Opening up trading accounts
To help professional investors, such as pension funds, hedge funds and insurers,who want to trade in options and futures, the former Amsterdam Exchanges (now Euronext Amsterdam) introduced professional clearing accounts (PCAs) a few years ago .
This is an exclusive clearing facility for professional investors. These accounts allow professional investors to give orders to any brokers without creating several different positions. In addition, PCAs have other benefits for professionals and their risk control and management systems.
Professionals investors that qualify for a PCA include credit institutions, financial institutions, assurance companies, central governments, international public organisations, funds, and so on.
The PCA ‘principle’ has more or less the same mechanism as the give up facility, only a different structure. Because the PCA principle is not as well known, I would like to clarify some issues.
A PCA is an account with a clearing member. Clearnet Amsterdam (option clearing) keeps integrated records of all positions in options and futures in this account exclusively for the professional in question. The positions may have been created in open outcry trading or via one of the professional arrangements (OTCs). PCAs can only be used by professionals who are not seatholders on the exchanges. Positions in PCAs must be positions professionals enter in their own account.
A professional can open a PCA via a clearing member after concluding a clearing agreement with that member. On opening a PCA the professional receives an account number from Euronext Amsterdam derivatives market via its clearing member. The professional has to quote this account number when placing orders with brokers. Clearnet Amsterdam reports all positions in a professional clearing account to the clearing member through which the professional operates its account. The professional clearing account comes directly under the clearing member.
The clearing member is responsible for all exercise instructions, tenders and assignments relating to the professional’s positions in all products in which it trades. However, a broker (public order member or introducing broker) is also indirectly involved in exercise instructions, tenders and assignments. Clearnet Amsterdam has to inform a broker for each exercise instruction, tender or assignment in which a professional is involved. This broker has to prepare a contract note, which is a responsibility exclusively reserved for brokers. A professional has to name a specific broker for each individual exercise instruction, tender or assignment. This broker is then informed of exercise instructions, tender and assignments by Clearnet Amsterdam.
A PCA account means that orders can be given to any broker without creating different positions in different accounts. Clearnet Amsterdam centrally records positions as being held by the clearing member through which the PCA is operated. Professionals with a PCA account therefore only have to conclude one arrangement to cover margin obligations with their clearing member and do not have to deal with different brokers with regard to margin.
Central position records mean that a position can be opened via one broker and closed, if desired, via another without having to consult or inform the first broker. With PCAs the role of the brokers is restricted to providing advice and executing orders. This means that the costs of trading in options and futures are transparent for professionals, as brokers only charge commission. The clearing member charges the other fees, namely the fees for administering the account and the exchange fees. Premiums and margin obligations are also paid and/or received via the clearing member with which the PCA is operated
PCA holders are no longer required to comply with the margin requirements that apply to private investors. The PCA holders have to deposit collateral in the form of cash and/or assets with their clearing member.
Professionals may decide to deposit collateral with Euronext Amsterdam options clearing directly. A separate deed of pledge has to be drawn up for this purpose. This procedure means that the clearing member’s solvency is taken out of the equation.
Collateral deposited directly only serves to cover the obligations resulting from the PCA with the clearing member in question. If the clearing member is in danger of becoming insolvent, Euronext Amsterdam option clearing division cannot lay claim to any part of the collateral deposited by the professional with the options clearing division unless this serves to cover the obligations resulting from the PCA that the professional operates via the clearing member in question. The collateral deposited by the professional with Euronext Amsterdam options clearing therefore cannot be used to cover the clearing member’s other obligations towards Euronext Amsterdam option clearing. The direct contact between professionals and clearing members means that it is sometimes possible to obtain specific periodical information based on the positions in the PCA in consultation with the clearing member. Such information can include the value of the portfolio compared to, say, underlying values or interest rates. This information, which relates to entire positions in options and futures in the professional clearing account, may make a positive contribution to the professional’s risk management systems.
Participants trade in a wide variety of shares, bonds, warrants, options and futures every day on Euronext markets with the assurance that the concluded contracts will be honoured, regardless of the counterparty’s creditworthiness. This assurance is safeguarded by the guarantee system operated by Euronext clearing house Clearnet.
In the near future the three Euronext markets (Belgium, France, Netherlands) will be fully integrated. This means that there will be opportunities for the PCAs holders. Our group, expects that this possibility for professionals will be in place for the whole of Euronext (including Paris and Brussels) and that it will increase trading volume.
As an independent general clearing member on Euronext Amsterdam as well as Euronext Paris, we support this opportunity for professionals to trade through independent brokers. This means that professionals can have profitable advantages because of the free choice of broker.
Wim den Hartog and Martin Korst are with Fortis Bank in Amsterdam