To make the right decision in choosing a broker to buy and sell your shares or ETFs through, you need to understand what is CHESS sponsorship.
So what is CHESS Sponsorship?
Most countries around the world have a stock exchange through which people buy and sell stocks. The ASX (Australian Stock eXchange) is the main exchange in Australia where stocks are traded.
Australia is unique in having a world-class electronic system called CHESS, where the ASX keeps a list of who owns what shares. When shares are bought or sold, there is a record of those shares being owned directly by you and in your name (via your own personal HIN — Holder Identification Number).
To do this, authorised participants such as brokers are allowed access to the CHESS system to settle trades (exchanging the legal ownership of shares for money).
FYI, the process of executing through to settling trades is called ‘Clearing’ and CHESS stands for Clearing House Electronic Subregister System, so it is a system to clear (execute and settle) trades and keep a register of who owns which shares.
What makes CHESS such a great system is that you can view your ownership independently of your broker via the share registry to verify that you own it.
What is a share registry?
When a company lists on the Australian stock exchange so that people can buy and sell shares of that company, they appoint an independent organisation to manage the registry of shareholders for that company.
The registry has the following responsibilities:
- Recording changes in share ownership
- Issuing shareholding statements
- Managing dividend payments, bonuses and rights issues.
The main share registries in Australia are Computershare and Link Market Services.
To find the share registry for a particular company or ETF:
Go to www.asx.com.au ➔ type the ticker symbol (e.g. VAS) into the search bar ➔ click on the link to go to that page ➔ scroll to the bottom of the page.
The alternative — Custodian-based brokers
The way shares are held in other countries (and for Australian brokerage companies that elect not to use CHESS with individual HINs for each client) is under a custodian model, which means the broker appoints a separate company — a custodian — to hold the shares under trust (overseen by a trustee) on your behalf. This ensures it is quarantined from the company’s other assets for asset protection.
When you purchase shares through a custodian-based broker, they hold the legal title for you, meaning they are the legal owner and you are the beneficial owner. So you receive the benefits of the asset (proprietary interest in your investments and the income and rights attached to your investments) without legal ownership.
Shares purchased within an account held under trust cannot legally be accessed by others, including claims from any creditors in case the broker goes out of business. In that case, you could transfer your shares from the custodian to another broker.
However, it may take you a long time to get access to those shares. In Australia, this has happened from time to time, and here is a relatively recent example from 2018, where customers were locked out of their investments and funds were returned only three years later.
Where a broker has not followed legal procedure, the result could be worse, such as what happened with Opes Prime.
The main reason why an Australian broker may opt for the custodian model over CHESS with individual HINs is to lower the costs. This is done by reducing the compliance costs associated with trading on the ASX. Rather than issuing individual HINs to each client, they operate under a single institutional HIN.
CHESS vs custodian — pros of each
Pros of using a CHESS sponsored broker
- Full legal ownership rather than beneficial ownership.
- More transparent ownership. You can view it directly from outside your brokerage account in the share registry.
- Access to trade all listed companies and listed funds. Some custodian-based platforms offer only a limited number of listed securities.
- You get access to automatic dividend reinvestment. Some custodian-based platforms may offer an equivalent of this, but this is not always the case.
- You get issuer communications, such as issuer annual tax statements. Although, many custodians-based platforms offer annual statements and consolidated reporting for your whole account.
- You get MyTax pre-fill organised by the issuer. Although some custodian-based platforms make it easy to fill in yourself by providing the codes, so you only need to find the letters in your tax return and copy the numbers.
Pros of using a custodian-based broker
- Lower cost to run, and the savings may be passed on to you.
- Some custodian-based platforms offer fractional shares
- Dealing with share registries can be a hassle if you need anything out of the ordinary. Changing your name (e.g., if getting married) results in long delays as you are required to post documentation rather than email. Transferring shares through your broker can be frustrating when something as small as a missing middle name will need to be corrected through the share registry (by posting the documentation), and you end up with long delays, even when every other detail matches.
- Some platforms are simpler to use. Everything is done through one interface, and you only deal with one company. That includes tax reporting, updating personal information, viewing all your information on all of your holdings.
- Some custodian-based platforms offer unlisted funds, which often have high minimums and are otherwise inaccessible to retail investors.
How to choose a broker — CHESS sponsored or custodian?
Now that you understand what is CHESS sponsorship, here is how to choose a broker based on your share purchasing needs.
Purchasing small frequent amounts —
custodian CHESS sponsored If you are adding small amounts, then the fixed brokerage fee is going to take too big of a bite out of your capital each time you make a purchase, and a low-cost custodian broker may make more sense. Examples include Vanguard Personal Investor and Superhero.
CMC Markets now offers free ASX brokerage up to $1000 per security per day, so you can have the best of both worlds — small frequent purchases and CHESS sponsorship.
Stake offers $3 brokerage on ASX trades (no limit to the purchase amount), which also allows you to get both cheap small frequent purchases and CHESS sponsorship.
Purchasing more substantial amounts on the ASX — CHESS sponsored
If you are adding more substantial amounts and buying shares listed on the ASX, you may want to look for a broker that uses individual CHESS HINs for peace of mind with your life savings. Examples include Pearler, SelfWealth, Stake, CMC Markets, OpenTrader, and Commsec.
Purchasing shares on exchanges other than the ASX — custodian (the only option)
If you are buying shares on other exchanges, since other exchanges don’t have CHESS sponsorship, you have no other choice than to go with the custodian model. Choosing a large, listed, well-established broker like Interactive Brokers is going to provide an added level of safety.
I hope this has answered the question of what is CHESS sponsorship, and you have a good understanding to base your decision on when selecting which broker to use for your share and ETF trading.