end of 2017 we made the decision to work with Digital Asset to deliver the new system to replace CHESS.
By mid-2018 we had concluded an 18-month process of stakeholder consultation to identify the new functional features that our customers wanted the new system to provide – and we were ready to commence the development of the new system.
The CHESS replacement initiative is now in the build phase, with a targeted go-live in March/April 2021. A Customer Development Environment (CDE) is now available so that ASX CHESS users and their technology providers have commenced their development and testing activities. The next twelve months will see progressive drops of functionality into the CDE until the functional payload is complete and the project moves into Industry-Wide Testing (IWT) in mid-2020.
CHESS replacement using DLT
ASX’s DLT-based CHESS replacement solution will deliver a contemporary system that carries through the functionality of the existing system and offers 35 new features, requested by the market through the consultation process. It will operate with the global ISO20022 messaging standard being adopted by regulators and market infrastructures globally.
It also enables the use of the Digital Asset Modelling Language (DAML) - a smart contract language, which supports multi-party business processes.
Value Proposition for ‘Taking a Node’
ASX’s aim is to create a solution which is based on open technology, to give better access to market users and enable them to create new products and services, improve efficiencies, and to help lower risks and industry costs.
Importantly, ASX is offering choice when it comes to connecting to the new system and adopting DLT-based technology. ASX will provide three options for users to connect to CHESS replacement:
- ISO-20022 messaging, which will be an upgrade from the current suite of CHESS messages.
- Taking a Node - Nodes will be offered as a managed service
- A web browser option for low activity users and business continuity support purposes.
Connection options are not mutually exclusive. That is, a user can have ISO20022 message connection working in parallel with a node connection. Activity in our Customer Development Environment shows that most customers are choosing to connect to both.
Key benefits associated with node-based access are:
- Providing users with access to a synchronised, current state view for all data to which the user has the right to access. The integrity and currency of that data is independently and mathematically verifiable, thereby eliminating the need to reconcile, while the privacy and confidentiality needs of the user are preserved.
- Offering the user and their technology providers the ability to model multi-party workflows using DAML. DAML is a purpose-built smart contract functional programming language optimised for modelling rights and obligations between counterparties. It is relatively easy for a programmer to learn and provides important safe-guarding features which makes the modelling of multi-party workflows efficient and safe.
So, what does this mean for the broader industry?
Firstly, it’s about standardisation. By providing an infrastructure where all users have the same database structures, the same workflow process, and a common programming language to build applications, significant efficiencies can be realised in the rapid development and deployment of applications across many customers and jurisdictions – in other words, an application built to work for one customer will work for everyone. Importantly, DAML is being more broadly adopted for uses in many different markets globally. For example, DAML has been adopted by the International Swaps and Derivatives Association in the ‘Common Domain Model’ initiative. This means our customers can invest in their DAML capabilities knowing that it has broad application in global markets.
Secondly, the sharing of data that everyone knows to be true and correct enables the reduction of errors and the costs associated with resolving them. This is very important to the industry as we seek to remove legacy systems and processes, and the inefficiency, costs and risks that come with these.
Thirdly, when we talk about benefits we are also referring to the opportunity to connect a broader range of users to one another more effectively and efficiently across a common infrastructure. This creates value by providing users with the ability to develop better products and services for the next decade and beyond. It means better workflows, such as improving the administration of corporate actions. It also means providing the ability for users to perform more complete and complex analytics that provide insights for themselves and their clients.
ASX’s CHESS replacement journey has offered several important learnings which may be of interest to members of the WFE:
- DLT is not a goal in itself: There has been significant hype in the capabilities of DLT. Careful analysis of the business problem we are seeking to solve has been an important part of the discovery and design process. It ensures a clarity of objective, appropriate risk management, and has driven some important design decisions to allow our customers to choose how they use the messaging and DLT capabilities of the system.
- Implementations of DLT for FMIs are a marathon, not a sprint: While ASX’s initial CHESS replacement project implementation completes in early 2021, there will be substantial innovation that is expected to follow cutover as users and technology providers innovate using the DLT-based infrastructure.
- DLT may seem ‘new’ but in many ways it is a continuation of the evolutionary role of FMI: The introduction of CHESS in 1994 is an example of infrastructure implementation that automated and simplified, reduced risk, and removed friction, and facilitated the introduction of electronic trading. The introduction of DLT is a continuation of this core purpose to innovate and improve, provide efficiency and functionalities to meet the needs of future users.
- Introducing DLT is multi-dimensional: In addition to a traditional technology application, design and build there have been additional streams of work to increase communication with customers and regulators, to build infrastructure and security services, plus additional support for customer development and industry wide testing.
- The DLT landscape continues to evolve: During the lifecycle of this project several important positive changes have occurred. Specifically the Digital Asset Modelling Language (DAML) has become open-source, and DAML can now operate on top of multiple ledgers, both distributed and centralised including VMware blockchain, Hyperledger Sawtooth and Fabric, R3 Corda and Amazon Aurora. This reflects the ongoing maturation of DLT as a technology and importantly reduces potential barriers to investment for ASX users.
- DLT is becoming more mainstream: The very early stages of the evolution of DLT, there were a significant number of proof of concept initiatives undertaken to test the capabilities of the technology. Now, we are seeing a number of important technology initiatives (such as CHESS replacement) that are into advanced stages of development. Importantly, large technology firms are beginning to include DLT solutions as part of their global offerings. Other market infrastructures are monitoring these developments to enable them to understand the application of DLT.
- It is critical to always think about this initiative from our customers’ perspectives: Many of our customers operate in multiple geographies. While we are focused on enhancing the Australian capital market environment we recognise that for our customers, the investment they make in Australia is more beneficial if it can be leveraged in other markets. This is why we are committed to adopting global standards such as ISO20022 and why we are in working with other exchanges and FMIs that are looking at introducing DLT into their markets, and exploring opportunities for the adoption of standards and approaches that can increase meaningful leverage and inter-operability.
The introduction of DLT into the post-trade environment has the potential to deliver significant benefits to global financial market users. Achieving these benefits will require commitment over the medium to long term and investment from FMIs, users and technology providers. This process has begun, and there are many more years of development ahead.
While the DLT technology landscape continues to evolve, efforts by market infrastructures to work together to develop global DLT standards and common business practices will be an important part of this process. We look forward to working with the industry to achieve this – and playing our part in this exciting opportunity to create the global market infrastructure for the next evolution of financial markets.