International ETF Structure Gains Ground

Terry Flanagan

State Street Global Advisors has become the first issuer to migrate exchange-traded funds from a domestic structure to an international structure after Blackrock issued an ETF with an international structure in June.

SSGA plan to merge thirteen SPDR ETFs to an international ETF structure under Irish Law towards the end of this year. The international structure designed by Euroclear Bank allows the ETFs to be ssued and settle for the first time in an international central securities depository.

Stephan Pouyat, global head of capital markets at Euroclear. told Markets Media: “Having State Street Global Advisors soon to migrate 13 ETFs is very important as industry practitioners realise that highly efficient post-trade services for this instrument type has now become a reality.”

In Europe the ETF market is fragmented as the same fund can be listed on a number of national stock exchanges and settled locally in the national central securities depository of the exchange where the trade is executed.

As a result it is difficult and expensive to trade same ETF across borders i.e buy an ETF listed on one national exchange and sells it a on a different country’s exchange. Market participants need to have accounts with multiple national CSDs in order to move ETFs between countries, reconcile their positions and to follow different post-trade market practices in different markets. There is an increased potential for settlement failures, fines, counterparty compensation claims and ETF buy-ins to avoid settlement fails leading to ETFs in Europe trading at much wider spreads than in the US.

“Domestic ETFs experience post-trade fiction as they are held in the local market with settlement dependent on the services offered by the local CSD, opening hours, currency and interoperability limitations,” added Pouyat. “The international structure that we have introduced will greatly reduce this friction and the related costs and risk.”

Pouyat said a conservative estimate of the friction costs in settling European ETFs across borders under the current domestic set up is €200m. “Every week we see new market players adopting the international structure as they realise that trading is much easier than it was previously,” he added.

Under the international ETF structure both new issues and settlement of transactions can take place in an international CSD. Local CSDs can also provide post-trade services for internationally-structured ETFs via their links with the ICSD.

The 13 State Street ETFs are listed on Euronext Paris, Euronext Amsterdam, Euronext Brussels, Borsa Italiana, SIX Swiss Exchange and will also list on the London Stock Exchange for the first time.

SSGA said in a statement: “We anticipate that the benefits of this structure will include reduced operational costs and risks, improved liquidity, tightened bid-ask spreads and the creation of a simpler, more precise process for all parties.”

In addition to changing the structure of 13 ETFs, SSGA said it was reducing fees across 15 of its core equity and fixed income ETFs by 20% from the beginning of this month.

Euroclear is in discussions with other ETF issuers about using the international structure according to Pouyat.

“We will hopefully connect the international structure to exchanges and ETF issuers in US and Asia before the end of the year, but that is a complex process driven entirely by the strategies of the ETF issuers,” he added. “We are working meticulously to add to the current backbone of services, to further maximise value for the industry.”

Pouyat said a long-term goal for the infantry is to see the same ETF readily accessible for trading all around the world, unencumbered by post-trade issues.

In June BlackRock listed an iShares with an international structure on Bats Chi-X Europe in partnership with Euroclear.

Leland Clemons, head of iShares capital markets in EMEA said at the time: “Market infrastructure improvements are imperative to support the rapid growth of the ETF industry and we hope to see this structure adopted by providers across Europe to continue to drive the ETF market evolution.”

On October 1 Bats Chi-X Europe introduced a reporting service for ETFs ahead of the requirements in MiFID II, the new regulations covering trading in the European Union from 2017.

The exchange said that between 70% and 80% of ETFs listed in Europe are traded over-the-counter on a daily basis which is slowing the growth of a pan-European ETF market.

In the new service traders are encouraged to report all their ETF trades to BXTR, the exchange’s trade reporting platform, within three minutes of execution rather than having to report to multiple national exchanges or trade data monitors. The data will then be made publicly available on Bats’ market data feeds either immediately or with a permitted delay depending on the size of the trade.

John Keogh, managing director, Susquehanna International Securities said in a statement: “Put simply, greater transparency of the prices and volumes traded will promote better liquidity. As more trading flows are directed to central limit order-books, bid ask spreads should tighten and displayed volumes should increase.”

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