What Is an Escrow Receipt?
An escrow receipt is a financial institution or clearing assertion written to ensure that an options writer has a ample quantity of the underlying security obtainable for delivery, ought to the necessity come up because of assignment.
Sellers (writers) of choices are vulnerable to being assigned if the choice goes into the money. For name writers, they must ship shares to the lengthy. For writers of places, they would wish sufficient liquid funds to buy shares put to the lengthy.
- An escrow receipt vouches that the author of choices has sufficient shares of the underlying to fulfill a possible task.
- An escrow receipt is most frequently utilized when a shopper’s choices account is held at a financial institution, moderately than a registered broker-dealer.
- The escrow receipt have to be written in such a approach to be acceptable to the trade and the Choices Clearing Company (OCC), or another related regulatory physique.
Understanding Escrow Receipts
An escrow receipt is a financial institution or clearing agency assure that certifies an choice author holds sufficient of the underlying safety on deposit and it’s available for supply if the holder of that choice chooses to exercise it. This ensures that the holder of an choice will obtain supply of exercised choices on time and with none subject.
This assure is most frequently utilized when a shopper’s options account is held at a financial institution, moderately than with a registered broker-dealer. The escrow receipt have to be written in such a approach to be acceptable to the trade and the Options Clearing Corporation (OCC), or another related regulatory physique. Using escrow accounts and receipts supplies written proof and assurance that the securities can be found to finish the transaction.
Some institutional purchasers, reminiscent of pensions or insurance coverage corporations, keep their property at a custodian financial institution, moderately than at a registered broker-dealer. An choices exchange’s margin guidelines might permit a broker-dealer to just accept an escrow receipt (or escrow agreement) with respect to brief choices positions, in lieu of posted money or securities.
The escrow receipt might by no means be wanted, since it is just guaranteeing the potential for supply. If the brief choices place isn’t assigned—for example, if it expires out of the money (OTM)—the escrow receipt is not going to be invoked.
Examples of Escrow Receipts
An escrow receipt associated to a brief fairness call option states that the choice vendor’s financial institution guarantees to ship the underlying inventory to the broker-dealer within the occasion their buyer’s account (the lengthy choices place) is assigned. For a brief fairness put option, the financial institution guarantees to ship money within the quantity of the equal brief inventory place.
The OCC additionally permits banks to put in writing escrow receipts for brief index options positions. For a brief index name choice, the financial institution guarantees that it’s going to maintain money or cash equivalents, or at the least one marginable fairness safety, or a mixture of the three. The overall worth of the property held by the financial institution should equal the combination underlying index worth on the commerce date. An escrow receipt with respect to a brief index put choice have to be backed by money or money equivalents on the financial institution that equal the combination put train quantity. The escrow receipt should additionally give the financial institution the authority to liquidate property held below the settlement if crucial to fulfill an task.