Important changes in the deficit procedure, option trading and margin

In this article, you will find an overview of the most important changes around the deficit procedure, option trading and margin. 

The deficit procedure 

The margin and loan utilization is not allowed to be above 100%. This will result in a deficit procedure which might in some cases result in a stop-out procedure. The underlying message is to stay far away from a margin and loan utilization of 100%. There are differences in the deficit procedure with Saxo Bank: 

1. The breach of margin and loan utilization is monitored real-time instead of end of day at BinckBank. 
2. The maximum time that is given to bring the margin and loan utilization below 100% will be 5x24 hours instead of 5 days. 
3. When the 125% of the margin and loan utilization is breached, the client will be stopped out immediately. 
4. Asset managers will receive a separate email and notification pop-up in SaxoConnect per individual client when the margin utilization exceeds 90% and 100% on a daily basis in case of a deficit procedure with a margin and loan utilization between 100 and 125. Asset Managers will also receive a separate email and notification pop-up in SaxoConnect per individual client in case of a stop out event that has resulted in a (partial) closure of position in your end-customer’s portfolio by Saxo Bank.
5. Also, you will receive information regarding the end-customer's margin via EOD files. Read more about EOD day files here.  
6. In the SaxoConnect dashboard, you'll find a tile that shows you the number of end-customers with a margin and loan utilization above 75%. This percentage can be amended. When you click on the number in the tile, you find the list of applicable clients with additional information. You’ll also find a tile with information about the number of margin call and stop-out events applicable for your book of business.

The key message is that a deficit in spending power is not permitted. If you exceed 100% margin utilization at any time, you run the risk that all positions in your end-customer's portfolio will be closed by Saxo Bank. 

Learn more about the deficit procedure here. 

Options  

You will find an increased number of underlying values on which options are available.   

The option to specify market orders and limit orders remain. The duration of the option orders has been extended to: 

• Day orders (best or limit) for Euronext and the US 
• Specific date 
• Until cancellation (and not 28 days) 

At Saxo Bank, you can place the regular option combination orders like spreads, straddles and strangles. But also the three and four legs combination orders on both Euronext and the US stock exchanges (e.g., Butterfly and Iron Condor) are available in one order ticket. 

Assignment 

The exchange uses a procedure that determines randomly (“at random”) who will be “assigned”. If a customer of Saxo Bank is assigned, Saxo Bank also internally uses a random procedure that determines which customer will ultimately be designated. 

Option premium reservation 

A client must always be able to buy back short options. This also counts for covered call options (long stock in combination with a short call option).  This means that the option premium received is not 'free to spend', but the option premium is reserved to ensure that you can do this at any time. You can therefore no longer use the option premium received to purchase other securities, for example.

Writing (covered) call options is not possible for options with a risk rating of 6.

Assignment of uncovered short call options 

This will lead to a buy order that will cover the short share position. This order will be executed at the opening of the exchange (usually the Monday following expiration Friday). 

Exercising options 

Of course, you can exercise your end-customer's right to exercise with a long option position. But you cannot exercise on the day of expiration.  

Automatic exercise of all in the money options on expiration day 

At Saxo Bank, options with intrinsic value (even if it is only EUR 0.01) are automatically exercised. This results in the counter intuitive effect that long calls will be margined, starting 2 hours before expiration (15:30 in Amsterdam). The margin will increase in 1,5 hours to 100% of the strike price. This is to ensure that the holder of the option can fulfill his financial obligation to pay for the delivered stock if the call option expires in the money. 

The biggest change to note here is that Saxo Bank also requires margin for long positions the last 2 hours of trading. 

Long puts and long shares will result in a decrease in the stock holding (if the put option is in the money) of 100 shares per long put. Long naked puts (that expire in the money) will lead to a short position in the underlying stock if the client has sufficient cash to fulfill the margin requirement on expiration day. If so, this will result in an automatic generated buy order for the stock to cover the short position on the next trading day (usually the Monday following expiration Friday). 

If you want to know more about what will change for you as an options investor, take a look here. 

Margin calculations at Saxo Bank 

SaxoConnect uses the Strategy Based Margin methodology (SBM). With SBM, you can calculate yourself what your end-customer's margin will be using relatively simple formulas. Read more about SBM here.