Custodial vs. CHESS: How do these share trading models differ?

When researching brokerage platforms, you've probably heard that Australian shares are either CHESS sponsored or in a custodial model. As an investor, understanding the difference between the two can help you to decide what brokerage platform you might want to use as some will opt for one ownership model over the other.

CHESS stands for Clearing House Electronic Subregister System. It's a system used by the Australian Securities Exchange (ASX) to manage the settlement of shares so that they can be bought and sold. When you buy or sell shares, CHESS records the change in ownership. This system provides you with a Holder Identification Number (HIN) which is linked to all the shares you own on the ASX in one place.

Pros of CHESS sponsorship 

• Direct ownership of shares: The shares you buy are in your name, which means you have direct control over them.
• Consolidated view of holdings: All your shares are tied to your HIN, making it easier to track your portfolio.

Cons of CHESS sponsorship 

• Limited to Australian securities: CHESS is only for Australian securities. If you want to trade international shares, you may need a different setup.
• Broker dependence: If your broker goes out of business, it could take some time to transfer your HIN to a new broker.

In a custodial model, a financial institution, known as the custodian, holds a customer's securities for safekeeping. This is intended to minimise the risk of the customer losing their assets through theft or loss. Instead of a HIN, you're given a Security Reference Number (SRN) which is unique to each parcel of shares. 

Pros of Custodial 

• Access to international markets: Many custodial services allow you to trade both Australian and international shares.

• Fractional shares: Although not as common on the ASX, the custodial model lets you own fractions of an international share. This can be helpful if you want ownership of expensive shares as some in the past decade have reached as high as $1,000.

Cons of Custodial 

• Indirect ownership: The custodian technically owns the shares, which can lead to complications if the custodian runs into legal issues.
• Fees: Custodian services often come with additional fees for their services.

See also: share trading terms explained

Ultimately, choosing between a CHESS-sponsored account and a custodial model largely depends on your individual needs and circumstances.

If you prefer direct ownership of your shares, plan to actively participate in corporate actions, and only need access to the Australian market, then you might find a CHESS-sponsored account more suitable.

On the other hand, if you're looking to trade international shares, prefer a third party taking care of your share safekeeping, or find the simplicity of selling shares through a custodian appealing, then you might prefer the custodial model.

Want to get started with share trading? Check out some of the brokerage platforms below, or have a look at our share trading page and compare providers.