Increasing globalization and investor appetite for diversification offer a unique opportunity to companies looking to tap a new investor base, expand awareness or raise capital. Creating a depositary receipt program gives issuers flexibility and access necessary to achieve strategic goals, while providing investors with an easy and convenient way to invest in companies outside their home markets absent the concerns that normally accompany cross-border investments.
- More than 2,300 issuers-from more than 80 markets-have established DR programs and broadened their shareholder base.
- Depositary Receipts continue to be a popular means for investors to gain exposure to foreign issuers. J.P. Morgan estimates total global investment in DRs at approximately $1.1tn at the end of 2014.
- In the US alone, the level of investment in foreign equities is approximately $6.6tn, equivalent to 19% of U.S. investment portfolios.
While depositary receipt programs can be structured in a variety of ways, there are two basic options:
- American Depositary Receipt programs (ADRs) which give companies outside of the US access to the US capital markets, and Global Depositary Receipt programs (GDRs), which provide exposure to the global markets outside the issuer's home market.
- J.P. Morgan created the first depositary receipt in 1927 for UK retailer Selfridges. Eighty years later, our experience, innovation and creativity are at your service, each and every day.
What are Depositary receipts?
Depositary receipts in the United States - American Depositary Receipts (ADRs)
In the United States, issuers have several types of programs from which to choose: listed on a national stock exchange or traded over-the-counter; available to retail or institutional investors; and designed to expand the issuer's shareholder base or raise capital.
Depositary receipts around the world - Global Depositary Receipts (GDRs)
Issuers who look beyond the US equity markets to raise capital typically do so using a GDR, which commonly combines two complementary structures: the Regulation S (Reg S) depositary receipt and the American Depositary Receipt (ADR). The most frequently-utilized structure is a RegS/Rule 144A DR, which raises capital in the European markets (typically London or Luxembourg) and through private placement with qualified institutional buyers in the US. The inherent flexibility of GDRs is one of its most attractive characteristics, however, and Reg S DRs can be combined with either Level I (Unlisted) or Level II/III (Listed/Listed with IPO), depending upon the issuer's needs.
At the most fundamental level, a Depositary Receipt represents ownership of equity shares in a foreign company. These shares are issued against ordinary shares held in custody in the issuer's home market. Although the terms are often used interchangeably, a DR refers to the actual physical certificate while a Depositary Share (DS) refers to the actual shares.
Each depositary share issued represents a certain number of underlying shares held in custody in the issuer's home market. Ratios will vary based upon the share price of the underlying shares and the US share price of other companies in that industry.
Resembling an ordinary share certificate, the DR certificate contains the general terms and conditions of the depositary receipt that apply to DR holders.
DRs can be listed on a major exchange (e.g., NYSE, AMEX, NASDAQ in the U.S.; London, Luxembourg, or Singapore outside of the U.S.). DRs may also be unlisted, and trade in the over-the-counter (OTC) markets, or be privately-placed with Qualified Institutional Buyers and trade via the PORTAL system.
DRs trade and settle in accordance with market practice in the markets in which they are traded. For example, ADRs (available in the U.S.) settle via the DTC while Reg S DRs in Europe settle via Euroclear and Clearstream.
Although DR denominations match the currency of the market in which they trade, currency risk associated with investments in foreign companies is not eliminated.
The depositary and custodian work closely on the issuance and cancellation of underlying shares and depositary receipts in support of an issuer's depositary receipt program.
What is issuance and cancellation?
"Issuance" and "cancellation" simply refer to the transfer of custody of the share between the home market and the overseas market. These terms do not refer to the purchase, sale or trading of the depositary receipt.
A word about liquidity
Depositary receipts are as liquid as the shares in the home market, because new depositary receipts can be created (or cancelled) as needed based on investor interest. Consequently, the supply of depositary receipts is not constrained by the number of DRs traded at any point in time in the markets where they are available.
This diagram shows a typical Issuance and Cancellation flowMechanics Flow Diagram
J.P. Morgan collects fees from holders of depositary receipts. JPMorgan may (i) reimburse the issuer for certain expenses incurred by the issuer in connection with the depositary receipts program or (ii) share with the issuer revenue derived by JPMorgan from the program. JPMorgan may use brokers, dealers or other service providers that are affiliates or other divisions of JPMorgan and may earn or share fees and commissions.
From time to time, J.P. Morgan may pay a rebate to brokers in connection with the deposit of shares for the issuance of unsponsored depositary receipts. J.P. Morgan disclaims all liability arising out of, or relating to, such rebates. In particular, J.P. Morgan disclaims all responsibility regarding whether such broker passes all or a portion of such rebate to beneficial holders of such depositary receipts.
JPMorgan Chase Bank, N.A. and other J.P. Morgan entities (“JPMorgan”) as depositary (each a “Depositary”) for sponsored and unsponsored depositary receipt (“DR”) programs may enter into foreign exchange transactions (“FX Transactions”) to facilitate the administration of various depositary receipt transactions, including, disbursement of dividends or other cash disbursements and other corporate actions.
FX Transactions are entered with JPMorgan acting in a principal capacity through the relevant JPMorgan FX desk.
The foreign exchange rate (the “FX Rate”) applied to an FX Transaction, is determined by JPMorgan in its sole discretion, and shall be either (a) the WMR Rate, or (b) the JPMorgan Rate plus, in either case up to 20 basis points.
The “WMR Rate” means the spot rate published by WM Reuters Company (“WMR”) for the currencies that JPMorgan classifies as freely convertible, and shall be the rate published by WMR at 11:00 a.m. or 2:00 p.m., New York time, or at such other time as JPMorgan may determine from time to time (or the weighted average of the rates). As of 12 June 2014, currencies for which WMR publishes the WMR Rate and which JPMorgan classifies as freely convertible for DR FX purposes are:
AUD – Australian Dollar
CAD – Canadian Dollar
CHF – Swiss Franc
DKK – Danish Krone
EUR – Euro
GBP – British Pound
HKD – Hong Kong Dollar
HUF – Hungarian Forint
ILS – Israeli Shekel
JPY – Japanese Yen
MXN – Mexican Peso
NOK – Norwegian Krone
SEK – Swedish Krone
SGD – Singapore Dollar
TRY – New Turkish Lira
ZAR – South African Rand
The “JPMorgan Rate” means the JPMorgan FX desk (“FX desk”) quoted rate for currencies that are not classified by JPMorgan as freely convertible. The JPMorgan Rate is determined by JPMorgan in its sole discretion and may be based on a third party or internal rate source, a published spot rate, the FX desk’s view of the market risk, the actual rate at which the FX desk executed a cover trade, or otherwise as deemed appropriate by the FX desk. The
JPMorgan Rate may include a profit earned by JPMorgan in converting the currency.
Notwithstanding the foregoing, with respect to currencies determined by JPMorgan to be freely convertible, if (a) WMR stops publishing the WMR Rate for a particular currency or (b) the FX desk deems, in its sole discretion, that a WMR Rate is not a reasonable reflection of the market, then, without prior notice, the FX Rate will be the JPMorgan Rate.
In connection with FX Transactions involving certain non-freely convertible currencies, or cases when it is not commercially practicable for JPMorgan to enter into an FX Transaction through its FX desk, as the case may be, the FX Transaction is managed and executed by JPMorgan’s local sub-custodian in the relevant jurisdiction. For such FX Transactions, the foreign exchange rate applied by the local sub-custodian is the FX Rate.
JPMorgan may hedge its exposure in respect of any FX Transaction in a principal capacity and may incur a gain or loss in doing so.
Additionally, notwithstanding the capabilities of JPMorgan or its agents to enter into a foreign exchange transaction, from time to time in the discretion of the Issuer: (a) foreign currency is converted by the Issuer acting as principal, independent of the Depositary and/or its agents; and/or (b) dividends or cash are provided by the Issuer to the Depositary in US dollars at a foreign exchange rate determined by the Issuer.
Depositary Receipt Sale and Purchase of Security
JPMorgan Chase Bank, N.A. and other J.P. Morgan entities acting as depositary (each a “Depositary”) for depositary receipt (“DR”) programs may facilitate the sale and purchase of securities in accordance with the terms and conditions of the applicable deposit agreement (“DA”) governing a DR facility or in accordance with the terms and condition of an unsponsored DR program. JPMorgan Chase Bank, N.A also acts as Registrar and Dividend Disbursing Agent for certain New York Registered Share (“NYRS”) programs of issuers incorporated in the Netherlands. The procedures set forth below apply to any sales/purchases required under sponsored or unsponsored DR programs or a NYRS appointment to the extent such sales/purchases are contemplated in the terms of such appointment. For purposes of NYRS programs, the term “Depositary” herein shall refer to JPMorgan Chase Bank N.A. acting in the role as NYRS Registrar and Dividend Disbursing Agent. Sales or purchases may be executed in the jurisdiction of incorporation of a DR issuer or in the market where the DRs or NYRS are listed and/or traded. Examples include but are not limited to:
- a sale in the local market of rights to subscribe to underlying equity shares of an Issuer, where such rights are not registered in the US (or other jurisdiction if registration is required);
- a sale of shares issued as a result of the acquisition of a DR issuer;
- a sale of corporate action-related entitlements that are not distributed to DR holders;
- the purchase of local shares with a foreign currency cash remittance that cannot be converted to US dollars; and
- a sale of securities underlying DRs that remain outstanding subsequent to the termination of a DR program.
Exceptions to the procedures set forth in this document will only be made in accordance with the policies of the Depositary.
Execution of sale or purchase of securities
If the Depositary is required to endeavor to sell or purchase securities for the benefit of DR or NYRS holders, it may instruct the J.P. Morgan Equity Trading Desk (“JPM trading desk”) acting as principal or agent to execute the transaction. The Depositary and the JPM trading desk have agreed to a fixed commission currently 10 bps, calculated on the execution price (subject to rounding). If the JPM trading desk does not have the capability to buy or sell securities in the relevant market or is unable to perform the trade for any reason, the Depositary may instruct its appointed local market custodian or a local broker to execute the sale or purchase, as the case may be. Any such local market custodian or local broker may charge a commission in relation to the execution of any such sale or purchase transaction. Sales or purchases executed through agents other than a JPM trading desk or the Depositary’s local market custodian will only be made in accordance with the policies of the Depositary.
The Depositary will endeavor to execute the full sale/purchase during the applicable trading period and in the applicable markets of the security to the best of its ability. Sales transactions will only commence subsequent to confirmation by the Depositary of receipt of the security to be sold.
Absent a specific trading period, the Depositary will instruct the JPM Equity Trading Desk, the local custodian or the local broker, as the case may be to execute a sale or purchase as soon as reasonably practicable as market conditions will permit, endeavoring to complete such sale or purchase within five (5) business days. The execution price for the securities bought or sold will depend on market conditions, including but not limited to:
- volume of securities subject to the trade;
- influence of the trade on market value of securities;
- historic trading volumes of the securities; and
- number of counterparties interested in the trade.
The Depositary does not guarantee that the securities will be purchased or sold or at any particular price.
The Depositary will base the final price (“Final Price”) on the actual execution price for the sale or purchase as adjusted for costs and commissions as described below.
The Final Price for executions of trades over a trading period of more than one day will be determined based on the weighted average of the final prices of all the sales/purchases of securities carried out on behalf of the Depositary and on its instructions that occurred over each day of the trading period taking into account the highest and lowest price traded on all days of the trading period during normal trading hours of the exchange or market where the security trades. Any conversion of foreign currency into US dollars that may be required will be undertaken in accordance with the foreign exchange policies of the Depositary in place at that time.
The Final Price will be determined net of certain incurred costs or commissions, including but not limited to: (i) commission paid to a JPM Equity Trading Desk, local custodian, local broker or other agent; (ii) stock exchange fees; (iii) applicable taxes and governmental charges; and (iv) a fee of the Depositary of up to 20bps, with such fee to be assessed only in accordance with the terms and conditions of the applicable DA or the unsponsored DR program, and not to the extent it would cause the Final Price to fall outside of the range of prices for the security on that day during normal trading hours of the exchange or market where the security trades.
JPMorgan Chase Bank, N.A. and other J.P. Morgan entities reserve the right to change any of the above execution policies at any time as deemed necessary or appropriate and it may cease to offer any of the services referenced herein or add new services over time. This document is provided solely for informational purposes and provides a summary of the information contained therein. It is not a complete description of the transactions, processes and procedures referred to herein. Processes and procedures described in, and any other content of, this document are subject to change without notice. JPMorgan Chase Bank, N.A. and other J.P. Morgan entities do not accept any obligation to update this document on time or at all whether such processes and procedures have changed or otherwise.