Glossary
A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
A
ABS
A financial security backed by a loan, lease or receivables against assets other than real estate. For an investor the ABS is an alternative to investing in corporate debt.
Accrued Interest
The interest that has accumulated on a bond since the last interest/coupon payment up to but not including the settlement date. Please note that the interest rate convention used can vary between type of bonds and across different jurisdictions. In general there are two methods for calculating accrued interest: 360-day method for corporate and municipal bonds, 365 day method for government bonds
All-in Dividend
The sum of the manufactured dividend plus the fee to be paid by the borrower to the lender, expressed as a percentage of the dividend of the stock on loan.
All-in Price
The market price of a bond, plus accrued interest. All in price is generally rounded to the nearest 0.01 (currency). It is also known as the dirty price (see dirty vs clean price).
B
Bearer securities
Securities that are not registered to any particular party and hence are payable to the party in possession of them.
BMA
The Bond Market Association is a US-based industry organization of participants involved in certain sectors of the bond markets. Sometimes knows as TBMA, establishes non-binding standards of business conduct in the US fixed-income securities markets.
Borrow vs fee
This is a straight borrowing of bonds vs payment of a fee to the lender.
Buy-in
A buy-in is the practice whereby a lender of securities enters the open market to buy securities to replace those that have not been returned by a borrower. Strict market prices govern buy-ins. They may also be enforced by market authorities in some jurisdictions.
Buy/sell back
With a buy/sell back an investor buys securities outright for cash and then sells them back at a later date for the forward purchase price (a repo does not have a forward price).
C
Callable Repos
Callable repos come in two variations differing by their right to call and substitute collateral and by their right to close a repo transaction prematurely. For an explanation of the former please see
ROS and for the latter see ROE.
CDO
Collateralized debt obligations are an investment grade security backed by a pool of bonds, loans, and other assets. CDOs do not specialize in one type of debt. They are similar to CMO or CLO, but unique in that they represent different types of debt and credit risk.
Certificate of Deposit (CD)
A certificate of deposit is a short- or medium-term, interest-bearing, insured debt instrument offered by banks. CDs offer higher rates of return than most comparable investments, in exchange for tying up invested money for the duration of the certificate's maturity. Money removed before maturity is subject to a penalty. CDs are low-risk, low-return investments and are also known as "time deposits", because the account holder has agreed to keep the money in the account for a specified amount of time, anywhere from three months to six years.
Clean Price
The clean price of a bond is the price that is quoted for trading purposes and excludes any accrued coupon payments. The clean price represents the price volatility of the bond while the accrued coupon is just an add-on. When combined they form the dirty or invoice price.
CLO
Collateralised loan obligation is a debt security backed by commercial loans.
CMO
Collateralised mortgage obligation is a mortgage-backed investment grade bond that separates mortgage pools into different maturity classes. CMOs are backed by MBS (mortgage backed securities) with a fixed maturity. They can eliminate the risks associated with prepayment because each security is divided into maturity classes that are paid off in order. As a result they yield less than other MBS products.
Collateral Schedule Set
A collateral schedule set is a basket of collateral which has been assembled according to particular criteria. An example would be a set of A-rated general collateral (GC). These sets are pre-agreed between counterparties when they enter in triparty transactions. More standardization of these sets will increase the volume of triparty repo transactions.
Contract for Difference (CFD)
A contract for difference (CFD) is an over the counter derivative transaction that enables one party to gain economic exposure to the price movement of a security (bull or bear). Writers of CFDs hedge by taking positions in the underlying securities, making it vital for carrying out efficient securities financing or borrowing.
Convertible Bonds
A corporate bond is usually a junior debenture that can be exchanged by the holder for a specific number of shares of the company's preferred stock or common stock. Convertibility affects the performance of the bond in certain ways. First and foremost, convertible bonds tend to have lower interest rates than non-convertibles because they also accrue value as the price of the underlying stock rises. In this way, convertible bonds offer some of the benefits of both stocks and bonds. Convertibles earn interest even when the stock is trading down or sideways, but when the stock prices rise, the value of the convertible increases. Therefore, convertibles can offer protection against a decline in stock price. Because they are sold at a premium over the price of the stock, convertibles should be expected to earn that premium back in the first three or four years after purchase. In some cases, convertibles may be callable, at which point the yield will cease.
Corporate Action
A corporate event in relation to which the security holder must or may make an election or take some other action in order to secure its entitlement and/or opt for a particular form of entitlement.
D
Day Counts
A day count is a way of quoting interest rates paid by a security. It specifies the number of days in an interest payment period. There are several types of day-count conventions. The three most common are Actual/Actual, 30/360 and Actual/360.
- Actual/Actual day counting is commonly used for Treasury bonds and notes. This day counting scheme is the most intuitive. To determine the number of days between any two dates, we just count the actual number of days. For example, the number of days between 25 February and 5 March will be eight in most years and nine in leap years.
- 30/360 day counting is commonly used for corporate bonds, US Agency bonds and
Mortgage backed securities in the US. This counting scheme was invented to make computations easier in the days before computers. The premise is that all months have 30 days, all years have 360 days. This way, tables could be used to look up the value of accrued interest. This time, the number of days between 25 February and 5 March is 10 irrespective of whether it is a leap year or not given that all months are assumed to be 30 days long. - Actual/360 day counting is commonly used for bank deposits and in calculating rates pegged to indices such as LIBOR (London Interbank Offer Rate). Bank deposits compound interest rates daily (using an actual day count) but assume 360 days per year to calculate the daily rate. Hence if the stated rate is 6%, then the daily rate is 6/360 = 0.0166667%.
Delivery-by-value (DBV)
A party may borrow or lend cash overnight against collateral. The settlement system (eg, CREST) delivers collateral securities, meeting the pre-determined criteria to the value of the cash (plus a margin) from the account of the cash borrower to the account of the cash lender and reverses the transaction the following morning.
Delivery vs Payment (DVP)
A securities industry procedure in which the buyer's payment for securities is due at the time of delivery. Security delivery and payment are simultaneous. DVP is also known as delivery against payment or delivery against cash.
Dirty Price
The dirty price (sometimes called the invoice price) of a cash bond incorporates any accrued coupon that is associated to the time of the last coupon payment. Compare this with the clean price.
E
EONIA
EONIA is the weighted average of overnight Euro Interbank Offer Rates for inter-bank loans. It is the standard interest rate for Euro currency deposits and is calculated on a daily basis by the European Central Bank.
F
Federal Funds Rate
This is the interest rate that banks charge each other for the use of Federal funds. It changes daily and is a sensitive indicator of general short interest rate trends. The Federal funds rate is one of the two interest rates controlled by the Fed. While the Fed cannot directly affect this rate, it effectively controls it in the way it buys and sells Treasuries to banks. This is the rate that reaches individual investors, though the changes usually are not felt for a period of time.
Floating Rate Notes (FRN)
A note with a variable interest rate. Adjustment to the interest rate is usually made every six months and is tied to a certain money-market index eg LIBOR. Also simply known as floaters.
Floating Rate Repo
Floating rate repos differ from conventional repos in that the repo rate used throughout its life is set against a daily fix. As such floating rate repos change their rate daily. They are akin to a
floating rate note (FRN) and trade off a spread versus the fix. Floating rate repo are popular in Europe under the Pension Livree trades that fix against EONIA.
Futures
A standardised, transferable, exchange-traded contract that requires delivery of a commodity, bond, currency or stock index, at a specified price on a specified future date. Unlike options, futures convey an obligation to buy. The risk to the holder is unlimited, and because the payoff pattern is symmetrical, the risk to the seller is unlimited as well. Dollars lost and gained by each party on a futures contract are equal and opposite. In other words, futures trading is a zero-sum game. Futures contracts are forward contracts, meaning they represent a pledge to make a certain transaction at a future date. The exchange of assets occurs on the date specified in the contract. Futures are distinguished from generic forward contracts in that they contain standardized terms, trade on a formal exchange, are regulated by overseeing agencies and are guaranteed by clearing houses. Also, in order to ensure that payment will occur, futures have a margin requirement that must be settled daily.
G
GC Basket Repo
A basket of repo products that conform to a basket's description and conformity, eg a GC basket on automotive bonds min A-rated require anyone trdaing such basket to collateralise the basket using automotive bonds no worse than A-rated. In effect the basket description stipulates what bonds are eligible for inclusion into the basket. This is somewhat similar to
triparty repo trading set.
General Collateral Trade
A general collateral trade is one whereby the owner of securities would like to raise funds on a collateralized basis. Utilising collateral enables the security owner to raise funds at a more favourable level than would be possible on an unsecured basis. The cash, and not the security, is driving the trade.
Glass-Steagall Act
In 1933 in the aftermath of the Great Depression and its widespread bank failures, Congress enacted the Banking Act of 1933. Four sections of the Banking Act of 1933 are referred to as the Glass-Steagall Act. Many critics believed that banks had engaged in inappropriate securities activities that harmed investors. In particular, critics charged that if a bank had a bad loan to a failing company or even a country, it would sell securities to pay off the loan and leave investors with the poor investment. The Glass-Steagall Act addressed that concern in a very broad way:
- Section 16 - restricted commercial national banks from engaging in most investment banking
- Section 20 - prohibited any member bank from affiliating in specific ways with an investment bank
- Section 21 - restricted investment banks from engaging in any commercial banking
- Section 32 - prohibited investment bank directors, officers, employees or principals from serving in those capacities at a commercial member bank of the Federal Reserve System
GMRA
The Global Master Repurchase Agreement (GMRA) is the standard agreement for repo. It is produced by ISMA and TBMA (formerly PSA).
Download a copy of the GMRA and GMRA Guidance Notes.
GMSLA
The Global Master Securities Lending Agreement is the main legal document governing securities lending transactions. It was introduced by the International Securities Lending Association (ISLA) in 2000.
H
Hold in Custody
Hold in Custody repo (HIC) is a rarely used type of transaction for free of payment trading. Customers who have no wish to enter into triparty custody transactions or who have insufficient in-house ability to manage triparty are typical users. UBS borrows a bond on a fee basis in the usual manner but pledges the bond collateral into a ring-fenced client custody account within UBS. Most counterparties are unable to accept this transaction type due to the inherent risk-on-risk component and UBS itself would prefer to use an external triparty agent. Today, it is more common for this type of structure to be used under a "pledge agreement", for example, when UBS is dealing with a counterparty of a low credit rating and UBS is unwilling to trade with them unless they agree to have their collateral ring-fenced (so UBS then has first right to it in the event of a default).
I
ICMA
The Zurich-based International Capital Market Association is the self-regulatory organization and trade association for the international securities market. ICMA sets standards of business conduct in the global securities markets, advises regulators on market practices and provides educational opportunities for market participants. It was formed on 1 July 2005 following a merger between the International Securities Markets Association (ISMA) and the International Primary Market Association (IPMA). http://www.icma-group.org
Interdealer Broker
An agent or intermediary that is paid a commission to bring buyers and sellers together. The broker's commission may be paid either by the initiator of the transaction or by both parties.
K
KYC
Know Your Counterparty. Jargon to describe the procedure around the vetting of a counterparty status. This is an important part of the regulatory system ensuring that counterparties are known and their trade motivation is legitimate.
L
LIBID
The London Interbank Bid Rate (LIBID) is the rate banks bid on eurocurrency deposits. In effect, it represents the international rate that banks lend to other banks.
LIBOR
London Interbank Offer Rate (LIBOR) is the interest rate that the banks charge each other for loans (usually in Eurodollars). This rate is applicable to the short-term international interbank market and applies to very large loans borrowed for between one day to five years. This market allows banks with liquidity requirements to borrow quickly from others with surpluses, enabling banks to avoid holding excessively large amounts of their asset base as liquid assets. The LIBOR is officially fixed once a day by a small group of large London banks, but the rate changes throughout the day.
Liquid General Collateral
See General Collateral Trade
M
MTN
Medium Term Note. A note that usually matures in five to 10 years. Recent developments embraced MTN in corporate debt markets where MTN are corporate notes differing in maturities ranging from nine months to 30 years, and offered by a company to investors.
Mortgage-Backed Security (MBS)
An MBS is a security backed by a pool of mortgages such as those issued by the Ginnie Mae and Freddie Mac. It is also called mortgage-backed certificate.
Moving Average
A technical analysis term to describe the average price of a security over a specified time period (the most common being 20, 30, 50, 100 and 200 days). It is used to spot pricing trends by flattening out large fluctuations and is perhaps the most commonly used variable in technical analysis. Moving average data is used to create charts that show whether a stock's price is trending up or down. They can be used to track daily, weekly, or monthly patterns. Each new day's (or week's or month's) numbers are added to the average and the oldest numbers are dropped; thus, the average "moves" over time. In general, the shorter the time frame used, the more volatile the prices will appear. For example, 20-day moving average lines tend to move up and down more than 200 day moving average lines.
O
Options
The right, but not the obligation, to buy (for a call option) or sell (for a put option) a specific amount of a given stock, commodity, currency, index, or debt, at a specified price (the strike price) during a specified period of time. For stock options, the amount is usually 100 shares. Each option has a buyer, called the holder, and a seller, known as the writer. If the option contract is exercised, the writer is responsible for fulfilling the terms of the contract by delivering the shares to the appropriate party. In the case of a security that cannot be delivered, such as an index, the contract is settled in cash. For the holder, the potential loss is limited to the price paid to acquire the option. When an option is not exercised, it expires. No shares change hands and the money spent to purchase the option is lost. For the buyer of a call, the upside is unlimited. Options, like stocks, are therefore said to have an asymmetrical payoff pattern. For the writer of the call, the potential loss is unlimited unless the contract is covered, meaning that the writer already owns the security underlying the option. Options are most frequently used as either leverage or protection. As leverage, options allow the holder to control equity in a limited capacity for a fraction of what the shares would cost. The difference can be invested elsewhere until the option is exercised. As protection, options can guard against price fluctuations in the near term because they provide the right to acquire the underlying stock at a fixed price for a limited time. Risk is limited to the option premium (except when writing options for a security that is not already owned).
Option Conversion Reversal
Also known as the Put-Call Parity Theorem, it states the relationship between a call and put option in relation to the underlying, net basis cost and volatility value. The price of a call can be expressed in terms of a long underlying and long put position, inclusive of any basis cost. If any of these gives it a value out of line, then an arbitrage condition exists. For repo the synthetic long position, ie long call/short put of the same strike, must create a basis cost opposite to the short future position and as such can create a synthetic repo.
OSLA
The Overseas Securities Lenders' Agreement was developed as a market standard for stock lending prior to the creation of the Global Master Securities Lending Agreement . It was drafted with a view to complying with English law. It was intended for use by UK-based parties lending overseas securities (ie, excluding UK securities and gilts).
Download a copy of the OSLA:.
OTC
Over the counter. The open market that established itself away from commoditised exchange trading. It represents by far the largest trade proportion and heralded the true globalisation of financial products and their complex product development.
P
Pair off
A pair off is the netting of cash and securities in the settlement of two trades in the same security for the same value date. Pairing off allows for settlement of net differences.
Proprietary Trading
Proprietary trading transactions are made by a securities firm and affect the firm's account but not the accounts of its clients. Firms who engage in proprietary trading believe that they have a competitive advantage that will enable them to earn excess returns.
Pension Livrées AFTB
The Pension Livrées AFTB 1994 is the standard legal document governing repo transactions in the French domestic market.
Download a copy of the document:.
Primary Market
The market for new securities issues. In the primary market the security is purchased directly from the issuer.
R
ROE
A repo that allows either counterparty (bilateral right) to terminate the repo transaction prior to the stated maturity date. This feature has real interest rate optionality embedded as it allows either party to break the repo if funding levels of the cash or repo value of the collateral changes. The settlement date of any early termination are designated by the number 24 or 48 denoting one-day or two-day settlement. ROE24 is the norm in US agency markets while ROE48 is the norm in most other markets.
ROS
A repo that allows the lender of collateral to substitute the pledged collateral for other collateral of equal or better quality. This gives the lender the flexibility to change assets provided. The number of substitutions allowed can be specified. The settlement date of any substitutions are designated by the number 24 or 48 denoting one-day or two-day settlement, respectively. ROS24 is the norm in US agency and treasury GC markets while ROS48 is considered an extra feature in other markets.
Repo
An abbreviation for "Sale and Repurchase Agreement". A repo is a sale of assets and a simultaneous agreement to repurchase equivalent assets at a future date for the original value plus a return on the use of the cash.
Risk
This is the risk resulting from the fact that interest or dividends earned from an investment may not be able to be reinvested in such a way that they earn the same rate of return as the invested funds that generated them. For instance, failing interest rates may prevent bond coupon payments from earning the same rate of return as the original bond.
Roll
A roll is the renewal of a trade at its maturity.
S
Secondary Market
A market in which an investor purchases a security from another investor rather than the issuer, subsequent to the original issuance in the primary market. Also known as aftermarket.
Shaping
This is a practice whereby delivery of a large amount of a security may be made in several smaller blocks so as to reduce the potential consequences of a fail. Shaping is particularly useful when partialling is not accepted.
SONIA
SONIA is the weighted average rate to four decimal places of all brokered, unsecured deals between 43 listed money market institutions and their overseas branches transacted between midnight and 3.30pm GMT.
Special Trade
A special collateral trade is one whereby a specific security is needed in order to cover a short position arising from market activity. This short position could arise from a variety of trading activities including market making in cash bonds, credit derivatives, or option trading. The need to borrow a specific security drives the trade.
STP
Straight-through processing. STP has developed in recent years due to the increased growth of e-commerce trading in B2B (bank to bank) and B2C (bank to customer) trades. Essentially it describes the scenario whereby a trade execution, and ticketing, matching, settlement and reconciliation processes are done automatically between counterparties in real-time. This allows cost efficiency and reduction of errors. The prime brokerage services offered by many financial institutions rely heavily on a robust global STP system thereby providing efficient settlement services.
Swap
This is an exchange of streams of payments over time according to specified terms. The most common type is an interest rate swap, in which one party agrees to pay a fixed interest rate in return for receiving an adjustable rate from another party.
Swaption
Sometimes called swap option, this is the option to enter into an interest rate swap. In exchange for an option premium, the buyer gains the right but not the obligation to enter into a specified swap agreement with the issuer on a specified future date. The swaption will specify whether the buyer of the swaption will be a fixed rate receiver (like a call option on a bond) or a fixed rate payer (like a put option on a bond).
T
TBMA
See BMA
Triparty
A triparty repo is a repo where the bonds lent/borrowed are not specified but are allocated by a triparty agent based upon a pre-defined set of rules and criteria agreed by both counterparties.
Triparty Schedule Sets
Triparty schedule sets are predetermined sets of bonds that satisfy criteria defined in the schedule document. The idea is to allow standardisation of bond groupings that can be used for triparty trading. By agreeing such sets with clients it enables more efficient trading and collateralisation of funds by a known commoditised set of bonds.
Download a sample schedule set for triparty