Euroclear expects global uptake of ICSD settlement model supporting ETF distribution

Following deal with Hong Kong Exchange, Euroclear expects more exchanges in Asia, the Americas, and the Middle-East to join its ICSD settlement structure for ETFs.

By Jonathan Watkins

Euroclear expects its international central securities depository (ICSD) settlement model to gather momentum with global exchanges looking to boost ETF distribution.

The model has been adopted by exchanges in Mexico and Hong Kong and lauded by market participants in a new report from the central securities depository.

Euroclear has now said it expects more exchanges in Asia, the Americas, and the Middle-East to join its ICSD settlement structure for ETFs which will allow trades to be settled in one central location rather than in multiple depositories in different markets.

The global distribution channel for UCITS ETFs allows trading in the same ETF to ‘follow the sun’ in an efficient manner through cross-listings on different continents. 

By issuing ETFs within an ICSD, the international structure with a common depository removes the major operational and settlement issues that have often deterred issuers from cross-listing their ETF products around the world and imposed additional costs on market-makers – costs that have ultimately been borne by end-investors. 

“The industry has grown exponentially since the UCITS ETF emerged as an international wrapper with clients across Latin America, the Middle East and Asia all taking to them,” says Jim Goldie, head of ETF capital markets (EMEA) at Invesco. “But without an efficient means of moving ETF shares from one settlement venue to another, liquidity providers are less able to manage inventory in a cost-effective manner.” 

Euroclear’s ISCD settlement permits 24-hour trading, spanning Asia, Europe and Latin America, through the introduction of a process involving the same model already used for Eurobonds, depositary receipts and a substantial number of ETFs in Europe. 

“Anything that allows us to move ETFs in a more efficient way is a huge win for us,” said Slawomir Rzeszotko, ETF business development at Jane Street Capital. “It allows us to offer the lowest possible spreads and reduces the cost to clients.” 

The Mexican CSD went live with Euroclear’s model in September 2018 with Hong Kong adopting it this month.

Frank Mohr, head of ETF Sales-Trading, Commerzbank said he is hopeful the openness to change shown by the Mexican and Hong Kong market infrastructures will prove a template for other jurisdictions.

“It is important that the whole ETF ecosystem – involving all participants, be they settlement systems, market-makers, exchanges or issuers – works together to make the most of a wonderful product and deliver a positive experience for investors.”