As one of the first firms to the receive Securities and Exchange Commission (SEC) approval, Precidian Investments ActiveShares® is currently on track to be the first to market with licensee American Century Investments (ACI). Recently, we engaged two of the founding principals, Stuart Thomas and Mark Criscitello, to discuss the challenges and opportunities around their new ETF wrapper.
SS&C ALPS: The main difference between your model and the other ANT ETF structures is the role of the Authorized Participant Representative (APR). This has led to some conversation regarding the APR’s role, as well as some possible hurdles for this type of structure. What progress has been made with various service providers regarding additional operational infrastructure needed for this additional party involved in the creation/redemption process?
Precidian: To be clear, an APR is an executing broker/dealer acting on behalf of an AP solely to facilitate creation and redemption activity for ActiveShares®. They are acting as an agent and will execute based upon the AP’s instructions (i.e., they have no discretion). All of the major custody banks will be offering this service via their broker/dealer division as an extension of their custody business as well as a number of traditional broker/dealers specializing in basket execution. All of the major banks intend to utilize existing order entry systems that APs are intimately familiar with. There has been no need for a major overhaul of the existing electronic order systems or any of the processes to facilitate the daily servicing of ETFs.
SS&C ALPS: How do you address concerns that many firms that are possibly interested in acting as an APR may be priced out of the market? At this point, are there multiple firms still interested in acting as APRs for ActiveShares® products?
Precidian: Since all of the major custody banks are providing the APR role as an extension of their service, the resulting competition and economies of scale will keep pricing and quality of execution very competitive. This is a major advantage to the fund and its shareholders. That said, while this may be true for generic U.S.-listed equities, as ActiveShares® evolves to include more asset classes (e.g., fixed income, international equities, etc.), there will be ample opportunities for firms other than the custody banks to provide this service. Those opportunities are made possible because the firms may have particular expertise in certain asset classes (e.g., JaneStreet for fixed-income, FlowTraders for international equities, etc.).
SS&C ALPS: Approval for ActiveShares® became effective in May of 2019. In the whitepaper, we mentioned the SEC wanting extra time to review American Century‘s listing standard application until February 20th. Do we see other ActiveShares® launching shortly thereafter?
Precidian: Immediately following their launch, it is our intention to follow with our own offering in conjunction with our partners at Legg Mason.
SS&C ALPS: What is the biggest misconception that firms might have about the ActiveShares® model?
Precidian: That ActiveShares® doesn’t give managers the flexibility to disclose portfolio constituents more frequently than quarterly. While ActiveShares® does not force the portfolio managers to disclose 50-100% of their portfolio constituents on a daily basis like the various proxy solutions do, it is up to the managers how often and which securities they want to disclose (as long as the same information is disclosed to everyone simultaneously). While many of our licensees will be disclosing constituents at the same frequency as their existing mutual funds, some have expressed interest in disclosing the portfolio constituents on a more frequent basis. Additionally, as the universe of securities expands beyond first-generation SEC approval, a few managers are considering giving additional information to aid market makers and help ensure efficient markets.
On January 16, 2020, one of the licensees of the ActiveShares® model filed for their exemptive relief. In that filing, they are requesting an expansion of the investable universe to include fixed income, foreign investments that do not trade contemporaneously with shares, currencies and derivatives (including options). This filing, when approved, along with Fidelity, NYSE and Blue Tractor’s amendments, will also seek approval for the use of custom baskets, thus providing even more alternatives for investment managers to choose from.
Wanting to learn more about ActiveShares®? Read more in the SS&C ALPS Whitepaper.
Asset Management, Wealth Management