BlackRock and Euroclear to Centralize Post-Trade Infrastructure for First Cross-border ETF in Europe

BlackRock and Euroclear Bank will centralize post-trade agreements for the asset manager’s new iShares ETF in Europe. Under the plan, the ETF will be issued and settled for the first time in an ICSD, Euroclear Bank.

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

“ETF liquidity is currently spread across multiple markets in Europe,” says Ivan Nicora, director, product management, Euroclear. “There are around 2000 ETFs listed and traded across 23 exchanges, leading to a spaghetti effect. Our solution aims to bring greater capacity to trade ETFs over multiple exchanges by centralizing settlement in a single location.”

BlackRock will initially issue one iShare ETF, or pilot ETF, in July. “The market needs a simpler way to settle ETFs,” says Nicora. “Blackrock is an important catalyst for change and if the new ETF structure proves its merit, then it will be open to further issuers.”

Compared to the $1.5 billion ETF market in the US, the European market is worth only about $300 billion. “Filling that gap is the potential for Europe,” says Nicora. “Although Europe is more fragmented in the post trade space, if we treat these ETFs as international securities and centralise settlement in a single venue, then it becomes more comparable with the US.”

In the US, the Depository Trust and Clearing Corporation is the single settlement location for ETFs.

Commenting further, Nicora says: “The post-trade fragmentation in Europe creates fragmentation in ETF liquidity, which in turn creates costs and risks. Liquidity will increase if we can demonstrate the value of this structural solution; the benefits we estimate the initiative will bring is savings of $200 million per year. We are very much unlocking the potential of the European ETF market – and removing the fundamental blocking factor that is the fragmented nature of the post trade space. As BlackRock intends to grow the European ETF market, this is one of the issues they wanted us to address.”

The new partnership aims to grow the European ETF market by simplifying the issuance and post-trade environment. It is also expected to improve liquidity and ultimately lower the costs of ETF transactions through reduced spreads and back-office transaction costs.

“Brokers’ spreads in the US are typically 2 basis points and in Europe they are 20 basis points – that’s because brokers need to be compensated for the costs and risk they are taking in trading and settling ETFs across borders,” says Nicora.

Tim Howell, CEO of Euroclear, commented: “ETF trade processing across borders in Europe has long suffered from inefficient, complex and labor-intensive post-trade processes. BlackRock and Euroclear Bank have listened to the industry’s calls for an improved European solution and worked closely together to provide one. We believe the new international ETF structure that we and BlackRock will launch later this year will transform ETF trading and settlement in Europe.”

Mark Wiedman, global head of iShares, commented: “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 $1trillion 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. We are proud to be a part of this development by making iShares ETFs “Euroclearable” and hope that the result will be valuable for our clients.”

Upon successful completion of the pilot program additional ETFs will be issued using the new international structure.