Sponsored by BNY Mellon
Over half of the European exchange traded product (ETP) market already uses the International Central Securities Depositary (ICSD) model, operated by Clearstream and Euroclear, and uptake is accelerating. Here, Rosa Scappatura, head of ICSDs relationships at BNY Mellon Corporate Trust, explains the drivers of this trend and outlines some of the key benefits of the ICSD model
GC: Why is the ICSD model becoming more important to the European ETP market?
Rosa Scappatura: Irish ETFs represent approximately 62% of European ETFs or around €430 billion of assets under management. Brexit means that Euroclear UK & Ireland will no longer be able to provide issuer CSD services for these securities. Instead, they will be settled by Euroclear Bank, based in Belgium, and Clearstream Banking Luxembourg. The migration of Irish ETPs is underway and should be completed by the end of 2020.
While the Irish migration is a major event in European ETP market history, it is also expected to pave the way for greater adoption of the ICSD model across the European Union.
GC: What is driving the broader shift to the ICSD model?
RS: Many managers compelled to migrate as a result of Brexit also have ETPs domiciled in other European jurisdictions, given the dominance of large issuers in terms of volumes. These managers are inevitably applying their experience of the Irish migration to similar products in other jurisdictions.
GC: When does the ICSD model make sense?
RS: It is increasingly seen as the first choice for managers planning to enter the European ETP market or other extant managers with ambitions to list products on multiple country exchanges. Similarly, the broad trend among big managers towards cross-exchange listed ETPs as a means of consolidating their ETP offerings could increase the appeal of the ICSD model.
GC: What is the attraction of the ICSD model for cross-exchange listed ETPs?
RS: ETPs traded across borders but settled in the national CSD of the exchange where the trade is executed face numerous operational challenges. Moving the ETP from the national CSD where it has been bought to the national CSD where it is being sold requires a firm to have multiple CSD accounts, align ETP positions among different CSDs and follow multiple different post-trade market practices.
Settling in a single pan-European location using the ICSD model delivers operational benefits through streamlining and reducing risk. By simplifying post-trade processing, the model enables market makers to offer more competitive trading spreads to investors, and also boost overall liquidity as a single European settlement location facilitates cross-border ETP trading.
GC: What other benefits does the model offer?
RS: The ICSD model helps issuers to identity where ETFs are held and by whom, and this enables them to better target their marketing efforts. In addition to this, regulatory requirements for transparency – especially in relation to AML and KYC – are increasingly impacting ETFs and other listed instruments. The ability for ETF issuers to identity investors is therefore a major advantage in terms of compliance.
GC: How are other European ETP trends impacting uptake of the ICSD model?
RS: The ETP market is principally comprised of exchange traded funds (ETFs), although exchange traded notes (ETNs) and exchange traded commodities (ETCs) represent roughly a sixth of the total and are growing more rapidly than the market overall. During the turbulent first quarter of 2020, European commodity-linked products attracted inflows of $7.9 billion compared to outflows of $22.8 billion for the ETP market overall.
The benefits of the ICSD model for ETCs and ETNs – as well as green ETFs, which are also expected to grow rapidly – are identical to those enjoyed by ETFs, provided they are listed on multiple exchanges. As these products are often managed by the same teams as existing ETPs, the adoption of the ICSD model by ETCs, ETNs and green ETFs is therefore likely to follow the same path as ETFs.
This Q&A is based on exerts from a BNY Mellon white paper featuring insights from Euroclear, Clearstream and HANetf. To download your copy of ETPs: Momentum Builds for the ICSD Model whitepaper, please click here to download.
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