Why CHESS Sponsorship Is A Waste Of Your Time (Mostly)

Australian investors are obsessed with CHESS – it’s often a focus of heated debate in online investing forums.

It may be almost as polarising as the other culture wars topic of the modern era (e.g transgender, taxation or abortion debate, anyone?)

Why Do I Not Care About CHESS?

Regardless of what I write here, some people will never use a non-CHESS broker.

They’ll argue until they’re blue in the face about the system’s alleged safety benefits – while ignoring the fact that no country in the world uses it.

This means if you want to be 100% covered by CHESS, you need to absorb 100% of the opportunity cost of forgoing exposure to international markets.

Let me ask you a question.

Which is greater:

Everyone will calculate these risks differently – and their answer will determine what they think of CHESS.

Above: If you invested $1600 in a Mag7 fund 10 years ago, you’d have $35,000 today, representing a 2,050% return.

As I’ll show below, there were two notable brokerage insolvencies in Australia in the last decade.

But the US’ Magnificent 7 companies rose by about 2050% during this period, with the wider S&P rising by about 270%.

The ASX, meanwhile, returned about 75%.

CHESS: What Does It Mean?

CHESS is an acronym that stands for Clearing House Electronic Subregister System. It’s the system the Australian Securities Exchange (ASX) uses to do two very important things:

Despite the somewhat confusing terminology, ‘CHESS sponsored’ essentially means your broker ‘sponsors’ your use of CHESS.

The broker provides you with your own unique identifier in the system, and grants you direct legal ownership of any Australian shares you’ve purchased.

The system is owned and operated by ASX Settlement Pty. Limited (ASX Settlement), which is a wholly owned subsidiary of the ASX.

Several securities exchanges in Australia use CHESS, including the ASX, Sydney Stock Exchange, CBOE Australia and the National Stock Exchange (NSE).

(Related: Best Copy Trading Platforms In Australia).

When And Why Was CHESS Sponsorship Introduced?

CHESS was first introduced in 1994, so the system is now 30 years old.

At the time of its introduction, it was considered world-leading, because it allowed Australia to:

Almost all other countries continue to use custodial systems.

But we’re no longer looked upon as a leading example.

(Related: 14 Best Share Trading Platforms In Australia).

In fact, CHESS is considered somewhat outdated today compared to systems used in some other countries.

However, the project was riddled with problems and was eventually, and controversially, abandoned by the ASX in 2022, with the company writing off around $250 million in costs related to its failure.

(Related: Ultimate Guide To Investing In Shares For Beginners.)

How Does CHESS Impact Buying Shares?

When investing on the ASX, to access the benefits of CHESS sponsorship you’ll need to create an account with a broker that uses the model.

Brokers will always make it clear on their website that they offer CHESS sponsorship.

When you sign up with a CHESS sponsored broker, you will:

Your HIN is what links you to your assets within CHESS and grants you direct ownership of those assets.

When you buy stock using a CHESS sponsored broker, after about two days the system will finalise settlement of that trade by transferring legal ownership of the shares to you.

It also simultaneously sends the payment from your bank account to the seller’s account.

Note that international shares are always held by a custodian, even if your broker offers CHESS sponsorship.

(Related: 7 Best Crypto Exchanges In Australia).

The Purpose Of HINs.

Each HIN is a unique 10-digit identifier, generally they start with an X.

Each account you open with a CHESS sponsored broker will have its own HIN, so you can accumulate multiple HINs if you maintain multiple brokerage accounts. Any shares bought through a particular account will be linked with the associated HIN.

Let’s say you want to switch accounts to access lower fees, HINs help make the transition of all your assets smooth, and you can retain the same HIN.

You’ll receive CHESS holding statements for each HIN you hold, which notify you of any changes to your holdings.

That helps you keep track of what you own and the performance of assets in each account easily – as they’re all linked to a single identifier.

Pros And Cons Of CHESS Sponsorship.

CHESS sponsored brokers aren’t unequivocally better than a platform with a custodial model, as every system has upsides and downsides.

The main advantages of CHESS Sponsorship include:

The negatives of a CHESS sponsored broker include:

For instance, a custodial broker may be more likely to enable trading across multiple international exchanges (where CHESS doesn’t apply).

How Does CHESS Sponsorship Differ From Custodial Models?

The key difference between CHESS sponsored brokers and custodial brokers is that a custodial model typically operates under a single ‘omnibus’ HIN.

So, your assets can’t be held by you directly, instead they’re held in trust by a third-party custodian appointed by the broker under the supervision of a trustee.

What really gets people riled up in online forums is the idea that under a custodial broker the investor does not have legal ownership of the shares they’ve purchased:

What are the implications of this?:

Is The Custodial Model Really Less Safe?

A custodial broker going bust has happened in Australia before, and it proved difficult for investors to claw back the money they were owed.

More recently, Prospero Capital imploded in 2024 after becoming the target of a Federal Police investigation. Thankfully, most investors got their money back.

If you use a CHESS-sponsored broker, there is zero risk of losing your Australian-listed shares, because you always have legal ownership.

These instances sound band

Brokers rarely fail in Australia due to our strong financial regulation, so the risk is relatively small.

On the plus side, the custodial model often results in lower trading fees for investors, making it popular with investors who trade frequently.

Also, many micro-trading apps that help you get into an investing habit based on spending smaller amounts use the custodial model for precisely this reason.

Some of the more popular custodial brokers in the Australian market include:

(Related: eToro vs Stake – Which is Best for Australian Investors?)

5 CHESS-Sponsored Broker Platforms In Australia.

Thinking you’d prefer a CHESS sponsored broker? Here are 5 prominent platforms worth investigating:

Choose A Broker That Ticks Your Boxes.

You can avoid counterparty risk through CHESS sponsorship, but as long as you use a reputable broker, you’re unlikely to encounter issues with a custodial model.

Millions of people around the globe safely invest and trade with custodial brokers every day.

CHESS sponsporship is just one factor among many that determines whether your funds are at risk, and to what extent.

Jody