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Margins - ASX Clear - Australian Securities Exchange - ASX

Margins ASX Clear Before you begin This booklet explains how ASX Clear calculates Margins for options traded on ASX's option market. You should note that brokers' Margins may be different from ASX. Clear . (This is explained further on page 3). Simply stated, Margins serve to protect the integrity of ASX's options market. As not all options transactions involve margin payments this booklet explains when they are required, how they are calculated and what collateral ASX Clear will accept to cover margin obligations. This booklet assumes that you have a basic understanding of the workings of ASX's options market. You may also find What are Margins ? Understanding Options Trading and the LEPO Explanatory Definition: a margin is the amount calculated by ASX Clear Booklet helpful. as necessary to cover the risk of financial loss on an Copies can be obtained free from our website at options contract due to an adverse market movement.

4 This is summarised in the table below: Day1 2 43 Option market value $0.35 $0.45 $0.40 $0.36 Market value per contract $35 $45 $40 $36

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Transcription of Margins - ASX Clear - Australian Securities Exchange - ASX

1 Margins ASX Clear Before you begin This booklet explains how ASX Clear calculates Margins for options traded on ASX's option market. You should note that brokers' Margins may be different from ASX. Clear . (This is explained further on page 3). Simply stated, Margins serve to protect the integrity of ASX's options market. As not all options transactions involve margin payments this booklet explains when they are required, how they are calculated and what collateral ASX Clear will accept to cover margin obligations. This booklet assumes that you have a basic understanding of the workings of ASX's options market. You may also find What are Margins ? Understanding Options Trading and the LEPO Explanatory Definition: a margin is the amount calculated by ASX Clear Booklet helpful. as necessary to cover the risk of financial loss on an Copies can be obtained free from our website at options contract due to an adverse market movement.

2 Simply put, the minimum level of cover required to cover or by contacting ASX or your broker. margin obligations is the liquidation value of your option The terminology associated with Margins is explained in contracts. the Glossary of Terms on page 13. Throughout this booklet examples are used to explain how the margining system works. All examples assume an option contract size of 100 shares and, for simplicity of explanation, ignore Exchange fees or commissions that may also be payable. Examples are provided for illustrative purposes only and may not reflect current market levels. Note: A calculator that enables you to estimate your margin position is available on the ASX website at 1. When are Margins not already own these shares you would have to buy them at the current market price but deliver them to the taker paid?

3 For $ , possibly incurring a loss. The primary objective of requiring margin cover is to ensure that options positions can be liquidated (closed If you only buy options, then out) and the obligation removed. Margins are not payable. It is On the other hand, if you are the taker of a BLD $ call option you would not be required to meet any when you write options that Margins . This is because you have no obligation to buy the Margins may be payable. BLD shares. In buying the option you would have already paid a premium to the writer for the right to buy the Margins are paid to cover your obligations to your broker. BLD shares. This premium represents your total outlay Brokers in turn pay these Margins to asx Clear . asx unless you decide to exercise your option, in which case Clear recalculates Margins at the end of each day to you would be required to buy the 100 BLD shares at the ensure an adequate level of margin cover is maintained.

4 Exercise price of $ Normally you would only want to asx Clear then debits or credits your account with your do so if the market price was above $ at the time broker according to whether your margin obligation has you decide to exercise. increased or decreased. Where there is a shortfall in your account you will usually be required by your broker to Put options pay Margins within 24 hours. When an obligation to the Like the writer of a call option, the writer of a put option market no longer exists, all margin amounts are credited has a potential obligation if the taker of the put decides to back to your account with your broker. exercise their right to sell the underlying Securities . For example, the writer of a call option would be required For example, say you are the writer of a Woolworths to add to their margin cover if the share price moved up (WOW) October $ put option.

5 You have the from its current level. This is because the writer has a obligation to buy 100 WOW shares at $ if the larger potential obligation under the option contract and taker exercises their right to sell. In return for taking may need to buy shares in order to deliver them at the on the obligation to buy 100 WOW shares at $ , exercise price. If the share price falls, the writer's margin you will receive the option premium. In our example, the obligations would be reduced. option premium is $ per share or $35 (35 cents x 100 shares) per WOW contract. To ensure you can meet Potential obligations arise from: your potential obligations you will be required to lodge written call option contracts; margin cover. On the other hand, if you are the taker of a WOW October $ put option you will have to pay the written put option contracts; and premium of $35 to the writer.

6 As the taker you have the both taken and written LEPO positions. right to sell the WOW shares at $ Please note that margin obligations apply to these In summary, writers of call and put options are required situations in isolation. If you establish certain types of to lodge margin cover because of their obligations which option strategies, the margin obligations may be reduced arise from writing options. because some positions may offset other positions. margin offsets are discussed on page 5. LEPOs When you buy an ordinary Exchange traded option you Written calls and puts are required to pay the entire option premium up front. Option writers have a potential obligation to the market However, when you buy a LEPO, the initial amount you pay because the taker of the option may decide to exercise is only a small fraction of the full premium.

7 Therefore asx their position. Clear requires the taker as well as the writer of a LEPO. to lodge margin cover. Takers of LEPOs are margined Call options because they have an outstanding obligation to pay the For example, say you are the writer of a Boral Ltd (BLD) balance of the premium to the writer. Writers of LEPOs, November $ call option and the BLD share price like writers of ordinary Exchange traded call options, may is $ In writing the position you receive the option suffer losses if the underlying security rises in value, and premium and have an obligation to sell 100 BLD shares therefore writers of both LEPOs and ordinary Exchange at $ per share if the taker of the option exercises traded call options are required to lodge margin cover. A. their right. If the market rises, your written call option full explanation of the margining process for LEPOs can be could be exercised.

8 If this happens you would have to sell found on page 10. 100 BLD shares to the taker at $ each. If you did 2. How can Margins be How are Margins met? calculated? margin obligations are calculated at the end of trading Note: A calculator that enables you to estimate your each day and asx Clear notifies each broker of the margin position is available on the ASX website at margin obligations for each of that broker's accounts early the next trading day. As the broker is responsible for the margin obligations to asx Clear , it is the broker who has The minimum level of cover required to cover margin the legal obligation to settle with asx Clear . Each broker's obligations is equivalent to the liquidation value of your total margin obligations must be lodged with asx Clear by option contracts. am the same day. For example, if the market value of an option contract To enable the broker to settle their daily margin is $ , the writer would be required to lodge at least obligations with asx Clear the broker will generally ensure $38 ($ x 100 shares per contract) as margin that their clients have deposited cash or collateral, such cover.

9 However, this does not take into consideration the as Securities or bank guarantees. possibility of inter-day price movements. In reality, asx Clear calculates Margins using a sophisticated system known as the ASX Derivaties Margining System (ADMS), Margins from your broker may be an internally developed replica of the CM-TIMS algorithm. different to asx Clear ADMS takes into account the volatility of the underlying security when calculating your margin obligations. Volatility asx Clear 's margining methods calculate the Margins refers to the size and frequency of price fluctuations. required from your broker (Clearing Participant). Your broker's margin requirements for your account may Generally only one margin call is made each day. However, be different to those of asx Clear if your broker uses if the market moves strongly up or down, asx Clear may a different margining standard to asx Clear .

10 The call for extra margin cover to be lodged during the day explanations throughout this booklet apply where your ( an intra-day margin call) to cover changes in value of broker adopts the same margining as asx Clear . the underlying Securities . ADMS arrives at a margin by calculating two margin Cash components for each position: the premium margin and A broker may require you to provide cash to enable the the risk margin . The sum of these is the total margin . broker to meet their margin obligations to asx Clear . Calculating the premium margin Collateral The premium margin is the market value of the particular In addition to, or as an alternative to cash, you may wish, position at the close of business each day. For example, (subject to your broker and/or asx Clear agreeing), to if an option is valued at $ at the close of business provide certain types of collateral.


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