DEFINITION of European Depositary Receipt - EDR
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) in the U.S.
BREAKING DOWN European Depositary Receipt - 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; and the banks that issue and support EDRs generate trading commissions and fees for their books.
Making and Servicing an EDR
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 a 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 European's home currency, the EDR will also have devalued. 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.