ETFs (Exchange Traded Funds) are often described as simple products. In reality, there is no ‘simple’ product for financial markets and investing.
For an ETF to be listed on a stock exchange like NASDAQ OMX Copenhagen and gain access to public investors and trading, it must meet specific requirements set by the regulator Finanstilsynet.
(The Danish FSA), which will include how much capital has been raised for the fund, what type of assets are being invested, etc.
Once these criteria have been met, The ETF can apply for admission on NASDAQ OMX Copenhagen.
It, however, does not mean that the fund immediately becomes available to investors. There is still some other administrative paperwork, like setting up the ETF’s ISIN (International Securities Identification Number), which is needed to buy and sell the securities involved in an ETF.
Apart from this, there are also strict rules about market-making (“Market Making” ) if the ETF has opted for that as part of its creation basket (that means making markets at all times).
Market Making
Market Making includes things like:
- Having enough liquidity on both back and forward sides.
- Pricing transparency.
- Immediately correcting any imbalance.
- Giving proper notice of buy/sell orders etc.
These rules also apply to institutional investors and private investors who invest online at værdipapircentralen. DK.
They are part of our ‘code of conduct and have been adopted from the Stock Exchange, where market-making is a requirement for being allowed to trade shares at all.
Market Making is an exciting concept, but the discussion is closed given that this report focuses on settlement time.
In short, the idea behind Market Making is to ensure a stable and orderly market by having someone willing to either buy or sell securities at any point in time so there can always be a transaction taking place. It helps both investors and issuers minimize trading risk in illiquid markets.
Meaning that even though you might believe you want to invest in an ETF right now, you should always first ensure that the fund is available for trading.
When investors decide to invest in an ETF, they will choose which broker-dealer they want to use as their point of entry into the market for buying/selling shares (There are usually no limitations on who can act as a dealer).
Once this decision has been made, the actual settlement time depends on what type of securities the ETF holds.
It means that there are two ways of settling depending on what kind of assets the fund invests in: Physical Settled Funds and Cash Settled Funds.
When launching a new ETF, choosing these two types is up to each Fund Manager. However, for most funds, it will be determined by the strategy behind the fund.
Physical Settled Funds are funds where actual shares are being purchased for the portfolio of securities held inside the ETF, meaning that when you invest X amount of money into an ETF, you buy X number of shares in each security included in the fund.
It is different from Cash Settled Funds, where only cash is purchased at settlement for holding inside your ETF.
Instead of buying physical instruments, these funds will instead have a contract with a counterparty who will then go out and purchase index-linked securities or other equivalents on their behalf.
When these contracts expire or mature, they will receive cash representing your investment back.
EFT settling time
This type of fund takes five business days to settle. With this method, the settlement date is determined by matching the trade date (the day you buy your ETF) with the actual T+5 calculated from when your money leaves your account and arrives at your dealer’s account (minus any holidays)
For example, if someone invested in an ETF on October 10th 2018, we can look back at how many days it has been since then and calculate that there should be a settlement date on November 3rd 2018.
The process itself will then take two more business days (T+2) before the shares are actually in your account.
Link to Saxo Bank for more information.
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