Many institutional accounts maintain their assets at a custodian bank, not at a broker-dealer. Exchange margin rules allow a broker-dealer to accept an "escrow agreement" in respect of short options, in lieu of cash or securities. An escrow agreement (also escrow receipt or option guarantee letter) is a document that, according to Exchange Rules, must be issued by a bank and be in a form which is acceptable to the Exchange. Broker-dealers may require that an escrow agreement be in a form that will be accepted by the Options Clearing Corporation.
In respect of an escrow agreement for a short equity call option, the issuing bank promises to deliver the underlying stock to the broker-dealer in the event the customer's account is assigned. In issuing an escrow agreement for a short equity put option, the bank promises to deliver cash in the amount of the aggregate put exercise price in the event the customer's account is assigned.
Exchange Rules also allow bank issued escrow agreements to be accepted for short index option positions. In issuing an escrow agreement for a short index call option, a bank attests that it will hold cash, cash equivalents, at least one marginable equity security, or a combination of the three. The total value of the assets held by the bank must equal the aggregate underlying index value on the trade date. As with short equity put options, an escrow agreement respecting a short index put option must be backed by cash or cash equivalents at the bank which equal the aggregate put exercise amount. In the case of both index calls and puts, the bank issuing the escrow agreement promises to deliver the in-the-money amount to the broker-dealer in the event the customer's account is assigned. The escrow agreement must give the bank the authority to liquidate assets held under the agreement if necessary to meet an assignment.
For more information on current margin requirements for options, please contact CBOE's Department of Member Firm Regulation at (312) 786-7718.