The Lure of Foreign Shares

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Depositary Receipts

Banks have created 1,400 new unsponsored ADR programs to meetand hopefully generate- growing demand, particularly from investors in separately managed accounts.

The long drought in initial public offerings has slowed the pace of raising capital in the form of depositan- receipts, but trading in these instruments is growing rapidly as investors continue to diversity their portfolios with securities of some of the biggest companies worldwide. As risk appetite returns, many investors are aiso seeking to gain at least some exposure to the faster-growing emerging markets,

Depositary receipts enable investors to purchase and sell interests in foreign shares without experiencing the settlement delays and other problems that can crop up when dealing with unfamiliar trading systems in distant countries. Trading in American depositary receipts (ADRs) and global depositary receipts (Gl)Rs) increased by 34% last year to a record S4.4 trillion. Some of the activity reflects volatile market conditions, with investors fleeing and re-entering foreign markets as economic conditions changed in the wake of the global financial crisis.

US investors are able to trade receipts reflecting ownership in shares denomi- nated in dollars in more non-US com- panies than ever before. More than 1 ,4(H ) new unsponsored ADR programs have been created since October 2008, when the US Securities and Exchange Com- mission relaxed rules tor trading deposi- tary shares of major overseas companies in the over- th e counter market. US de- positary banks can now register unspon- sored Al)Ks on the equity securities of any non-US company that automatically qualifies by meeting certain ongoing trading and online disclosure require- ments. Unsponsored ADRs are securities issued by one or more depositar)· banks in response to market demand, without a formal agreement with the company whose shares are being traded.

Michael Cole-Fontayn, chief executive of The Bank of New York M elIon's depositary receipt division, says growing demand from US investors for wider access to international equities for portfolio diversification convinced the bank to move aggressively to set up new unsponsored Al )R programs. These programs have proved especially popular with managers of separately managed accounts (SMAs) that are restricted to investing in dollar-denominated securities. Most SMA platforms are not designed to handle foreign currency transactions. Also known as separate accounts, or wrap accounts, SMAs are similar to mutual funds aimed to include particular asset classes. The major difference is that the SMA manager purchases the securities for individual clients rather than a rund. SMAs are sold to high-net-worth individuals through major brokerage homes.

The Bank of New York Mellon has issued more than Sl. 4 billion of unsponsored ADRs since the SEC implemented rule changes last October to make it easier to establish these securities. '"Institutional and retail investors alike can no longer ignore this segment of the ADR universe," Gole-Fontayn says. The bank has created 715 new unsponsored programs from 35 countries, far more than any other depositary bank.

"The regulatory change was signaled by the SEC fairly clearly in advance, which enabled us to be in active dialogue with the overseas companies chat were good candidates tor unsponsored programs even before the rule was issued," Cole-Fontayn says. The bank's staff put in many hours doing the appropriate due diligence, he says. "We had to make sure that the websites of these companies fulfilled the SEC requirement that certain disclosures are made available on a timely basis in English,'1 he explains. "We also had to make sure we were in compliance with know-your-client regulations."

Of the bank's 715 new unsponsored programs, 164 are actively traded, ColeFontayn says. "Of the thousands ot nonUS companies without ADR programs, we selected those likely to attract the most interest from investors," he says. …