Ireland is aiming to migrate remaining ETF issuers to an international issuance and settlement model by the end of the year, the head of the country’s trade body for funds said.
But the ambition could be affected by the Covid-19 pandemic.
More than 90% of ETF assets in Ireland had been migrated to the international model by the end of February as the country looks to increase the efficiency of ETF asset servicing.
The international structure allows ETF shares to be created and settled centrally through either of the two providers competing in the space – the international central securities depositaries (ICSDs) Clearstream and Euroclear – rather than through individual domestic CSDs.
The ICSD model was first developed in 2014 in an effort to reduce this friction in Europe’s ETF market, creating US-type levels of liquidity and secondary-market buoyancy.
Pat Lardner, chief executive of industry association Irish Funds, said: “The ETF issuers, service provider community and the ICSDs have worked closely over the past 18 months to ensure that all ETF issuers have an allocated transition slot to an ICSD model. At present, all Irish ETF issuers have an allocated slot to move to the ICSD model by the end of 2020.”
The coronavirus pandemic may yet impact on the migration plan, though, says Ciaran Fitzpatrick, head of ETF servicing in Europe at State Street. Issuers have to complete a legal process, which normally involves a number of appearances before the Irish courts before announcing the change to shareholders and convening an EGM. However, the Irish courts have been closed for a number of weeks, probably slowing down the overall process.
“If we can get every issuer in Ireland into the model by the end of 2020, it would be a significant milestone and would contribute to creating a more centralised and automated market with greater volume and liquidity and a reduction in settlement failures,” said Fitzpatrick.
Rob Rushe, Emea head of ETF services at BNY Mellon, said more could be done to raise awareness among traders as many could be unaware that they could trade ETFs via the ICSD model, as long as it is agreed in advance with their counterparty.
“By and large, most exchanges treat ETFs as equities. There is no unique identifier to mark them as ETFs. Consequently, they will revert to their default status when it comes to settlement and miss out on possible benefits,” said Rushe.
A 2019 ETF report by KPMG Ireland found Ireland was home to 60% of Europe’s ETF assets.
The report – called ‘Are you with the right ETF service provider?’ – also raised awareness of how the choice of service provider can influence ETF investors’ total cost of ownership. Given that exchange-traded funds are price-driven investment vehicles, the report argued that more should be made of this point.
Twelve per cent of respondents to the KPMG survey said they were satisfied with their providers while 88% expressed “mixed feelings”.
Jorge Fernandez Revilla, the Emea ETF leader at KPMG Ireland, said it is so hard for ETF issuers to change their service providers, since they are deeply embedded in their processes. “This makes it very difficult for new [service provider] entrants to the Irish market,” says Revilla.
“Some of the new entrants have very good platforms and can offer the benefit of access to global custody, seed capital and capital-markets access and newer technology – but they really need a flagship client to get any credibility. And in the current Covid-19 conditions, changing ETF provider will be even less of a priority.”
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