What Is a European Depositary Receipt (EDR)?
A European depositary receipt (EDR) is a negotiable security issued by a European bank that represents the public security of a non-European company and trades on local exchanges. The shares issued by the bank are priced in local currencies (mainly Euro) and also pay dividends, if applicable, in local currencies. Non-European companies may list EDRs to attract a wider base of investors.
EDRs are the functional equivalent of American depositary receipts (ADR), which allow foreign companies to list shares on U.S. exchanges.
- A European depositary receipt (EDR) is a tradable security issued by a European bank that represents shares in a non-European company.
- EDRs trade on European stock exchanges and allow European investors to more easily invest in foreign companies.
- EDRs and their dividends are priced in euros.
Understanding European Depositary Receipts (EDR)
European depositary receipts have existed for decades but they have become more popular with the rise of global investing. The benefits are clear: investors in Europe gain convenient access to shares of public companies based in the U.S. and other foreign countries; non-European companies attract tap a larger pool of capital by listing in Europe; the banks that issue and support EDRs generate trading commissions and fees for their books.
After determining that the stock of a public company meets local exchange requirements, a European-based bank purchases a block of shares of the company and places them in custody at its depositary arm. It then bundles them in packets and reissues them in local currencies to be traded and settled on local exchanges.
Beyond the creation of an EDR, a bank handles dividend payments, currency conversions, and distributions of receipts. It also provides transmission of shareholder information to EDR holders, including annual reports, proxy filings, and other corporate action materials.
To a European investor, being able to invest in foreign security on a local exchange has its appeal. However, there are at least two main risks. First, there is currency risk.
Take, for example, a stock of a U.S. company purchased by a European investor at a certain point in time. If at a later date the U.S. dollar is worth less against the euro currency, the EDR will see a reduction in value.
Second, an EDR may have low trading liquidity, which means that investors would not be able to trade in and out at tight bid-ask spreads at their desired quantities of shares.
EDRs, ADRs, and GDRs
EDRs and ADRs are quite similar. The primary difference is that ADRs allow non-U.S. companies to list shares on American exchanges while EDRs allow non-European companies to list shares on European exchanges. While ADRs are priced in U.S. dollars, EDRs are priced in euros.
ADRs and EDRs both provide listings to foreign shares in one market: the U.S or Europe, respectively. Global Depositary Receipts (GDRs) instead give access to two or more markets, most frequently the U.S. market and the Euromarkets, with one fungible security. GDRs are most commonly used when the issuer is raising capital in the local market as well as in the international and US markets, either through private placement or public offerings. Thus, a company based in Japan may seek to list GDRs than have both an American and European counterpart.