NY Times noticed a new promotion run by Saxo Bank in the UK asking “paid in shares this month?” – basically Saxo Bank offers to turn stock bonuses into trading collateral.
Some background to help understand what this all means: after the 2008 crisis there were many calls in the UK to limit bankers (and senior executives’ bonuses) as banks were seen (mostly rightfully so) as responsible for the financial crisis. Large potential bonuses drove bankers to take more risk which would result in bigger bonuses the year after and so on. In 2010 Committee of European Banking Supervisors (CEBS) announced that only 20-30% of bonuses can be paid in upfront cash. Therefore bankers would receive only smart part of their bonuses in straight cash whilst the remaining part is usually given in stocks and options.
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Some of these stocks are vested (have been registered to your ownershio) while some would be vested after a certain period. This means that the bankers and senior executives receive some ‘dead weight’ which they can’t use or won’t use for various reasons because stock isn’t exactly cash. And here comes Saxo: it offers traders to have their vested stocks (typically of their own company) turned into a trading cash collateral and up to 75% of their worth. This basically means that you can go and buy other companies’ stocks with your vested stocks without having to register them for trade (I suppose certain limitations apply).
I discussed this with Saxo’s senior executives yesterday asking whether this means that if the collateralized stock goes down by more than 25% would it mean that Saxo starts losing money. The explained that Saxo Bank does not give collateral value for all equities, each equity is given a rating based on various risk parameters. Those include amongst others volatility, market cap, likelihood of default etc. Hence Saxo Bank carefully evaluates which equities it gives collateral for and which not. The equities are re-rated regularly to reflect current market conditions at each time to keep potential risk at minimum.
So there you go, if you want to keep your vested stocks while using their value as a collateral for investment in other market instruments you can now easily do so and Saxo will even pay for the transfer-in fees.