What it means
When you trade listed options, two things happen. First, a broker executes the trade on the exchange, and second, a clearing member firm is responsible for guaranteeing it to the clearing house, which is the central body that stands behind every trade so neither side has to worry about the other defaulting.
A CMTA allows those two jobs to sit with different firms. A trader or fund might use several executing brokers to get the best prices or research, but keep all positions at a single clearing firm.
The CMTA is the written instruction that routes each executed trade to that clearing firm automatically. The practical benefit is consolidation.
Instead of managing margin (the cash or securities held as security against losses) with many brokers, a fund holds all its positions in one place and sees one combined risk figure. That usually lowers the collateral needed and makes reporting far simpler for the finance team.
Setting one up involves three parties: the customer, the executing broker and the clearing member. Each signs up to the arrangement, and the clearing member must agree to accept trades from that executing broker for that customer.
If any party has not approved, the trade can be rejected and has to be fixed quickly. The nuance is that a CMTA moves the clearing responsibility but does not remove the executing broker's role in the trade itself.
Errors in the account details at the point of execution are a common reason for trades to fail to transfer, so finance and operations teams should check the details with the same care they give to bank payment instructions. Finance teams should also remember that a CMTA affects fees.
Executing brokers charge for finding the trade and clearing members charge separately for clearing it, so the total cost is the sum of both. Comparing the two charges across providers is a simple way to cut the cost of an active options programme.
In practice
Real-world examples.
Example
A hedge fund trades equity options through four different brokers to access the best liquidity. It uses CMTA arrangements so every trade ends up at its prime clearing firm, where the risk team sees a single margin requirement each morning. The operations lead also gets a clear audit trail showing which broker found each trade.
Example
A proprietary trading firm in the energy sector wants the lowest execution costs, so it routes orders to whichever broker quotes best. A CMTA means its positions are still cleared at the one firm that holds its capital and approves its limits. The firm's risk committee approves the clearing relationship once, rather than once per broker.
Example
A family office that invests in index options uses a specialist broker for execution advice but keeps all clearing with its bank. The CMTA lets the office see its entire options book in a single statement, which makes its quarterly valuation much easier. Because the statement is consolidated, the valuation team no longer reconciles several broker reports.
Case study
Seen in the real world.
Brightwater Capital is an illustrative, fictional asset manager that traded options with three executing brokers but cleared everything separately at each one. The operations lead found that the firm was posting margin three times over for positions that partly offset each other, and month-end reconciliation took four people two days.
After setting up CMTA arrangements with a single clearing member, all trades were routed to one account. Offsetting positions were netted for margin purposes, which freed collateral and reduced reconciliation to a single statement.
The illustrative lesson is that the operational saving was as valuable as the margin saving, because the finance team could report one clean position figure instead of stitching together several broker reports. It now reviews broker fees and clearing fees as two separate lines each quarter.
Watch out
Common mistakes.
- Assuming a CMTA means the executing broker no longer needs to be approved, when all parties must agree in advance.
- Entering the wrong clearing account details at execution and then discovering the trade has been rejected at the clearing house.
- Believing a CMTA changes who is responsible for the quality of the trade price, when it only changes where the trade is cleared.
Questions
People also ask.
Why would a trader use a CMTA?
It lets them use several brokers for execution while keeping all positions, margin and reporting at one clearing firm.
Is a CMTA a legal contract?
It is an agreement between the parties, set up with the clearing house's rules and the firms' own documentation, so you should read the terms before relying on it.
Does a CMTA reduce margin?
It can, because offsetting positions held at one clearing firm are netted, which often lowers the total collateral required.
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