European Depositary Receipts (EDRs): Understanding, Benefits, and Risks

A European depositary receipt (EDR) is a negotiable security issued by a European bank, representing shares of a non-European company. EDRs enable European investors to easily invest in foreign companies without the need to trade directly on foreign exchanges. They provide an avenue for diversification by allowing investors to gain exposure to international markets while transacting in their local currency.

European-based banks purchase blocks of shares of non-European companies and hold them in custody. They then issue EDRs, priced in euros, which trade on local European exchanges. These receipts facilitate trading and settlement in local currencies, simplifying the investment process for European investors. Additionally, banks handle dividend payments, currency conversions, and distributions of receipts, providing comprehensive support to EDR holders.

The primary purpose of EDRs is to provide European investors with convenient access to foreign investments while allowing non-European companies to tap into European capital markets.

EDRs are priced and traded in euros on European exchanges, simplifying the investment process for European investors.

The main risks associated with EDRs include currency risk due to fluctuations in exchange rates and low trading liquidity, which may impact bid-ask spreads and liquidity.