The UK’s exit from the European Union has had an unintended benefit for the European ETF industry and that is the mass migration to the international central securities depositary (ICSD) model.
Due to passporting issues, Brexit means the Euroclear UK & Ireland (EUI) will no longer be able to provide issuer CSD services for Irish-domiciled ETFs which account for 62% – or €430bn – of European-listed ETFs.
With EUI set to become a third-country CSD in January 2021, the issuance of Irish-domiciled ETFs is migrating to Euroclear Bank in Belgium and Clearstream Banking.
According to BNY Mellon in a report entitled Momentum Builds for the ICSD Model, some €61bn of Irish ETP migrations are set to complete by the end of 2020 leading to 96% of Irish ETPs using some form of the ICSD model.
“This change has been prompted in large part by Brexit,” BNY Mellon said.
The move has been described by BNY Mellon as a “pivotal moment” for the ICSD model which came into effect in 2013 to allow cross-listed ETFs to be settled in one pan-European location.
Prior to the ICSD model, firms with ETFs listed on multiple exchanges would need to move the ETF from the national CSD where it had been bought to the national CSD where it was being sold.
“Moving ETPs from one CSD to another in order to deliver the ETPs to the buyer in another market often requires the firm to have accounts with multiple CSDs, to align the firm’s ETP positions among different CSDs and to follow different post-trade market practices in different markets,” BNY Mellon explained.
With the introduction of the ICSD model, ETFs are able to be settled in a more timely manner and there is a reduction in settlement failures meaning improved liquidity, transparency and trading volumes.
According to Stephanie Lermusiaux, head of FundsPlace at Euroclear, improved settlement efficiency has resulted in a 40% reduction in spreads “making ETFs a significantly more attractive proposition for end investors”.
“Many managers have had to address the migration issue for their Irish ETFs, noted the advantages of the international model, and have therefore begun to consider its more widespread application across their European products,” Lermusiaux said. “We are seeing a snowball effect.”
Some ETF issuers made the jump before Brexit, however. State Street Global Advisors (SSGA) was the first ETF issuer to migrate over to the ICSD model completing the process in 2018 while in 2015, BlackRock decided to migrate its entire European ETF range to the ICSD model.
“BlackRock’s decision to use the ICSD model provided comfort to the market,” BNY Mellon continued. “BlackRock’s action was driven by a belief that a multinational central settlement and clearing venue for European securities would make ETF trading more efficient.”
Furthermore, in the report, BNY Mellon predicts there will be a “truly” pan-European ETP market with the widespread use of a single, centralised issuance and settlement platform.
“Anecdotal evidence suggests that increased awareness of the benefits of ICSD – and a feeling that momentum towards the ICSD model is growing – will ultimately prompt managers across Europe to switch their existing ETPs and issue new funds using the international settlement model.
“A second wave of ICSD adoption (post-Irish migration) could take place towards the end of 2020 and may last two or three years – a short time given the relatively long history of the ETP market.”