What is an Active Box?

Active Box Details

An active box is an investment term for collateral that is available or hypothecated by the client to the broker (pledged as security without providing the title in possession). The active box backs the broker’s loan or an individual’s margin position.

To dive a little deeper, a margin account lets an investor buy securities, which are documents verifying rights to stocks and bonds, with money borrowed from a broker. These funds are due when the broker demands them. An active box, which is also known as a safekeeping box, segregation box, or open box, must secure these funds. The active box is a safe that comprises stocks and bonds owned by you as the borrower until you pay the margin account off.

Securities provided as collateral must be owned by the broker before he or she offers them to the lender. The circulation of financial securities, such as collateral, can raise money quickly and efficiently and can satisfy margin requirements whenever you plan to go forward with investing.

Example of Active Box

Fror example, say you have heard on the news that a promising startup technology company will issue securities to be traded on the stock market. You would like to buy shares before the upcoming initial public offering (IPO), which is the first time a company's shares are offered for sale to the public.

You believe that after the IPO, the securities' market value will keep rising and you would need a loan to purchase a sizeable amount of shares. However, you need to secure your margin position, which is the difference between the market value of the security and the loan taken by the broker, just as you would need to secure a personal loan. Collaterals for a personal loan may include checking and savings accounts, mortgages, debit and credit cards, personal loans, cars, or other property. Collaterals for securing your margin position, or what is stored in your active box, would be other securities that are already in your possession.

Significance of Active Box

You may have heard of the largest bankruptcy case in the history of the United States – the collapse of the Lehman Brothers, a company which in the time between 2004 and 2006 reported a 56 percent growth in revenues from real estate. In March 2007, though, mortgage defaults reached the highest percentage in ten years. Because of the huge number of mortgage-backed securities that Lehman Brothers traded, the company experienced an unprecedented failure. In addition, it turned out that Lehman Brothers had been raising cash by selling securities to a company retained by its own executives.

That is when experts began arguing that ensuring collateral would no longer be enough. It then became important to give the right capital. Brokers started applying stricter collateral eligibility requirements when choosing the optimal assets. Firms also began revisiting their inventory regularly to skip expensive financing of additional collateral.

History of Active Box

Box, as an investment term, means securities under the control of or owned by the broker-dealer. The word we use comes from the physical place where people are likely to keep those securities, such as vaults, file cabinets, and other safe spaces.

Active Box vs. Segregation Box

We often use the terms "active box" and "segregation box" interchangeably. However, the segregation box as opposed to the active box contains fully paid securities, which are not required as collateral. A segregation box simply holds the customer’s securities separately from the other company’s securities.

Collateral management has become critical for risk minimization, liquidity maximization, and higher revenue. According to the government's federal reserve website, 85 percent of the collateral that comes in automatically flows out and is reused repeatedly. As you can infer, the reuse of collateral increases the uncertainty about who holds it, if it is returned, and who will be entitled to it in case of default. Active box simplifies and speeds up trading, but it carries risks like all other investment components do.