Depository Receipt

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A depositary receipt is a negotiable financial instrument issued by a bank to represent a foreign company's publicly traded securities

Depositary receipts make it easier to buy shares in foreign companies because the shares of the company don't have to leave the home state The first ADR was introduced by J.P. Morgan in 1927 for the British retailer Selfridges.

A DR is a negotiable instrument issued by a U.S. depositary bank evidencing ownership of shares in a Non-U.S. corporation. Each DR denotes Depositary Shares (DSs) representing a specific number of underlying shares on deposit with a custodian in the issuer’s home market. The term “DR” is commonly used to mean both the physical certificate and the security itself. DRs are generally quoted and traded in $US and are subject to the trading and settlement procedures of the market in which they trade. The ease of trading and settling DRs makes them an attractive investment option for investors wishing to purchase securities issued by companies outside the investor’s home market.

DRs can be publicly offered, privately placed or issued pursuant to a global offering.

DR markets development (1)
Depositary receipts markets grew at a double-digit rate in the 1990’s  There were 836 DR programs with 176 of them listed in the US in 1990; these figures reached 1,534 and 608 respectively in 2000.  As a consequence of the global market corrections in 2000-2002 the DR markets growth slowed down.  The number of sponsored DR programs was rising with exception of 2003; the number of US listed programs has been decreasing since 2001. 

Development of number of DR programs

2 000 1 800 1 600 1 400 1 200 1 000 800 600 400 200 0 1997 1998 1999 458 501 520 1 527 1 681 1 729

1 791

1 819

1 847

1 817

1 858

570

563

537

504

498

2000

2001

2002 Sponsored

2003

2004

Sponsored US-listed

Source: The Depositary Receipt Market Review 2004, The Bank of New York

4

DR markets development (2)


Also the trading volumes increased substantially – from 3.8 billion shares with dollar volume of 75 billion in 1990 to 28.7 billion shares and USD 1,185 billion in 2000. The number of traded ADRs in the US markets increased further in 2001 and even in 2002, but the dollar trading volumes were rapidly falling in 2001 and 2002. The last two years brought again a substantial growth of both figures.

Trading volumes of US-listed DRs
1 400 1 200 1 000 40 35 30 25 20 600 400 200 0 1997 1998 1999 2000 2001 2002 2003 2004 15 10 5 0

USD bn

800

billions of USD

billions of DRs

Source: The Depositary Receipt Market Review 2004, The Bank of New York

5

DR vs. actual share price


The price of a depositary receipt should virtually equal to the price of underlying shares in the local market: DR price = ADR ratio * price of underlying share * exchange rate (± transaction costs) ◦ ADR ratio is the number of ordinary shares represented by one DR.



For equality:
◦ continuous buying and selling in both markets ◦ the two assets are virtually identical with basically the same pay-offs ◦ the price of both instruments reflects the same information



Against equality:
◦ markets segmentation
◦ information lags

◦ different trading hours – very temporary differences

6

 

DR vs. actual share price – results (1) I examined 3 Czech, 3 Hungarian and 3 Polish stocks, to which DRs have been issued. I found, that the prices of depositary receipts and their underlying shares are very closely correlated.



For all Czech and Hungarian shares the correlation coefficient was above 0.99. For two of the Polish shares lower values. Development of Český Telecom ordinary share and GDR prices 1,000 900 800 700 600

CZK

500 400 300 200 100 0

/2 9

/2 7

/2 6

/2 5

/2 5

/2 3

/2 4

/3 0

/3 0

/2 8

/2 5 03 /0 7 20

98 /0 7

99 /0 1

99 /0 7

00 /0 1

00 /0 7

01 /0 1

01 /0 7...
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