Brexit Impact to Irish-Issued Exchange-Traded Products
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Brexit Impact to Irish-Issued Exchange-Traded Products
Ireland is the largest domicile of The most important decision facing ETF
managers is which alternative settlement
exchange-traded funds (ETFs) in
model to use. There is very little time left to
Europe, with nearly $500 billion in select an alternative for Irish-issued ETFs
assets across all exchange-traded that are still settling in the domestic model
products.1 ETF managers with through EUI. Here are the key options.
Irish-issued securities must carefully
1. Alternative Domestic Settlement model
consider the impact that Brexit will
have on their settlement process. In One alternative for ETF managers who currently
issue and settle Irish-issued ETFs is to move the
recent months, regulators have made settlement into a different domestic settlement
their message clear: affected model. In this framework, the ETF shares would
managers should take action now. be issued initially from another European CSD
such as Clearstream Bank Luxembourg or a
In December 2018, the European Commission domestic Euroclear branch and then transferred
(EC) granted a time-limited equivalence for to CREST as a CREST Depositary Interest (CDI).
UK central security depositories (CSDs) to
continue to accept the settlement of Irish-issued ETF shares must be able to transfer across
securities until the end of March 2021, impacting markets to satisfy local demand. A CDI is
any ETF issuers settling shares through CREST treated as a foreign security in the UK, which
in the UK. Euro-denominated ETFs will also means there are higher fees for settlement
be affected, as settlement through CREST and custody of the ETF in the UK. If the ETF
will not be possible after that cutoff date. issuer primarily settles the ETF product in
mainland Europe, remaining in a domestic
In March 2019, the European Securities and settlement model is a viable option. Euroclear
Markets Authority (ESMA) announced its time- and Clearstream have both announced options
limited recognition of Euroclear UK & Ireland for a domestic settlement model. However,
(EUI) as a third-country CSD in accordance the impending end to settlement of Euro-
with Article 25 of the EU CSD Regulation, to denominated ETFs in CREST will impact this
be effective in the event of a no-deal Brexit. solution and would require a change of the
EUI has secured direct euro liquidity from ETF’s settlement currency. Therefore, if an ETF
the European Central Bank (ECB) for this is settled across multiple European locations,
period. Like the EC exemption, this ESMA including CREST, then the domestic settlement
recognition expires at the end of March 2021. model would not be the optimal choice.
1
ETFGI, European ETF and ETP Industry Insights, June 2019, and State Street analysis.
12. Transfer to the International Central Industry Engagement
Securities Depository (ICSD) model The Irish market has seen significant
The ICSD settlement model is an extension engagement regarding the movement away
of the eurobond settlement model. The ICSD from the existing domestic settlement model
model for ETFs launched in 2013 after to alternative models. Euroclear Bank and
extensive development with Euroclear Bank, Euronext have engaged with the CBI and the
Clearstream Bank, iShares as ETF issuer, Department of Finance on planning for these
State Street as custodian and Citibank as market changes. While it is possible that
common depositary. The model has proven legislative change will make this process easier,
extremely efficient as it offers centralized there is no guarantee that new rules would be
settlement in the two ICSDs for ETFs as well in place soon enough for a smooth transition.
as a wider settlement window. The benefits are
more timely settlement and a reduced incidence The majority of Ireland-domiciled ETF shares
of settlement fails related to share transfers, are now settled through the ICSD model.
relative to the domestic settlement model. However, there are still several ETF issuers
with Irish-domiciled products that will need
A transition to the ICSD model happens at the to select an alternative settlement model
legal entity level. This means that managers in advance of Brexit. An orderly conversion
may need to execute multiple transitions, process is essential for all ETF issuers
depending on how many umbrellas they have across the Irish market, which requires
in their ETF structure, which could increase engagement from all market participants.
the timeline for any conversion. The Central
Bank of Ireland (CBI) and the Irish Department
of Finance have directed ETF issuers to use The Irish market has
a Scheme of Arrangement (SoA) to execute
seen significant engagement
an orderly transition away from the domestic
EUI settlement model. The SoA requires a regarding the movement
shareholder vote and also the submission of
applications through the Irish Courts, due to a
away from the existing
change in property rights of the shareholders. domestic settlement model
Consequently, the conversion process can be
lengthy, which requires significant planning to alternative models
and engagement across many parties.
2How We Can Help For more information, contact:
In Ireland, State Street has successfully
converted more than 300 ETFs across multiple
clients from the domestic settlement model for
ETF shares to the ICSD model. Today, we service
more than 400 Irish-domiciled funds in this
model and are the leading ETF service provider
in Europe, servicing 67 percent of the market.2 CIARÁN FITZPATRICK
Head of ETF Servicing, Europe
Our close involvement in the development of the
+3 531 776 6089
ICSD model means we can offer expert guidance
ciaran.fitzpatrick@statestreet.com
in all aspects of the conversion process and daily
operations. We continue our strong industry
engagement by participating in the Euroclear and
market working group charged with developing
solutions for the end-to-end conversion from
the existing EUI domestic settlement model.
Our experience gives us a unique viewpoint, and
we are well positioned to engage with managers FRANK KOUDELKA
of all types on their post-Brexit operating Global ETF Product Specialist
models. We recommend that affected managers +1 617 662 4749
make their preparations as soon as possible. francis.koudelka@statestreet.com
2
ETFGI, Global ETF and ETP Industry Insights, June 2019, and State Street analysis.
3statestreet.com State Street Corporation State Street Financial Center ©2019 State Street Corporation One Lincoln Street All Rights Reserved Boston, Massachusetts 02111-2900 2688166.1.1.EMEA.RTL +1 617 786 3000 Expiration date: 08/31/2020 Important information All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. Views and opinions are subject to change at any time based on market and other conditions. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without State Street’s express written consent. This document and information provided herein is for marketing and/or informational purposes only, it does not take into account any prospect or client’s particular investment or other financial objectives or strategies nor any prospect or client’s legal, regulatory, tax or accounting status, nor does it purport to be comprehensive nor intended to replace the exercise of a prospect or client’s own careful independent review regarding any corresponding investment or other financial decision. This document and information provided herein does not constitute investment, legal, regulatory, tax or accounting advice and is not a solicitation to buy or sell securities nor to enter into any transaction, nor is it intended to constitute any binding contractual arrangement or commitment by State Street to provide securities services nor any other financial services. Any information provided has been obtained from sources believed to be reliable at the time of publication, nonetheless, we cannot guarantee nor do we make any representation or warranty as to their accuracy and you should not place any reliance on such information. This document and any comments and statements made herein do not necessarily reflect those of State Street, its subsidiaries or its affiliates. State Street hereby disclaims all liability, whether arising in contract, tort or otherwise, for any losses, liabilities, damages, expenses or costs arising, either direct or consequential, from or in connection with the use of or any reliance place upon any information provided. This document and information provided herein is not intended for retail clients, nor for distribution to, and may not be relied upon by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to applicable law or regulation.
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