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T+1 and EU CSDR accelerate need for improved efficiency in ETF creation and redemption processes


There is an increased need for ETF creation and redemption processes to undergo automation and standardisation, due to the EU’s Central Securities Depositories Regulation (CSDR) and the rollout of T+1 globally, according to new research from Calastone. In a white paper titled A New ETF Asset Servicing Paradigm Emerges, Calastone said the process requires automation and standardisation, as issuers ask asset servicers for "bespoke" solutions and customising these on a client-by-client basis may "overwhelm providers and impede scalability".

ETF creation refers to authorised participants (APs), which are typically institutions, assembling a portfolio mirroring the ETF's index, and delivering it to the ETF issuer in exchange for new ETF shares, which can be listed for trading. 

Redemptions sees APs returning ETF shares to the issuer for a basket of securities, the redeemed shares are then cancelled and received securities are either held or sold on the secondary market.

Regulatory pressure regarding settlement is intensifying the call for industry-wide efficiency, according to Calastone. 

Calastone explained that CSDR imposes cash penalties on market participants if settlements fail, which "disproportionately" impacts ETFs as they have higher fail rates due to the underlying assets.

"This is because APs do not always own a full basket of securities when pricing ETFs, and this can occasionally lead to late delivery," the firm added.

A CSDR refit was proposed in March 2022, which could introduce mandatory buy-ins if cash penalties are not effective enough. Mandatory buy-ins allow buyers to go to a third party if securities are not delivered on time and impose a compensatory payment from the original seller to the buyer. Calastone said the introduction of these could create additional problems for APs.

The rollout of T+1 will shorten the timeframe for the delivery of securities from two business days (T+2) to one.

Countries such as the US, Canada and Mexico are transitioning to T+1, while the EU and UK are consulting on whether to transition, Calastone said. They noted that some countries are going further, such as India, which has established T+1 and is considering a shift to T+0 in 2024, then instant settlements in 2025.

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