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January 1, 2007

ADR Trading is Safe for Now

By Peter Chapman

Trading in American depository receipts (ADRs) is unlikely to dry up anytime soon, despite the perceived threat to the ADR marketplace presented by cross-border mergers of stock exchanges.

According to a new report from the TABB Group, a research outfit based in Westborough, Mass., obstacles to cross-border trading will still exist even if mergers between exchanges occur.

TABB published its report as the two largest U.S. stock exchanges were looking to tie up with two of the largest European exchanges.

As Traders Magazine went to press, the New York Stock Exchange was getting closer to its goal of merging with Euronext. At the same time, Nasdaq was pushing hard to gain control of the London Stock Exchange.

If these mergers occur, some observers believe easier trading in European "ordinaries" from the U.S. would obviate the need to trade ADRs.

Depository receipts are issued by banks and represent one or more shares of the foreign ordinary. ADRs are traded on the NYSE, Nasdaq and in the unlisted market. Dollar volume in ADRs exceeded $1 trillion last year.

The U.S. exchanges, in pursuing the Europeans, have indicated they would consolidate trading of all securities on a single platform.

That could make it possible for U.S. traders to effect trades in ordinaries issued by companies domiciled in the U.K., France, Belgium and the Netherlands. There are about 250 ADRs issued by companies based in those countries, representing 11 percent of the total 2,200 ADRs traded.

TABB, though, sees several obstacles confronting traders who might want to trade ordinaries over the same platforms as they do ADRs. "These linkages will surely facilitate increased cross-border trading," Andy Nybo, author of the report, writes. But "their impact on the depository receipt market at least in the short term will be negligible."

Nybo cites two key obstacles to efficient cross-border trading and the demise of the local ADR marketplace: costly and inefficient foreign clearing and settlements systems, as well as different regulatory structures.

"A disparate global regulatory structure provides a strong foundation for the global depository receipts industry," Nybo writes.