11 October 2022
Many will have heard of the CREST stock settlement system which is an acronym for Certificateless Registry for Electronic Share Transfer. While we often take this stock settlement/clearing service for granted, it has played an integral role in the settlement, clearing and custody of various stocks and investment instruments. Before we look at CREST Depository Interests, it is important to note that CREST is not a monetary clearing service, but one of the best-known stock settlement/clearing services.
Those who began trading in the 1980s and onwards will be aware of developments such as American Depository Receipts (ADRs) and Global Depository Receipts (GDRs). These were “special shares” which were created in order to encourage the trading of stocks in different countries. A CDI is a modern day version of an ADR/GDR, allowing stock clearing services to be completed through the CREST system. The CREST clearing and custody system is integral to the ongoing success of CDIs which tend to focus on heavily traded well-known overseas stocks.
The CREST system revolves around dematerialised securities, i.e. the holding of stocks and other investments in electronic format. Looking back, the introduction of the CREST system back in the 1990s was critical to the ongoing development of clearing services. In this instance, a CDI is a type of share which is created on the back of traditional company shares held in the CREST system. For example, let’s say that Company A wanted to make shares available in London on the back of a listing in the USA.
The CREST system would take delivery of for example 1 million shares which would be held in electronic format. Using the CREST clearing and custody technology, 1 million CDIs would be created which would normally be traded off market through regulated participants. So, an individual in London could buy shares in Company A and trade as they would with the underlying stock. In reality, there may be a slight price differential between the London CDIs and the US listing due to issues such as liquidity and currency. However, this is akin to a modern day version of an ADR or GDR.
Aside from the fact that CDIs allow investors to create exposure to overseas shares, they offer a much easier clearing and custody service through the CREST system. The system is also able to accommodate both receipt of dividends, paid out in different currencies, and the execution of corporate actions such as right issues and takeovers. The fact that the underlying overseas shares are held in the CREST system not only ensures safe custody but also a more orderly market. Over time, the overseas company can increase or decrease the number of shares held in this format which would be reflected in the number of CDI shares available.
Settlement services, clearing services and safe custody are integral parts of the global investment market. The fact that the CREST system can be used to create tradable CDIs has certainly reduced the paperwork and made clearing and custody of overseas stocks more efficient. This level of efficiency is attracting investors, which improves liquidity and in theory attracts more investors. The integration of stock markets, settlement systems and clearing services throughout the world is rarely discussed. However, it has been a game changer for those looking at global diversification.
While the London Stock Exchange had a number of false dawns when looking to move to electronic share ownership (paperless trading), CREST has been a phenomenal success. The stock settlement/clearing services provided are not only efficient, with standard settlement now reduced to 2 working days, but they also allow the integration of overseas stocks. Integration of overseas stocks has certainly benefited from UK investor confidence in CREST stock clearing and custody services. It really has been a game changer!
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