What are TraCRs and how do they compare to buying international shares directly?

Jan 29, 2020

Welcome to Finance and Fury, The Say What Wednesday Edition

Today's question comes from Chris

What are your thoughts on TraCRs? I can’t recall if you’ve spoken about them before on your past episodes, if you have which one was that and I’ll go back and listen? How would you say TraCRs compare to using a platform like Stake? Do you think there are better ways of getting exposure to specific foreign stocks than TraCRs?

Sorry if it’s an overload. Also thanks for doing the podcast I thoroughly enjoy your material and outlook

 

1. What is a TraCR? Transferable Custody Receipts
   1. Structure to provide beneficial ownership of the underlying shares of a listed overseas company
   2. For example, if you invest in a TraCR issued over a US-listed share, you are buying an Australian security that gives you a beneficial interest in, but not a legal title to, the US share.
   3. A single TraCR provides the holder with the beneficial ownership of a single underlying share. The value of the underlying share of a TraCR and the applicable foreign exchange (FX) rate will be the main factors in determining the Australian dollar (AUD) value of the TraCR.
   4. Structure - structured to provide a TraCR holder with the beneficial ownership of international shares; and settled through CHESS and held in an Australian registry in the same way as Australian shares.
2. How are TraCRs traded? You buy and sell TraCRs the same way you buy and sell other Australian securities.
   1. Exclusively quoted on Chi-X and can only be bought or sold on the Chi-X market or through a Chi-X participant
   2. Prices are on a one for one ratio with the underlying shares of a company listed offshore.
   3. You can terminate TraCRs and convert them to cash if an ‘illiquidity event’ occurs: if no liquidity is provided by a registered market maker for 20 consecutive business days then you will, under the terms of issue, be entitled to request that the TraCR issuer convert your holding into cash by selling the underlying shares (fees and charges will apply).
   4. All TraCRs that are bought and sold on Chi-X are cleared and settled through ASX Clear and ASX Settlement and covered by the Australian regulatory framework.
3. What are the risks? Basic ones with all international investments – but also an additional layer of risk
   1. Foreign currency exchange rates: the underlying shares of a TraCR and TraCR dividends are denominated in a foreign currency and so investors are exposed to FX movements.
   2. Not being able to exercise rights attached to the underlying share: some rights attached to the underlying shares are not available to non-US residents
   3. Trading timezones - TraCRs trading when the underlying shares are not: the Chi-X market will be open at times when global markets, on which the underlying shares trade, are closed. Therefore, trading in a TraCR may take place before the main market for an underlying share has reacted to recent price-sensitive news or when market makers are not present – may not get price wanted
4. Additional risks
   1. Not being able to sell/buy when you want: market makers may not provide liquidity all the time and so there may be no liquidity at reasonable prices at the time you want to buy or sell
   2. Price variations: TraCR prices may vary from the precise FX adjusted price of the underlying US share and change quickly and by more than changes in the price of the underlying asset.
   3. Dependency on the one organisation’s website - holders will not be able to trade TraCRs in the unlikely event that this web site is down.
   4. The way TraCRs are structured and the terms of their issue: TraCRs are different in structure and framework from the underlying shares on which they are based – as it is beneficial interest, not direct ownership – removed voting rights, has custodial risks – such as if TraCRs become insolvent or structure frozen in a liquidity crisis
5. Liquidity risks - There is a risk that TraCRs become illiquid – i.e. difficult to sell or buy securities
   1. Can come from a lack of demand for the securities – remember you are trading the TraCR – not the share – may be 1,000,000 people wanting to buy the underlying share – but the market for Underlying Shares is likely to be more liquid than the market for TraCRs - possible the Market Makers will not provide liquidity in the TraCRs market – market maker is something that offers both buys and sell – making money out of brokerage or on price spreads (selling and buying are slightly different) = exchange services or large broking companies
      1. Issues is that is a TraCRs ceases to meet the Chi-X Liquidity Requirements - has the discretion to suspend or remove that Series of TraCRs from quotation on the Chi-X Market
      2. There is a risk that: — you may not be able to buy TraCRs or sell your TraCRs at a reasonable price or at all; and — the price of that Series of TraCRs may be volatile and diverge materially from the price of the Underlying Shares adjusted by the foreign exchange rate.
      3. The number of TraCRs on the issue may be small Regardless of the market capitalisation of an Underlying Company, the total capitalisation of a particular Series of TraCRs may be small. There is a risk that this could impact liquidity for a Series of TraCRs.
      4. Market Makers do not guarantee liquidity Under the market making agreements, a Market Maker is not required to make offers to buy or sell TraCRs or to otherwise make a market or provide liquidity for a Series of TraCRs.
      5. There are agreements in place provide fee relief to Market Makers if they do – but no guarantee that a Market Maker has to provide a role in buying or selling a TraCR –
         1. There is a risk that the trading of TraCRs may be halted or suspended by Chi-X at any time.
         2. Chi-X may halt or suspend trading in a Series of TraCRs if any of the information required to be made available on the TraCR Website in relation to the Underlying Shares of the relevant Series of TraCRs, is unavailable to the public for more than five consecutive minutes during trading hours on a Chi-X Business Day;
         3. Or — Chi-X deems such action appropriate in the interests of protecting investors and maintaining a fair and orderly market in TraCRs.
      6. Also - There is a risk that may change the Terms in certain circumstances, including as set out in Sections 9.4 and 14.14, and clauses 22.7 and 24 of the Terms. There is a risk that these changes may have negative implications for you and for the price of your TraCRs. (j) TraCRs expose you to operational performance and counterparty risk The operational performance of TraCRs is dependent upon DAIL, the Custodian and other Persons such as the Registrar and Stockbrokers. You assume the risk that DAIL, the Custodian and other Persons do not or are not able to perform their obligations in respect of TraCRs (e.g. in the event of the Persons’ insolvency). If these persons do not perform their obligations in a timely fashion or at all, it may affect: — the price of the TraCRs; — your ability to buy or sell TraCRs; and — the time it takes to process any Application, Cancellation Request or Sale Request.
      7. This is the potential issue with TraCRs – counterparty risk - is an “unsponsored product” as the offshore company is not involved in the creation, trading or operation of the TraCR product in Australia in any way. The issuer of a TraCR has no relationship with the listed company that has issued the underlying shares – so if they go bust, or the company owned in the TraCRr goes bust, lose lose potential
6. What Process Fee is charged? Since you instructed your Authorised Broker to submit your application (rather than submitting the Application directly to the Registrar), DAIL would not charge the Process Fee. If you submitted your Application directly to the Registrar, DAIL would have charged you the Issuance Fee plus the Process Fee of A$40.00.
   1. Fees – Insurance fees of around 0.125% for the purchase amount

 

Other options – Trading platforms like Stake

1. Just note that trading name of Hellostake Limited - authorised and regulated by the UK Financial Conduct Authority
   1. While they have an AFSL –
   2. Do have some fees – Major Fees – FX – US$0.70 per $100 – have to buy using other currency – so in AUD about a 1% clip ($1 per $100)
2. Few other platforms are available to buy international shares – which is a potentially better strategy than the structure of TraCrs when liquidity in markets is solely reliant on central banks –
   1. Difference is counterparty risk to not
3. That is when it comes to individual shareholdings –
4. How I do international shares is through managed fund and ETF structure
   1. While can't be picky in individual shares – can focus on sectors or managers who specialise in what you are after –
   2. Buy sells are lower – 0.3%-0.5%, so less than half of Stake – plus picking up hundreds of international shares in the hands of investors whose whole job is just to pay attention to one sector and trade it –

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