The European ETF Market
It has been 16 years since the first ETF came to market in Europe. Assets under management in the European ETF market reached €473.6 billion at the end of July 2016.
The European ETF industry has over 1,500 ETFs with Ireland leading the way as domicile with 47% of all product structures. Luxembourg accounts for a further 27%. Of these ETFs only 32% have a single stock exchange listing, with 44% having between 2-3 listings on exchange in the region, and a further 22% with 4-5 listings. This fragmentation and local focus is a significant factor in the estimated breakeven cost of €8 billion for ETFs in the European market.
Notwithstanding that most ETFs are set up as UCITS, as benefit from the UCITS passport for sale, in Europe ETFs must be locally registered in each jurisdiction in which they are to be sold, with a local listing preferable in each market.
With many ETFs listed on multiple exchanges across Europe, liquidity is fragmented into small discrete pools. Transparency is limited by a lack of trade reporting in the ETF sector, with an estimated 70% of ETF trades currently unreported. This memorandum aims to serve as a guide through the process, key considerations and differences at local market level in bringing ETFs to market and to listing across the principal European exchanges.
Cross Listing on Multiple Exchanges
The process of bringing ETFs to market in Europe differs substantially from the US environment, with European ETFs having to consider the requirements of a range of national exchanges, local regulations and the appointment of local agents.
With no centralised exchange system in Europe, the European ETF market is largely centred on the more popular European exchanges such as the London Stock Exchange ("LSE"), Deutsche Borse, SIX, Borsa Italiana and Euronext. ETFs are usually cross listed on a number of these markets as the product is sold across Europe, with 68% of European ETFS listed on 2 or more exchanges. It is important to be aware that listing requirements and regimes at each exchange can differ substantially and involve separate listing applications and separate compliance and reporting requirements in each jurisdiction.
By way of example, the following table shows the extent to which some of the larger ETF ranges are distributed across Europe:
Trading volumes across the main exchanges show that the top 6 exchanges accounted for 98% of on exchange ETF turnover in October 2016:
Local Registration for Sale
The first step in selling in Europe involves the registration of the ETF for sale in each jurisdiction in which it is to be sold or listed. Registration is facilitated under the UCITS brand. This efficient passport regime allows UCITS to be sold on a retail basis throughout the EU. The UCITS regime provides a 10 day timescale for local registration in each Member State, and is undertaken directly by the ETF's Home Competent Authority. An Issuer should however consider that requirements to appoint local agents in each jurisdiction for such registrations may extend this timeline.
Switzerland, being outside of the EU, and therefore outside of the scope of the UCITS Directive, operates on a different basis. Registration with the local regulator, FINMA, takes 30 days. It is possible to sell to institutional investors in Switzerland without a local listing.
Following registration for sale, the ETF is generally listed on the domestic exchange in each jurisdiction. The listing process in each jurisdiction differs considerably, but generally involves the following steps:
- Appointment of local service providers (as appropriate) – Paying Agent, Registration Agent, Legal Adviser, Listing Sponsor, Market Makers, Distributors;
- Application to Listing Authority for listing approval (in the UK only through UKLA);
- Application to Exchange for listing & trading.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.