Like many Americans, Andrew Levine, managing director and head of ADRs at Convergex, enjoyed Thanksgiving on Thursday, but that doesn’t mean Global Custodian let him off the hook without some difficult questions, such as what are his favorite Thanksgiving dishes (answer: a juicy turkey, cranberry from a can and Entenmann’s Chocolate Chip Iced Cake). Levine also shared that his favorite Thanksgiving traditions are an early morning run, followed by having family over his house. But this year, what’s traditionally American has a bit of a twist. American Depositary Recepits (ADRs), first created by J.P. Morgan in 1927 to provide access to shares of British retailer Selfridges from within the U.S. and traded in dollars, are traditionally issued by one of four depositories: BNY Mellon, Citi, Deutsche Bank or J.P. Morgan. Now, however, brokerage firm Convergex has launched a depository of their own, the first of its kind in nearly 20 years. Through partnerships with global custodians, transfer agents and the like, Convergex is ready to take on the growing ADR space.
GC: What made you want to launch the depository now?
AL: On the brokerage side, we’ve been offering an ADR conversion product, ADR direct and reverse ADRs, where we have over 100 clients, a dedicated desk, patented methodology, and it’s been a nice business for us. One of the things we noticed post the 2008 4th quarter rule change that the SEC made, specifically with unsponsored ADRs, is that over the years, the percentage of trading that we do for our clients in unsponsored ADRs has gone up significantly, which actually caused us to make a lot of changes on the brokerage side with our clients in terms of how to better service them. So we got to thinking, could we do a better job if we internalize this flow? The rule change basically said, in effect, you don’t need the issuer to be part of the registration statement with the SEC anymore; it’s up to the depository to meet certain requirements of the ’34 Act. And the SEC did that for reason, which was to make more ADR programs available to investors. So it’s been successful. Unsponsoreds are now, not just in our business but if you look at other ADR depositories, one of the fastest growing parts of the ADR business. So we said, ‘Well, the barriers to entry to get into this business, other than the intellectual capital and time, etc., are not as great as they had been historically. We think we can do it.” Plus, I was previously part of the senior management team at BNY Mellon ADRs. So I’ve seen both sides: I’ve seen the depository side, and I’ve seen the brokerage side of it. `
We’re in the beta phase now, live in some of our major markets, and we’ll be live in 27 markets early in the first quarter. We’ve already set up all the infrastructure to do this, and we have an ADR depo portal that centralizes all the transactions and messaging. We also have bulge bracket custodians working with us, transfer agents, dividend reclaim partners, etc.
GC: How do you differentiate from the other ADR depositories?
AL: One of our differentiators is serving as a centralized touchpoint for our clients. We can do things with our clients directly, where our brokerage business and our depo business are working together end to end, helping our clients set up brand new programs.
We don’t have to go to somebody else to ask them to do it. We can help our clients better understand the processing of the conversion trade because we’re in the middle of it now, and same applies to corporate actions that occur when you do ADR conversion trading, market intelligence associated with ADR conversion trading, etc. Owning the plumbing on the depo side of it gives you unique insight. So we think the centralized touchpoint will help us distinguish ourselves to our clients and that our clients, through us, will be less swivel chair, meaning if you call us, we can tell you everything about what’s going on from one desk. I would suspect from the way we’ve historically done our business that when there’s issues with the ADR at other depositories, that buy-side manager goes to their respective depository to find out what’s going on, goes to their broker-dealer to see what’s going on, or may go to the global custodian to see what’s going on. That wouldn’t happen in our unsponsored world. The other differentiator is our technology. We’re building new technology that we think will help us process the depo business more efficiently.
GC: Tell us about the partnership with custodians. What made them want to work with you rather than compete with the other ADR depositories directly themselves?
AL: We had a robust RFI and bidding process to represent us as a custodian, and I think the issue that came up with custodians that were interested in partnering us, as opposed to just doing it themselves, is that the ADR depo business is a highly specialized business, and in terms of knowledge transfer, it’s a limited number of professionals who truly understand the business, and it’s a big commitment to set this up.
When we spoke with some of the other custodians that were not in the business, they were interested to partner with us, because they saw this as a potential gap in their offering.
Those that are in the global custody world already have brick and mortar and are doing business with institutional investors, so we fit into the scale that they’ve already built, and the ADR provides good diversification to their portfolio. From a servicing standpoint, not that we don’t expect excellent servicing from our providers, but in terms of the number of services that a custodian needs to provide a depository as opposed to an investment manager, it tends to be less. There’s not ERISA issues, for example, there’s not trading issues, so it should be a simpler model for a global custodian to service the custody end of the depository. There are some nuances, but the vast majority of what a custodian has already built overseas can already service this. It’s just like adding a new client, but a different sort of new client.