A week ago, the PSE released a proposed set of rules to govern Global Philippine Depository Receipts (GPDRs) (PDF link), which are being pushed as a way to trade foreign stocks through the PSE using your Philippines-based broker. But what are they and how do they work? Let’s talk about it.
> What are GPDRs? In a sentence, a GDPR is a peso-denominated voucher for an underlying share in a company listed on a foreign stock exchange that can be traded on the PSE.
> Are these like ADRs? Yes! American Deposit Receipts (ADRs) (Investing.com link) are the way that some PSE-based companies have been introduced to American investors for trade on US exchanges. There are about 30 PSE companies that have ADR shares traded in the US.
> Do PSE companies get money for ADR shares? No. At a high level, ADRs are just a block of PSE company shares that a US bank buys on the open market that it thinks US investors will be interested in, so it issues ADRs for those shares and sells the ADRs to the public for trading. Similarly, foreign companies will not get money (directly) from Filipino investors through GDPRs.
> Why would banks list GDPRs? To make a profit and churn some fees. All sections of the financial “human centipede” will be available to bring GDPRs to market, like underwriters, issue managers, and sales. They will all earn professional fees for the risk of undertaking the transaction and bringing the shares to market.
> What kinds of GDPRs are there? There are two: sponsored and unsponsored. Sponsored GDPRs are those that are brought to the PSE by a local issuer on behalf of a foreign company where the two are working together. Unsponsored GDPRs are just when a local issuer decides on its own to list the GDPRs without any input from the foreign company. Multiple banks/issuers can list GDPRs relating to the same source foreign company. For traders, it doesn’t look like that distinction will matter.
> What stocks will be available? That depends on the GDPR issuers, which can be banks, brokers, or authorized non-bank financial institutions and investment companies. There’s no central planning or authority that will choose which stocks to make available to Filipinos through GDPRs. Issuers can offer whatever stocks they like so long as the GDPR lists with at least ?30 million in subscriptions between at least 50 subscribers, and the issuer complies with all of the administrative requirements.
> Can GDPR holders earn dividends? No, and they won’t be eligible to vote either. GDPR holders will have the right to convert their GDPR shares into the equivalent shares of the underlying stock, but that’s the extent of the shareholder rights that pass to GDPR holders under these rules.
> How will the price move? In theory, the ability to convert the GDPR shares to the actual shares should eliminate any significant price differences between the GDPR version of the share and the actual foreign share. That said, since the GDPRs will be priced in pesos, the GDPR version price will reflect the value of its underlying share but also currency shifts against the peso (depending on the currency of the source share). Some studies on ADR shares in the US found that ADRs tended to initially overreact to domestic market forces and underreact to changes in the source share’s price or changes in currency exchange rates.
> Who should invest in GDPRs? Without knowing anything about the stocks that issuers will bring to the PSE or the volume that those GDPRs will trade with, it’s difficult to say who “should” invest in GDPRs. I’d say that they’re appropriate for a moderately experienced investor who is looking to diversify their portfolio and get exposure to new market forces.
MB bottom-line: I think it would be awesome for issuers to get creative and bring American ETFs to the PSE. I’d love the chance to trade a basic S&P 500 ETF (SPY) or any of the Vanguard series of Growth, Value, and Developed Market ETFs. I’d love to get exposure to hard technology stocks like NVIDIA, Palantir, and Intel, or to “soft” technology stocks like Amazon, Tencent, Apple, or Alibaba, or even popular cultural stocks like Telsa. There are a lot of possibilities and no way for us to know (yet) what might be coming. But why is the PSE doing this? Well, to make money, of course, through fees and commissions, but also to make itself more appealing as a platform to Philippine-based investors who are increasingly looking elsewhere to crypto and foreign trading apps to place bets on foreign markets. The PSE must have done the math and concluded the potential loss in volume to local stocks was worth keeping existing traders and bringing new ones into the fold. Who knows if it will work? We’re still waiting for the first short sale.
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