An Eastern Account is an underwriting agreement in finance where all participating underwriters share collective responsibility for the total issuance of securities. This type of agreement ensures that the risk and responsibility for selling the full issue are distributed among all underwriters involved, rather than limiting each underwriter’s responsibility to their subscribed portion.
Detailed Definition
Explanation and Context
In underwriting, an Eastern Account denotes a syndicate agreement among underwriters such that every member of the syndicate assumes partial responsibility for the entire issuance of securities. This means that even if an individual underwriter fails to sell their specific assigned portion, they remain liable for their share of the unsold amount of the whole issuance.
Key Characteristics
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Collective Responsibility: Every underwriter in the syndicate is responsible for the sale of the entire issuance. The collective underwriting method mitigates the risk for any single underwriter.
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Joint and Several Liability: Participants are jointly and severally liable for the securities that remain unsold, laying a joint guarantee responsibility across all members.
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Syndicate’s Role: The syndicate restructures itself in collaboration to ensure the successful completion of the security issuance.
Comparison with Western Account
Unlike the Eastern Account, a Western Account restricts an underwriter’s obligation to their agreed portion of the security issue. Underwriters are individually responsible for selling only what they subscribe to, with no responsibility for the unsold portion of securities of other underwriters.
Example:
- In a Western Account, if an underwriter is responsible for 20% of the issue and fails to sell their part, they are not liable for the remaining unsold 80% handled by others.
- Conversely, in an Eastern Account, if underwriters collectively have not sold 20% of the issue, each member of the syndicate bears a fraction of the remaining liability.
Historical Context
Eastern Accounts originated in Europe and have a historical context wherein the collaborative nature of European financial markets led to practices embracing shared responsibility. The approach was sought for its perceived mutual stability in underwriting risk and its equitable distribution among all participating entities.
Applicability
Market Relevance
Eastern Accounts are prevalent in primary capital markets, particularly within syndicates that underwrite large-scale issuances. They are instrumental in initial public offerings (IPOs), municipal bonds, and other large underwriting contracts where spreading risk is essential.
Factors to Consider
- Risk Appetite: Firms must assess their risk-bearing capacity as they are liable collectively.
- Reputation: Participation in a syndicate with a positive track record can reduce the perceived risk.
- Market Conditions: Prevailing economic and market conditions can influence the success of the issuance.
Related Terms
- Western Account: A different underwriting agreement with separate liabilities.
- Underwriting Agreement: The overall agreement among underwriters covering terms and responsibilities.
- Syndicate: A group of underwriters who together underwrite a new issue.
- Primary Market: The market where new securities are issued and sold for the first time.
FAQs
What is the primary benefit of an Eastern Account?
How does an Eastern Account affect underwriter collaboration?
Are Eastern Accounts common in modern underwriting practices?
References
- Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions by Joshua Rosenbaum and Joshua Pearl.
- U.S. Securities and Exchange Commission (SEC) official documentation on underwriting syndicates.
- Corporate Finance Institute (CFI) resources on underwriting practices.
Summary
An Eastern Account represents a financial underwriting agreement where all participating underwriters share collective responsibility for selling the entire issuance of securities. This contract ensures that the risk of unsold securities is evenly distributed, offering a collaborative risk mitigation approach, contrasting the Western Account’s individual liability structure. The concept has historical roots in European financial systems and continues to be relevant in contemporary large-scale financial underwriting environments.
