From Grok,
The Bank of New York Mellon Corporation (BNY Mellon), as a depositary bank for American Depositary Receipts (ADRs), does not typically engage in arbitrage trading in both U.S. and foreign markets as a primary revenue source. However, its role in facilitating ADR programs can indirectly support arbitrage opportunities for other market participants (e.g., traders, hedge funds, or institutional investors). Below, I explain how BNY Mellon’s activities relate to arbitrage and whether it engages in such trading itself:
Understanding Arbitrage in the Context of ADRs
Arbitrage in the ADR context involves exploiting price differences between the ADR (traded on a U.S. exchange, like NYSE or NASDAQ) and the underlying foreign shares (traded on the foreign company’s home market, e.g., London Stock Exchange or Tokyo Stock Exchange). The ADR price should theoretically align with the underlying share price, adjusted for the ADR ratio (e.g., 1 ADR = 2 underlying shares) and currency exchange rates. When mispricings occur, arbitrageurs buy the cheaper instrument and sell the more expensive one to profit from the price convergence.
BNY Mellon’s Role and Arbitrage
BNY Mellon’s primary role in ADR programs is as a depositary bank, not as a trader. Its activities include:
- Issuing and Canceling ADRs: BNY Mellon facilitates the creation of ADRs by holding the underlying foreign shares in custody and issuing ADRs to U.S. investors. Conversely, it cancels ADRs when investors convert them back to foreign shares.
- Custody and Settlement: It manages the custody of foreign shares and ensures smooth settlement of ADR trades in the U.S. market.
- Currency Conversion: It handles foreign exchange transactions for dividends or share conversions.
These activities enable arbitrage by ensuring that ADRs and the underlying shares are interchangeable, which helps maintain price alignment between the two markets. For example:
- If an ADR trades at a discount to the underlying shares (adjusted for exchange rates and ADR ratio), an arbitrageur can buy the ADR, cancel it through BNY Mellon to receive the underlying shares, and sell them on the foreign market for a profit.
- If the ADR trades at a premium, an arbitrageur can buy the underlying shares, deposit them with BNY Mellon to create new ADRs, and sell the ADRs in the U.S. market.
BNY Mellon earns fees (e.g., issuance, cancellation, or custody fees) from these transactions, but it does not typically take proprietary trading positions to exploit arbitrage opportunities itself.
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