Ireland is one of the most popular destinations for European ETF issuers to domicile their products due to its tax advantages with roughly $500bn worth of assets in Dublin-domiciled ETFs, according to State Street, but as a result of Brexit, issuers are having to change the model they use to list their ETFs.
Prior to the Brexit referendum, 23 ETF issuers domiciling their products in Ireland would settle their shares through CREST in the UK, however, now the UK is leaving the European Union, the European Commission has set 29 March 2021 as the final date for issuers to use the CREST model.
A number of issuers such as iShares, Invesco and Franklin Templeton have transitioned to the International Central Securities Depository (ICSD) model which has been structured by Euroclear Bank. BNY Mellon estimates over $100bn of ETF assets will move from Ireland to the Euroclear Bank in Belgium as a result of this structure change.
James McManus, head of ETF research at Nutmeg, commented: "The biggest disruption on investors’ minds was all about the settlement of Irish based ETFs in London post no-deal.
"However, this appears to have been solved as back in March when the European Commission gave Euroclear UK & Ireland (the central securities depositary for Irish based London listed ETFs) equivalence status, allowing continued settlement under a no-deal Brexit scenario until March 2021."
The benefits of using this model is a more timely settlement and a reduced incidence of settlement fails related to share transfers, relative to the domestic settlement model.
According to Ciaran Fitzpatrick, head of ETF servicing, Europe, at State Street, other benefits of the ICSD model include improved liquidity, transparency and trading volumes. It opens European ETFs to settle shares in Asia, such as Hong Kong and Singapore.
One issue of implementing these market changes by 2021 is the timeliness. Not all ETF issuers have made the transition and the project can take up to 10 months to complete.
Fitzpatrick said: “One problem is the timeline. A number of issuers have not engaged in the transition and the project takes a long time to complete with the Euroclear Bank.
“All issuers need to start transferring [models] now as it would be damaging to the whole industry if one does not complete it by the deadline.”
As the migration has been implemented as a result of Brexit, uncertainty on when the UK will leave the European Union has left some small issuers thinking Brexit might be cancelled, said Fitzpatrick.
A concern for issuers is ensuring they are well prepared to be able to distribute funds in and out of the UK post-Brexit as well as contractual arrangements for staff based in the UK.
Hector McNeil, co-founder and co-CEO of the recently launched white-label platform HANetf, said these are areas of concern for him and his company. Additionally, another issue is how much effort the company should put into the transition given the uncertainty around Brexit still.
"Luckily we are a new company so there is limited legacy to worry about. I bet it is a huge headache for the longer established guys," added McNeil.
From a regulatory standpoint, it is very important that all ETFs currently settling through CREST can continue to trade effectively in the event of a hard Brexit, according to Tara O'Really, partner at Arthur Cox.
O'Reilly, who was involved in the development of the infrastructure and first ICSD transition for an ETF, said: "The deadline for conversion is March 2021 and while that might seem like there is plenty of time, the transition to the ICSD is process heavy with a number of legal and operational components that need to work in tandem to conclude an effective conversion.
"While these elements are well understood from previous transitions, each issuer needs to engage separately with their relevant service providers and the operational and legal aspects need to coincide at an available transition date," she added.
"We want to ensure that all issuers are ready on time, so the Irish industry is working with issuers to make sure they have the information and support they need to get over the line in time."
It is not public knowledge as to which ETF issuers are still yet begin the restructure. A shareholder vote is required before moving to the ICSD model in advance of any restructure therefore, this information wouldn't be publicly available until the legal process has been formalised.
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