Embed Size (px)
Citation preview
Brexit Impact to Irish-Issued Exchange-Traded Products
Ireland is the largest domicile of exchange-traded funds (ETFs) in Europe, with nearly $500 billion in assets across all exchange-traded products.1 ETF managers with Irish-issued securities must carefully consider the impact that Brexit will have on their settlement process. In recent months, regulators have made their message clear: affected managers should take action now.
In December 2018, the European Commission (EC) granted a time-limited equivalence for UK central security depositories (CSDs) to continue to accept the settlement of Irish-issued securities until the end of March 2021, impacting any ETF issuers settling shares through CREST in the UK. Euro-denominated ETFs will also be affected, as settlement through CREST will not be possible after that cutoff date.
In March 2019, the European Securities and Markets Authority (ESMA) announced its time-limited recognition of Euroclear UK & Ireland (EUI) as a third-country CSD in accordance with Article 25 of the EU CSD Regulation, to be effective in the event of a no-deal Brexit. EUI has secured direct euro liquidity from the European Central Bank (ECB) for this period. Like the EC exemption, this ESMA recognition expires at the end of March 2021.
The most important decision facing ETF managers is which alternative settlement model to use. There is very little time left to select an alternative for Irish-issued ETFs that are still settling in the domestic model through EUI. Here are the key options.
1. Alternative Domestic Settlement model
One alternative for ETF managers who currently issue and settle Irish-issued ETFs is to move the settlement into a different domestic settlement model. In this framework, the ETF shares would be issued initially from another European CSD such as Clearstream Bank Luxembourg or a domestic Euroclear branch and then transferred to CREST as a CREST Depositary Interest (CDI).
ETF shares must be able to transfer across markets to satisfy local demand. A CDI is treated as a foreign security in the UK, which means there are higher fees for settlement and custody of the ETF in the UK. If the ETF issuer primarily settles the ETF product in mainland Europe, remaining in a domestic settlement model is a viable option. Euroclear and Clearstream have both announced options for a domestic settlement model. However, the impending end to settlement of Euro-denominated ETFs in CREST will impact this solution and would require a change of the ETF’s settlement currency. Therefore, if an ETF is settled across multiple European locations, including CREST, then the domestic settlement model would not be the optimal choice.
1 ETFGI, European ETF and ETP Industry Insights, June 2019, and State Street analysis.
1
2. Transfer to the International Central Securities Depository (ICSD) model
The ICSD settlement model is an extension of the eurobond settlement model. The ICSD model for ETFs launched in 2013 after extensive development with Euroclear Bank, Clearstream Bank, iShares as ETF issuer, State Street as custodian and Citibank as common depositary. The model has proven extremely efficient as it offers centralized settlement in the two ICSDs for ETFs as well as a wider settlement window. The benefits are more timely settlement and a reduced incidence of settlement fails related to share transfers, relative to the domestic settlement model.
A transition to the ICSD model happens at the legal entity level. This means that managers may need to execute multiple transitions, depending on how many umbrellas they have in their ETF structure, which could increase the timeline for any conversion. The Central Bank of Ireland (CBI) and the Irish Department of Finance have directed ETF issuers to use a Scheme of Arrangement (SoA) to execute an orderly transition away from the domestic EUI settlement model. The SoA requires a shareholder vote and also the submission of applications through the Irish Courts, due to a change in property rights of the shareholders. Consequently, the conversion process can be lengthy, which requires significant planning and engagement across many parties.
Industry Engagement
The Irish market has seen significant engagement regarding the movement away from the existing domestic settlement model to alternative models. Euroclear Bank and Euronext have engaged with the CBI and the Department of Finance on planning for these market changes. While it is possible that legislative change will make this process easier, there is no guarantee that new rules would be in place soon enough for a smooth transition.
The majority of Ireland-domiciled ETF shares are now settled through the ICSD model. However, there are still several ETF issuers with Irish-domiciled products that will need to select an alternative settlement model in advance of Brexit. An orderly conversion process is essential for all ETF issuers across the Irish market, which requires engagement from all market participants.
The Irish market has seen significant engagement regarding the movement away from the existing domestic settlement model to alternative models
2
2 ETFGI, Global ETF and ETP Industry Insights, June 2019, and State Street analysis.
How We Can Help
In Ireland, State Street has successfully converted more than 300 ETFs across multiple clients from the domestic settlement model for ETF shares to the ICSD model. Today, we service more than 400 Irish-domiciled funds in this model and are the leading ETF service provider in Europe, servicing 67 percent of the market.2
Our close involvement in the development of the ICSD model means we can offer expert guidance in all aspects of the conversion process and daily operations. We continue our strong industry engagement by participating in the Euroclear and market working group charged with developing solutions for the end-to-end conversion from the existing EUI domestic settlement model.
Our experience gives us a unique viewpoint, and we are well positioned to engage with managers of all types on their post-Brexit operating models. We recommend that affected managers make their preparations as soon as possible.
For more information, contact:
CIARÁN FITZPATRICK
Head of ETF Servicing, Europe
+3 531 776 6089
FRANK KOUDELKA
Global ETF Product Specialist
+1 617 662 4749
3
Important information
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. Views and opinions are subject to change at any time based on market and other conditions. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without State Street’s express written consent.
This document and information provided herein is for marketing and/or informational purposes only, it does not take into account any prospect or client’s particular investment or other financial objectives or strategies nor any prospect or client’s legal, regulatory, tax or accounting status, nor does it purport to be comprehensive nor intended to replace the exercise of a prospect or client’s own careful independent review regarding any corresponding investment or other financial decision.
This document and information provided herein does not constitute investment, legal, regulatory, tax or accounting advice and is not a solicitation to buy or sell securities nor to enter into any transaction, nor is it intended to constitute any binding contractual arrangement or commitment by State Street to provide securities services nor any other financial services. Any information provided has been obtained from sources believed to be reliable at the time of publication, nonetheless, we cannot guarantee nor do we make any representation or warranty as to their accuracy and you should not place any reliance on such information. This document and any comments and statements made herein do not necessarily reflect those of State Street, its subsidiaries or its affiliates. State Street hereby disclaims all liability, whether arising in contract, tort or otherwise, for any losses, liabilities, damages, expenses or costs arising, either direct or consequential, from or in connection with the use of or any reliance place upon any information provided. This document and information provided herein is not intended for retail clients, nor for distribution to, and may not be relied upon by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to applicable law or regulation.
State Street CorporationState Street Financial CenterOne Lincoln StreetBoston, Massachusetts 02111-2900+1 617 786 3000
statestreet.com
©2019 State Street Corporation All Rights Reserved
2688166.1.1.EMEA.RTLExpiration date: 08/31/2020
