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Launching a European Exchange Traded Fund
The European exchange traded
fund (ETF) market showed strong
performance at the beginning
of 2020, continuing the momentum
from the prior year which posted
record flows. However, in March
2020, the COVID-19 pandemic shook
the entire funds industry and eroded
stability across global markets.
Amidst this medical and financial crisis,
ETFs have once again demonstrated their
value by providing liquidity in situations
where the underlying assets have struggled,
especially in the bond market. In many cases,
ETFs have been trading at higher volumes
than the underlying assets, underscoring
their critical role in price discovery.
While some trepidation in launching new
products during a volatile period like this
is natural, some firms may view it as the right
time to enter the ETF market as a new issuer.
There are significant opportunities in this
competitive market for the right product set,
particularly as investors continue to move from
high-cost traditional mutual funds to low-cost
ETFs, using them as the building blocks within
their wider portfolios.
At State Street, we believe that the investment
in ETFs is likely to grow. This guide explains
our view on the most important strategic issues
facing issuers. We base these recommendations
on our experience in partnering with our clients
to launch more than 400 ETFs in the European
market over the last decade.
1 ETFGI Research, January 2020
European ETF Asset Growth1
2009
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331395
438487
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762726
974
2010 2011 2012 2013 2014 2015 2016 2017 2018 20190
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Domicile Selection for European ETFs
The two main domiciles for ETFs in Europe are
Ireland and Luxembourg, as both have a strong
ecosystem for servicing these funds. Other
issuers may opt to domicile in their home market.
It is critical for an ETF issuer to understand
the specific regulatory requirements in each
jurisdiction before selecting a domicile.
We can provide end-to-end support for ETF
issuers in relation to this choice.
Regulatory Framework
Undertakings for Collective Investment in
Transferable Securities (UCITS)
• Ireland- and Luxembourg-domiciled ETFs are
set up under the UCITS directive
• UCITS provides for passporting of fund
distribution across the European Union, which
is a key attribute for Europe-domiciled ETFs
• There are tax advantages to the UCITS
regime in Ireland over Luxembourg due to
an exemption from Irish tax on income and
gains of the product
• Taxe d’abonnement (subscription tax
based on fund’s net assets) is applicable
on UCITS products in Luxembourg on an
annual basis
UCITS Structures
There are different options for structures to use
when launching an ETF in Europe.
Ireland
The two main UCITS structures for Irish ETFs are:
1. Public limited company (PLC) or investment
company
2. Irish Collective Asset-management Vehicle (ICAV)
Historically, all ETFs in Ireland were launched
under the PLC structure. Since the launch of
the ICAV in 2015, several new ETF issuers have
selected it for their ETF products in Ireland due
to its unique advantages, such as a bespoke
legislative regime and the ability to make
changes to constitutional documents without
investor approval.
Luxembourg
All ETFs domiciled in Luxembourg use the
Société d’investissement à Capital Variable
(SICAV) structure due to the benefits it provides
in relation to passporting the product across
Europe.
Management Structures
Self-Managed Investment Company (SMIC)
Self-Managed Investment Company (SMIC) is an
authorized UCITS investment company which
has not appointed a management company and
which complies with applicable provisions set
down in the regulations in relation to capital
requirements and organizational structure.
2
Management Company
The UCITS investment company can appoint
a management company to engage in
the management of the UCITS structure.
The management company will typically
delegate day-to-day functions, such as
fund administration, depositary, transfer
agency, investment management and others,
to external parties, although it maintains
overall responsibility and ownership, and
manages the funds.
The Central Bank of Ireland (CBI) is now
requesting the use of a management company
as part of the submission, thus reducing the use
of the SMIC structure for new ETFs.
European Regulations Impacting Exchange
Traded Funds (and UCITS Funds in General)
1. UCITS: must be adhered to once the product
is launched under this directive
2. Local Regulator Guidelines: The domicile of
the product will drive the local regulations
that need to be followed in line with the policy
of each regulator
3. Markets in Financial Instruments Directive
(MiFID) II: A follow on from MiFID, which
is regulation that governs the provision of
investment services in financial instruments
4. European Market Infrastructure Regulation
(EMIR): Legislation and regulation of
over-the-counter derivatives in Europe
Steps to Establish an ETF Structure in Europe
Appoint an
Experienced Service
Provider
Choosing a strong and
experienced service
provider helps ensure
that the ETF issuer
receives key insights
on the launch process
and how to structure
the operating model.
The local regulator
will require a
service provider to
be engaged before
approving any ETF.
Engage a Legal
Advisor
The Ireland and
Luxembourg markets
are well represented
by legal firms with
experience in advising
ETF issuers who are
new to the ETF market
and also those looking
to expand their ETF
presence in Europe.
Secure Approval
from the Local
Regulator
The ETF issuer must
deliver a proposed
prospectus for the
ETF legal entity to
the local regulator
(CSSF or CBI) to
seek approval of the
product. The regulator
will also require a
depositary agreement
as part of the initial
submission.
1 2 3
3
Standard Services of a Service Provider
1. Fund accounting
2. Custodian services
3. Transfer agent and registrar
4. Depositary services
5. Financial reporting
6. Custody and product tax services
7. Trade processing
8. Foreign exchange service
There are additional services required for an
ETF, which involve significant knowledge and
expertise. We are one of the leading ETF service
providers in the European market, offering:
1. Portfolio Composition File (PCF)
or basket creation
2. ETF servicing and management of the
primary market
3. ETF share creation, settlement
and re-positioning
4. Automated primary market order taking
from authorized participants
5. ETF creation and redemption lifecycle
management
6. Capital markets engagement
7. Implementation of best practice solutions
for exchange traded funds
8. Dedicated ETF resources to service your
business and the market
9. Technology for meeting the demand of
exchange traded products
10. Thought leadership on the ETF market
environment
Examining the Primary Market
Capital Markets
It is essential to create a capital markets
team in advance of launching a European ETF
structure. Identifying and employing at least one
individual who has experience in the European
ETF market will facilitate engagement with the
primary market in advance of the product launch.
The service provider selected by the ETF issuer
should be in a position to provide all the
back-office services of the primary market,
leaving the capital markets resource
available to manage Authorized Participant
(AP) engagements on new products,
monitoring spreads in the secondary market,
sales engagement and other key tasks to
manage the growth of the new products.
At State Street, we believe that the optimal operating model in Europe for ETFs is to engage a single provider for these services. This allows for a streamlined lifecycle for your ETF product and reduces the number of vendors the ETF issuer is required to engage with.
4
Index Selection
The ETF issuer will be required to identify
or create the relevant index that the ETF
will track. It is important that the index the
UCITS ETF will seek to track is in line with the
UCITS directive and adheres to regulations
in the specific domicile. There are a few key
requirements to consider:
Diversification
Ensure that the index is sufficiently diversified
and there are not significant weightings over
20 percent. If there is a holding greater than
this, the issuer will be required to justify the
increased concentration.
Publication of the Index
Ensure that:
• The index value is published at the required
frequency
• It is readily available to the ETF issuer,
investors and authorized participants
• It provides the underlying constituents of the
index and the methodology utilized in the
composition of the index
The ETF issuer is also required to ensure that the
index provider adheres to the European Union
indices “Benchmarks Regulation.” This regulation
targets mainly the provider of the index value
and data; however, the issuer of the UCITS
product must ensure that the regulation
is followed.
Exchange Listings
The ETF issuer will need to determine which
exchanges the ETFs will be listed on in advance
of the product launch. This will be driven by
the target market for the investors and their
jurisdiction. The standard listing venues for
European ETFs are:
1. London Stock Exchange (LSE) – can be
accessed by listing on Irish Stock Exchange
and passporting to LSE
2. Deutsche Börse Xetra, Germany
3. SIX Swiss Exchange
4. Euronext, Amsterdam
5. Euronext, Paris
6. Monte Titoli, Italy
Many European ETF issuers list their UCITS ETF
on other exchanges in Latin America, Asia and
Eastern Europe.
Countries of Registration
The ETF issuer is responsible for identifying the
countries the ETF products will be distributed
in and will be required to register the ETF for
sale and distribution in the specific countries.
The service provider and legal firm supporting
the ETF issuer can provide details on the
requirements in this area.
5
ETF Share Creation and Settlement Model:
European ETFs that launched from 2015 onwards
have typically opted for the International
Central Securities Depositary (ICSD) settlement
model through Euroclear Bank or Clearstream
Bank. The ICSD model will continue to be the
ETF issuance model for European ETFs due to
the impact of Brexit on certain domiciles, such
as Ireland.
ETF issuers who look to deliver ETF shares
within just one single country domicile may look
to issue the ETF shares within that domicile,
such as France, Netherlands and Luxembourg.
However, if the ETF issuer intends to distribute
and settle the ETF shares across Europe, the
ICSD settlement model should be selected.
Partnership
Selecting a service provider with whom the ETF
issuer can build a partnership is critical to the
success of an ETF, as it is with any product type.
The issuer needs to ensure that they partner with
a provider who has expertise in the ETF industry
and demonstrates a commitment to developing
industry-leading ETF technology to meet the
current and future needs of the market.
How Can We Help you?
We have been servicing ETFs globally for over a
quarter of a century. We are one of the leading
providers of ETF services in all the major ETF
markets. We have the personnel and technology
to build a strategic partnership with ETF issuers
of all sizes.
Our ETF experts are always available to engage
with new, existing and potential ETF issuers who
have questions about the European ETF market.
Our ETF product experts are available to discuss
any ETF related queries you may have.
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For more information, contact:
CIARÁN FITZPATRICK
Head of ETF Servicing, Europe
+3 531 776 6089
FRANK KOUDELKA
Global ETF Product Specialist
+1 617 662 4749
