Trust and Agency Services

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TraCRs improve Australian investors’ direct access to US stocks

January 2020

Transferable custody receipts allow Australian investors to broaden their horizons and gain exposure to global household names. Brendan Lake of stockbroker Morgans Financial tells flow how the product has helped him to engage retail investors

Australian retail broker Morgans Financial has bridged investors’ access to the top US shares by facilitating trades in their own time zone and currency.

 

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They are one of many brokers who have adopted transferable custody receipts, or TraCRs, to provide more efficient and more affordable access to US shares for Australian investors. TraCRs convey beneficial interest in a US share, with settlement happening in Australia during the same cycle as Australian shares. Brokers may also provide the US-based account through which investors have the ability to convert their TraCRs directly into the underlying US shares.

“We previously would have bought shares in America in the evening and reported back to our clients the next morning by 8am,” reflects senior trader Brendan Lake from Morgans Financials’ head office in Brisbane. “Now we can gain access to these US shares here through TraCRs, in our own time zone and in Australian dollars, so it flies pretty smoothly.”

 

TraCRs pioneer in Australia and abroad

TraCRs are pioneering in the Australian investment landscape by enabling retail investors to look abroad. A finite investable universe at home and a superannuation pool that is bursting at the seams is leading these investors to seek homes outside of Australia to diversify their holdings.

Up until a year ago, getting exposure to the top international stocks, particularly US ones, was onerous and costly for many Australian investors and brokers who faced a clunky process, with significant operational issues, to obtain access to US companies.

In order to gain meaningful exposure to global growth stories and the new economy, both retail and institutional investors needed a US-based account and associated services.

Alternative exchange provider Chi-X Australia partnered with Deutsche Bank to work on a solution that would provide direct beneficial ownership of US shares with diversified businesses and break down the barrier to investing in global household names1 . The exchange leveraged Deutsche Bank’s experience in issuing transferable custody receipts over US shares in Argentina, Mexico and Brazil, allowing TraCR investors to access US shares on their home market’s stock exchange.

By partnering with Deutsche Bank, Chi-X Australia launched TraCRs to offer Australian investors the option to access US shares in Australian dollars, during the Australian trading day, using their existing domestic brokerage accounts.

 

Embracing innovation in trading

One of the things advisors appreciated is the fact that TraCRs are denominated in Australian dollars and they know up front how much they are going to pay for it
Brendan Lake, Morgans Financial

Morgans embraced this innovation and set up TraCRs accounts for its retail investors. Lake adds that it has also become an easy sell for advisors who are interested in international exposure for investors. “We were there from early on and now it’s starting to get a bit more volume and we see more interest in that product,” he says.

As a broker whose international exposure is mostly in direct equity, Morgans moved from buying Apple shares in the US to buying Apple TraCRs in Australia since the product offers them a more convenient and user-friendly experience. These and other stocks, including Amazon, Apple, Berkshire Hathaway, Facebook and Disney are traded locally via TraCRs on Chi-X exchange in Sydney.

Deutsche Bank’s Depositary Receipts team and Chi-X arranged and led face-to-face meetings and roadshows to explain the concept to advisors and field questions from them. “One of the things advisors appreciated is the fact that TraCRs are denominated in Australian dollars and they know up front how much they are going to pay for it,” says Lake.

This is a much simpler way of accessing the best shares
Brendan Lake, Morgans Financial

Corporate actions and dividend payments are also straightforward since investors are not receiving multiple letters about corporate actions and dividends from abroad as TraCRs provide investors with local facilitation relating to their exposure. “This is a much simpler way of accessing the best shares,” adds Lake.

 

How TraCRs work

TraCRs are classified as Australian equity market products, under the ASIC Market Integrity Rules. By holding a TraCR, an investor gets the beneficial interest in a US share, which is ultimately held by a US custodian bank. This means that TraCR investors gain exposure to the financial performance of that share, including the right to receive dividends in Australian dollars, and to exercise voting rights.

TraCRs are purchased and sold through an investor’s local broker in Australian dollars during local trading hours, which can be more cost-effective than investing directly into shares in the US. Clearing and settlement takes place in Australia’s Clearing House Electronic Subregister System (CHESS), and investors can see their holdings alongside their other Australian domestic securities investments, as the explainer video below demonstrates:

What are TraCRs?

Overcoming complexity

Direct share investment in the US has historically proved challenging for Australians. Investors require US accounts capable of holding the shares, and given the time zone difference, may have trades executed at unknown prices during the Australian nighttime. Additionally, direct investment has meant higher brokerage fees than for domestic trades, and foreign exchange conversion costs. In some cases, investors also bear US custody costs.

TraCRs solve these challenges, as they trade on the Chi-X exchange during local market hours in Australian dollars. Market makers provide quotes, with the expectation that natural liquidity will form on both sides over time. TraCR investors also benefit from wholesale foreign exchange rates via Deutsche Bank’s foreign exchange platform. Since TraCRs are traded domestically, there is no US account requirement, nor associated US custody costs. Investors can trade TraCRs in the same way as they would invest in Australian listed shares.

 “If they're happy to buy them and we come to an agreement to buy the Apple TraCRs, it's a pretty straightforward system where the advisors place an order from the desk, and that order reaches the trading desk at Morgans Financial, which would then purchase or sell it,” says Lake.

Market Makers are responsible for providing liquidity enabling Morgans Financial to acquire TraCRs for their clients and produce a contract note immediately after execution. According to Lake, it’s a simpler process than going direct in the international market to place an order in the evening and only knowing the FX rate in the morning. “With TraCRs the client gets a contract within 20 minutes and they know what they have bought, what they have to pay, and they can see the shares in their holdings account here at Morgans,” he adds.

 

Predicting success

One year since the launch of TraCRs, Lake is pleased with a successful take up by investors and is confident of future success. “Credit goes to the Deutsche Bank and Chi-X team who have been there from the start,” he says. “It’s a very good product and the key is to continue the education campaign to other brokers, advisers and investors.”

* Deutsche Access Investments Limited (ABN 55 118 336 584, AFSL 330531), the issuer of TraCRs, has issued a product disclosure statement in connection with TraCRs which is available at tracrs.com.au. You should consider that product disclosure statement, including the risks associated with TraCRs, before deciding whether to acquire, or to continue to hold, TraCRs. You can obtain more information on TraCRs at tracrs.com.au

__________________________

Sources:
1See https://cib.db.com/insights-and-initiatives/flow/rich-pickings.htm

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