Most UK brokerages will be able to offer US equities at a comparable cost to UK equities as of March...
Most UK brokerages will be able to offer US equities at a comparable cost to UK equities as of March 2000, when an electronic link between the two countries goes live.
UK electronic settlement house CrestCo has entered into partnership with US house Depository Trust Corporation (DTC), which should enable US brokers to settle American securities more easily and faster.
In conjunction with CrestCo's project on the electronic settlement of UK unit trusts and Oeics, this link up could be advantageous in opening up a new distribution market for UK funds.
Paul Symons, head of corporate affairs at CrestCo, said: "This will offer the possibility that product providers will be able to distribute UK funds into the US. Although this would be a later phase of development."
CrestCo plans to offer electronic settlement of Oeics later next year.
The partnership could even lead to UK unit trusts and other funds, which invest in North America, becoming less expensive for fund management groups.
At present UK fund managers have arrangements with US counterparts, which makes the volume purchasing and selling of the US shares cheaper than retail brokerages.
In the long term it may be cheaper to buy these stocks through Crest, although for the moment the project is being aimed at retail brokerages, Symons said.
At the moment UK brokerages offer US trading but at a steep cost, sometimes as much as four times the commission charged for a UK security.
Symons said: "Settlement of US securities is pretty difficult and expensive for private investors who wants to invest small amounts.
"Commissions and costs can be up to four times as high as those for UK securities because often two sets of commission have to be paid as well as additional costs such as custody arrangements.
"Through our link, trading in US securities will become cheaper. We're opening up a new market."
Brokerages such as DLJ, E*Trade and Schwab can use their US counterparts to handle this part of the transaction, thereby not incurring these additional charges.
John Morgan, operations director at E*Trade UK, said: "UK brokers do not have the online links to the US that we do and, therefore, lose all the benefits of online trading.
"They would have two brokerage fees to pay plus custodian costs, whereas we can use E*Trade Inc to handle settlement and act as a broker.
"It's all kept within the same company and we are just a client of E*Trade Inc so investors would just be charged the same as a UK commission rate."
Settlement times have been a concern of some brokerages in that the US settle their trades within three days (T+3) as opposed to the five days it takes in the UK.
DLJ Direct and E*Trade have both noted that it would be a challenge for even the American brokerage firms to meet a T+1 settlement time period, which is what the US is looking to adopt in the near future.
Symons said: "If we introduce this system then brokers should be able to keep up with the US.
"The shortened settlement times should hold no fear, although the time difference does make it a challenge."
CrestCo plans to hold the American securities within DTC but will issue something like a depository receipt, called the Crest Depository Interest, which is a UK security representing the underlying US security.
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