SECAO is designed to make the most efficient use of equity collateral linked to delivery obligations arising from derivatives positions. It is an improvement of the Short Call Coverage, whereby the writer of a call option would pledge the contract size multiplied by the number of contracts worth of the underlying to cover his margins. With SECAO, the margin requirement calculations are exactly as before, and thus the moneyness of the derivatives position is taken into account, bringing about a reduction in the number of underlyings required as collateral. Thus, while SECAO does not decrease margin requirements for the derivatives position, it does serve to make more efficient use of equity collateral.

SECAO is designed for equity derivatives with upside risk (short call option or short Single Stock Futures positions). Thus, this function does not apply to equity index derivatives, say the DAX® margin class, since they are margined as "futures style options".

For a short call or short Single Stock Futures (SSF) position in equities, the margin calculations are performed as per the Risk-based Margining methodology, and the writer of a call would have to cover his margin requirement by posting collateral. Should the member choose to cover the margin requirements with equity, a haircut, as stated in the Eurex Clearing Circular: Admissible Equity Collaterals, would be taken to guard against market moves. With SECAO, since the deliverable of the derivative position is assigned as collateral, no haircut is applied, and the number of shares required is simply the total margin requirement divided by the settlement price of the stock.

In the following example, we have 2 Short SAP Calls, with strike 24. The underlying is trading at 26, pricing the call option at roughly 3.45. For this position, our total margin requirement is 783. If we choose to cover this position with the corresponding underlying, we need at least 783/26 SAP shares. Thus, 31 shares suffice to cover our position. Note that the deeper in the money an option is, the greater the price of the underlying, and thus a greater number is required to cover our margin requirements. This is natural, given that deep in-the-money positions are likely to be exercised. Conversely, a deep out the money position would have a much lower total margin to share price ratio, up until the Short Option Adjustment.

SECAO equity collateral in excess of the number needed to cover the margin requirements for derivative positions on the share will not be taken as margin credit. Instead, it will be allocated to the standard collateral pool of the member, where a haircut, as stated in the Eurex Clearing Circular: Admissible Equity Collateral, is applied.

For standard equity derivative positions, Risk-based Margining would be applied. Any margin requirements could be satisfied by pledging collateral. If equity is pledged, a haircut, as stated in the Eurex Clearing Circular: Admissible Equity Collateral, is applied to guard against a depreciation in value. Thus in the above case, to cover our margin requirement of 783, we would need to deposit SAP shares worth 1566, i.e. 1566/26 = 61 shares. This is inefficient in the case of short call and short Single Stock Futures positions, since the greatest risk is the delivery of the contract size*position of shares.

The Specific Equity Collateral Assignment Overview window is used to assign/deassign specific equity collateral for a given trading member to the pledged account at a specific CSD. The SECAO functionality is available in the Eurex Clearing GUI (@X-tract): Main Menu -> Collateral -> Specific Equity Collateral Assignment Overview.

Please see the appendix for further details on the SECAO window.

The report CC051 shows per Clearing Member, exchange member, currency, account and margin class the unadjusted margin requirement, information about specific equity collateral used to cover this margin requirement and the remaining effective unadjusted margin requirement. The information about used specific equity collateral comprises the equity ISIN, the price at which this collateral was evaluated, the assigned quantity, the value of the assigned quantity at the given price and how much of the value has been used to cover the margin requirement. When no specific equity collateral is disposable, then no information on the equity ISIN, the price at which this collateral was evaluated, the assigned quantity, the value of the assigned quantity at the given price is contained and the value of the used specific equity collateral will be zero.

Example of Report CC051:

Below, the member has 20,000 ABB shares, which are allocated to cover a derivative margin requirement. The remaining CHF 12,344.5 worth of shares are added to the regular equity collateral of the member.

Please see the appendix for further details on the composition of Report CC051. An existing specific equity collateral assignment can be deleted by selecting the corresponding row in the table and clicking the Delete button.

The Specific Equity Collateral Assignment Overview window is used to assign/deassign specific equity collateral for a given trading member to the pledged account at a specific CSD.

Overview

The Specific Equity Collateral Assignment Overview window is accessible from the Collateral menu of the Main Menu window, or from the Security Deposit Overview window. The window is available only to Clearing Members.

User can assign/deassign and inquire specific equity collateral from available bulk collateral of a given security to the pledged account at a specific CSD. This task can be performed on own account or on behalf of the related Non-Clearing Members. A user can also view the quantity of the pledged collateral that has been used for margining and the price at which the quantity is evaluated. The specific assignment is done per CSD and pledged account.

A field group at the bottom half of the window is provided for assigning new specific equity collateral. The field AvailBulkColl shows how much bulk collateral is available and the field SpecEquityColl shows how much specific collateral is assigned. To add a new specific equity collateral assignment, the account and specific equity collateral must be entered in the Act and SpecEquityColl fields. The Add button is then enabled and can be clicked. The field AvailBulkColl informs the user about the number of available shares.

An existing specific equity collateral assignment can be deleted by selecting the corresponding row in the table and clicking the Delete button.