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A Different Hurricane Play

Chris Laudani

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After a major storm, any investors are searching for a way to "play" it. They look for companies that will benefit from the cleanup or they look to short companies that will lose money from storm-related damage.

One angle that I don't think many people have thought about is what I call the "Depository Trust" play. The Depository Trust & Clearing Corporation (DTCC for short) is a major player on Wall Street, but only those working in the back office usually hear of it. DTCC is owned by its member firms and provides custody and clearing services for more than 3.6 million U.S. securities. The company does business in 121 countries and provides custody services for more than $36 trillion worth of securities. And get this: In 2010, DTCC settled nearly $1.66 quadrillion transactions. Yes, quadrillion. Obviously, these guys are very, very busy.

But DTCC is privately held by the brokerage community, so what's the storm-related play? Turns out, DTCC's vault -- the one that holds those 3.6 million pieces of paper -- is currently underwater at 75 Broad Street. Why someone would store 3.6 million pieces of paper in a basement 200 yards from a huge river on an island escapes me. But they do. And DTCC's storage record isn't perfect. DTCC's last vault was in the basement of the World Trade Center and was destroyed on September 11. While it's not entirely clear if all 3.6 million certificates are in the vault at 75 Broad Street, it is believed that at least 1.3 million certificates are in the vault. Obviously, DTCC is cagey about exactly what's in their vault since they don't want some international crime syndicate renting the apartment next door and drilling into its $36 trillion vault.

While the company does keep all of these transactions electronically, the certificates in the vault are the actual physical representations of the exact securities represented by the electronic trades. Consequently, the certificates need to be replaced. After September 11, DTCC spent some $300 million reproducing all the lost certificates. As I understand it, the brokerage community had to pony up the money to reproduce all the certificates. It works like a condominium association; everybody was hit with a special assessment.

In 2010, R.R. Donnelley & Sons RRD bought financial printer Bowne & Co., which was founded in 1775 by Robert Bowne. It became the largest financial printer in the world. (Crane & Co. also does financial printing, but mostly focuses on making the paper for U.S. currency.) Bowne prints prospectuses and security certificates like the kind in that watery grave on Broad Street. (Apparently, the vault is designed for security not water tightness!)

And if you've ever seen a modern securities certificate, you know you just can't run off a few copies. Theses certificates are very sophisticated little pieces of paper; intaglio printed on special paper using secret inks complete with watermarks and holograms. Reportedly, Bowne keeps a secret safe with all intaglio-printing plates for just such an occasion. When Bowne was a publically held company, it wasn't exactly forthcoming with details regarding printing facilities or the location of printing plates. After all, you could print off a couple of thousand shares, walk into a brokerage house and sell them on the spot.

When Facebook FB went public, the company spent $400,000 on engraving and printing its prospectus and stock certificates. Bowne did all that printing and engraving.

While it's not known if the certificates in DTCC's vault are ruined, RRD might be an interesting speculative play on the behind-the-scenes world of the securities business. In the next few days, we'll know the extent of the damage and if the industry has to come up another couple of hundred million to reprint all those damaged certificates. If you follow this story closely, you might make some money on Hurricane Sandy.