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 prefer. Let’s examine them.

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 a Holder Identification Number (HIN) linked to all the shares you own on the ASX in one place.

Pros of CHESS sponsorship

• Direct ownership: Your shares are registered directly in your name
• Consolidated portfolio view: Your HIN links all your ASX holdings in one place
• Enhanced security: The ASX's system provides an additional layer of security for your investments
• Corporate action participation: Direct participation in shareholder voting, dividend reinvestment plans, and other corporate actions
• Regulatory protection: Clear regulatory oversight of ASX and ASIC frameworks

Cons of CHESS sponsorship

• Australian market limitation: CHESS only covers ASX-listed securities
• Broker dependency: Changing brokers requires a HIN transfer process, which can temporarily limit your trading ability
• Higher brokerage fees: CHESS-sponsored trading often involves higher brokerage fees compared to custodial arrangements
• Minimum investment requirements: CHESS-sponsored platforms require minimum investment amounts (generally Australian shares require a minimum of $500).

Under a custodial model, a licensed financial institution holds and manages securities on your behalf. Instead of a HIN, you receive a Security Reference Number (SRN) for each share. The custodian handles administrative tasks while you retain beneficial ownership of the assets.

Pros of Custodial

• Global market access: Trade both Australian and international shares through a single platform
• Fractional investing: Purchase partial shares, making high-priced stocks more accessible
• Lower fees: Often feature more competitive brokerage fees
• Simplified administration: The custodian handles corporate actions and paperwork
• Quick broker transitions: Easier to switch between trading platforms

Cons of Custodial

• Indirect ownership: Shares are legally owned by the custodian, though you maintain beneficial ownership
• Additional fees: May incur custody and administration fees
• Corporate action limitations: Less direct control over shareholder voting and other corporate activities
• Counterparty risk: Dependent on the custodian's financial stability and systems
• Complex recovery process: If the custodian faces financial difficulties, recovering assets might be more complicated

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.