Stake Academy AUS: CHESS & HIN
The two most important acronyms in the Australian market. CHESS and HIN keep your portfolio completely secure and accessible. Here’s everything you need to know about the CHESS system.
Explain the acronyms
Developed and maintained by the ASX, the Clearing House Electronic Subregister System (CHESS) is responsible for processing all your ASX transactions. In its simplest form, the CHESS system has two functions. Firstly, to securely exchange cash and shares between buyers and sellers after every trade. And secondly, to create a subregister of owners for every share.
That’s where the HIN or your Holder Identification Number comes in. This number ensures every investment you make is in your own name. Every time you make an investment, the security is assigned to your HIN and your own name.
What’s the benefit? It’s all about security and access to your investments. Not all brokers are CHESS-sponsored which can lead to complications for investors. Instead, they use a custodial model. The downside of a custodial model can be that you have less direct control over your investment and access to your holdings can be sometimes more difficult.
Travelling through the pipes of the ASX, how does the system work more specifically?
Transactions settle on a T+2 system. That is, within 2 days of the transactions, shares and cash have been fully exchanged and settled. This process is known as delivery versus payment (DvP) and is guaranteed. Since shares and cash are registered with CHESS, settlement is all within the system.
The ASX has a further reading section here.
The main benefit of the CHESS-sponsored system is security giving you direct access to your shares. The alternative is a custodian model. Custodian brokers hold shares under one broker HIN-number and assign customers beneficial ownership of their shares. Customers can still buy, sell, transfer and withdraw just as easily but they do not own the shares in their own name. This is more than just academic.
Not a game
Reiterating the importance of a CHESS-sponsored broker is more than just lip service.
Throughout history, the custodian model has left investors out-of-pocket on numerous occasions. Investors have been locked out of their portfolios in instances where a broker goes under.
Halifax Investment Services was an Australian broker with 12,000 customers and over $200m on their books. They operated using a custodian model Following their collapse and liquidation in 2018, customers were locked out of their investments and only now are being returned, 3 years later, only now are funds being returned. Under a CHESS-sponsored model, investors would have been able to access and transfer their portfolios to new brokers as soon as the collapse occurred.
While Stake does not suggest that custodian-based brokers are more prone to collapse, when investing, it is important to consider all risks.