American depositary receipt
 |
| Docs | The Full American: US bond docs, plus security and custody. Lots of it, all dull. | 6 |
| Amendability | Nope, but why would you? | 5 |
| Collateral | Fully, and delta-one. | 0 |
| Transferability | Seeing as that’s the point, yes. Safely transferable. | 0 |
| Leverage | Zippo the Hippo. | 0 |
| Fright-o-meter | Disney grade only. Suitable for all the family — Unless the issuer is in a scary foreign jurisdiction in which case OMEN GRADE | 8 |
Not to be confused with synthetic equity derivatives. Or a GDR for that matter.
An American depositary receipt, or “ADR”, is a way of getting synthetic exposure to securities in hard-to-access markets. They were introduced in 1927[1] as an easier way for U.S. investors to buy foreign stock. Before ADRs came along, US persons wanting to buy non-U.S. listed shares had to buy the shares on international exchanges in the local currency, with all the FX and regulatory hair that entails.
ADRs are issued by a US custodian bank evidencing an entitlement to the stock purchased by the bank which the bank has bought through a broker in the open local market in the local currency are deposited in a foreign depositary bank. ADR holders realise any dividends and capital gains in U.S. dollars converted from their local currency net of conversion expenses and foreign taxes. They can be listed or unlisted.
Sponsorship
ADRs can be “sponsored” — where the underlying issuer lined up the custodian directly — or “unsponsored” where it didn’t, and the custodian set it up off its own bat without the issuer’s help.
Levels
The SEC applies different scrutiny to different “levels” of ADRs.
- Level 1 ADRs: trade over the counter (not on American exchanges) and are the only level of ADR that can be unsponsored. Level 1 ADRs have minimal SEC reporting requirements, and they're not required to file quarterly or annual reports in compliance with U.S. generally accepted accounting principles (GAAP), which means less information is available on these securities, and it's more difficult to compare their financial metrics to those of U.S. companies that comply with GAAP.
The lower amount of reliable information makes level 1 ADRs riskier for investors. Level 2 and level 3 ADRs, meanwhile, require the issuer to register and file annual reports with the SEC. Level 3 ADRs have stricter reporting requirements than level 2 ADRs. Level 3 ADRs represent an initial public offering (IPO) on U.S. exchanges. An "IPO" is when a company's stock first becomes available to be purchased on major U.S. stock exchanges. Level 3 ADRs therefore have the added ability to raise capital through a public offering on U.S. exchanges. In order to register the public offering, the ADR is required to file a Form F-1 with the SEC, which entails additional transparency and regulation. For more information, read this page on the SEC website.
Conversion of real underliers into ADRs and back again: A hobbit’s tale
Holders of the underlying ordinary shares may ask the custodian to “convert” these shares into an ADR, by delivering them to the custodian in exchange for an ADR certificate. Similarly, holders of an ADR may request to convert to the underlying ordinary shares if they want to take the shares back out of the American market.
See also
- GDR - former communist East Germany - or - a global depositary receipt.
- Alternative dispute resolution
References
- ↑ Fun fact: The first ADR was introduced by J.P. Morgan on fusty British haberdasher Selfridges.