Understanding CHESS and its advantages

Summary

• CHESS refers to the Clearing House Electronic Sub-Register System used by the Australian Securities Exchange (ASX) for the trade settlement. 
• The settlement involves the transfer of a title or legal ownership of securities in the exchange for trade.  
• To access CHESS, one must be registered with ASX Settlement and Transfer Corporation (ASTC), which provides a unique member code. 
• CHESS also electronically registers the ownership of shares on its sub-register, providing several advantages to brokers, investors, and issuer of securities. 

The Clearing House Electronic Sub-Register System (CHESS) refers to a world-class computer system used by the Australian Securities Exchange (ASX) for enabling the transfer of a title or legal ownership of securities from a seller to a buyer in exchange for money. 

CHESS is a form of electronic book-entry that facilitates the exchange of securities. It is operated is a wholly owned subsidiary of the ASX, namely ASX Settlement Pty Limited. 

Furthermore, CHESS also registers shares’ ownership on its sub-register in a secure and efficient manner, allowing holders to register share title for the purpose of trading. 

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Who can access CHESS to settle trade?

To access CHESS for settling the trade, custodians, institutional investors, brokers, settlement agents and other participants need authorisation from ASX Settlement Pty Limited.

Individuals must be registered with ASX Settlement and Transfer Corporation (ASTC) for accessing CHESS. Registered ASTC members accessing CHESS have a unique member code. It is for the same reason that many investors engage stockbrokers who are already registered with ASTC. 

While large institutional investors directly participate in CHESS transactions, other investors hire stockbrokers on their behalf for accessing CHESS and registering their securities. The invoices are received within two days of the transaction. 

It is illegal to conduct unauthorised sale or purchase of securities on CHESS. The act is considered a criminal offence. Thus, individuals who are not controlling shareholders do not have the authority to carry out transactions.

In case of money loss, the client is entitled to compensation, recovered either from the stockbroker or the National Guarantee Fund. Notably, the National Guarantee Fund covers losses resulting from unauthorised transactions on CHESS.

How settlement of trade takes place on CHESS?

When a buyer and a seller agree to trade on CHESS, settlement takes place usually two business days later. Thus, the legal ownership of shares is transferred by CHESS, which simultaneously also facilitates money transfer between participants through their respective banks. The settlement referred to as Delivery versus Payment (DvP) is irrevocable in nature. 

Significantly, the Delivery versus Payment settlement occurs through a Model 3 multilateral net batch settlement mechanism, where the settlement of transfer instructions for both securities and funds takes places on a net basis with the settlement finalised at the end of the processing cycle.

Usually, at around 12:30 PM each day, CHESS completes the batch settlement involving the determination of net funds held by each participant along with their security delivery obligations and the payment providers’ net fund obligations. 

The settlement involves a multilateral payment netting arrangement, which ensures the settlement efficiency of the system. Thus, money is transferred across the Exchange Settlement Accounts of the payment providers in RBA’s Information and Transfer System (RITS). Once completed, the movement of securities is initiated within the CHESS. 

The functions are performed for a diverse range of financial products such as shares, warrants, stapled securities, company-issued options, and units in trusts.

What is a CHESS Sub-Register?

CHESS is designed to electronically register shares’ ownership on its sub-register, thereby facilitating settlement between participants on a DvP basis. Investors have an alternative to either register their holdings on the CHESS sub-register or issuer sponsored sub-register. 

Issuer sponsored registration occurs when an investor registers on Issuer Sponsored Sub-register managed exclusively by each company to allow share registration in that company alone. 

Broker sponsored registration is held within the CHESS system when the shares in any listed company are registered in the CHESS Sub-register. Using such a form of registration, brokers can manage shareholdings of their sponsored client while the client retains the legal title. 

What are the advantages of CHESS Sub-Register?

There are several advantages of broker sponsored registration for both the investors and brokers. 

Under a single investor’s name, a variety of different shares in a single registration can be held through the broker sponsored registration. Therefore, it ensures simplified portfolio administration as all shareholdings are consolidated into a single account. 

Investors are provided with a form of independent validation concerning their shares purchases, sales, holdings and transfers as directly generated CHESS Holding Statements from the sub-register are sent to investors. Thus, it provides security of investors’ holdings, which can only be affected after receiving proper instructions from the clients. In addition, frequent share traders have their details already registered with CHESS, thereby increasing convenience during trading.

Holdings being maintained on the sub-register expedites the securities movement in preparation for settlement while ensuring timely allocation of shares to client accounts post settlement. It reduces brokers’ risk in relation to facilitating settlement and client transactions. 

Issuers of securities can meanwhile benefit from the cost-effective maintenance of shareholders’ registers provider by the CHESS sub-register, which also ensures an efficient and accurate mechanism for processing corporate actions.