Custody banks net short-selling gains from EU crisis

Tue Jan 10, 2012 7:37am EST
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By Luke Jeffs

LONDON (Reuters) - A group of specialist banks are profiting from Europe's financial crisis, thanks to a surge in demand for securities which allow traders to bet against bank stocks and government bonds.

The so-called custody banks that administer securities, a normally unglamorous and low-margin business, include BNY Mellon, JP Morgan (JPM.N: Quote) and State Street (STT.N: Quote).

The banks, as well as loan specialist Equilend, take a fee for linking lenders with surplus stock -- typically pension funds -- with borrowers such as hedge funds and banks, who want to position themselves in markets by short-selling.

Pension funds and insurers have become increasingly attracted to lending by the fees they accrue from the borrowers at a time when equity returns are off.

The latter want stocks or bonds to sell them in the hope that their price will fall over time. They can then buy back the securities at a lower rate and pocket the difference before returning them to the lender.

"There were many trading opportunities in 2011," said James Slater, global head of securities lending at BNY Mellon.

"Activity in the second half was driven by (hedge) funds, reacting to global events like the euro zone crisis."

JP Morgan and State Street both saw lending levels rise in 2011, while Equilend, whose electronic systems match firms wanting to lend with prospective borrowers, saw its trading levels spike in August.   Continued...