Innovative solutions for the ETF market


A recent research paper gives insights into post-trading fragmentation issues and analyses flexible solutions to foster efficiencies. But what is it all about? Bernard Tancré, Head of Investment Funds Services at Clearstream, gives some insights. 

Why are ETFs so popular at the moment?

With ETFs one could say that investors get more for their money. ETFs have the advantages of higher liquidity, more transparency and lower costs which all contribute to a potentially higher rate of return.
Institutional and retail investors choose ETFs as typically they are traded through the day offering a high level of liquidity and are particularly favoured for short-term investment. Another advantage is, that they tend to have lower associated fees than their mutual fund counterparts, yet offer more opportunities for maximising value as they are stock exchange listed so prices are visible throughout the trading day. This real-time data availability together with full disclosure of constituents and their relative weighting offer an enhanced level of transparency. Additionally, ETFs offer opportunities to hold a diverse portfolio, hedge in a wider range of securities and even provide a more tax efficient return on the underlying securities.          

What are current developments within the market?

ETFs meet many investor objectives and are already a huge success story particularly in the US, but we should not underestimate their potential here in Europe where the growth value of European ETFs has increased more than six-fold over the last ten years. It is investment common sense to capitalise on this and to invest in future growth. Clearstream aims to improve efficiency in the post-trade segment and to facilitate a more liquid ETF market providing greater transparency and better pricing in order to meet the needs of more investors. To reach this goal we continue to reinforce the solution based on ICSD settlement by making issuance more efficient for asset managers and administrators, but also by maintaining and building on the link between ICSD and CSD settlement (including T2S settlement) to provide maximum flexibility and benefit to issuers, investors and the market in general.    

Which solutions does Clearstream offer?

Clearstream offers a range of innovative solutions for ETF issuance tailored to different needs and ultimately services ETFs issued directly within T2S as well as those issued outside T2S.
In the ETF market, there are generally two issuance models – one for the ICSD infrastructure and the other for the CSD infrastructure – governing the lifecycle of trading, clearing and settlement. Clearstream’s new ICSDplus issuance model, goes a step further, using a unique Fund Issuance Account capability to give direct access to T2S taking advantage of all the cross-market settlement, low settlement costs and efficiency benefits this infrastructure brings. Both ICSD issuance models pave the way to many efficiencies, cost reductions and post-trade fragmentation. The flexibility of this type of model allows for efficient coping mechanisms for activities ranging from new issuance to regulatory or market change.