BlackRock and Euroclear to pilot cross-border settlement of ETFs

Jun 4th, 2013 | By | Category: ETF and Index News

BlackRock, the firm behind iShares, the world’s largest provider of exchange-traded funds (ETFs), and Euroclear Bank, a leading provider of post-trade services, have unveiled plans to revolutionise ETF trade processing and settlement across Europe.

BlackRock and Euroclear to pilot cross-border settlement of ETFs

BlackRock is to pilot the cross-border settlement of European ETFs in Euroclear’s international central securities depository.

At present, all cross-exchange listed ETFs in Europe are issued and traded on one or more national stock exchanges and settle in the national central securities depository (CSD) of the exchange where the trade is executed. This often causes inefficiencies when ETFs are traded across borders.

BlackRock and Euroclear are looking to circumvent the current arrangement by piloting an ETF with an international security structure which will be issued and settle for the first time in an international CSD, or ICSD.

By using a single European settlement location, it is expected the new international ETF structure will improve trading liquidity, ease cross-border ETF processing and significantly lower transaction costs for investors.

In the US, a single settlement location for ETFs has been in place for years, providing efficiency at all levels of trading, clearing and settlement. By simplifying the issuance structure and post-trade environment in the European ETF market, it will make it easier for liquidity providers to service clients and ultimately lower the cost of owning ETFs through reduced transaction costs.

Tim Howell, Chief Executive Officer of Euroclear, who described the current system as inefficient, complex and labour-intensive, said: “We believe the new international ETF structure that we and BlackRock will launch later this year will transform ETF trading and settlement in Europe. The beauty of our service offering is that it centralises settlement for ETF trades conducted on multiple trading venues. This structural shift, that clearly recognises ETFs as internationally traded securities, will further broaden investor appeal and provide the optimal post-trade arrangements. This will enable ETFs to continue their rapid rate of growth in Europe.”

Mark Wiedman, Global Head of iShares, added: “This pioneering partnership seeks to facilitate growth in the European ETF market by simplifying the issuance structure and post-trade environment of European ETFs. In order for the European ETF market to reach $1 trillion in the next three to five years, the entire market ecosystem must become more efficient for investors. Access must be widened to encompass new investors and operating simplicity must be delivered in the form of lower transaction costs.”

Assuming the pilot proves a success, additional iShares ETF launches using the new international structure are anticipated. It is also likely that elements of the structure will be adopted by rival ETF providers, especially for their most popular cross-exchange listed ETFs.

The announcement from Euroclear and BlackRock comes less than a month after BATS Global Markets revealed that its Chi-X Europe platform had been granted Recognised Investment Exchange (RIE) status, putting it in direct competition for primary ETF listings with mainstream European exchanges such as the London Stock Exchange, NYSE Euronext and Deutsche Borse.

The combination of these developments – both of which are aimed at improving efficiencies in the European ETF market – spells good news for  ETF investors here in Europe, who have typically been burdened by inferior liquidity and higher trading costs compared to their US counterparts. Ultimately, enhancements to market microstructure should help the European ETF industry win an ever-increasing share of managed assets under management.

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