Accessing European exchange-traded funds (ETFs) is expected to become easier for Asian investors on the back of the recently-announced distribution platform launched by the Hong Kong Exchange (HKEX) and Euroclear Bank.
The new distribution platform allows for same-day settlement and clearing of European shares sold to Asian investors, and is expected to help enhance settlement efficiency, reduce cost, and improve risk management for Asian investors eyeing the European ETF market.
Apart from diversification, European ETFs are generally favoured by Asian investors because they provide an easier way of investing in European equities when compared to buying individual stocks or depositary receipts. European ETFs are also more liquid when compared to their Asian counterparts.
“We have received requests for help from ETF issuers in Europe to facilitate more sales of their products to Asia, and Hong Kong is the first market they want us to help them in,” says Mohamed M’Rabti, director and deputy head of capital markets for Euroclear, the Brussels-based international central securities depository (ICSD).
In the past, investing in European ETFs was relatively challenging for Asian investors, including those based in Hong Kong, because of delays in the clearing and settlement of shares which, in turn, resulted in higher trading costs and more operational risk.
“Moving shares from Europe to Asia can take from two to 10 days. It is also a very complex process which doesn’t help in terms of having good liquidity and getting good spreads. There are also penalties for late delivery so the buyers and market makers are putting on high spreads to cover the risk,” says M’Rabti.
Under the new distribution platform Euroclear has linked itself operationally to the Central Clearing and Settlement System (CCASS), the local securities settlement system used within the HKEX.
By using the Euroclear-HKEX/CCASS platform, a European ETF market maker can transfer shares from Europe to Hong Kong on the same day. Clearing and settlement will also take place on the same day, thus allowing the buyer in Asia to receive ETFs in real-time even across multiple time zones.
The new distribution platform can also expand the universe of European ETFs that are immediately available to Asian investors. For example, there are 663 European ETFs from BlackRock/Ishares that can become immediately available to Asian investors through the Euroclear-HKEX/CCASS platform.
The ICSD link, however, does not allow for European investors to buy Asian ETFs. “It is possible but we have not yet discussed that with the HKEX. The scope is to really bring European ETFs to Hong Kong,” M’Rabti says.
Euroclear deployed the same ICSD link in Mexico, where the platform has been successful in doubling the volume of ETF sales from Europe to that market.
“The ICSD link, which has proven to be effective in narrowing spreads and driving liquidity, will reinforce Hong Kong’s position as Asia’s ETF marketplace. This aligns with our vision to bring best execution and timely settlement to ETF investors, all in a convenient time zone,” M’Rabti says.