After the UK leaves the European Union, there is a significant chance the UK will lose its passporting rights that allow UK-based firms to provide financial services to EU-domiciled firms.
In this scenario, Euroclear UK & Ireland (EUI), Ireland’s issuing and settlement services provider, will no longer be able to provide issuer central securities depository (CSD) services for Irish securities, as of April 2021.
Therefore, Euroclear has made the decision to move its issuance of Irish ETFs and Irish corporate securities to Euroclear Bank in Belgium.
Ireland is the leading ETF market in Europe with around 60% (or €430bn assets) of all European ETFs domiciled there.
While 80% of the Irish ETF market is already issued under the international central securities depository (ICSD) model, which allows issuers to offer ETFs across multiple exchanges, there remains more than $100bn of ETF assets that could need to be migrated over to Euroclear Bank by April 2021.
In a report, entitled Brexit and ETF Migration: Countdown to March 2021, BNY Mellon has highlighted the options for ETF issuers if they are not granted passporting rights or new legislation fails to be enacted.
The report said ETF providers can use a domestic model, which makes sense for ones serving a single market, or an international model known as iETF.
iETF, which was introduced by Euroclear in December 2013, looks to replicate the US approach, where settlement takes place in a single location using the ICSD model.
The benefits of this model, the report explained, was it removes many of the challenges associated with domestic settlement such as enabling trading on multiple exchanges.
ETF issuers such as State Street Global Advisors have already migrated its entire ETF range over to Euroclear's international settlement platform.
“The use of a single settlement location reduces errors and the need for multiple International Securities Identification Numbers,” Rosa Scappatura, head of ICSDs relationships for BNY Mellon Corporate Trust and co-author of the report, said. “The set-up process is smoother.
“iETF lowers operational costs as people are no longer required to manage transfers,” she continued. “As ICDS does not require broker-dealers to maintain local inventory, it reduces operational risks, improves liquidity and lowers bid-offer spreads.”
Although some ETF issuers had made progress already, Rob Rushe, head of ETF services, EMEA, at BNY Mellon, said a number of players are waiting for further developments and are “less engaged”.
According to BNY Mellon, ETF issuers wanting to migrate to the ICSD model by the March 2021 deadline need six to eight months to complete the process meaning they should start the migration in early 2020.
This process will require ETF providers to engage with a number of stakeholders including their administrator, paying agent, relevant exchanges, central counterparty clearing houses and market makers and ICSDs such as Euroclear.
“Time is of the essence because of the need to evaluate migration options and allocate resources accordingly,” Rushe added.