Unsponsored ADRs Attract Investors, Boosting Volume in OTC Securities

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CORPORATE FINANCING FOCUS

Of the more than 1,000 unsponsored American depositary receipt programs created in the wake of last October's rule change by the US Securities and Exchange Commission, a handful are attracting significant trading interest, helping to boost the profile of the over-the-counter market. Unsponsored ADRs are established by a depositary bank with no direct involvement of the foreign issuer of the underlying shares.

Companies that operate foreign stock exchanges have been among the most active ADRs traded in the OTC markets in the United States recently. The newly created unsponsored ADR for Hong Kong Exchanges and Clearing, the holding company for the Stock Exchange of Hong Kong and the Hong Kong Futures Exchange, traded more than 5.5 million depositary shares in March, for a dollar volume of $52 million, according to Pink OTC Markets. Pink OTC Markets is the leading inter-dealer quotation and trading system for OTC securities.

The unsponsored ADR for the Deutsche Börse traded more than 2 million shares valued at $13 million in the OTC markets in the US in March. Germany's Frankfurtbased stock exchange opened a representative office in Beijing last December and has been actively seeking more foreign listings of its own.

Other actively traded unsponsored ADRs in the US OTC market that were created since October 2008 include a number of Switzerland-based companies: fragrances and flavors maker Givaudan, private bank Julius Baer Holding and Lonza, a chemicals and biotechnology firm.

Reckitt Benckiser, a UK-based manufacturer of household cleansers and personal-care products, also was an active ADR in the OTC securities markets in March, with more than 4.2 million shares traded, with a value of $32 million. French bank Crédit Agricole and tire maker Michelin, along with hypermarket operator Carrefour, also made Pink OTC Markets' listing of active unsponsored ADRs.

Further Trading Gains Likely

"We expect the dollar volume of trading in these unsponsored programs to expand significantly in the next few years, with many of them likely to be upgraded to sponsored programs," says Chelsey Loshak, director of marketing for International OTCQX, the top tier of the OTC markets, which offers greater visibility to investors and is limited to companies that can satisfy financial and disclosure listing standards.

Created in March 2007, OTCQX includes only sponsored ADRs, such as those of Wal-Mart de Mexico, which was among the first to list. Such well-known companies as Adidas, Air France-KLM, BASF, Marks & Spencer, Benetton and Roche Holding use OTCQX as their US trading location. Loshak says OTCQX gives companies a presence in the US markets without duplicative regulatory costs required for fisting on a traditional exchange. French auto maker Peugeot was admitted to OTCQX in April, bringing the total number of companies trading in the top tier to 55 out of more than 5,400 companies trading in Pink OTC Markets.

"Restricted to companies that are listed on a qualified overseas stock exchange, OTCQX separates credible companies from the large number of economically distressed and questionable companies that trade in the OTC markets," Loshak says.

Most of the hundreds of unsponsored ADRs that have been created since last fall have landed in what is known as the grey market. Also known as "other OTC," the grey market has no market makers. Trades in this bottom tier of the OTC markets are reported by broker-dealers to the selfregulatory organization, the Financial Industry Regulatory Authority (Finra), and distributed to market-data vendors.

On Top of the Grey Market

The top-traded ADR in the grey market in March was Japan-based Toppan Printing, which had a volume of $17 million. …