What is Western Account
A western account is an offering agreement in which each underwriter in a consortium of underwriters is responsible only for selling its allotted amount of the new issue. Once participants have met their previously agreed upon target allotment sale, their liability in the offering is completed.
BREAKING DOWN Western Account
A western account is also known as a "divided account," as the share of liability is divided among the underwriters by the size of their allotment of the investment vehicle. It is the opposite of an "Eastern account", also known as an "undivided account".
Underwriters in investment brokerages assume a fair amount of the risk with new security issues. This is so because it agrees to pay the issuer a certain amount of money regardless of whether the securities can be sold on the market. To offset some of this risk, many firms will enter into syndication agreements, which spread around both the risks and rewards of underwriting a new issue. A western account, also known as a divided account, is one of the major forms of syndication agreements. In a western account, each underwriter agrees to take on liability for only the portion of the issue that it takes into its own inventory. Under western account terms, an underwriter is not liable for unsold portions of the issue in the inventories of other underwriters in the syndicate.
Western Account vs. Eastern Account
By, contrast, eastern account-style syndicate members share liability for the entire issue of an offering, including all unsold portions of each allotment. The syndicate apportions the liability for unsold stocks or bonds based on the participation percentage of each syndicate member. For example, Company A and Company B each agrees to a 50 percent participation in an underwriting syndicate. Although Company A sells its entire portion, it is still 50 percent liable for the unsold portions of Company B’s allocation.
Most syndicates are administered by one of the participating firms, and the most frequent arrangement is the eastern account. Although the risks are fewer with western accounts, this form of agreement among underwriters (AAU) also curtails the substantial profits made from the difference between the buying and selling prices of the issue. If an underwriter can participate in an eastern account with a consortium of prominent investment companies with expertise in market valuation and securities trading on the secondary market, it can share in a percentage of the profits while putting up a relatively small amount of money for the underwriting.