An Exchange Traded Fund (ETF) is a security that trades on an exchange as an equity that seeks to replicate the performance of an index without the need to purchase the underlying components.
The NSCC process for clearing ETFs includes the ability to review, either on-line or in a data file, the ETF’s portfolio constituents which is also used to automate the creation and redemption of ETF shares and their subsequent settlement.
NSCC's ETF process automates the creation and redemption of ETFs when the underlying securities are eligible to be cleared through NSCC. NSCC reports, clears and settles ETFs and their underlying securities through its creation/redemption process. NSCC’s ETF processing service includes a web based tool that displays the ETF’s portfolio constituents and relevant cash amounts. The data in this browser-based application can be downloaded by Members as an excel spreadsheet. Members may also elect to receive a data file of the same portfolio information.
In the event the securities underlying an ETF are not NSCC-eligible, NSCC’s ETF processing service allows Members to customize standard portfolios by excluding those securities and substituting those securities with cash or with another NSCC-eligible security. The customized portfolios can then be used to create and redeem the ETF within NSCC’s ETF processing.
NSCC also clears and settles U.S. listed ETFs that are traded in the domestic secondary market. In addition, ETF Agents and Authorized Participants have access to a self-service web based tool that enables them to monitor and maintain relationships in connection with these creation and redemption transactions.
Who Can Use the Service
Any full service NSCC Member that has entered into an Authorized Participant agreement with an ETF Agent and Distributor / Sponsor to become an Authorized Participant can use NSCC’s ETF processing service.
While, in some instances, an ETF sponsor may allow a non-clearing firm to become an Authorized Participant, any firm executing a transaction in an ETF through NSCC must either be an NSCC Member or must have a clearing relationship with an NSCC Member.
NSCC’s ETF process provides the following efficiencies and risk controls around the creation and redemption of ETFs:
- Provides Members with the ability to select only the portfolios they need for next day’s trading through a web based on-line view. Through this mechanism, Members may down load the portfolio details to an excel spread sheet format. In addition, Members may continue to elect to receive a nightly data file containing the same information that is available through the web based tool.
- Provides Members with the ability to submit a supplemental portfolio on trade date for standard and custom portfolios.
- Provides an Instruction Detail file or report containing the details for each ETF’s creation and redemption.
- Reduces manual deliveries.
- Provides clearance and settlement of the ETF, as well as the underlying components, through NSCC's CNS and Non-CNS settlement processes. When eligible, settlement of the underlying components of ETFs and certain eligible ETFs through CNS are guaranteed by NSCC.
- Allows Members to create or redeem ETFs on a shortened settlement cycle either on a next-day or two-day settling basis.
- Allows Members to create or redeem a customized standard portfolio by substituting the underlying components with cash, or by replacing those components with other securities that are eligible to be processed at NSCC.
- Allows Members to create or redeem a portfolio either against cash or through the exchange of securities.
How the Service Works
- On the day before Trade Date (T-1), Members can view the details of an ETF portfolio composition either through a web-based application or in a data file. The data file also identifies the cash amount in each portfolio and other relevant information.
- On Trade Date (T), Members can place a creation/redemption order through the Distributor. The Distributor will deliver the order to the ETF Agent, who then transmits an Instruction File for the creates or redeems to NSCC.
- On the night of T, NSCC will transmit an Instruction Detail File that displays the details of the creation and redemptions. The information in the file can also be viewed by Members who subscribe to Universal Trade Capture through that service’s data output.
- Both the components underlying the ETF and the ETF itself are processed through NSCC’s normal equity clearance and settlement systems.
- Creation and redemption transaction fees are reflected separately in Members’ end of day settlement.
For More Information
Please contact Client Support at 1-888-382-2721, Option 5 then Option 1.