Escrow Receipt

What Is an Escrow Receipt?

An escrow receipt is a bank or clearing statement written to guarantee that an options writer has a sufficient amount of the underlying security available for delivery, should the need arise due to assignment.

Sellers (writers) of options are at risk of being assigned if the option goes into the money. For call writers, they would have to deliver shares to the long. For writers of puts, they would need enough liquid funds to purchase shares put to the long.

Understanding Escrow Receipts

An escrow receipt is a bank or clearing firm guarantee that certifies an option writer holds enough of the underlying security on deposit and it is readily available for delivery if the holder of that option chooses to exercise it. This ensures that the holder of an option will receive delivery of exercised options on time and without any issue.

This guarantee is most often utilized when a client's options account is held at a bank, rather than with a registered broker-dealer. The escrow receipt must be written in such a way to be acceptable to the exchange and the Options Clearing Corporation (OCC), or any other similar regulatory body. The use of escrow accounts and receipts provides written evidence and assurance that the securities are available to complete the transaction.

Some institutional clients, such as pensions or insurance companies, maintain their assets at a custodian bank, rather than at a registered broker-dealer. An options exchange's margin rules may allow a broker-dealer to accept an escrow receipt (or escrow agreement) with respect to short options positions, in lieu of posted cash or securities.

The escrow receipt may never be needed, since it is only guaranteeing the potential for delivery. If the short options position is never assigned — for instance, if it expires out of the money (OTM) — the escrow receipt will not be invoked.

Examples of Escrow Receipts

An escrow receipt related to a short equity call option states that the option seller's bank promises to deliver the underlying stock to the broker-dealer in the event their customer's account (the long options position) is assigned. For a short equity put option, the bank promises to deliver cash in the amount of the equivalent short stock position.

The OCC also allows banks to write escrow receipts for short index options positions. For a short index call option, the bank promises that it will hold cash or cash equivalents, or 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. An escrow receipt with respect to a short index put option must be backed by cash or cash equivalents at the bank that equal the aggregate put exercise amount. The escrow receipt must also give the bank the authority to liquidate assets held under the agreement if necessary to meet an assignment.