EUROCLEAR, one of the world’s largest financial clearing houses which serves 90% of the world’s 50 largest banks, has informed investors that it will ‘no longer support international cannabis-related stocks’ from January 2023.
The move has left swathes of UK investors scrambling to find alternative ways to invest in North American cannabis stocks, with many facing little choice but to sell off their holdings at a considerable loss.
As the SAFE Banking Act hits yet more roadblocks in the US, this decision also marks a step backwards in the cannabis industry’s ongoing battle to win over financial institutions across Europe.
While little is known about the rationale behind Euroclear’s decision, one financial analyst told BusinessCann it was likely simply the case that the regulatory risk continues to outweigh the financial reward in the cannabis market.
Cannabis stocks no longer supported
Last week a number of UK investors reported receiving emails from their stockbroker Hargreaves Lansdown informing them of the upcoming changes.
Investors with holdings in Tilray, Sundial, Canopy Growth, Mind Medicine and a number of other leading North American cannabis operators and ETFs were informed that they will ‘no longer be able to trade or hold’ these shares from January 27, 2023.
The emails stated: “Euroclear, a custodian that we and a number of UK stockbrokers use, have announced they will no longer support international cannabis-related stocks… They are making this change following a review of all international cannabis-related stocks in which they decided they no longer meet the admission criteria to trade.”
Due to a suspected typo, which listed the final date these stocks could be traded as January 27, 2022, some investors questioned the legitimacy of the announcement.
Hargreaves Lansdown’s press office has since confirmed to BusinessCann that these emails are accurate, and this is indeed the position of itself and Euroclear.
BusinessCann has contacted Euroclear for comment but is yet to receive a response at the time of writing.
Investors are now left with three options. They can do nothing, in which case Hargreaves Lansdown will sell their shares on their behalf and put the proceeds into their accounts, waiving the usual dealing charges.
They can sell their own shares up until market close on January 26, again with the usual dealing charges waived.
Or, finally, they can transfer their holdings to another provider, with the cut-off date for the transfer request set for January 10.
Despite investors having the option to transfer their holdings, the prevalence of Euroclear means alternative choices for them are now severely limited.
Euroclear is one of two of the Eurozone’s principal securities clearing houses, which act as middlemen between buyers and sellers of financial instruments, helping ensure financial markets run smoothly.
Almost all brokers across the UK and Europe use Euroclear or Clearstream, which has imposed its own restrictions on cannabis stocks since 2020.
A number of investors are understood to have already submitted complaints regarding the action, as they will now be forced to eat significant losses following a torrid year for cannabis stock prices, while a mass sell-off could see prices driven down further.
The move comes just over a year after US banking giant JPMorgan Chase & Co announced similar plans to restrict trading of cannabis stocks.
On November 2, 2021, Reuters published a letter that JPMorgan sent to brokers stating that it had ‘introduced a framework that is designed to comply with US money laundering laws and regulations by restricting certain activities in the securities of US Marijuana Related Businesses’.
It gave investors just six days’ notice before it banned purchases or short positions with cannabis businesses, similarly allowing clients with existing positions the opportunity to liquidate them.
JPMorgan’s decision came just months after a similar position was taken by Credit Suisse Group in May, in which it informed investors it would no longer be executing stock transactions of cannabis companies.
Investors have long cited both of these events as major factors driving the poor performance of cannabis stocks over the past year.
One financial analyst told BusinessCann that it was possible JPMorgan, which launched Euroclear in 1968 and continues to be its fifth largest shareholder, had played a part in influencing Euroclear’s decision.
They added that the decision was ‘terrible’ for the cannabis industry, as it meant there was ‘a lot less money going around and a lot less opportunity for funding channels’.
Another said that while the decision was ‘disappointing’ for cannabis, they struggled to ‘find an argument they could readily come up with that would make Euroclear’s position difficult to understand’.
They explained that this was a decision ‘by a large institution that deals primarily with other large institutions that the legal risks of carrying on covering a very small part of their business are no longer appropriate, given the potential contamination of a large part of their business’.
“It’s been the exact same story for the provision of commercial banking services to CBD businesses in the UK, where people have had their services withdrawn at short notice for reasons that they won’t elaborate upon.
“But look at it from the providers’ point of view, their whole business is reliant on continued good graces with their respective regulator.
“In every single instance, they have to make a judgement if this client is worth the fight. If the answer to that is yes, because the client is valuable and part of a valuable sector or they just don’t see any significant legal risk, then of course you carry on. But if the reverse is true, it becomes a different conversation.”