Chancellor Sunak’s decision to drop CSDR to benefit CREST-settled UK ETFs

Could lead to tighter spreads

Tom Eckett

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ETF trades settling via CREST could have a “competitive advantage” following Chancellor Rishi Sunak’s decision for the UK to not participate in the incoming CSDR regime.

Last month, the Chancellor of the Exchequer announced the UK would not be implementing the Central Securities Depositaries Regulation (CSDR) settlement regime. CSDR was set to be introduced in February 2021 to the European market however ESMA proposed a further delay last week due to the impact of coronavirus.

In a written statement, Sunak said: “Leaving the EU means the UK has taken back control of the rules governing our world-leading financial services sector.

“Any future legislative changes will be developed through dialogue with the financial services industry, and sufficient time will be provided to prepare for the implementation of any new future regime.”

CSDR, which is likely to come into effect in February 2022 now, is designed to harmonise settlement standards across the European market.

As part of this, it aims to improve settlement rates by imposing fines on market participants that fail to settle on time.

Since the regime was introduced, industry participants have warned the fines could lead to additional costs being passed onto the end investors by market makers.

As Simon McGhee, head of ETF business development, EMEA, at Bluefin Europe, said: “Market makers will be more mindful of the daily penalties for settlement failure and have to price in the additional cost of buy-in risk.”

With the UK withdrawing from the CSDR regime, this could benefit UK-listed ETFs as market makers would be able to keep spreads tighter without the threat of being fined for late settlement.

According to Simon Barriball, ETP and portfolio trading, Europe, at Virtu Financial, however, UK-listed ETFs that settle in Euroclear would remain in the scope of CSDR.

“I can see a strong push back from UK clients and brokers wanting to settle UK-listed ETFs back in CREST post the introduction of CSDR to remain out of the scope of CSDR,” he added.

Where this could become complicated is CREST is owned by Euroclear so there remains a question mark over whether the Brussels-based firm will allow a subsidiary to be outside the scope of CSDR.

While Sunak has stated the UK’s position on CSDR, it remains to be seen whether the UK can fully dictate what decision CREST makes.

Furthermore, the majority of issuers have recently migrated their ETFs to the ICSD model, which settles all ETFs either on Euroclear or Clearstream, in preparation for the UK's exit from the European Union in March 2021.

According to BNY Mellon, some €61bn of Irish ETP migrations are set to complete by the end of this year leading to 96% of Irish ETPs using some form of the ICSD model.

However, McGhee stressed: “It is worth noting that some ETF issuers have still not moved to the ISCD model and may have a competitive advantage if CSDR do not apply to CREST settled securities.”

With CREST remaining outside the scope of CSDR, Barriball predicted this could lead to an influx of ETFs being listed in the UK due to the tighter spreads on offer.

Furthermore, despite the migration of UK listed ETFs to Euroclear and Clearstream’s ICSD model, the associated costs of CSDR could see a move back to CREST.

“Regulation should be about ensuring elements of market inefficiency are ironed out,” he continued. “CSDR is well intentioned but the associated costs will be born by all participants including end investors.

“Additionally, we could see the first regulatory divergence from the UK post-Brexit impact the efficient functioning of the European ETF industry.”


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