Global Depositary Note (GDN)

What are Global Depository Notes

Global Depository Notes (GDNs) are debt instruments issued by depositary banks, facilitating international investment in local currency-denominated debt securities. These notes essentially represent ownership of bonds traded in local markets but are settled in US dollars. GDNs mirror the terms of the underlying bonds, including interest rates, maturity dates, and credit quality, but enable investors from various countries to access markets they might otherwise find challenging to enter due to currency restrictions or market complexities. Settlements for GDNs typically occur through major clearing systems such as Euroclear, Clearstream, or the Depository Trust Company, streamlining the investment process across borders and currencies.

How do Global Depository Notes Work?

Global Depository Notes (GDNs) operate as a conduit for international investors to access local bond markets seamlessly. When an investor purchases a GDN, they effectively acquire ownership of a portion of the underlying bond volume, which is denominated in the local currency of the country of issuance. However, all transactions related to GDNs, including coupon payments and settlement at redemption, are conducted in US dollars. While not mitigating currency risk for investors, as the payments are linked to a local currency exchange rate relative to the US dollar, this still streamlines the investment procedure as the investors get the return in a hard currency without a need for conversion.

The process of issuing and redeeming GDNs is managed by depositary banks, such as Deutsche Bank or Citi Bank, who handle corporate actions, foreign exchange transactions, and payments to GDN holders. GDNs are typically issued, settled, and cleared through established clearing systems like Euroclear, Clearstream, or the Depository Trust Company, ensuring efficient and secure transactions. This structure simplifies the investment process for international investors, allowing them to participate in local bond markets without the complexities associated with direct investment in foreign debt securities.

Benefits for Investors and Issuers

1. International Market Access. GDNs provide investors with access to local currency bond markets worldwide, enabling the diversification of investment portfolios beyond their domestic markets. This access allows investors to capitalize on opportunities in different regions and economies.

2. Convenient Settlement. Since GDNs are settled in US dollars regardless of the local currency denomination of the underlying bonds, the currency exchange procedure is fully handled by the depository, removing the burden from the investor.

3. Streamlined Transactions. GDNs are issued, settled, and cleared through established clearing systems such as Euroclear, Clearstream, or the Depository Trust Company. This streamlined process simplifies transactions, reducing administrative burdens and operational complexities for investors.

4. Replication of Underlying Bonds. GDNs replicate the terms of the underlying bonds, including interest rates, maturity dates, and credit quality. This ensures that investors receive the same financial benefits and exposure to the underlying assets as if they had directly invested in the local bonds.

5. Liquidity Enhancement. By facilitating trading in US dollars and leveraging established clearing systems, GDNs enhance liquidity for investors. This liquidity allows investors to buy and sell their holdings easily out of the country of bond issuance, improving market efficiency and reducing transaction costs.

6. Diversification Benefits for Local Markets. For local bond markets, GDNs attract international investors, diversifying the pool of investors and enhancing liquidity. This influx of foreign capital can lower borrowing costs for local issuers and stimulate economic growth.

Global Depository Notes vs. Direct Investment in Local Bonds

1. Accessibility and International Reach. GDNs provide international investors with access to local bond markets that would otherwise be hard to access due to regulatory barriers or market complexities. Local currency bonds are typically targeted at domestic investors and may pose challenges for foreign investors to enter directly.

2. Currency Denomination. While providing the investor with exposure to local currency assets, GDNs are denominated and settled in US dollars. As a result, the boon of expanding the currency composition of the portfolio is coupled with the convenience of the hard currency settlement.

3. Market Participation and Efficiency. GDNs leverage established clearing systems such as Euroclear, Clearstream, or the Depository Trust Company, streamlining transactions and enhancing market efficiency for international investors. Local bonds, on the other hand, may have settlement processes that vary across different jurisdictions, potentially posing challenges for foreign investors in terms of timing and operational procedures.

Examples of Global Depository Notes

1. Chile Bonds, 5% 1mar2035, CLP (GDN). The security bears the ISIN code US168863CT30 and is denominated in Chilean peso with settlement in US dollars. The underlying instrument replicated by this GDN is Chile Bonds, BTP 5% 1mar2035, CLP.

2. Grupo Televisa, 8.79% 27sep2027, MXN. With an ISIN code USP4987VAY94, this Mexican peso-denominated GDN pays interest of 8.79%. The code of the underlying security is MX91TL000031.