To The Moon

The world of investing is constantly evolving, and the Singapore Exchange (SGX) has recently launched the Singapore Depository Receipts (SDRs). SDRs present a unique opportunity for Singapore investors to broaden their investment horizons and tap into the potential of companies from other countries. Acting as a bridge between Singapore investors and foreign companies, SDRs provide a convenient and simplified method for accessing international markets.

In this comprehensive guide, we will explore the intricacies of investing in Singapore Depository Receipts (SDRs). We will delve into the benefits and potential risks associated with this new investment instrument, and include a list of FAQs to help investors gain a better understanding about SDRs.

What are SDRs?

You might have heard of American Depository Receipts (ADRs) and SDRs work the same way. They serve the primary purpose of providing a convenient investment avenue for investors to participate in companies listed on overseas exchanges, without the complexities of navigating unfamiliar markets or complying with additional regulatory requirements.

For instance, let’s consider the initial SDRs introduced for Thai stocks. Instead of the need to directly invest in Thailand, which typically involves opening accounts with specific brokers providing access to Thai stocks and potentially incurring higher commission fees, Singapore investors can conveniently purchase the same underlying securities through the SGX. By offering this accessibility and convenience, SDRs empower Singapore investors to seize opportunities presented by foreign companies while eliminating potential hurdles.

SDRs should not be mistaken for actual stocks; instead, they function as exchange-traded instruments. These instruments are issued by a financial institution or better known as a “SDR Issuer” specifically for trading purposes. SDRs are backed by the underlying securities of the foreign companies but these foreign companies are not involved in creating the SDRs. Should investors choose to do so, they have the flexibility to convert their SDR holdings into the actual securities they represent, thereby exercising their ownership rights in the underlying companies or securities.

Source: SGX.com

Benefits of SDRs

There are several benefits to trading SDRs:

Access to global securities

SDRs enable local investors to participate in overseas markets through the familiar SGX ecosystem. By aligning with the trading rules and the lot sizes of 100 on the SGX, SDRs provide a standardized and familiar trading experience. Investors can navigate the market more efficiently, leveraging their existing brokerage accounts without the need for separate accounts or incurring overseas trading fees. This streamlines the investment process and allows investors to manage their SDR investments within their familiar brokerage setup.

Similar to stock trading

SDRs are classified as Excluded Investment Products (EIP) as they are viewed similar to stocks. This means that there are no restrictions on buying and selling SDRs, and any investor with a brokerage account to trade SGX securities can easily trade SDRs.

Trading in SGD

Trading SDRs in SGD eliminates the need for investors to convert to foreign currencies. Moreover, it ensures price transparency and certainty when executing the trades in SGD, as oppose to not knowing the foreign exchange rate at the time of trade execution for foreign securities. Additionally, investors receive dividends in SGD, enhancing convenience even further.

Lower fees

Trading SDRs generally incurs lower costs compared to directly trading Thai stocks. Investors can enjoy cost savings by opting for SDRs instead.

CDP Custody

SDRs are held in custody by the Central Depository (CDP) of Singapore, providing investors with a secure and reliable system for the storage and management of their SDR holdings. 

Convertibility

SDRs offer the advantage of convertibility. Investors have the option to convert their SDR holdings into the actual securities of the foreign companies represented by the SDRs. This flexibility allows investors to exercise their rights as shareholders and potentially benefit from any corporate actions or events.

Transparency

Corporate actions related to SDRs are made in English and published on the SDR Issuer’s website. The underlying companies also publish annual reports, presentations and announcements in English on the SET website. The availability of information in English enhances transparency and facilitates informed decision-making.

How do SDRs work?

The SDR ecosystem relies on the involvement of six key parties. These parties include the custodian for the overseas securities, the SDR issuer, SGX, market makers, CDP (Central Depository), and brokers.

Overseas Custodian: safeguard the underlying securities

To facilitate the creation of Singapore Depository Receipts (SDRs), a custodian based overseas plays a crucial role by holding the actual securities that serve as the underlying assets for the SDRs. 

In Thailand, a specific class of securities known as non-voting depository receipts (NVDRs) is utilized for this purpose. NVDRs, as the name suggests, do not carry voting rights and are designed to cater to foreign investors, ensuring they are not restricted by foreign ownership limitations imposed by Thai law. Consequently, the underlying securities for the Thai SDRs consist of these NVDRs. Although NVDRs lack voting rights, investors can still benefit from the financial aspects of the companies, such as receiving dividends.

The custodian responsible for holding these securities plays a critical role in maintaining their security and integrity throughout the entire process. This means that investors are not exposed to issuer risk. Even in the event that the SDR issuer ceases to exist for any reason, investors can rest assured that their securities held on trust by the custodian will remain intact, ensuring the continuity of their investment. The custodian’s role provides a layer of assurance and safeguards the interests of SDR investors, reinforcing the overall integrity of the SDR ecosystem.

SDR Issuer: Issues the SDRs and handle corporate actions

The SDR issuer creates the SDRs based on the underlying securities held in custody by the Thai custodian. 

The SDR Issuer also facilitates the conversion between SDR and the underlying securities upon request from the SDR investors. That said, conversion is not necessary if investors want to trade on SGX only.

A crucial role of the SDR issuer is to handle various corporate actions, such as cash dividends, script dividends, distribution-in-specie, bonus issues, stock splits, consolidations, rights issues, and delisting offers. Notably, cash dividends are distributed in Singapore Dollars (SGD), ensuring convenience for SDR investors.

The SDR issuer also assumes the role of publishing important corporate announcements regarding the underlying companies. These announcements, which include details about corporate actions, can be accessed through SGX’s Company Announcements webpage or the designated platform provided by the SDR issuer.

However, it is important to note that not all announcements will be published on the SDR Issuer’s. Investors should monitor the websites of the respective companies or the Stock Exchange of Thailand (SET) to stay updated on the latest developments and business activities of the underlying companies.

SGX: Trading of the SDRs

Once created, SDRs are quoted and traded on the Singapore Exchange (SGX). This provides investors with transparent, fair, and efficient pricing of the SDRs, in contrast to over-the-counter transactions. This enhances investor trust in the pricing mechanism, ensuring that they receive accurate and reliable pricing information.

Trading of SDRs on the SGX follows the trading rules and trading hours set by the exchange. The SGX trading hours are longer than the trading hours of the Stock Exchange of Thailand (SET). For instance, SGX operates between 9:00 am and 5:16 pm, with a lunch break from 12:00 pm to 1:00 pm. On the other hand, SET trades between 10:00 am and 5:00 pm, with a longer lunch break from 12:30 pm to 2:30 pm (Bangkok Time). Consequently, the extended trading hours provide investors with more time to engage in buying and selling activities for SDRs.

SDRs are traded in SGD and the trading prices of SDRs are reflected on the SGX website, providing investors with information on the market prices of SDRs. Additionally, the SGX monitors the trading of SDRs and takes appropriate action, such as halting or suspending trading, if the underlying securities are halted or suspended on the overseas exchange. This ensures the integrity and reliability of the trading process for SDRs.

SDRs can be easily identified through a naming convention that includes the company name, market, and SDR designation. The first three Thai SDRs introduced are as follows:

Trading NameTrading CodeAOT TH SDRTATDCP ALL TH SDRTCPDPTTEP TH SDRTPED

Market Makers: Providing liquidity to SDRs

Market makers play a crucial role in ensuring the liquidity of SDRs, enabling investors to buy and sell these securities easily. When investors wish to purchase SDRs, they can acquire them from market makers at the ask price. Conversely, if investors want to sell their SDRs, they can sell them to market makers at the bid price. This two-sided quoting mechanism allows investors to trade with market makers regardless of the immediate availability of other buyers or sellers in the market.

Additionally, market makers help maintain price parity between SDRs and their underlying securities listed on the Stock Exchange of Thailand (SET). Generally, prices of SDRs quoted by market makers may be influenced by the prices of the underlying securities on SET, foreign exchange rates and the supply and demand of SDRs on SGX.

By actively participating in the market, market makers foster a liquid trading environment that facilitates seamless transactions for investors. Their presence improves bid-ask spreads, which refers to the difference between the buying and selling prices, making it more cost-effective for investors to trade. Moreover, market makers contribute to reducing price volatility, as they are willing to provide liquidity even during periods of uncertainty or lower market activity.

Overall, market makers play a vital role in enhancing the liquidity and stability of the SDR market. Their continuous participation ensures that investors can readily buy or sell SDRs at fair prices, promoting a more efficient and accessible trading experience.

Brokers: Executing trading orders for SDRs

To trade SDRs, investors can rely on their existing brokers who facilitate their buy and sell orders on SGX. The advantage is that there is no need to engage a specialized broker specifically for SDRs.

When it comes to brokerage fees, investors can expect the usual broker commissions and SGX trading fees to apply when trading SDRs. However, it’s important to note that fee structures may vary among different brokers.

First, there are limited brokers in Singapore that offer direct access to Thai stocks listed on the SET. Second, the fees associated with buying SDRs to buying Thai stocks listed on the SET directly are also different. One notable exception is POEMS.

In terms of costs, purchasing Thai stocks directly typically incurs a fee of 0.18% with a minimum commission of THB500 (~S$19.51) on the POEMS platform. On the other hand, buying the equivalent Thai SDRs can cost as low as 0.08% with no minimum commission. Even when factoring in the exchange fees, the overall cost for Thai stocks would be around 0.181%, while for SDRs it would be approximately 0.12% (+S$0.35).

However, it is essential to be aware of additional fees associated with SDRs. For dividend distribution, there is a 1% charge, which applies not only to SDRs but also to foreign stocks in general. Therefore, there is no difference in terms of this fee. Similarly, there is a 0.25% charge on cash distribution resulting from the sale of securities related to a corporate action.

Furthermore, if investors wish to convert their SDRs to the underlying overseas securities, a conversion fee is applicable. This fee amounts to S$5 for every 1,000 SDRs, with a minimum fee of S$50 and a maximum fee of S$1,000. It is important to note that frequent conversions are not expected, and an alternative, potentially more cost-effective approach, is to sell the SDRs and purchase the underlying Thai stocks.

Considering the cost comparison, it is evident that purchasing SDRs is generally more cost-effective than buying Thai stocks directly. The lower fees associated with SDRs make them a more attractive option for investors seeking exposure to Thai companies listed on the SGX.

CDP: Holding SDRs in custody

Finally, the custody of SDRs will be held by the Central Depository (CDP). Unlike custodizing foreign shares with brokers, there are no custody fees associated with holding SDRs in CDP. This is a significant advantage for investors, as it eliminates additional costs typically incurred when holding foreign shares over a long period. However, this applies only to investors who possess CDP accounts. In case the connection with CDP has not been established, the broker may hold the SDRs on behalf of the investor.

Investors can conveniently view their SDR holdings within their CDP accounts via the SGX Investor Portal, even if the SDRs represent securities of foreign companies. This provides a seamless and consolidated overview of their investment portfolio.

Moreover, the custody arrangement with CDP provides the added advantage of direct dividend payments to investors’ bank accounts. This eliminates the need for investors to go through the process of withdrawing dividends from their stock brokerage accounts.

Furthermore, CDP plays a crucial role in processing corporate actions related to SDRs, based on the decisions made by the SDR issuer. For instance, if the SDR issuer chooses to facilitate rights subscription for SDR holders, CDP will efficiently handle the necessary processing and ensure a smooth execution of such corporate actions.

By leveraging the services of the SGX Investor Portal, investors can enjoy the convenience, reliability, and cost-efficiency associated with the custody and management of their SDR investments, contributing to a seamless and efficient investing experience.

Risks of SDRs

There are inherent risks associated with trading SDRs that investors should be aware of:

Overseas market risks

Investing in SDRs exposes investors to the risks associated with foreign markets where the underlying securities are listed. Factors such as geopolitical events, regulatory changes, and economic conditions specific to those markets can impact the performance and value of SDR investments.

Forex risk

Although SDRs trade in SGD, investors should recognize that forex risks still exist. Fluctuations in exchange rates between SGD and the foreign currencies of the underlying securities can affect the returns and value of SDR investments. 

Liquidity and pricing risks

The liquidity of SDRs is dependent on trading activity and market demand. In some cases, SDRs may have lower liquidity compared to the actual securities listed on foreign exchanges. This can result in wider bid-ask spreads and potential challenges in executing buy or sell orders at desired prices. 

No voting rights

SDR holders do not possess voting rights in the underlying companies. While SDRs provide financial benefits such as dividends, investors do not have the right to vote on major matters. This lack of voting rights may limit investors’ influence over corporate actions and strategic decisions.

Trading hours and market holidays

Differences in trading hours and market holidays between the SGX and the foreign stock exchanges where the underlying securities are listed can create disparities in price movements and trading activities. 

Have questions about SDRs? Here’s the list of FAQs: https://www.drwealth.com/guide-to-investing-in-singapore-depository-receipts-sdrs/