Section 17 - Exchange traded funds: in-specie applications and redemptions

Section 17 - Exchange traded funds: in-specie applications and redemptions

17.1 - Exchange Traded Funds: In-specie Applications and Redemptions Overview

The creation and redemption of exchange traded fund (ETF) units is intended to minimise (as much as possible) any sustained discounts and premiums between the traded ETF unit price and the underlying unit net asset value, as the quantity rather than price becomes the principal mechanism for achieving balance between the demand for and supply of units on market. ETFs effectively involve an ongoing primary market for unit creation and redemption, which operates in tandem with a secondary market provided by a market venue for trading in units already created.

ETP units are created in the primary market in creation unit quantities, which consists of a fixed number of ETF units in exchange for the creation unit portfolio, which is a basket of securities that is equivalent in value to the ETF units that comprise a creation unit. The creation unit portfolio will typically also include a cash rounding balance (the cash component) that reflects the difference between the value of the underlying securities and the ETP units being exchanged as part of the unit creation or redemption. 

Whilst the ETF issuer typically determines the number of ETF units comprising a creation unit at fund inception, the ETF issuer may update the creation unit portfolio that must be exchanged for an ETF creation unit on a daily basis and publishes this to the market. The cash component is typically set at the end of the day, once the closing prices for the underlying securities within the creation unit portfolio and the net asset value of the ETP units are determined.

Redemption of ETF units occurs in the opposite way. A security holder, with a creation unit number of ETF units, can apply to the ETF issuer for a unit redemption and receive the creation unit portfolio. 

ETF units can only be created or redeemed in creation unit quantities or multiples of single creation unit quantities, in exchange for the creation unit portfolio or multiples of the creation unit portfolio.

For the secondary market, ETF units are traded on the ASX trading platform or other Approved Market Operator (AMO) platform and settled using CHESS just like any other listed financial product.

17.2 - ETF Unit Creation (Primary Market)

The participant is deemed to be the principal for the purposes of ETF unit creation.

There are several independent roles played by the ETF issuer, including fund custodian and fund registry.

The messages used to create ETF units can be summarised as follows:

 

Procedure

Step

Description

Step

Description

1

The participant determines their need to apply for the creation of ETF units and submits an application for primary market unit creation to the ETF issuer (registry).

The trading participant effects an ETF special trade (as agreed with the ETF issuer) in accordance with ASX Operating Rules Procedure [3310].

The participant accumulates the required basket of underlying securities.

2

The ETF units are issued by the ETF issuer (registry) allotting the instructed daily unit total to the fund custodian nominated account (HIN) through the Holding Adjustments Process with the reason code Unit Creation (ETF) (UNCR).

3

To deliver that security to the fund custodians, the participant initiates the Bilateral Settlement Instruction Process with the transaction basis Facility for Non Reportable Transactions (FNRT) for each security in the creation unit basket.

4

To receive that security from the participant, the fund custodian initiates the Bilateral Settlement Instruction Process with the transaction basis Facility for Non Reportable Transactions (FNRT) for each security in the creation unit basket.

5

To deliver the ETF units being purchased by the participant, the fund custodian initiates the Bilateral Settlement Instruction Process with the transaction basis Facility for Non Reportable Transactions (FNRT). The value of this transaction reflects the value of the basket transactions plus an adjustment for cash as determined by the fund.

6

To receive the ETF units from the fund custodian, the participant initiates the Bilateral Settlement Instruction Process with the transaction basis Facility for Non Reportable Transactions (FNRT). The value of this transaction reflects to the value of the basket transactions plus an adjustment for cash as determined by the fund.

7

On T+2 CHESS settles the transactions (refer to section 9).

17.3 - ETF Unit Redemption (Primary Market)

The participant is deemed to be the principal for the purposes of ETF unit redemption.

There are several independent roles played by the ETF issuer, including fund custodian and fund registry.

The messages used to redeem ETF units can be summarised as follows:

Procedure

Step

Description

Step

Description

1

The participant determines their need to apply for the redemption of ETF units and submits an application for primary market unit redemption to the ETF issuer (registry).

2

To deliver the ETF units being redeemed to the fund custodian, the participant initiates the Bilateral Settlement Instruction Process with the transaction basis Facility for Non Reportable Transactions (FNRT). The value of this transaction reflects the value of the basket transactions plus an adjustment for cash as determined by the fund.

3

To receive the ETF units from the participant, the fund custodian initiates the Bilateral Settlement Instruction Process with the transaction basis Facility for Non Reportable Transactions (FNRT). The value of this transaction reflects the value of the basket transactions plus an adjustment for cash as determined by the fund.

4

To deliver that security to the participant, the fund custodian initiates the Bilateral Settlement Instruction Process with the transaction basis Facility for Non Reportable Transactions (FNRT) to CHESS for each security in the creation unit basket.

5

To receive that security from the fund custodian, the participant initiates the Bilateral Settlement Instruction Process with the transaction basis Facility for Non Reportable Transactions (FNRT) for each security in the creation unit basket

6

On T+2 CHESS settles the transactions (refer to section 9).

7

The redemption units are cancelled by the ETF issuer (registry) reducing the instructed daily unit total from the fund custodian’s nominated account (HIN) through the Holding Adjustments Process with the reason code Unit Redemption (ETF) (UNRD).

 

 

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