Glossary of Terms

30/360 Also 360/360, 30(E)/360 or Accrual Basis. A day/year count convention assuming 30 days in each calendar month and a “year” of 360 days; adjusted in America for certain periods ending on 31st day of the month (and then sometimes known as 30(A)/360).

AAA The highest credit rating given by Standard & Poors for a company or asset—the risk of default is negligible. Rating scale descends, that is, AA, A, BBB, BB.

Accrual Basis Basis for accruing, for example, interest income based on number of days See 30/360.

Accrued Interest Interest due on a bond or other fixed income security from the issuer to the holder or that must be paid by the buyer of a security to its seller if purchase is between interest periods. Payment = coupon rate of interest multiplied by the number of elapsed days from the last interest payment date (ie, Coupon date) up to but not including settlement date for the trade.

Accruals Amounts recorded in the accounts that refer to future income or payments but form part of the current position. Important in the NAV of a fund.

Accumulation units/shares Unit or share where the income is reinvested in the fund.

ACD Authorized Corporate Director that is a corporate body and an authorized person given powers and duties under FCA regulations to operate an OEIC.

ACT/360 A day/year count convention taking the number of calendar days in a period and a “year” of 360 days.

ACT/365 Also ACT/365 Fixed or ACT/365-F. A day/year count convention taking the number of calendar days in a period and a “year” of 365 days. Under the ISDA definitions used for interest rate swap documentation, ACT/365 means the same as ACT/ACT.

ACT/ACT For an interest rate swap, a day/year count convention dividing the number of calendar days in the interest period that fall in a leap year by 366 and dividing the remainder by 365.

Actual Settlement Date Date the transaction effectively settles in the clearing house (exchange of securities eventually against cash).

Actual Settlement Date Accounting Date on which a custodian or other party will give value for the settlement.

Accumulation Fund A fund where the distribution of income is instead reinvested in the fund. Shares or units in a fund will be designated accordingly, that is, as income or accumulation shares or units.

Agent One who executes orders for or otherwise acts on behalf of another (the principal) and is subject to its control and authority. The agent takes no financial risk and may receive a fee or commission.

AGM Abbreviation for the statutory Annual General Meeting all companies must hold to report to shareholders.

AIFMD/Alternative Investment Fund Managers Directive A EU Directive, the Alternative Investment Fund Managers Directive (AIFMD) seeks a common EU approach to bringing hedge funds, private equity and other types of funds without a UCITS passport within the scope of regulatory supervision. It also aims to bringing transparency and stability to the way these funds operate.

Allotment The amount of a new issues (ie, number of bonds, shares) given to a syndicate member by the lead manager. Also the amount of an issue allotted to a subscribing investor in an offering like an IPO or a rights issue or as a result of a capitalization.

Allotment Letter Formal letter or document (including in e-format) detailing the entitlement, terms and payment details of the holder of the existing shares or to an applicant for new shares.

ANNEXE IV Transparency reporting requirement for AIFMs and their AIFs under the AIFMD.

Alpha A term used in investment management to describe the amount by which an investment has exceeded its performance.

American Depository Receipt (ADR) A depository receipt issued by an American bank to promote trading in a foreign stock or share. The bank holds the underlying securities and an ADR is issued against them. The receipt entitles the holder to all dividends and capital gains in USD. ADR’s allow investors to purchase foreign stock without having to involve themselves in foreign settlements and currency conversion.

American Style Option The holder of the long position can choose to exercise the position into the underlying instrument until the expiry day.

Amortization Accounting procedure that gradually reduces the cost value of a limited life asset or intangible asset through periodic charges to income. The purpose of amortization is to reflect the resale or redemption value. Amortization also refers to the reduction of debt by regular payments of interest and principal to pay off a loan by maturity. Also the amortizing of expenses of an investment fund to avoid “spiking.”

Amortizing CDO A collateralized debt obligation (CDO) where the principal investment is repaid at intervals during the life of the instrument.

Amortizing swap A swap where the notional principal decreases during the life of the swap.

Announcement In a new bond issue, the day on which a release is sent to prospective syndicate members describing the offering and inviting underwriters and selling group members to join the syndicate.

Annual General Meeting (AGM) Meeting of shareholders which a company must call every year. Main purposes are to receive the accounts, vote on dividends, and appoint directors. Applies to investment companies and funds as well as commercial companies.

Arbitrage The simultaneous buying and selling of two different derivatives, or a derivative and its underlying, or two similar assets where the fair value and quoted prices are different but will converge at some point. The arbitrageur has a risk-less trade as the exposure is flat and the profit is the difference between the two prices traded.

Arbitrageur A trader or programmed dealing system which takes advantage of profitable opportunities arising from price anomalies between the same or similar products or instruments traded on different markets or systems.

Agent A third party who acts as an intermediary or broker in a transaction and who assumes no financial risk. For this service, the agent receives an agreed commission or fee.

Asset Allocation The process of structuring a portfolio by allocating capital to various asset classes.

Asset Backed Securities Debt obligations that pay principal and interest; principal only or interests only; deferred interest etc. which is backed off against some kind of asset rather than being a direct exposure to the issuer.

Asset Class A designated group of assets, for example, equities, debt, property, commodities, cash etc.

Asset Manager Person or sometimes refers to a company that makes investment decisions concerning the structure of investment portfolios. These can be investments for any type of fund or structured product like a CDO and can be in respect of portfolios either owned by or outsourced to the asset manager. Could also be referred to as investment manager or fund manager.

Asset swap An interest rate swap or currency swap used to change the interest rate exposure and/or the currency exposure of an investment. Also used to describe the package of the swap plus the investment itself.

Assets Everything of value that is owned or is due as a result of a purchase or entitlement: fixed assets (cash, buildings, and machinery) and intangible assets (patents and good will).

Assignment The process by which the holder of a position is matched against a holder of a similar but opposite position who has exercised his right attributable to the instrument held. For example, an option buyer exercises his right and the option seller is assigned or the holder of a short futures position tenders for delivery and a holder of a long position is assigned. Can also refer to the assignment (passing) of the interest in a legal document or asset to another party.

Auction Method by which the issuer can offer securities to investors. Successful applicants pay the price that they have offered. Used for the issue of some types of government bonds.

Authentication agent A bank or suitably recognized party putting a signature on each physical bond to certify its genuineness prior to the distribution of the definitive bonds on the market.

Authorization Status required by the Financial Services Act 2012 for any firm or individual that wants to conduct investment business or provide financial advice. Could also apply to the authorization by a regulator or other body to an institution such as an exchange, clearing house, central securities depository, or to an agent/ 3rd party. Also an internal control over an instruction, that is, authorization of a payment.

Ballot A process that creates a random selection of applicants for something; for instance a new issue of shares. Also a vote at a company meeting where a shareholder can utilize their voting right. Ballot paper—formal document issued to those entitled to vote or, where appropriate, their proxy.

Bank–commercial Organization that takes deposits and makes loans as well as providing a variety of financial products to its customers.

Bank-investment Organization that combines corporate services, broking, trading, and investment management.

Bank–merchant Organization that specializes in advising on takeovers and corporate finance activities—also called corporate finance.

Bank of England (BOE) The UK’s central bank which undertakes policy decided by the Treasury and determines interest rates as well as ensuring financial stability, managing inflation, and the value of the currency. Nickname: “The Old Lady of Threadneedle Street”

Bank for International Settlements (BIS) Set up in the 1920’s to administer debt repayments among European countries, it is now has an important role as the vocal point in organizing discussion on International finance. Has been involved in the issuing of many important directives, for example, Basel II related to operational risk.

Bankers’ acceptance Short term negotiable discount note, drawn on an endorsement by and accepted by banks which are obliged to pay the face value amount at maturity.

Base Currency Currency chosen for reporting purposes, for example, the base currency of a company’s accounts or of an investment fund. Also applies to an FX trade where one currency is the Base and the other the Quoted currency.

Basel II/Basel III An important directive related to operational risk that financial organizations face. The Directive is the work of the Bank for International Settlement and requires certain capital adequacy to maintain against possible loss as a result of operational risk events happening. Basel III is now being structured and implemented.

Base Rate The rate of interest set by the banks as a basis for the rate on loans and deposits. The central bank sets a base rate that other banks then work off.

Basis (Gross) The difference between the relevant cash instrument price and the futures price. Often used in the context of hedging the cash instrument.

Basis (Value or Net) The difference between the gross basis and the carry.

Basis Point (B.P.) A change in the interest rate of one hundredth of one percent (0.01%). One basis point is written as 0.01 when 1.0 represents 1%. That is, 0.01 = 1 basis point, so 0.10 = 10 basis points and 1.00 = 100 basis points. Referred to as “bips”.

Basis Risk The risk that the price or rate of one instrument or position might not move exactly in line with the price or rate of another instrument or position which is being used to hedge it.

Basis Swap An interest rate swap where the interest payments that are exchanged between each party are different types of floating rates.

Basis Trade A trade simultaneously of a future and the underlying; a facility offered by some exchanges.

BBA Abbreviation for British Bankers’ Association.

Bear A nickname for an investor who believes prices will fall.

Bear Market A market in which prices are falling and sellers are more predominant than buyers. Usually refers to equity markets.

Bear Raid The selling of shares, generally in large volumes, to influence the price in order to acquire shares more cheaply. Strategy employed by some hedge funds involving selling short, that is, selling shares not yet owned.

Bear Squeeze Where an investor having gone “short” and sold shares they do not have in anticipation of either a share or the market as a whole falling, is squeezed by the rising price during the speculative period. The squeeze happens because the seller has sold short, borrowed shares to enable settlement of the trade and must at some point buy the shares to return the borrowed securities.

Bearer Document Documents which state on them that the person in physical possession (the bearer) rather than a named individual is the owner, example being currency.

Bearer Securities Unregistered securities where the holder of the document is deemed the owner. An example is a bearer bond. Income is usually paid on presentation of the coupon attached to the bond and redemption (return of original capital) also requires the presentation of the security.

Benchmark A performance comparator used to determine the relative rate of increase/decrease in a market or security, for example, index. A benchmark is often a target against which investment performance is measured. Can also be used to measure the performance of suppliers against for instance a service level agreement.

Benchmark Bond Likely to be the most recently issued and most liquid government bond.

Beneficial Owner The person entitled to all benefits of ownership even though a broker, bank custodian, nominee or 3rd party like a Central Securities Depository holds the security in their name.

Bermudan Option An option where the holder can choose to exercise on any of a series of predetermined dates between the purchase of the option and expiry. See also American option, European option.

Best-Efforts Basis Term describing how an instruction received by a broker or custodian will be managed. If due to factors beyond their control the instruction cannot be guaranteed to be completed it is carried out on a best efforts basis.

Best Execution The requirement for a broker to obtain the best market price when buying or selling a marketable investment on behalf of the client.

BIC Abbreviation for a Bank Identifier Code—used in payment instructions.

Bid 1.    The price or yield at which a purchaser is willing to buy a given security. 2.    To quote a price or yield at which a seller is able to sell a given security. 3.    The investor’s selling price of units in a unit linked policy. The opposite to bid is “offer.”

Bid/Offer spread The difference between the buying and selling price of units in a unit trust or a security. In the case of a unit trust, it includes any initial charges and investment costs.

Bilateral Netting A netting system in which all trades executed on the same date in the same security between the same counterparties are grouped and netted to one final delivery versus payment.

Bill of exchange A money market instrument, a written promise to pay a specified sum of money (usually postdated) that is similar to a cheque.

BIS Abbreviation for the Bank for International Settlements.

Bitcoin Bitcoin is a digital currency created in 2009. It follows the ideas set out in a white paper by the mysterious Satoshi Nakamoto, whose true identity has yet to be verified. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms and is operated by a decentralized authority, unlike government issued currencies. There are no physical Bitcoins, only balances associated with public and private keys. These balances are kept on a public ledger, along with all Bitcoin transactions, that is verified by a massive amount of computing power. Source: Investopedia

Black Days Prefix to a day where a market disaster occurs.

Blockchain A blockchain is a public ledger of all Bitcoin transactions that have ever been executed. It is constantly growing as “completed” blocks are added to it with a new set of recordings. The blocks are added to the blockchain in a linear, chronological order. Each node (computer connected to the Bitcoin network using a client that performs the task of validating and relaying transactions) gets a copy of the blockchain, which gets downloaded automatically upon joining the Bitcoin network. The blockchain has complete information about the addresses and their balances right from the genesis block to the most recently completed block. Source: Investopedia. The possible use of blockchain is being looked at in terms of the financial market infrastructure including clearing and settlement.

Block Trade A purchase or sale of a large number of securities normally much more than what constitutes a usual trade in the market in question. Many markets allow this type of trade.

Blue Chips Denotes the companies that in theory at least provide the safest equity investment potential. Companies listed in the FTSE 100 or S&P 500 index for instance are considered “Blue Chip.”

Board Lot Standard unit of shares commonly traded in the market, often one share. Shares that are issued in fractions or multiples of a board lot are referred to as odd lots and jumbo lots respectively and may not be readily negotiable.

Bond An instrument often comprising a certificate of debt, generally long-term, under the terms of which an issuer contracts, inter alia, to pay the holder a fixed principal amount on a stated future date and, usually, a series of interest payments at predetermined times during its life. Other types of bonds exist, that is, zero coupon bonds, convertible bonds etc. Issued by both governments and corporate companies and sometimes municipal/local authorities.

Bonus Issue A free issue of shares to a company’s existing shareholders. No capital is paid by shareholders and the share price falls pro rata. It is a cosmetic exercise to make the shares more marketable. Also known as a capitalization or scrip issue. Could also be an issue of shares to investors, directors, or employees at the company’s expense from shares held by the company.

Book Entry Transfer System of recording ownership of securities by computer where the owners do not receive a certificate. Records are kept (and altered) centrally in “the electronic book.”

Books closed day Last date for the registration of shares or bonds for the payment of the next distribution of dividend or interest and also for other types of corporate action, subscription, offer etc.

Break A term used for any out-of-balance condition. A money break means that cash debits and credits are not equal. A trade break means that some information such as that from a contra broker is missing to complete that trade.

Bridge The electronic link enabling transactions between Clearstream and Euroclear participants to settle across the two CSDs.

Broker An agent, often a member of a stock exchange or an exchange member himself who acts as intermediary between buyer and seller. A commission is charged for this service.

Broker/Dealer Firm that operates in dual capacity in the securities marketplace: as principal trading for it’s own account and as broker representing clients on the market.

Broken date A maturity date other than the standard ones normally quoted.

Broken period A period other than the standard ones normally quoted.

Broker Organization or individual who transacts business as an agent in return for a commission.

Broking The activity of a broker representing a client as agent and charging commission for doing so.

Bull Investor who believes prices or a market will rise.

Bull Market A market in which prices are rising and buyers are more predominant than sellers. Usually refers to equity markets.

Bulldog Bonds A sterling bond issued in London by an overseas government agency. The term is also used for debenture type issues from a commercial organization.

Bullet Maturity A bond that pays periodic interest and repays the principal on maturity.

Buying In (Buy In) The action taken by a broker failing to receive delivery of securities from a counterparty on settlement date to purchase these securities in the open market for immediate delivery. All costs are passed to the “failing” party.

BVIfsc BVI Financial Services Commission.

Calendar spread The simultaneous purchase (or sale) of a futures or option contract for one date and the sale (or purchase) of a similar futures contract for a different date. See Spread.

Call Deposits Deposits that can be called (or withdrawn) at the option of the lender (and in some cases the borrower) after a specified period. The period is short, usually one or two days, and interest is paid at prevailing short-term rates (call account).

Call Option An option that gives the seller the right, but not the obligation, to buy a specified quantity of the underlying asset at a fixed price, on or before a specified date. The buyer of a call option has the obligation (because they have bought the right) to make delivery of the underlying asset if the option is exercised by the seller.

Call Spread The purchase of a call option coupled with the sale of another call option at a different strike, expecting a limited rise or fall in the value of the underlying.

Callable Bond A bond where the issuer has the right to redeem all or some of the bond issue prior to maturity by paying some specified call price.

Cancellation price The lowest possible valuation of a unit in a unit trust under FSA regulations on any one day. The actual selling or bid price is usually higher.

Cap Also ceiling. A package of interest rate options whereby, at each of a series of future fixing dates, if an agreed reference rate such as LIBOR is higher than the strike rate, the option buyer receives the difference between them, calculated on an agreed notional principal amount for the period until the next fixing date.

Capital The value of an individual’s savings and investments. The capital showing in a firms accounts including investment funds.

Capital Adequacy Requirement for firms conducting banking or investment business to have sufficient funds to maintain a solvent business.

Capital Gain (or Loss) Profit (or loss) from the sale of a capital asset. Capital gains may be short-term (one year or less) or long-term (more than one year). Capital losses are used to offset capital gains to establish a net position for tax purposes.

Capital Adequacy Rules Regulations specifying minimum capital requirements for investment businesses and banks and how this must be met.

Capital Gains Tax (CGT) Tax payable by individuals on profit made on the disposal of assets.

Capital Markets A term used to describe the market where capital is invested and raised. Large amounts of money (capital) are raised by companies, governments, and other organizations for short, medium, and long-term use and involve the creation of financial instruments in which investors place excess capital, via cash deposits or invest through investment funds.

Capitalization The value of a limited company as determined by the par value, issue price, or market price (whichever is greatest) of its shares and the total number of shares in issue. The size of stock markets is often determined by the total aggregate of the capitalization of all the shares quoted on that market, for example, the FTSE 100 Index is made up of the 100 shares with the highest capitalisation based on the mid-price quoted on the London Stock Exchange times the shares in issue.

Capitalization Issue See Bonus Issues.

Carried Interest The amount of interest a fund promoter or manager has in the performance of the fund. A form of performance fee.

Carried Interest Partner The partner in a partnership that holds the carried interest.

CASCADE Clearstream CSD system accessed via Creation Connect.

Cash funds Another name for money market funds.

Cash Market Traditionally, this term has been used to denote the market in which commodities were traded for immediate delivery against cash. Since the inception of futures markets for T-bills and other debt securities, a distinction has been made between the cash markets in which these securities trade for immediate delivery and the futures markets in which they trade for future delivery.

Cash Sale A transaction for instance in a market which calls for delivery or exchange of the securities/goods for cash at the same time or during that same day.

Cash Settlement In the money market a transaction is said to be made for cash settlement if the securities purchased are delivered against payment on the same day the trade is made. Can also describe the method of settlement by stipulating that only physical cash rather than by a cheque, electronic payment etc.

CCASS Clearing system for the Stock Exchange of Hong Kong (Central Clearing and Settlement System).

CCP A central clearing counterparty where positions novate for clearing and may be guaranteed for settlement. Can also be a clearing conduit where the parties to a trade remain responsible for settlement with each other via the CCP.

CDD An abbreviation for Client Due Diligence, carrying out checks like antimoney laundering etc.

CDS An abbreviation for the Canadian Depository for Securities. Also an abbreviation for a credit default swap.

Ceiling See Cap.

Central Bank Influential institution at the core of a country’s monetary and financial system, such as the Bank of England, the Federal Reserve in the United States of America or the European Central Bank. Its main aim is to ensure price stability in the economy through control of inflation and safeguard the financial industry.

Central Securities Depository (CSD) An organization authorized in a jurisdiction that holds records of securities positions and transfer of ownership in either immobilized or dematerialized form thereby enabling transactions to be processed by book entry transfer of ownership. Also holds physical securities. Some CSDs also provide securities custody services.

Certificate Paper form of shares (or bonds), representing ownership of a company (or its debt). Example—a share certificate. Can also evidence ownership of units or shares in a fund.

Certificate of Deposit A money market instrument often in bearer form issued by a bank certifying a deposit made at the bank and which gives the purchaser a return.

CFD See Contract for difference.

CFMA Commodity Futures Modernization Act introduced in the United States to change the regulatory environment in derivatives markets.

CFTC The Commodities and Futures Commission, (United States)—a regulator.

CHAPS Clearing House Automated Payment System—clearing system for Sterling payments between member banks.

Chapter 11 Area of the US Bankruptcy Reform Act 1978 that protects companies from creditors.

Cheapest to Deliver The cash security that provides the lowest cost (largest profit) to the arbitrage trader; the cheapest to deliver instrument is used to price the futures contract.

CHESS Organization for holding shares in dematerialized form in Australia (Clearing House Electronic Sub Register System).

CIMA Cayman Islands Monetary Authority.

Chinese Walls Artificial barriers to the flow of information set up in large firms to prevent the movement of sensitive information between departments.

CHIPS Clearing House Interbank Payments System—clearing system for US dollar payments.

Chi –X Europe (BATS) A pan European multi trading facility (MTF) started in 2007 that combined with BATS Europe in 2011.

Churning A term used to describe dealing in a client’s investments or advising a client to deal more frequently than is reasonable in the circumstances, thereby increasing commission revenue.

City Code Principles and rules written by Panel on Takeovers and Mergers to regulate conduct during a takeover.

Clean Price The total price of a bond less accrued interest.

Clearance The process of determining accountability for the exchange of money and securities between counterparties to a trade: clearance creates statements of obligation for securities and/or funds due.

Clearance Broker A broker who will handle the settlement of securities related transactions for himself or another broker. Sometimes, small brokerage firms may not clear for themselves and therefore employ the services of an outside clearing broker.

Clearing The centralized process whereby transacted business is recorded and positions are maintained, the preparation of a transaction for settlement. See also Clearance. Positions are sometimes matched and or registered as genuine trades during the process of clearing. It is a presettlement phase in securities and cash—hence clearing banks deal with cheques and cash payments and clearing houses/CCPs deal with securities etc.

Clearing Agent An institution that settles transaction for a large number of counterparties.

Clearing Broker Is the clearing agent for the trading broker in the market where the trade will be settled. It is usually the party with which the sub-custodian will actually settle the trade.

Clearing fee Fee charged by a clearing house or clearing broker, usually per trade or contract/lot.

Clearing House Company or entity that acts as central counterparty for the settlement of stock exchange transactions sometimes becoming the counterparty to the trade through a process called novation. May also offer some type of guarantee of settlement it maintains the records of transactions and settles the transactions with members. Most clearing houses are also very much involved in the risk management of the markets and the clearing house members.

Clearing House Funds Also known as next-day funds, where the proceeds of a trade are available on the day following the actual settlement date.

Clearing Organization Another name for the organization that acts as the guarantor of the performance and the settlement of contracts that are traded on an exchange.

Clearing Process System (CPS) Clearing system used by Euronext and NYSE-Liffe which has been replaced in 2012 by the Universal Clearing Platform (UCP).

Clearing system Generic term used for a system established to clear transactions.

Clearstream International CSD and clearing house based in Luxembourg and Frankfurt and linked into Deutsche Borse through its merger with Deutsche Borse Clearing.

Closing day In a new bond issue, the day when securities are delivered against payment by syndicate members participating in the offering.

Closing Trade A bought or sold trade which is used to offset an open position, to reduce it or to fully offset it and close it. Part of a “close out” of a position.

CME Abbreviation for the Chicago Mercantile Group. A commodity and financial derivative exchange now comprised of the Chicago Mercantile, Chicago Board of Trade, COMEX, Kansas City Board of Trade, and NYMEX exchanges.

CME ClearPort OTC trade capture and clearing system operated by the CME Group.

Collar Also cylinder, tunnel, fence, or corridor. The sale of a put (or call) option and purchase of a call (or put) at different strikes (typically both out-of-the-money) or the purchase of a cap combined with the sale of a floor in interest rates. See Range forward.

Collateral An acceptable asset used to cover a margin requirement or as security against a loan, obligation or debt. A risk management process

Collateralized Debt Obligations (CDOs) Type of structured product where a mix of some type of debt, that is, government bonds to junk bonds (Collateralized Bond Obligation) or loans (Collateralized Loan Obligation) is put together as a new product that is then issued in tranches to investors. Each tranche carries different levels of risk of default and a different return to the investor.

Collateralized Mortgage Obligations CMOs) A type of CDO, CMOs are backed by a pool of mortgages owned by the issuer. They usually reimburse capital at each coupon payment as per reimbursement of the underlying mortgages. Widely criticized as being the cause of the “crash of 2008” when defaults started to occur.

Commercial Book-Entry System (CBES) In the United States, the Commercial Book-Entry System (CBES) is a multitiered automated system for purchasing, holding, and transferring marketable securities. CBES exists as a delivery versus payment system that provides for the simultaneous transfer of securities against the settlement of funds. At the top tier of CBES is the National Book-Entry System (NBES), which is operated by the Federal Reserve Banks. For Treasury securities, the Federal Reserve operates NBES in their capacity as the fiscal agent of the US Treasury. The Federal Reserve Banks maintain book-entry accounts for depository institutions, the US Treasury, foreign central banks, and most government sponsored enterprises (GSEs). At the next tier in CBES, depository institutions hold book-entry accounts for their customers, which include brokers, dealers, institutional investors, and trusts. At the next tier, each broker, dealer, and financial institution maintains book-entry accounts for individual customers, corporations, and other entities.

Commercial paper Short-term obligations with maturities between 2 and 270 days issued by banks, corporations or other borrowers to investors with temporary idle cash. They are usually discounted although some are interest-bearing.

Commission Charge levied by a firm for agency broking or other services. Also known as brokerage.

Commodities The raw materials traded on specialist markets, that is, oil, coffee, copper (see also Soft and Hard commodities).

Commodity Futures These comprise five main categories; agriculture (Agri), for example, wheat and potatoes, softs, for example, coffee and cocoa, precious metals, for example, gold and silver, non-ferrous metals, for example, copper and lead, and energy, for example, oil and gas. There are other categories like livestock, timber etc.

Commodity Swap A swap in which the rate of interest is linked to the price of a specific commodity such as cocoa or copper. Example change in the price of coffee versus Libor. Also an arrangement to exchange two commodities at some stage.

Common Stock Securities that represent ownership in for instance a US corporation. The two most important common stockholder rights are the voting right and dividend right. Common stockholder’s claims on corporate assets are subordinate to those of bondholders preferred stockholders and general creditors. Called ordinary shares in the UK.

Compliance Officer Person appointed within an authorized firm to be responsible for ensuring compliance with the rules and regulations of the markets and jurisdictions where the firm does business as well as compliance with internal rules and controls.

Compound Annual Rate (CAR) The compounded annual rate of interest on a savings account taking into account the frequency of payment and assuming the re-investment of the interest.

Compound interest Interest calculated on the assumption that interest amounts will be received periodically and can be reinvested (usually at the same rate).

Conduct of Business Rules Rules created by a regulator such as the FSA in the UK related to how firms conduct their business. They deal mainly with the relationship between firm and client.

Conflicts of Interest Circumstances that arise where a firm including directors or senior management of investment funds has a situation which could encourage it not to treat its clients favorably. The more areas in which a firm or individual is involved in activity for both itself and clients the greater the number of potential conflicts.

Confirm (ation) A communication between two parties to a trade that seeks to match the details of the trade so that settlement can take place. An agreement for individual OTC derivative transactions that details the specific terms of the trade often used in conjunction with the ISDA Master Agreement and Schedules.

Consideration The value of a transaction calculated as the price per share multiplied by the quantity being transferred.

Contingent Liability A position that has the potential for more than one settlement obligation for example variation margin on futures contracts

Continuous Net Settlement Extends multilateral netting to handle failing trades brought forward and to continue the process of trying to settle throughout a defined period—see Multilateral netting.

Contract The standard unit of trading for futures and options. It is also commonly referred to as a “lot.” Also an agreement between to parties for the supply of goods, services etc.

Contract for Difference (CFD) Contract designed to enable an exposure to an instrument, index or basket. Movement in the price creates a profit or loss that is subject to cash settlement only so the underlying is never exchanged.

Contract Note Legal documentation sent by securities house to clients providing details of a transaction completed on their behalf. Can also apply to the document sent by a fund to an investor.

Contract Specification A derivative exchange designs its own products and publishes a contract specification setting out the details of the derivative contract. This will include the size or unit of trading and the underlying, maturity months, quotation and minimum price movement and value (see also Tick) together with trading times, methods and delivery conditions

Contractual Settlement Date Date on which seller and buyer are contractually obligated to settle the securities transaction.

Contractual Settlement Date Accounting Settlement value posted into a client’s account by a custodian on an agreed (contractual) date irrespective of whether the transaction has actually settled.

Convergence The movement towards each other of the cash asset price and the futures or other derivatives price as the expiration date of the futures contract approaches.

Conversion premium The effective extra cost of buying shares through exercising a convertible bond (see Below) compared with buying the shares directly in the market. Usually expressed as percentage of the current market price of the shares.

Conversion price The normal value of one instrument or asset which may be exchanged for another instrument or asset.

Conversion ratio The number of shares into which a given amount (eg, £100 or $1000) of the nominal value of a convertible can be converted.

Convertible Bond/Convertible Securities Security (usually a bond or preferred stock) that can be exchanged for other securities, usually ordinary shares/common stock of the same issuer, at the option of the holder and under certain conditions.

Convertible Currency A currency that is freely convertible into another currency. Currencies for which domestic exchange control legislation specifically allows conversion into other currencies.

Convertible Term Assurance A term assurance policy that can be converted into a whole life or endowment policy.

Corporate Action One of many possible capital restructuring changes or similar actions taken by the company, which may have an impact on the market price of its securities, and which may require the shareholders to make certain decisions.

Corporate bonds Usually fixed interest securities issued by public and private companies.

Corporate Debt Securities Bonds or commercial paper issued by private corporations.

Corporate Finance General title that covers activities such as raising cash through new issues, creating solutions to funding requirements and utilizing a company’s excess cash effectively.

Cost of carry The net running cost of holding a position (which may be negative), for example, the cost of borrowing cash to buy a bond, less the coupon earned on the bond while holding it. Also used in the calculation of the fair value of a futures contract

Counterparty (ies) A trade can take place between two or more counter parties. Usually one party to a trade refers to its trading partners as counterparties.

Counterparty risk The risk that a counterparty fails to meet an obligation or fails to deliver services in accordance with a service level agreement.

Coupon A term used to describe the nominal rate of interest expressed as a percentage of the principal value. The interest is paid to the holder of, for example, a fixed income security by the borrower. The coupon is generally paid annually, semiannually or, in some cases quarterly depending on the type of security. With physical (paper) instruments the coupon is attached and must be torn off and presented to the issuer’s agent to obtain the interest.

Coupon Swap An interest rate swap in which one leg is fixed-rate and the other is floating rate. See also Basis swap.

Covered option A written option where the writer (seller) has sufficient underlying or cash to settle the option if the buyer exercises their right. See also Naked option.

Covered Writing The process of the sale of options where the seller owns the underlying which would be required to cover the delivery if the position is assigned. Seller is known as a covered writer—opposite is a naked writer.

Creation Connect Clearstream communication system with access to CASCADE etc.

Creation price The highest possible buying price of units under FSA regulations before any initial charge. The actual price to the investor may be lower.

Credit Default Swap A swap where one side is a default event that results in the payment of the related loss and the other is the payment of a premium to secure the protection. If no event occurs then the seller of the protection keeps the premium.

Credit Derivatives Credit derivatives have as the underlying asset some kind of credit default. As with all derivatives, the credit derivative is designed to enable the risk related to a credit issue, such as non-payment of an interest coupon on a corporate or sovereign bond, or the non-repayment of a loan, to be transferred.

Credit risk The risk that a borrower, or counter-party to a deal, or the issuer of a security, will default on repayment or not deliver its side of the deal.

CREST/Euroclear The organization, known as a central securities depository (CSD), in the UK that holds UK and Irish company shares in dematerialized form and clears and settles trades in UK and Irish company shares. Now merged with Euroclear and called Euroclear United Kingdom and Ireland but still often referred to as “CREST.” Members like custodians have accounts within Euroclear where the positions and any transfer of ownership are recorded.

Cross Border Trading Trading which takes place between persons or entities from different countries.

Cross Currency Interest Rate Swap An interest rate swap where the interest payments are in two different currencies and the exchange rate, for the final settlement, is agreed at the outset of the transaction.

CSD Abbreviation for central securities depository (see Central securities depository).

CSSF Commission de Surveillance du Secteur Financier Luxembourg.

Cum-Dividend A security that is traded with the right to the current dividend.

Cum-Rights A term applied to a stock trading in the marketplace “with subscription rights attached” which is reflected in the price of that security.

Cumulative Dividend Dividend that is due but not yet paid on cumulative preferred shares. These must be paid before any ordinary dividends are paid.

Cumulative preference share A share that has preferential rights over ordinary shares. For example, if the company fails to pay a preference share dividend the entitlement to the dividend accumulates and the arrears of preference dividend must be paid before any ordinary dividend.

Currency Exposure Currency exposure exists if assets are held or income earned, in one currency while liabilities are denominated in another currency. The position is exposed to changes in the relative values of the two currencies such that the cost of the liabilities may be increased or the value of the assets or earning decreased.

Currency Futures Contracts calling for delivery of a specific amount of a foreign currency at a specified future date in return for a given amount of say US Dollars.

Currency Swap An agreement to exchange interest related payments in the same currency from fixed rate into floating rate (or vice versa) or from one type of floating rate to another. A currency swap is different to an interest rate swap as the principal amounts are also swapped.

CUSIP The Committee on Uniform Securities Identification Procedures, the body which established a consistent securities numbering system in the United States.

CUSIP Number Unique nine-digit number that identifies securities, US or non-US, which trade and settle in the United States (Committee on Uniform Security Identification Procedure).

Custodian Institution holding securities in safekeeping for a client. A custodian also offers other services to its clients such as settlement, portfolio services etc. A custodian is an authorized/licensed entity, for example, a bank but can also be a securities depository such as Euroclear.

Customer—nonprivate An institutional or sometimes high net worth customer who is assumed to understand the workings of the capital markets and investment world and therefore receives little protection from the regulator.

Customer—private Customer who is assumed to be financially unsophisticated and therefore receives more protection from the regulator.

CySEC the Cyprus Securities and Exchange Commission the Cyprus regulator.

D.K. “Don’t Know.” Term that is used in operations teams and applies to a securities transaction pending settlement where fundamental data is missing which prevents the receiving party from accepting delivery.

Daily Official List London Stock Exchange produced document that provides record of prices at which all stocks were traded on the previous day.

Day Count The basis for the number of days that will be used in calculations. In the UK, this is usually 365 days whereas in the United States, it is 360 days in a year.

Day count fraction The proportion of a year by which an interest rate is multiplied in order to calculate the amount accrued or payable. Examples 30/360, Actual/365.

Day-Light Exposure The risk to the deliverer of securities or payer of the settlement value to the possibility of a counterparty defaulting on his obligations during the business day.

Dealer Individual or firm that acts as principal in all transactions, buying for their own account. Can also be called a trader.

Debenture Another name for a corporate bond—usually secured on assets of the company.

Debt Warrant An option to purchase more bonds on fixed terms at the time of the offering of the warrants.

Decompounded Rate Used primarily in the US dollar market. A scaled down rate used for a shorter period or “stub” in a swap.

Default Failure to perform on a futures contract, either cash settlement or physical settlement.

Deferred share A class of share where the holder is only entitled to a dividend if the ordinary shareholders have been paid a specified minimum dividend. Can also describe a share where the dividend payment is deferred to some futures date by the payer or receiver.

Definitive Bond Any bond issued in final form. It is used particularly in reference to permanent bonds for which Temporary Bonds or Interim Certificates were issued.

Deflation Opposite of inflation and can be used as a method by governments to curtail rampant inflation, normally by reducing demand thereby lowering output and investment. However severe deflation is as dangerous for an economy as high inflation.

Deliverable Basket or Deliverable List The list of securities that meets the delivery standards of futures contracts or other derivatives.

Delivery The delivery of an asset in settlement of a transaction. A term used to describe the physical movement of the underlying asset on which the derivative is based from seller to buyer.

Delivery versus Payment (DVP) Settlement where transfer of the security and payment for that security occur simultaneously and also irrevocably. Also known as DVP.

Dematerialized (form) Circumstances where securities are held in a book entry transfer system with no certificates.

Department of Trade and Industry In the UK a department of government responsible for some commercial matters including monopolies and prosecution of insider dealing.

Deposit Account An account where interest is paid on the balance and in most cases, notice is required to make a withdrawal without penalty.

Deposit Protection Scheme A fund set up by the Banking Act of 1987 in the UK, which protects depositors in banks that go bust.

Depositary Organization similar to a custodian required for investment funds under the AIFMD and for funds such as UK OEICS

Depository Receipts Certificate issued by a bank in a country to represent shares of a foreign corporation issued in a foreign country. It entitles the holder to dividends and capital gains. They trade and pay dividend in the currency of the country of issuance of the certificate. For example, an American Depository Receipt (ADR).

Depository Trust Company (DTC) A US central securities depository through which members may arrange deliveries of securities between each other through electronic debit and credit entries without the physical delivery of the securities. DTC is industry owned with the NYSE as the majority owner. DTC is a member of the Federal Reserve System.

Depreciation The erosion of the value of something caused by a reduction in the value of a currency influenced by, for example, inflation and also the declining value created by a second hand sale of those goods, for example, a motor car. Used in accounting to reflect the decline in the value of assets like equipment.

Derivative Generic term for a commodity, financial instrument or other type of product whose value is dependent upon the value of an underlying asset.

Derivative Instruments or Derivative Securities Financial or commodity instruments which are based on other underlying securities, for example, options or futures. Derivative securities do not directly raise finance or create wealth, rather they provide for the transfer of risk from hedgers to speculators which in turn can result in gains or losses for the speculator.

Deriv/SERV- MarkitSERV DTCC Deriv/SERV now called MarkitSERV is a provider of automation solutions for the global over-the-counter (OTC) derivatives market, offering a services for a range of credit, equity and interest rate products (see also Markit).

Designated account A unit holder or shareholder account with additional identification.

Deutsche Börse The German Stock and Derivatives Exchange Group that includes the derivatives exchange Eurex.

Dilution/Dilution Levy A situation where some investors interest in a portfolio is diluted by other investor’s sales or purchase of units/shares in the fund. A dilution levy seeks to redress this situation

Direct Debit A method of payment where, on a regular basis, funds are extracted from the payer’s account and paid into the recipient’s account. A direct debit is variable and as such the amount debited can change.

Direct Market Participant A broker, broker/dealer or any direct member of an exchange.

Direct Placement Selling a new issue by placing it with one or several institutional investors rather than offering it for sale publicly. Also just referred to as placement.

Dirty Price The total price of a bond including accrued interest that will be used for settlement of a transaction.

Disclaimer A notice or statement intending to limit or avoid potential legal liability.

Discount The amount by which a future is priced below its theoretical price or fair value. A money market instrument issued at a discount to the value received on redemption, for example, some treasury bills. A bond issued at a discount to the value received on redemption, for example, a zero coupon bond.

Discount Factor The number by which a future cash flow must be multiplied in order to calculate its present value.

Discount Rate The rate of interest charged by the Federal Reserve in the United States to banks to whom money has been lent. Is also a term used for the same purpose by other central banks.

Discount Securities Noninterest bearing short-term securities that are issued at a discount and redeemed at maturity for full face value.

Distributions Income paid out from a unit trust or other fund that pays income. Also the amount paid to each investor on the winding up of a fund such as a private equity fund. The term distribution can also mean the sales/brokerage part of an investment bank

Dividend Distribution of profits made by a company to its shareholders if it chooses to do so.

Dividend Cover Dividends are paid out of a company’s profits and dividend cover is the excess profits after the dividend has been calculated. For example, if a company has a profit of £60,000 and the total dividend is £10,000, the dividend is covered 6 times.

Dividend per share Indicated annual dividend based on the most recently announced quarterly dividend times four plus any additional dividends to be paid during the current fiscal year.

Dividend Yield The dividend expressed as a percentage of the share price.

Diversification Investment strategy of spreading risk by investing the total available in a range of investments.

Dodd-Frank The Dodd–Frank Act—a major us regulation affecting capital markets

Domestic Bond Bond issued in the country of the issuer, in the currency of the country and according to the regulations of that country.

Domicile Where an individual or a business including investment funds is legally deemed to be registered, based or living.

Don’t Know (D.K.) Applies to a securities transaction on which fundamental data is missing or there is a discrepancy in the details of the transaction that prevents the receiver from accepting the delivery.

Double Taxation Treaty An agreement between two countries intended to avoid or limit the double taxation of income. Under the terms of the treaty an investor with tax liabilities in both countries can either apply for a reduction of taxed imposed by one country or can credit taxes paid in that country against tax liabilities in the other.

Dow Jones Index A main share index used in the United States of America.

Down-and-out option A knock-out option where the trigger is lower than the underlying rate at the start. There are also up-and-in option, down-and-in option, up-and-out option.

Drawdown A process of calling an amount from an account or available balance. In private equity funds it is the drawdown of the committed capital agreed by the investors

Drop-Lock A hybrid form of floating rate note that converts into a fixed rate bond once interest rates drop to a predetermined level.

DRP or (DRIP) Dividend Reinvestment Plan. Dividends are reinvested into shares rather than being distributed.

DTC Abbreviation for the Depository Trust Company—CSD for shares in the United States of America.

Dual Currency Bond A bond which pays interest in one currency and repays the principal in another currency.

Due Diligence The carrying out of duties with care and perseverance. Due diligence is generally referred to in connection with the investigations of a company, carried out by accountant’s to ascertain the value of that company and also applies from a regulatory point of view that firms and key personnel should carry out their duties with due diligence to the regulatory environment. An example is the client due diligence (CDD) when a firm or fund takes on a new client.

Dutch Auction A Dutch auction is where bids are made by an open-outcry or electronic system method and are accepted in descending order until the issue is completed.

ECB An abbreviation for the European Central Bank which is the central bank for countries using the Euro currency.

ECSDA An abbreviation for the European Central Securities Depository Association.

EUCLID Communications system operated by Euroclear.

EUREX German-Swiss derivatives exchange created by the merger of the German (DTB) and Swiss (SOFFEX) exchanges and part of the Deutsche Borse Group.

EURONEXT A pan-European securities and derivatives exchange listing Dutch, French, Portuguese, and Belgium securities and derivatives plus the derivative products traded on Euronext liffe. Joined with the New York Stock Exchange to create NYSE Euronext and NYSE-Liffe.

Earnings per share (EPS) The total profit of a company divided by the number of shares in issue.

Effective Date The date on which the interest period to which a FRA or swap relates, is to start which can be different from the date when the trade is agreed.

EIS Enterprise Investment Scheme in the UK aimed at early stage investment exposure for portfolios and tax efficient investment for individuals

Elective event Corporate action that requires a choice from the security owner.

Electronic Order Book The electronic order matching system used as the system for dealing in the shares that comprise the FTSE 100 stock.

Embedded option An option which is included as part of a product. Can be an option that the holder or the issuer can exercise, for example, callable and puttable bonds.

Emerging Market Often a non-limited or limited industrialized country with: -    low or middle per capita income, as published annually by the World Bank, -    Undeveloped capital market (ie, the market represents only a small portion of their GDP). Can provide excellent investment opportunities but with often high risk.

EMIR An abbreviation for the European Markets Infrastructure Regulations which has led to the establishing of the clearing of OTC derivatives through CCPs.

Equilization A process for managing out inequalities, for example, in the share of performance fee each investor pays. A process of showing the amount of capital and income involved in the subscription and redemption price of a debt fund.

Equity A common term to describe stocks or shares.

Equity/Stock Options Contracts based on individual equities or shares. On exercise of the option the specified amount of shares are usually exchanged between the buyer and the seller through the clearing organization.

Equity Index Swap An obligation between two parties to exchange cash flows based on the percentage change in one or more stock indices, for a specific period with previously agreed reset dates. The swap is cash settled and based on notional principal amounts. One side can involve a LIBOR reference.

Equity-Linked Bond A bond that can be converted into shares.

Escrow A bank account specifically designed to hold money independently, for example, during a dispute between two or more parties to prevent access to those funds until finalized.

ESMA European Securities Market Authority—European regulator.

E-T-C An abbreviation for an electronic trade confirmation system.

E-T-D This is the common term which is used to describe Exchange Traded Derivatives which are the standardized products. It also differentiates products which are ETD as opposed to those offered Over-The-Counter (OTC).

ETF Exchange-Traded Funds Passively managed basket of stocks that mirrors a particular index and that can be traded like ordinary shares. They trade intraday on stock exchanges, like securities, at market determined prices. In essence, ETFs are index funds that trade like stocks. Introduced in the United States in 1993 and in the UK in 2000, and based on the idea of gaining exposure to a stock index through a single tradable share (eg, iShares).

Ethical investments The investment in specific sectors and instruments through either personal conviction or the view that such companies have a higher potential, for example, investment in funds or companies supporting “green” issues, or the avoidance of so-called “unethical” areas such as animal experimentation, pollution etc.

EUCLID The Euroclear electronic communication system.

EURIBOR A measure of the average cost of funds over the whole euro area based on a panel of banks.

Euro The name of the single European currency used by several countries including Germany, France, Italy, Spain, the Benelux countries but not Switzerland, the UK, Denmark, and Sweden.

Euro-Commercial Paper Unsecured corporate debt with a short maturity structured to appeal to large financial institutions active in the Euro Market.

Eurobond An interest bearing security issued across national borders, usually issued in a currency other than that of the issuer’s home country. Because there is no regulatory protection, only governments and top rated multinational corporations can issue Eurobonds that the market will accept. In order to avoid confusion with the Euro currency they are today sometimes called international bonds.

Euroclear A central securities depository, CSD, using book-entry clearing facility for most Eurocurrency and foreign securities. Is the CSD for Euronext and has links to other CSDs such as Clearstream through an electronic “bridge.”

EuroMTS/MTS Group EuroMTS is part of the MTS Group that manages the pan-European electronic trading platform for government and quasi-government Eurobenchmark bonds as well as other areas of the capital markets. MTS Group is 100% owned by the London Stock Exchange.

European Style Option An option which can only be exercised on the expiry day.

Exception-based processing Transaction processing where straightforward items are processed automatically, allowing staff to concentrate on the items which are incorrect or not straightforward.

Exceptional In accounting, unexpected or one-off losses and gains are known as exceptional. They are part of a company’s pretax profit and although irregular, they are derived from the company’s normal business.

Execution and Clearing Agreement An agreement signed between the client and the clearing broker. This agreement sets out the terms by which the clearing broker will conduct business with the client.

Exchange A market place for trading that is authorized or licensed by a regulator. Has its own members who are subject to the rules of the exchange.

Exchange Delivery Settlement Price (EDSP) The price determined by the derivatives exchanges for physical delivery of the underlying instrument or cash settlement.

Exchange Owned Clearing Organization Exchange or member owned clearing organizations are structured so that the clearing members each guarantee each other with the use of a members default fund and additional funding like insurance.

Exchange Rate The rate at which one currency can be exchanged for another.

Excise Duties Type of tax levied on items such as alcohol, tobacco, and hydrocarbons.

Ex-Date Date on or after which a sale of securities is executed without the right to receive dividends or other entitlements.

Ex-dividend For example, after a stock has become “ex-dividend,” a buyer of stock purchases it without the right to receive the pending interest or dividend payment.

Execute and eliminate order Type of order input into dealing systems like the LSE SETS. The amount that can be traded immediately against displayed orders is completed, with the remainder being rejected.

Execution The action of making transactions by trading in the relevant instruments and markets. Two parties “execute” the trade by being buyer and seller and a broker executes trades on behalf of their clients.

Execution and Clearing Agreement An agreement signed between the client and the clearing broker. This agreement sets out the terms by which the clearing broker will conduct business with the client.

Execution Only or Give-Up Agreement For derivatives the tripartite agreements that are signed by the executing broker, the clearing broker and the client. This agreement sets out the terms by which the clearing broker will accept business on behalf of the client.

Exercise The process by which the holder of an option or a warrant, may take up their right to buy or sell the underlying asset. The process of carrying out a benefit or entitlement, that is, conversion of a convertible bond.

Exercise price (or Strike price) The fixed price, per share or unit, at which an option or warrant conveys the right to call (purchase) or put (sell) the underlying shares or units.

Exit charges Instead of or as well as making an initial charge, some investment funds make a charge if investors sell or redeem their holding within, say, five years.

Exotic Options More complex structured options including look-backs, barriers, baskets, ladders, etc. They have different terms to standardized traded options.

Expenses The broker’s or fund’s costs incurred in buying and selling shares. Also costs associated with sales, marketing, client services, legal expertise etc.

Expiry date The last date on which a holder can exercise their right related to options. After this date an option is deemed to lapse or be abandoned. The date at which a contract or agreement matures or ceases to apply.

Extraordinary General Meeting (EGM) Any meeting of a company’s shareholders other than its AGM.

Ex-Warrants The buyer will not be entitled to warrants that will be distributed to owners/holders of securities after the security goes “ex.”

Face Value The value of a bond, note, mortgage or other security that appears on the face of the issue (if paper), unless the value is otherwise specified by the issuing company. Face value is ordinarily the amount the issuing company promises to pay at maturity. Face value is also referred to as par value or nominal value.

Failed transaction A transaction that does not settle on time, that is, the securities and/or cash are not exchanged as agreed on the settlement date. Also known as a “settlement fail.’

FATCA The US Foreign Account Tax Compliance Act which requires Foreign Financial Institutions (FFIs) to provide details investments held by them in accounts for US citizens.

FATF Financial Action Task Force on Money Laundering.

FCA Abbreviation for the newly created Financial Conduct Authority, a UK regulator (see also FSA).

Federal Reserve Book Entry System CSD for US government securities.

FIA Abbreviation for the Futures Industry Association based in the United States.

Fill or Kill order Type of order input into a market or trading system. It is either completed in full against displayed orders or cancelled.

Final Settlement The completion of a transaction when the delivery of all components of a trade is performed.

Financial Futures/Options contracts Financial futures is a term used to describe a legally binding contract based on financial instruments like currencies, debt instruments and financial indices.

Financial Services Act 2012 The legislation that created the UK Regulators, the Financial Conduct Authority and the Prudential Regulation Authority.

Financial Transaction Tax (FTT) Proposed EU tax on a wide range of financial transactions.

First notice day The first day that the holders of short futures positions can give notification to the exchange/clearing house that they wish to effect delivery.

Fiscal Agent A commercial bank appointed by the borrower to undertake certain duties related to the new issue, such as assisting the payment of interest and principal, redeeming bonds or coupons, handling taxes, replacement of lost or damaged securities, destruction of coupons and bonds once payments have been made.

Fiscal Years In the UK these run from 6 April to 5 April and are the periods of assessment for both income tax and capital gains tax.

Fit and Proper Under UK regulation everyone conducting investment business must be a “fit and proper person.” The Act does not define the term, a function which is left to the regulators such as FSA.

The Financial Information eXchange (FIX) Protocol The Financial Information eXchange (FIX) Protocol is a technical specification for electronic communication of trade-related messages. The FIX Protocol is a series of messaging specifications developed through the collaboration of banks, broker-dealers, exchanges, industry utilities and associations, institutional investors, and information technology providers from around the world. FIX is open and free, but is not software. FIX is integral to many order management and trading systems.

Fixed Income Interest on a security that is calculated as a constant specified percentage of the principal amount and paid at the end of specified interest periods, usually annually or semiannually, until maturity.

Fixed interest securities Another term for “bond,” or a security/instrument carrying a fixed rate of interest.

Fixed leg In a swap, the flow of say a fixed-rate interest payment from one party to the other.

Fixed-rate A borrowing or investment where the interest or coupon paid is fixed throughout the arrangement.

Fixed-rate cont’d In a FRA or coupon swap, the fixed-rate is the fixed interest rate paid by one party to the other, in return for a floating-rate receipt (ie, an interest rate that is to be refixed at some future time or times).

Fixed Rate Borrowing A fixed rate borrowing establishing the interest rate that will be paid throughout the life of the loan.

Fixed rate payer In a swap, the party that pays the fixed-rate.

Fixed rate receiver In a swap, the party that receives the fixed rate.

Flat Position A position which has been fully closed out and no liability to make or take delivery exists.

Flat Yield The yield of a bond calculated as $\frac{\text{Annual Coupon}}{\text{Current market price}}\times 100\%$ Also called the income yield.

Flex Options Contracts which are a cross between OTCs and exchange traded products. The advantage of flex options is that participants can choose various parts of the contract specification such as the expiry date and exercise price.

Flotation When a company has its shares first quoted on the stock market it is said to have “floated” its shares.

Floating leg In a coupon swap, the flow of a floating-rate interest payment from one party to the other.

Floating-rate A borrowing or investment where the interest or coupon paid changes throughout the arrangement in line with some reference rate such as LIBOR.

Floating-rate cont’d In a FRA or coupon swap, the floating-rate is the floating interest rate (ie, an interest rate that is to be refixed at some future time or times) paid by one party to the other, in return for a fixed-rate receipt.

Floating Rate Note (FRN) Bond where each interest payment is made at the current or average market levels, often by reference to LIBOR.

Floating Rate Payer Payer of floating rate in a coupon swap.

Floating Rate Receiver Receiver of floating rate in a coupon swap.

Floor A package of interest rate options whereby, at each of a series of future fixing dates, if an agreed reference rate such as LIBOR is lower that the strike rate, the option buyer received the difference between them, calculated on an agreed notional principal amount for the period until the next fixing date. See cap, collar.

Floor brokerage The process of delegating the execution of futures and options to another counterparty.

Foreign Bond Bond issued in a domestic market in the domestic currency and under the domestic rules of issuance by a foreign issuer (for example, Samurai bonds are bonds issued by issuers of other countries on the Japanese market).

Foreign Currency Fund A mutual fund investing in foreign currencies.

Foreign Exchange Exchange of one currency into another one.

Forex Abbreviation for foreign exchange (currency trading).

Forward Market/Contract Where a price is agreed now for delivery of goods in the future. Used in currency, securities and commodities markets, often in conjunction with dealing in immediate delivery (see Spot Market) as a safety net. Forward contracts in currencies are a fixed rate for buying and selling at a date forward in time. Also known as an outright forward

Forward Rate Agreements (FRAs) An agreement where the client can fix the rate of interest that will be applied to a notional loan or deposit, drawn or placed on an agreed date in the future, for a specified term.

Forward Delivery Transactions that involve a delivery date in the future.

Forward Swap A swap agreed today that starts at some point in the future.

Forwardation Where a dealer purchases goods on the Spot Market to meet his future obligations, especially when those goods are cheaper now than quoted on the Forward Market.

Forwards Are very similar to futures contracts but they are not usually traded on an exchange. They are not marked to market daily but settled only on the delivery date.

Franked Income Where tax has already been paid on income.

Free of Payment Refers to the movement of currencies where there is no associated countervalue at the time of settlement due to timing differences in the payment systems or is a situation which is not dependent on the simultaneous payment of the cash value during the movement of assets, for example, in a stock loan or collateral movement. Movement of securities with no corresponding payment, for example, switching assets between custodians.

Front End Loading The deduction of costs from the initial contributions to savings vehicles such as investment funds, endowment policies or personal pension plans. Also applies to mortgages and loans where although spread throughout the term, in the early years the bulk of the repayment is of interest with very little reduction in the capital content. Toward the end of the term, the interest diminishes and virtually all the repayment is of capital.

Front Running The illicit utilizing by brokers and market-makers of advance warning or information about orders or trades for personal or corporate profit.

FSA Financial Services Agency (Japan). Previously the mnemonic for the Financial Services Authority the UK regulator now replaced by the FCA and PRA.

FSA Seychelles The Seychelles Financial Services Authority.

FSC Mauritius Financial Services Commission Mauritius.

FT Index The Financial Times Ordinary Share Index consists of 30 large companies across a broad field and gives an indication of share price trends. The larger Index, the FTSE 100 (known as the “Footsie”) provides a wider indication of 100 leading companies on the Stock Market. All stock markets have an index, for example, The Dow Jones in the US, the DAX in Germany or the Nikkei in Japan.

FTSE 100 index Main UK share index based on 100 leading shares.

FTSE Mid 250 UK share index based on the 250 shares immediately below the top 100.

Fund Administrator Internal team or an organization appointed to administer a fund. Responsibilities can include calculating the NAV, maintaining records of the funds activities and dealing with investors in the fund. Associated terms are Fund Support, Fund Operations, Fund Accounting, and Transfer Agency.

Fund Administration Agreement Sets out the legal basis and terms and conditions with a third party administrator.

Fund Manager Individuals or specialists companies responsible for investing the assets of a fund in such a way as to maximize its value. They do this by following a strategy to buy and sell equities and other financial instruments. See also asset manager and investment manager.

Funds General term for mutual funds, unit trusts and OEIC’s (open ended investment companies) and other collective investment schemes.

Fund of Funds A fund that specialises in buying shares in other funds rather than individual securities. Common example is a Fund of Hedge Funds which invests in the shares of Hedge Funds and is in turn invested in by institutions like pension funds.

Fungible Contract A futures or other contract with identical administration in more than one financial center which can be settled in one center against another.

Futures A derivative product traded on an exchange which is a contract in the form of an agreement to buy or sell an asset at a certain time in the future for a certain price that is agreed today.

Future Value The amount of money which can be achieved at a given date in the future by investing (or borrowing) a given sum of money now at a given interest rate, assuming compound reinvestment (or refunding) of any interest payments received (or paid) before the end.

Futures and Options Fund (FOF) Type of authorized unit trust that can invest partially in derivatives.

Futures Strip A series or stream of short-term futures contracts which when grossed up will generate a return for a term equal to the length of the strip.

GABRIEL The FCA online regulatory reporting system for the collection, validation, and storage of regulatory data.

Geared Futures and Options Fund (GFOF) Type of authorized unit trust that can invest in derivatives.

Gearing The characteristic of for example derivatives which enables a far greater reward for the same, or much smaller, initial outlay. It is the ratio of exposure to investment outlay, and is also known as leverage.

Generic Swap A generic swap is one for a standard period, against a standard fixing benchmark such as LIBOR. Also known as a “plain vanilla” swap.

GFSC Guernsey Financial Services Commission.

Gilt Long standing term used to describe a domestic sterling-denominated long-term bond backed by the full faith and credit of the United Kingdom and issued by the Treasury.

Gilt Edged Market Makers (GEMMs) A firm that is a market maker in gilts. Also known as a primary dealer.

Gilt Edged Security UK government borrowing.

Give-Up The process of giving a trade to a third party who will undertake the clearing and settlement of the trade.

Global Bond A (temporary) certificate representing the whole of a bond issue.

Global Certificate Certificate held at the Central Depository recording the total issue of a bond.

Global Clearing The channeling of the settlement of all futures and options trades through a single counterparty or a number of counterparties geographically located.

Global Custodian Institution that safekeeps, settles, and performs processing of income collection, tax reclaim, multicurrency reporting, cash management, foreign exchange, corporate action, and proxy monitoring etc. for clients’ securities in all required marketplaces. Does so by utilizing subcustodians in each jurisdiction.

Global Depository Receipt (GDR) A security representing shares held in custody sold to investors in various countries.

Gold Widely used commodity and regarded as a safe haven in times of uncertainty.

Good Delivery Proper delivery of certificates that is negotiable and complete in terms of documentation or information.

GRA The Gibraltar Regulatory Authority.

Granter Another term for a person who has sold an option position to a buyer.

“Greeks” A collective term for delta, gamma, theta, and vega, which relate to the movement in price of an option as a result of the movement in the underlying price, the rate of that movement and time erosion.

Grey Market Generally speaking it is a market for a new issue before the securities have been distributed to subscribers.

Gross A position which is held with both the bought and sold trades kept open.

Gross Domestic Product (GDP) A measure of the country’s entire output.

Gross Redemption Yield (GRY) The annual return on owning a bond, allowing both for interest and profit on redemption.

Grossing Up The process of calculating the gross income from a figure net of taxation.

Growth Stock Companies with or with the expectation of a rapid rise in expansion and subsequent share value.

GSCC Government Securities Clearing Corporation—clearing organization for US Treasury securities.

Guaranteed Bond Bonds on which the principal or income or both are guaranteed by another corporation or parent company in case of default by the issuing corporation.

Haircut Amount by which an asset being used as collateral is discounted. Can also be called margin.

Hard Commodities Commodities such as tin or zinc. Futures on them are traded on the London Metal Exchange.

Hedge Fund Vary enormously but essentially funds that are investing in a wide variety of instruments and strategies often designed to generate exceptionally high return but with higher risk of loss. Can gear the fund, short sell and invest in credit risk and other types of investments that retail funds cannot use. Sales limited to high net worth individuals and other funds.

Hedge Ratio Determining the ratio of the futures to the cash position so as to reduce price risk.

Hedging A trading method which is designed to reduce or mitigate risk. Reducing the risk of a cash position in the futures instrument to offset the price movement of the cash asset. A broader definition of hedging includes using futures as a temporary substitute for the cash position.

High risk Volatile investments that rise and fall sharply in value.

High Water Mark A benchmark used in the calculation of performance fees for investment managers.

HKEC/HKE/HKEx The Hong Kong Exchanges and Clearing comprised of the Hong Kong Futures Exchange, The Stock Exchange of Hong Kong Ltd and The Hong Kong Securities Clearing Company Ltd. The Central Clearing & Settlement System (CCASS) is used for securities and the Derivatives Clearing & Settlement System (DCASS) is used for derivatives. There is also the SEOCH, the Stock Exchange of Hong Kong Options Clearing House.

Holder A person who has bought an open derivatives contract.

Holder of Record The party whose name appears on a company’s stockholder register at the close of business on record date. That party will receive a dividend or other distribution from the company in the near future.

Holding Company A company which owns more than 50% of the shares of another company as its holding company.

Home State Regulation Under the EU regulations an investment business is authorized in the place of its head office and registered office. This home state authorization entitles it to conduct business in any member state of the European Union.

Host State Regulation Any European investment business operating outside its home basis is regulated by its host for its Conduct of business.

Hurdle Rate A benchmark used in the calculation of performance fees for investment managers.

ICE/ICE Clear See Intercontinental Exchange.

ICSD An International Central Securities Depository which clears and settles international securities or cross-border transactions through local CSD’s, for example, Clearstream, Euroclear, DTC.

IFSRA Irish Financial Services Regulatory Authority.

Immobilization The storage of securities certificates in a vault in order to eliminate physical movement of certificates/documents in transfer of ownership.

Implied Repo Rate The rate of return before financing costs implied by a transaction where a longer-term cash security is purchased and a futures contract is sold (or vice versa).

In-the-money A call option where the exercise price is below the underlying share price or a put option where the exercise price is above the underlying share price.

Income Enhancement Strategy that uses written call options to generate premium against underlying assets held.

Income Fund A fund that concentrates on finding companies whose dividends are likely to be above average or bonds with good yields so that income can be periodically distributed to investors.

Income Tax An annual tax on the income of an individual.

Independent Clearing Organization The independent clearing organization is quite separate from the actual exchange or market that it clears. Increasingly clearing organizations are becoming part of the exchange or owned by exchanges, for example, ICE, LSE acquiring LCH.Clearnet etc.

Index funds Funds that invest to perform in line with a stock market index, for example, the FTSE 100. Also known as “tracker” funds.

Index linked bond Bond whose interest payment and redemption value are linked to the retail prices index.

Index Swap A swap where payments on one or both of the legs are based on the value of an index, such as an equity index. See Equity Index Swap.

Indexation Where investments, wages, contributions etc. are linked to a benchmark such as inflation. For example, a contribution to a pension scheme may increase by 3% or the retail price index, whichever is the higher.

Indirect Market Participation Nonbroker/dealers, such as institutional investors, who are active investors/traders but who access markets via an intermediary like a broker.

Individual Savings Account A UK savings vehicle where the individual can save either on a regular monthly or lump sum basis with exposure to varying degrees of risk but with tax free concessions. An ISA is a “wrapper” into which cash, unit trusts and mutual funds are placed to get the tax benefit.

Inflation A period of generally rising prices and devaluation of money through a number of causes such as rises in fuel, manufacturing and labor costs. For example, high salary or wage demands not covered by productivity.

Inflation Accounting The allowing for the impact of inflation in preparing company accounts.

Initial charge/Fee A charge—typically 0.5–5%—that is paid to cover an investment manager’s expenses, such as commission, advertising, administration, and dealing costs.

Initial Margin or Deposit The deposit that the clearing house calls as protection against a default of a contract. It is returnable to the clearing member once the position is closed. The level is subject to changes in line with market conditions. Clearing brokers in turn call initial margin from their clients.

Inland Revenue/HMRC The government department responsible for the administration and collection of tax in the UK now called Her Majesty’s Revenue and Customs.

Inside Information Information relating to a security which is not publicly known and which would affect the price of the security if it was public.

Insider Directors, employees, shareholders, and other persons having inside information.

Insider Dealing The criminal offence whereby those with unpublished price sensitive information deal, advise others to deal or pass the information on. Maximum penalty is seven years jail and an unlimited fine.

Institutional Investor An institution which is usually investing money on behalf of others. Examples are mutual funds and pension funds.

Integration The third stage of money laundering, in which the money is finally integrated into the legitimate economy. See placement, layering.

Interbank Market A market for transactions exclusively or predominantly within the banking system. In most countries, the market for short-term money is an Interbank market since banks borrow and lend amongst one and another in order to balance their books on a daily basis. Nonbank entities may or may not be permitted to participate.

Interbank Rates The bid and offered rates at which international banks place deposits with each other.

Intercontinental Exchange (ICE)/ICE Clear Intercontinental Exchange® operates global commodity and financial products market places and also runs ICE Clear United States, Europe, and Canada plus ICE Clear Credit for credit derivatives clearing. Owns the NYSE Euronext market.

Inter Dealer Broker (IDB) Member of the London Stock Exchange that acts as a link between firms to enable them to trade with each other anonymously.

Interest Rate Futures Can be based on a debt instrument such as a Government Bond or a Treasury Bill or Note as the underlying product and require the delivery of a bond or will be cash settled to fulfil the contract. Contracts based on interest rates, for example, 3month Sterling Interest Rate.

Interest Rate Cap An option product where the holder (buyer) is guaranteed a maximum borrowing cost over a specified term at a rate of his choosing. A premium is required.

Interest Rate Collar An option product where the holder (buyer) is guaranteed a maximum and minimum borrowing cost over a specified term at rates of his choosing. A premium may be required, but may net to zero. Involves the simultaneous trading of caps and floors.

Interest Rate Floor An option product where the holder (buyer) is guaranteed a minimum yield on a deposit over a specified term at a rate of his choosing. A premium is required.

Interest Rate Guarantee Also IRG. Effectively an option on a forward rate agreement. An IRG can be either a borrower’s option (ie, a call on an FRA0 or a lender’s option (ie, a put on an FRA).

Interest Rate Swap An agreement to exchange interest related payments in the same currency from fixed rate into floating rate (or vice versa) or from one type of floating rate to another.

Interim dividend Dividend paid part way through a year in advance of the final dividend.

Intermediary A bank, broker or financial institution which accesses markets on behalf of a client or puts two counterparties together for a fee usually called a commission.

International Capital Markets Association ICMA/IPMA/ISMA The International Primary Markets Association merged with the International Securities Market Association to create the International Capital Markets Association.

International Equity An equity of a company based outside the UK but traded internationally

International Financial Centre A designated “territory” or location sometimes with very low tax rates and a different type of regulation (an “offshore center” like the Cayman Islands or Dublin) to the rest of the location which is home to domestic investors and companies. Also offers international banking, investment and other financial services. In general terms financial center also means locations such as New York, London, Frankfurt, and Tokyo.

International Monetary Fund Set up by the Bretton Woods agreement into which member countries contribute to provide assistance during periods of economic instability, thereby smoothing out the world trade cycle and avoiding a major plunge into depression as seen in the 1930s.

International Securities Identification (ISIN) A coding system developed by the ISO for identifying securities. ISINs are designated to create one unique worldwide number for any security. It is a 12 digit alpha/numeric code.

International Standards Organization (ISO) An international federation of organizations of various industries which seeks to set common international standards in a variety of fields.

Interoperability Ability of diverse systems, teams or organizations to work together.

Interpolation The estimation of a price or rate, usually for a broken date in a swap, from two other rates or prices, each of which is for a date either side of the required date.

In-the-money An option whose strike is more advantageous to the option buyer than the current market rate. See at-the-money, out-of-the-money.

Intervention The process whereby the Bank of England acts to influence the exchange rate for sterling by buying it to support its value or selling it to weaken it.

Intra-Day Margin Additional margins calls over and above the initial margin which the clearing organization can call during the day when there is a very large movement up or down in the price of the contract.

Intrinsic Value The amount by which an option is in-the-money.

IRS See Interest Rate Swap. Also the Internal Revenue System, tax system, in the United States.

Investment Banks A bank that has multiple activities, that is, Banking, principal trading, brokerage, asset management etc. Originally “investment banking” was about providing services to key corporate and other institutional clients including financing, advisory, and other such activities.

Investment Business Dealing, advising or managing investments. Those doing so need to be authorized.

Investment funds General term for unit trusts and OEIC’s (open ended investment companies) and their equivalents in other countries like SICAVS, Investment Companies with Variable Capital (ICVCs) and mutual funds as well as nonretail funds like hedge funds and private equity funds.

Investment Services Directive (ISD/MiFID) European Union Directive imposing common standards on investment business. Is now part of the Markets in Financial Instruments Directive (MiFID).

Investments Items defined by regulators and covered by their regulations used in the investment process. Can include shares, bonds, options, futures, life assurance, investment funds and pensions, as well as commodities, and alternative investments.

Investment Grade A grading level that is used by certain types of funds for determining assets that are suitable for investment in by the fund. Can be based on grading issues by organizations such as S & P, Fitch, or Moodys.

Investment Manager Either a person or a firm that manages assets and makes investment decisions. See also fund manager and asset manager.

Investment Trust (Company) Company quoted on an Exchange which has a fixed number of shares. The value of these shares is determined by supply and demand. The shares do not therefore normally reflect the value of its underlying assets and can be at a premium or discount on net asset value. Basically a trading investment company, it can borrow to provide gearing, can invest in a very wide range of securities, both listed and unlisted, and can hedge any currency risks.

Invoice Amount The amount calculated under the formula specified by the futures exchange, which will be paid in settlement of the delivery of the underlying asset.

IOSCO Abbreviation for the International Organization of Securities Commissions.

Irredeemable Gilt/Bond A gilt or bond with no fixed date for redemption. Investors receive interest indefinitely. Can also called a perpetual bond.

ISDA Abbreviation for the International Swaps and Derivatives Association, previously known as the International Swap Dealers Association. Many market participants use ISDA documentation across many products when trading over the counter.

ISSA An abbreviation for The International Securities Services Association.

Issue/Issuers Stocks or bonds sold (issued) by a corporation or government entity at a particular time. They are referred to as issuers.

Issue Price The price at which new securities or other financial instruments are offered in the primary market, that is, the offer price in an initial public offering.

Issuer Legal entity that issues and distributed securities and other instruments.

Issuing Agent Agent (eg, bank) who puts original issues out for sale.

Issuing House Institutions that issue shares for companies wishing to raise capital by underwriting shares issued direct to the public through the company or by buying and selling the shares itself.

“J” Curve A term used to describe the change in an investors capital from negative to positive during the duration from capital drawdown to distribution of return of a private equity fund.

JASDEC Japan Securities Depository Centre—the CSD for Japan.

JFSC The Jersey Financial Services Commission.

JSE TradeElect The Johannesburg Electronic Trading system.

JSCC Abbreviation for Japan Securities Clearing Corporation—clearing organization in Japan.

JSE Abbreviation for the Johannesburg Stock Exchange.

Junk Bonds High-risk bonds that have low ratings or are in default, where there is a risk of nonpayment of obligations such as interest or bond redemption.

Knock-in-option An option that is activated if a trigger level is reached. See barrier option, knock-out option.

Knock-out option An option that is cancelled if a trigger level is reached. See barrier option, knock-in option.

Know Your Customer (KYC) The conduct of business rule requiring investment advisers to take steps, before giving investment advice, to determine the financial position and investment objectives of the client.

Korea Securities Depository (KSD) CSD and clearing organization for the Korean Stock Exchange.

Large caps The shares of big companies like the “Blue Chips” or those with large market capitalization which is the number of shares issued multiplied by the current share price.

Last notice day The final day that notification of delivery of a futures contract will be possible. On most exchanges all outstanding short futures contracts will be automatically delivered to open long positions.

Last trading day Often the day preceding last notice day which is the final opportunity for holders of long positions to trade out of their positions and avoid ultimate delivery.

Layering The second stage of money laundering, in which the money is passed through a series of transaction to obscure its origin. See placement, integration.

LCH/LCH.Clearnet London Clearing House now merged with Clearnet to create LCH.Clearnet. The London Stock Exchange has a major stake in the firm.

Lead Managers In the securities markets the description given to the investment bank/broker appointed to handle a new issue. Also used to identify the lead party in a syndication.

LEI Legal Entity Identifier—important tool for client due diligence.

Legal Title or Ownership Legal title to property is held by the person who controls the property and in whose name the property is registered.

Leverage The magnification of gains and losses by only paying for part of the underlying value of the instrument or asset; the smaller the amount of funds invested, the greater the leverage. It is also known as gearing. In funds the term can apply to the borrowing of large amounts of capital over and above the subscription capital, which then creates a liability in the fund. If the strategy does not work the investors could lose all their capital as the fund clears the liabilities first. Example would be a Leveraged Buy Out Fund (LBO).

Liability Swap A swap which is coupled with for instance a bond in order to change the structure of the bond. The bond may already have been issued by the borrower or it may be issued together with the swap as a package.

LIBID The London inter-bank bid rate. The rate at which one bank will lend to another.

LIBOR The London inter-bank offered rate. It is the rate used when one bank borrows from another bank. It is the benchmark used to price many capital market and derivative transactions. Following a major rigging scandal changes to the way LIBOR is calculated have been made.

LIBOR-in-arrears swap A swap in which LIBOR is set usually two days prior to the payment date.

LIFFE The London International Financial Futures and Options Exchange, now part of NYSE Euronext and referred to as NYSE Liffe.

LIFFE Connect (Connect) Electronic dealing system developed by LIFFE and now used to trade derivatives on Euronext.

Limit Order Type of order input into the LSE SETS. If not completed immediately the balance is displayed on the screen and forms the Order Book.

Limit Order cont’d An order in which a customer sets the maximum price he is willing to pay as a buyer or the minimum price he is willing to accept as a seller.

Limited Partner The investor in a partnership.

Line of Credit A commitment by a bank to make loans to a borrower up to a specified maximum during a specified period.

Linked Forex When the currency is purchased via a fx trade to cover the local cost of a securities trade.

Liquidation Term used to describe the closing of open positions or the winding up of a fund or company.

Liquidator Person appointed to sell the corporate assets of a company in receivership, distributing the proceeds among the creditors.

Liquidity A liquid asset is one that can be bought or sold at any time or converted easily and rapidly into cash without a substantial loss of value. In the markets, a security is said to be liquid if the spread between bid and asked price is narrow and reasonable size can be done at those quotes.

Liquidity risk The risk that a party may not be able to close out a position because the market is illiquid.

Listed company Company which has been admitted to listing on a stock exchange and whose shares can then be dealt on that exchange.

Listed Securities Securities Listed on a stock exchange that can be traded on this exchange. Called the secondary market.

Listing Status applied for by companies whose securities are then listed on a stock exchange and available to be traded. The listing was a capital raising event in the primary market.

Listing Particulars Detailed Information that must be published by a company applying to be listed. This is typically via a Prospectus or Offering Document.

Listing Rules Rule book for listed companies which governs their behavior. Commonly known as the Yellow Book.

LLC Limited Liability Company, many investment funds are set ups a LLC’s.

LLP Limited Liability Partnerships, some private funds are set up as LLP’s with a General Partner who makes the investment decisions and limited partners provide the monies for investment. Tax is sometimes a factor in using an LLP.

Lloyds of London World’s largest insurance market.

Loan Stock See bonds.

Local An individual member of an exchange who trades solely for their own account.

Local Currency Currency of the country of settlement.

Lombard Rate The rate of interest at which the German Bundesbank lends to commercial banks when the loans are against Treasury Bills or bills of exchange.

London Inter Bank Offer Rate (LIBOR) Rate at which banks lend to each other which is often used as the benchmark for floating rate loans (FRNs).

London Metal Exchange (LME) Market for trading in derivatives of metals such as copper, tin, zinc etc., as well as plastics. Is merging with the HKEC.

London Stock Exchange (LSE) Market for trading in securities. Formerly known as the International Stock Exchange of the United Kingdom and Republic of Ireland or ISE.

Long/Long position A bought position in a derivative or security that is held as an open position, that is, an investors buys BP shares and is termed as being “long” of BP.

Long Coupons 1.    Bonds or notes with a long current maturity; 2.    A coupon on which the period is longer than the others or the standard coupon period.

Long-dated Gilts with more than 15 years until redemption.

Long Position Refers to an investor’s account in which he has more shares of a specific security than he needs to meet his settlement obligations.

Long/Short Fund A hedge fund strategy involving being long and simultaneously short of different assets with the possibility of positive returns on both positions.

Look Back Option An option that gives the holder the right to exercise the option at the most advantageous price reached by the underlying asset during the look back period. This is often the life of the option.

Lot A term used to describe the standard unit of trading for futures and options. The term “contract” is also used.

Low risk Where the value of an investment is unlikely to fall, although there is no guarantee.

Managed Fund A collective investment scheme with an active manager. A fund for individual investors but managed collectively often using futures contracts.

Management Expense Ratio (MER) A measurement of the expenses associated with the management of an investment fund.

Manager of Managers Unlike a fund of funds where the fund manager selects funds to buy, the owner/sponsor of a fund appoints several managers to run the portfolios (Multi Manager Fund). The Manager of Managers is responsible, not just for identifying competitive managers, but for monitoring the overall portfolios at a stock-by-stock, manager-by-manager level. The emphasis is on a clear and consistent investment process.

Manager’s report Available periodically and at least annually, it details the exact position of the fund, for example, its investments, the manager’s investment commentary, the performance of the portfolio etc.

Mandate Document that sets out the terms under which the investments of a fund must be managed. Will detail investments that are not permitted etc. Managers face penalties for breaching a fund’s mandate.

Mandatory event (Corporate Action) A corporate action which affects or changes the structure of the securities without giving any choice to the security holder.

Mandatory Quote Period Time of day during which market makers in equities are obliged to quote prices under London Stock Exchange rules.

Margin Initial margin is collateral placed by one party with a counterparty or clearing house at the time of a deal, against the possibility that the market price will move against the first party, thereby leaving the counterparty with a credit risk.

Margin cont’d Variation margin is a payment made, or collateral transferred, from one party to the other because the market price of the transaction or of collateral has changed. Variation margin payment is either in effect a settlement of profit/loss (eg, in the case of a futures contract) or the reduction of credit exposure.

Margin cont’d In a loan, margin is the extra interest above a benchmark such as LIBOR required by a lender to compensate for the credit risk of that particular borrower.

Margin cont’d Money or assets that must be deposited by participants in securities lending, repo’s or OTC derivatives markets as a guarantee that they will be able to meet their commitments at the due date.

Margin (trading on) Facility provide to hedge funds by a prime broker.

Marginal Rate of Tax The rate of tax which will apply to the next unit of income.

Mark-To-Market The process of revaluing the position in an OTC or exchange traded product each day. It is the using the difference between the closing price on the previous day versus the current closing price. For exchange traded products this is referred to as variation margin.

Market Description of any organization or facility through which items are traded. All exchanges are markets.

Market Counterparty A person dealing as agent or principal with the broker and involved in the same nature of investment business as the broker. This also includes fellow members of the SFA or trading members of an investment exchange, for those products only where they are members.

Market Forces This is supply and demand allowing buyers and sellers to fix the price without external interference.

Market Maker A trader who works for an organization such as an investment bank. They quote bids and offers in the market and are normally under an obligation to make a price in a certain number of contracts. They create liquidity in the contract by offering to buy or sell.

Market Price In the case of a security, the market price is usually considered as the last reported price at which the stock or bond has been sold.

Market risk Also position risk. The risk that the market value of a position falls or that it becomes illiquid and cannot be acquired/disposed of.

Market Value The price at which a security is trading and could presumably be purchased or sold.

Markit Markit is a leading, global financial information services company. The company provides independent data, valuations and trade processing across all asset classes in order to enhance transparency, reduce risk and improve operational efficiency. Worked in collaboration with DTC to create MarkitSERV.

Master Agreement This agreement is part of the ISDA documentation for OTC transactions and is signed between the client and the broker. It covers the basic terms under which the client and broker wish to transact business. Each individual trade has a separate individual agreement with specific terms known as a confirmation.

Matching (Comparison) Another term for comparison (or checking); can be via a matching system to compare trades and ensure that both sides of trade correspond. Is a clearing process.

Maturity The date on which the principal or nominal value of a bond becomes due and payable in full to the holder. The time at which a derivative ceases to exist.

MCSD The Misr for Clearing, Settlement, and Depository, clearing house and depository for the Egyptian Stock Exchange.

Medium Dated Bond or Note with a time to maturity typically somewhere between 1 and 15 years. Varies from country to country but in the UK, Gilts due to be redeemed within the next seven to fifteen years.

Medium risk Where the value of an investment may rise as well as fall in the short term but total loss of value is unlikely.

Merchant Banks Often relatively small but prestigious financial institutions, who deal mainly with companies and wealthy individuals in providing a range of financial services including, among others, corporate finance and portfolio management.

Mergers and Acquisition (M&A) Divisions of investment banks or merchant banks responsible for advising on takeover and merger activity. Usually work with the corporate finance department and is often kept as a single unit.

MFSA Malta Financial Services Authority.

MiFID In Europe the Markets in Financial Instruments Directive (MiFID) has replaced the Investment Services Directive (ISD). MiFID extended the coverage of the ISD regime and introduced new and more extensive requirements to which firms will have to adapt, in particular in relation to their conduct of business and internal organisation. Reform of the regulation introduced MiFID II and now MiFID III is in process.

Mismatch Risk The risk that arises in a swap portfolio when the terms of two off-setting swaps do not exactly match, for example, a mismatch between 3- and 6-month LIBOR.

Model risk The risk that the computer model used by a bank for valuation or risk assessment is incorrect or misinterpreted.

Model Code for Securities Dealing In the UK relates to directors dealing in their own company’s securities. Prohibits them from doing so during the two months before results are announced.

Modified following The convention that if a settlement date in the future falls on a nonbusiness day, the settlement date will be moved to the next following business day, unless this moves it to the next month, in which case the settlement date is moved back to the last previous business day.

Monetary Authority of Singapore (MAS) The overall investment regulatory body in Singapore.

Monetary Interest Rate The actual interest rate received in money terms.

Money Laundering The process where criminals attempt to conceal the true origin and ownership of the proceeds of their criminal activities and to legitimize these proceeds by introducing them into the mainstream of financial activities.

Money Market The market for the purchase and sale of short-term financial instruments. Short term is usually defined as less than one year to maturity of the instrument.

Money Market Fund An open-end mutual fund that invests in commercial paper, banker’s acceptances, repurchase agreements, government securities, and other highly liquid and safe securities. The fund pays money market rates of interest. Many money market funds are part of fund families; investors can switch their money from one fund to another and back again without charge.

Money Rate of Return Annual return as a percentage of asset value.

Money Supply Measure of the money available in the economy.

Monti Titoli CSD for Italian Securities that is owned by the London Stock Exchange Group.

Moody’s Investment Service Moody’s is one of the two most popular bond rating agencies in the United States. The other agency is Standard and Poor’s.

Mortgage A form of security on borrowing commonly associated with home borrowing.

Mortgage-Backed Security Security backed by an investment company that raises money from shareholders and invests it in stocks, bonds or other instruments (unit trust, investment fund, SICAV—BEVEK).

Multilateral Trade Facility (MTF) Electronic trading platforms set up as alternatives to established bourses and exchanges often citing speed and cheapness as advantages Examples: Chi-X, Turqouise.

Multilateral netting Trade between several counterparties in the same security are netted such that a counter-party makes only one transfer of cash or securities to another party or to a central clearing system. Applies only to transactions due for settlement on the same day.

Mutual collateralization The deposit of collateral by both counterparties to a transaction.

Mutual Fund Term used particularly in the United States to describe a fund operated by an investment company that raises money from shareholders (investors) and invests it in stocks, bonds, or other instruments (examples unit trust, investment fund, SICAV).

Naked Option An option bought or sold for speculation, with no offsetting existing position in the underlying behind it.

Naked Short Selling A strategy where an investor or fund manager believes that a security will fall in price and sells the security, which they do not own, with the expectation of buying back at a lower price.

Naked Writing Where the seller does not own the stock corresponding to the call option which he has sold and would be forced to pay the prevailing market price for the stock to meet delivery obligations, if called.

Names Individuals of Lloyds of London who join together in syndicates to write insurance business. Their liability is unlimited and therefore all their personal wealth is at risk.

NASDAQ National Association of Securities Dealers Automated Quotation system, an electronic market in the United States, Dubai, and Europe.

National Securities Depository Depository for the National Stock Exchange in India.

Net Asset Value (NAV) In investment funds, the market value of the fund share or unit. It is common practice for an investment trust to compute its assets daily, or even twice a day, by totaling the closing market value of all securities and assets (ie, cash) owned. All income, liabilities and expenses are deducted, and the balance is divided by the number of shares outstanding. The resulting figure is the net asset value per share. Hedge funds, property funds, and closed end funds will calculate the NAV periodically.

Net Present Value (NPV) The net total of several present values (arising from cash flows at different future dates) added together, some of which may be positive and some negative.

Netting Trading partners offset their positions thereby reducing the number of positions for settlement and also the counterparty risk. Netting can be on a bilateral, multilateral, or continuous net settlement basis. Used by clearing houses who net members trades for settlement.

New Issues Companies raise capital by issuing new securities. New issue is the name given to the bonds or stocks offered to investors for the first time.

Nikkei Dow Index Main share index in Japan.

Nikkei Futures Futures contracts traded on the Tokyo Stock Exchange, SGX, and OSAKA exchange.

Nil paid rights price Ex-rights price less the subscription price of a rights issue.

No-Par Value (NPV) Stock with no cash value assigned on the issuance of certificates. Note: NPV is also an abbreviation for net present value.

Nominal Amount Monetary value stated on the face of a security (principal value, par value). Securities processing: number of securities to deliver/receive.

Nominal value of a bond The value at which the capital, or principal, of a bond will be redeemed by the issuer. Also called par value or face value.

Nominal value of a share The minimum price at which a share can be issued. Also called par value. A share where the minimum price or more has been paid on issue is known as “fully paid.”

Nominated Advisor Firm appointed to advise directors of companies looking to list on the LSE’s Alternative Investment Market on their responsibilities. Role can be combined with that of nominated broker.

Nominate Broker Firm appointed to assist dealing in AIM listed securities.

Nominee An organization that acts as the named owner of securities on behalf of a different beneficial owner who remains anonymous to the company.

Noncallable Cannot be redeemed by the issuer for a stated period of time from date of issue.

Nonclearing member A member of an exchange who does not undertake to settle their business. This type of member must appoint a clearing member to register all their trades at the clearing organization.

Noncompetitive bid In an auction, bidding for a specific amount of securities without mentioning a price. Usually, the price paid will be equal to the average of the accepted competitive bids.

Noncumulative preference share If the company fails to pay a preference dividend the entitlement to the dividend is simply lost. There is no accumulation.

Nondeliverable forward(NDF) A forward contract that is cash settled. Example: A foreign exchange forward outright where, instead of each party delivering the full amount of currency at settlement, there is a single net cash payment to reflect the change in value between the forward rates transacted and the spot rate two working days before settlement.

Nonprivate Customer A person who is not a Private Customer or who has requested to be treated as a Nonprivate Customer.

Nonprofit Policy An endowment or whole life policy where the benefit is a guaranteed sum only.

Nonvoting shares Some companies have two types of shares. In such cases, for example, an investment fund, voting shares are restricted to owners and directors to maintain control, whereas nonvoting shares are held by investors. Where a corporate has issued nonvoting shares they generally are priced lower than the voting ordinary shares as they have less shareholder rights.

Normal Bonus The annual bonus paid on a with profits policy.

Normal Market Size (NMS) Minimum size in which market makers must quote bids and offers on LSE. Also the minimum shares that can be transferred, on most markets this is one share.

Nostro A bank’s nostro account is its currency account held with a foreign bank.

Nostro reconciliation Checking the entries shown on the bank’s nostro account statement with the bank’s internal records (the accounting ledgers) to ensure that they correspond exactly.

Note Bonds issued with a relatively short to medium maturity are often called notes.

Notional The notional amount of a transaction where the value itself is not transferred in settlement. For example, contracts for differences require a notional principal amount on which settlement can be calculated but that notional amount is not settled. An interest rate swap would be another example.

Novation The process where registered trades are cancelled with the clearing members and substituted by two new ones—one between the clearing house and the clearing member seller, the other between the clearing house and the clearing member buyer. The legal transference of an interest or obligation to another party that replaces the original party.

NSCC National Securities Clearing Corporation—clearing organization for US shares.

NYMEX New York Mercantile Exchange; the largest energy derivative exchange and part of the Chicago Exchanges Group.

NYSE New York Stock Exchange which acquired Euronext but is now part of ICE

OASYS Trade Confirmation system for US brokers operated by Thomson Financial Services.

OATs Obligations Assimilables du Tresor—a 7–10 year French Treasury bond.

Obligation netting An arrangement to transfer only the net amount (of cash or a security) due between two or more parties, rather than transfer all amounts between the parties on a gross basis.

OEICs A style of investment funds similar to unit trusts and common in European countries. Abbreviation for Open Ended Investment Company. OEICs are investment funds that “pool” investor’s money. ICVC (Investment Company with Variable Capital) is a newer name for the well-established OEIC structure. In Europe a common product that is an open ended investment structure is a SICAV. Unit trusts differ from OEICs & ICVCs, in that they often have dual pricing, with a bid to offer price spread. OEICs/ICVCs have a single price for buying and selling, based on the daily valuation of the underlying investments carried out at their mid-market price. While technically speaking the structure of the three types of funds are different, from an investor’s perspective they are all collective investments.

Off-balance sheet A transaction whose principal amount is not shown on the balance sheet because it is a contingent liability or settled as a contract for differences. It is not an asset.

Off-Market Coupon Swap A swap in which the coupon is above or below the current market value.

Offer for Sale Historically, the most popular form of new issue in the UK for companies bringing their securities to the stock market for the first time. The company offers its shares to the general public. Often called an IPO, initial public offering and is made via the issuing of a Prospectus or Offering Document.

Offering Memorandum An offering document or letter which sets out the terms of the offer of shares in a company or fund.

Offer Price The price at which a trader or market maker is willing to sell a contract.

Office of Fair Trading (OFT) Government department which advises the Secretary of State for Trade and Industry on whether or not a proposed takeover should be referred to the MMC for full investigation.

Offshore Relates to locations outside the regulation, tax, and legislative authorities of the investor. Popular offshore locations are Channel Isles, Cayman, BVI, Isle of Man, Bermuda etc. Offshore may not necessarily be outside the national boundaries of a country. In some countries, certain banks or other institutions may be granted offshore status and thus be exempt from all or specific controls or legislation. In others, areas are designated as benefiting from different tax and or regulatory regimes, for example, Luxembourg, Dublin. Offshore locations allow investors to have a different tax and or regulatory regime applied to their investments while in that location however should the money be brought back “onshore,” that is, from the Bermuda to the UK then it would become subject to the tax and regulation of that jurisdiction.

Offshore Financial Centre Another name for an international financial center located in a recognized offshore location. May be certain tax and regulatory advantages.

Omnibus Account Account containing the holdings of more than one client.

On-balance sheet A transaction whose principal amount or value is shown on the balance sheet.

On-line Processing which is executed via an interactive input onto a PC or stationary terminal connected to a processing center.

Open Economy A country where there are no restrictions on trading with other countries.

Open Ended Fund Type of investment such as Unit Trusts or OEICs, which can expand by issuing more units or shares usually without limit. Can of course also reduce in size by cancelling shares or units upon redemption by investors.

Open Ended Investment Company (OEIC) New corporate structure introduced in 1997. It is a form of collective investment vehicle. See OEICS.

Open Order A purchase or sale order at a stated price that is good until cancelled or executed.

Open Outcry The style of trading whereby traders face each other in a designated area such as a pit and shout or call their respective bids and offers. Hand signals are also used to communicate. It is governed by exchange rules.

Opening Trade A bought or sold trade that is held open to create a position.

Open Interest In derivatives exchanges the number of contracts both bought and sold which remain open for delivery on an exchange. Important indicator of liquidity.

Open Position The number of contracts or shares which have not been offset. The resultant position will be held in the clearing organization, firm, or custodian records at the close of business.

Operational risk The risk of losses resulting from inadequate systems and control, human errors, or management failings.

Option An option is in the case of the buyer; the right, but not the obligation, to take (call) or make (put) for delivery of the underlying product and in the case of the seller; the obligation to make or take delivery of the underlying product.

Option Premium The sum of money paid by the buyer, for acquiring the right of the option. It is the sum of money received by the seller for incurring the obligation, having sold the rights, of the option. Note: It is the sum of the intrinsic value and the time value that makes the price of the option.

Optional Dividend Dividend that can be paid either in cash or in stock. The shareholders entitled to the dividend make the choice when the option is offered by the issuer.

Options On Futures These have the same characteristics as an option, the difference being that the underlying product is either a long or short futures contract. Premium is not exchanged as the contracts are marked to market each day.

Order driven market A stock market where brokers acting on behalf of clients match trades with each other either on the trading floor of the exchange or through a central computer system.

Ordinary Shares Known as common stock in the United States and equities in the UK. Shareholders are the owners of a company and are protected so the maximum loss is the value of their shares and not the full debt of the company. In addition to ordinary shares there can also be preferred and deferred shares.

Oversubscribed Circumstances where people have applied for more shares than are available in a new issue.

Out-of-the-money A call option whose exercise price is above the current underlying share price or a put option whose exercise price is below the current underlying share price. This option has no intrinsic value.

Out of Pocket Expenses Expenses and costs which are charged to the client without taking any profit.

Outperformance Term used to describe a fund/fund manager that beats a stock market index or an average of competing funds.

Out-Trade A trade which has been incorrectly matched on the floor of an exchange.

Over-The-Counter (OTC) A one-to-one agreement between two counterparties where the specifications of the product are completely flexible and nonstandardized. A bilaterally negotiated transaction.

Overdraft Use of a financial facility where there is withdrawal of more money than is in a bank account at a given time.

Overnight Money Money placed on the money market for repayment for the next day.

Oversold Where a rush of selling shares has depressed the market for no justifiable reason. Can also be a term used to describe a dealing error, that is, sold 100 instead of 10.

Panel on Takeovers and Mergers (PTM) A nonstatutory body comprising City institution which regulates takeover activities.

Par Value See Nominal Value.

Par Yield Curve A curve which measures yield over time.

Pair Off Back-to-back trade between two parties where settlement occurs only by exchanging the cash difference between the two parties.

Pari Passu Without partiality. Securities that rank pari passu, rank equally with each other.

Participation Swap A transaction which operates as a cap on a full notional principal if LIBOR is set above the agreed interest rate and operates as a swap on a portion of the notional principal if LIBOR is set below the agreed interest rate.

Passive Manager A fund or manager where the fund is invested in such a way that it replicates all or a large part of a market. An example is a tracker fund where the fund is invested proportionally to an index it tracks.

Payer The payer in a swap is the counterparty which pays the fixed rate and receives the floating rate. The other party is the payer of floating and receiver of fixed.

Paying agent A bank which handles payment of interest and dividends on behalf of the issuer of a security.

Payment Date Date on which a dividend or an interest payment is scheduled to be paid.

Pension Fund Fund set up by a corporation, labor union, governmental entity, or other organization to pay the pension benefits of retired workers. Pension funds invest billions of dollars annually in the securities markets and are therefore major market players.

Performance Fees Fees payable to a fund manager when the value of a portfolio has risen above a previous level (high water mark) and or has met a benchmark over a period (hurdle rate). Usually a percentage of the growth in the period. Common in hedge funds.

Perpetual bond A bond which has no redemption date.

Physical Delivery Used to describe a derivative contract that on delivery will result in the asset being delivered, for example, bond futures, stock options, commodities. Also the delivery of a security in paper rather than electronic form.

PICs Term used for property index certificates, a type of bond.

PIFs Term used for forward contracts based on a property index, that is, property index forwards.

Pit The designated area on the market floor where a particular contract is traded. In the LME it is termed the ring.

Placement The first stage of money laundering, in which the money is passed placed in the banking system. See layering, integration. Note: not to be confused with the placement of new securities directly with the clients of an investment bank rather than being offered publicly or the placing of shares in a hedge fund.

Placement Memorandum Offering document for a hedge fund.

Placing Another term for the procedure used for new issues where a securities house contracts its own clients to offer them stock. It is almost always used for new issues of international/eurobonds and sometimes for equities.

Plain Vanilla or Vanilla Swap A swap which has a very basic structure.

Portfolio List of investments held by an individual, fund portfolio or company, or list of loans made by a bank or financial institution.

Power of Attorney The legal authority for one party to sign for and act on behalf of another party.

Preemption Rights The right of existing shareholders purchase shares in a new issue to maintain their percentage holding. Normally happens either when a company is trying to raise cash or as a result of a takeover for paper which the seller does not want.

Preference Shares Shares that have preferential rights to dividends, usually a fixed sum, before dividends are paid out to ordinary shareholders. They usually carry no voting rights. The rights of preference shareholders are established in a company’s articles of association and may differ between companies in a variety of ways.

Premium An option premium is the amount paid up-front by the purchaser of the option to the writer. Also the amount of a price above the fair value of the instrument.

Prepayments An accounting process to reflect a payment in one accounting period that is for services in a different period.

Present value The amount of money which needs to be invested (or borrowed) now at a given interest rate in order to achieve exactly a given cash flow in the future, assuming compound reinvestment (or refunding) of any interest payments received (or paid) before the end. See future value.

Presettlement Checks and procedures undertaken immediately after execution of a trade prior to settlement. Can be part of clearing. Often carried out in the Middle Office.

Price/earnings ratio The share price of a company divided by its earnings per share. A high p/e ratio implies that the company is well thought of for its future prospects.

Price (Conversion) Factor The price at which a bond would trade, per 1 nominal, to yield the notional coupon of the futures contract on the delivery day (or the first day in the deliverable month if this applies).

Price/Pricing Policy The method of establishing a price for the valuation process associated with assets. Used by fund administrators to value a portfolio and by middle office to value traders position. Assets can be “easy” or “difficult” to value and most firms will have a pricing policy that sets out the methodology to used in the process.

Primary Dealer A dealer in the primary market for securities and other instruments.

Primary Market Market for the offer or placement of new securities such as international, domestic, and foreign bond issues or equities. Any subsequent resale or purchase is handled on the secondary market.

Prime Broker Usually a major investment bank that offers hedge funds (and others) a broad range of services including execution, stock lending, loans, sales, custody services etc.

Prime Broker Agreement Key agreement between the customer (ie, hedge fund) and the PB, can also cover Custody services offered by the PB.

Prime Rate Term used in US banks for the rate at which they lend to prime or first class customers. Similar to the base rate in the UK.

Principal protected product An investment whose maturity value is guaranteed to be at least the principal amount invested initially.

Principal Trading When a firm buys from or sells to another firm for its own account. Trades result in a profit or loss for the firm.

Principal-To-Principal Market A market where the clearing-house only recognizes the clearing member as the entity it will deal with and hold liable to settle transactions, and not the underlying clients of the clearing member.

Principal Value That amount inscribed on the face of a security and exclusive of interest or premium. The amount is the one used in the computation of interest due on such a security.

Private Customer An individual person who is a client of a broker.

Private Equity Shares in nonquoted (unlisted) companies, that is, privately owned companies.

Private Equity Fund A type of investment fund that invests in private companies often with a definitive life of the fund, typically ten years. Capital is committed to the fund by investors and drawn down over a period as the investments are made. The sponsor of the fund is often a private equity firm which uses investment advisers to identify the companies the fund will invest in. Can be established as a limited liability partnership (LLP) or limited liability company (LLC).

Private placement Issue of securities that is offered to a limited number of investor.

Privatization Process whereby the government puts state owned industries into the private sector, for example, water, electricity. Usually involves an offer for sale of the shares in the newly created company. The government may continue to hold some shares.

Property Derivatives A market in derivatives traded OTC and based mainly on swaps utilizing the Investment Property Databank (IPD) indices versus Libor or index versus index.

Property Management Company (PMC) A management company that deals with the day to day operation of physical property owned by another party, for example, a property fund.

Proprietary Trader A trader who deals for an organization such as an investment bank taking advantage of short term price movements as well as taking long term views on whether the market will move up or down. See also principal trading.

Prospectus A document that sets out the terms of the offer to subscribe for shares in a company or investment fund.

Protected Funds Funds other than money market (cash) funds which aim to provide a return of a set amount of capital back to the investor, with the potential for some growth.

Proxy Appointee of a shareholder who votes on his behalf at company meetings.

Proxy Statement Material information to be given to a corporation’s stockholders prior to solicitation of votes.

Public Offering Offer of securities to the general public.

Public Placement An issue of securities that is offered through a securities house to institutional and individual clients.

Put Option An option that gives the buyer the right, but not the obligation, to sell a specified quantity of the underlying asset at a fixed price, on or before a specified date. The seller of a put option has the obligation (because they have sold the right) to take delivery of the underlying asset if the option is exercised by the buyer.

Putable In the case of a bond, it is the right of the investor to sell the bond back to the issuer. In the case of a swap, it is the right of the fixed rate receiver to cancel the swap.

Quoted Colloquial term for a security that is traded on the Stock Exchange.

Quote Driven Dealing system where some firms accept the responsibility to quote buying and selling prices.

Ramp A method employed to inflate a share price with the intention of selling before the price drops back again. Also the period associated with a CDO where there is no return to the investors while the value “ramps up.”

Range forward A forward outright with two forward rates, where settlement tales place at the higher forward rate if the spot rate at maturity is higher than that, at the lower forward rate if the spot rate at maturity is lower than that, or at the spot rate at maturity otherwise. See collar.

Rating Evaluation of risk by rating services such as Moody’s or Standard and Poor’s on companies, governments, countries, and financial products.

RCH Abbreviation for Recognized Clearing House under the UK Financial Services Act.

Real Interest Rate The rate of interest after taking inflation into account.

Real Time Gross Settlement Gross settlement system where trades are settled continuously through the processing day—abbreviate to RTGS.

Realized profit/loss Profit or loss which has arisen from a purchase and sale of an asset.

Receiver Person, usually an accountant, appointed by creditors in an attempt to rescue an ailing company through tighter financial controls than were already in place. Generally, they succeed only in utilizing the company assets to reimburse secured creditors after which any remaining creditors can appoint a liquidator. Also applicable in swaps as the opposite of the payer.

Recession Temporary reduction in trade that creates a downturn in the economy. A number of causes can create this situation such as falling share and property prices, lack of consumer confidence, unemployment etc. Usually two successive months or periods of no or negative growth in an economy is considered a recession.

Recognized Investment Exchange (RIE) Status given by a regulatory body to an approved exchange.

Reconciliation The comparison of a person’s, a fund’s or firms records of cash and securities positions with records held by another party and the investigation and resolution of any discrepancies between the two sets of records. For example, a fund portfolio to assets held by a custodian or a cash position to a bank account.

Record Date The date on which a securities holder must hold the securities in order to receive an income or entitlement.

Redemption The purchase and cancellation of outstanding securities including shares or units in a fund through a cash payment to the holder by the issuer.

Redemption Price A price at which bonds may be redeemed, or called, at the issuer’s option, prior to maturity (often with a slight premium). The redemption (sale) of units or shares in a fund.

Reference Term used in OTC derivatives to determine the entity or price or source that will in turn determine value, settlement etc., for example, Libor as the reference entity in an interest rate swap.

Referral A proposed takeover is investigated thoroughly and if there are concerns that it is not good for the market, that is, it may create a monopoly, it may be referred to a government department for a decision on whether to allow the offer to proceed.

Reflate The opposite of deflation is reflation and is used by governments to increase consumer spending.

REGIS-TR Clearstream operated trade repository for OTC derivatives.

Registered Bond A bond whose owner is registered with the issuer or its registrar.

Registered Title Form of ownership of securities where the owner’s name appears on a register maintained by the company.

Registrar An official of a company who maintains its share register.

Registrar of Companies Government department, in the UK Companies House, responsible for keeping records of all companies.

Relative Return A fund’s performance relative to the rest of its sector, or an index.

Reorganization Generally any event where the equity, debt, or capital structure of a company is changed.

Replacement cost The mark-to-market loss which would be incurred if it were necessary to undertake a new transaction to replace an existing one, because the counterparty to the existing transaction defaulted.

Repurchase Agreement (Repo) Borrowing funds by providing a government security for collateral and promising to “repurchase” the security at the end of the agreed upon time period. The associated interest rate is the “repo-rate.”

Reputational risk The risk that an organization’s reputation will be damaged.

Reserve Currency The trading balance of a country, normally held in readily convertible currencies such as sterling, dollars, Yen etc.

Reserves The assets of a country are made up of in part, its financial reserves such as gold, convertible currency, International Monetary Fund credits and special drawing rights. Other assets include property, overseas investments etc.

Reset Date The date when periodic payment terms are established, that is, floating rate on a swap. See also rollover.

Resettable Coupon A bond that allows the issuer to reset the coupon midway through the life of the bond.

Residence The status determining the extent to which a person is taxed in a country with a global system of taxation. Residence is determined according to periods of physical presence in the country.

Resolution Proposal on which shareholders vote, put them at a meeting.

REIT Real Estate Investment Trust.

Retail Fund An investment fund authorized by a regulator that can be marketed to almost any kind of investor including those with limited understanding of capital markets. There is a correspondingly high level of protection for investors through the regulations.

Retail Price Index (RPI) Index that shows the movement of a basket of prices, in the UK used as a measure of inflation.

Retractable Coupon A bond that allows the investor to sell the bonds back to the issuer at par if the new fixed rate on a resettable coupon bond is unacceptable.

Return The amount by which savings may increase due to a combination of interest or dividend income and capital growth.

Reverse Repo Purchase of gilt where the price and date for its resale is fixed at the same time.

Reverse Takeover The acquisition of a company by a smaller concern. Can also apply where a large organization takes over a smaller one but the overall running of the amalgamated company would be by the latter.

Reverse Yield Gap Usually equities produce a higher yield than bonds. When the converse applies it is known as the Reverse Yield Gap.

Rights Issue Offer of new shares made to existing shareholders under a preemptive right where the shares are first offered to existing shareholders but they have no obligation to buy them.

Right Of Offset Where positions and cash held by the Clearing Organization in different accounts for a member are allowed to be netted.

Risk A measure of the probability that the value of savings and the income from them will fall as well as rise.

Risk Warning Document that must be dispatched and signed by private customers before they deal in traded options.

Risk-weighted assets See capital adequacy ratio.

Roller coaster swap A swap in which the notional principal amount varies up and down over the life of the swap.

Rollover A rollover can be when the next leg of a swap is calculated or when a futures position in an expiring month is “rolled” to the next maturity. For example, the position in the Mar. expiry is closed out and reopened in the next available maturity, say the Jun. expiry.

Rolling Settlement System used in most countries including England. Trades are settled a set number of days after being transacted.

Rouble Currency of Russia

Round Lots The minimum amounts for which dealer’s quotes are good.

Round Tripping The combined commission or fees for both the opening and closing leg of a trade.

Running a Book Firms who are buying and selling stock for themselves hoping to profit from price differences are said to run a book in that stock.

Safekeeping Holding of securities on behalf of clients. They are free to sell at any time. Part of the services offered by custodians.

Sale of rights nil paid The sale of the entitlement to take up a rights issue—see also nil paid price.

Same Day Funds Refers to the availability of funds on the same day as they are deposited.

Samurai Bond A bond denominated in JPY and issued in the Japanese capital market by a foreign borrower.

Savings Account An interest bearing account with a bank or other savings institution which normally does not provide cheque and other transaction facilities.

Sawtooth risk A swap in which the notional principal amount varies up and down over the life of the swap, with an overall upward or downward trend.

Scaling Down When a new issue is oversubscribed, the procedure whereby applicants receive a proportion of the number of shares for which they applied.

Scheme Particulars Offering document associated with Unit Trusts.

Scrip Dividends Scrip dividends options provide shareholders with the choice of receiving dividend entitlements in the form of cash, share, or a combination or both. The amount of stocks to be distributed under a scrip option is calculated by dividing the cash dividend amount by the average market price over a recent period of time.

Scrip Issue See Bonus Issue.

SD Indeval Clearing House and Depository for the Mexican market.

SEATS Plus An order-driven system used on the London Stock Exchange for securities which do not attract at least two firms of market makers and for all AIM listed securities.

Secondary Market Market place for trading in existing securities. The price at which they are trading has no direct effect on the company’s fortunes but is a reflection of investors’ perceptions of the company.

Sectors Investment funds are divided into a variety of categories to keep together funds of a similar type, for example, “cash,” North American, European. The areas they operate in are called sectors. Stock markets are also divided into sectors, for example, financials, energy, transport etc.

Secured A debt issued by a company that is charged against an asset, or a private transaction like a mortgage, where the property is charged against the loan to purchase it.

Securitization The use of securities and other assets to guarantee the repayment of a debt. An example would be using the rents from a property to guarantee a bond that is issued to raise capital to purchase more property.

Securities Can mean any instrument in the markets but generally refers to bonds and equities.

Securities House General term covering any type of organization involved in securities although usually reserved for the larger firms.

Securities Lending Loan of securities for a fee by an investor to another (usually a broker-dealer), usually to cover a short sale or to enable settlement of a trade. Collateral is required see also stock lending.

Securities and Exchange Commission (SEC) The overall securities and equity derivatives regulatory body in the United States of America.

SEDOL Stock Exchange Daily Official List, a securities numbering system assigned by the International Stock Exchange in London.

Segregated account Account in which there is only the holdings of one client.

Segregation Of Funds Regulatory requirement where the client assets are held separately from those assets belonging to the broker, custodian or other firm operating for the client.

SEHK Stock Exchange of Hong Kong.

Selective Marketing See Placing.

SEPA Single Euro Payments Area—integrated payment process for euro denominated transactions for EU and EFTA countries.

Service Level Agreement An agreement between the service supplier and the customer for instance a custodian and the customer will have a SLA covering their relationship. Can also apply internally within a firm particularly in the area of IT and the business units.

SETS Abbreviation for the London Stock Exchange Trading System.

Settlement The fulfilment of the contractual commitments of transacted business.

Settlement Date The date on which a trade is cleared by delivery of securities against funds (actual settlement date, contractual settlement date).

Share Futures Based on individual shares. Delivery is fulfilled by the payment or receipt of cash against the exchange calculated delivery settlement price.

Share Option A right sold to an investor conferring the option to buy or sell shares of a particular company at a predetermined price and within a specified time limit.

Shell Company A company in name only but quoted on the stock exchange. Shells are used when setting up a new business avoiding the sometimes long and expensive process.

Shogun Bond Straight bond denominated in foreign currency, other than JPY, issued by a foreign issuer on the Japanese capital market.

Short/Short Position A sold position in a derivative or security that is held as an open position.

Short Coupons Bonds or notes with a short current maturity.

Short Cover The purchase of a security that has been previously sold short. The purpose is to return securities that were borrowed to make a delivery.

Short-dated Gilt Gilts due to be redeemed within the next seven years, according to the LSE, (FT states up to 5 years).

Short Position Position created by the selling of securities, commodities etc. which are not owned.

Short Sale The sale of securities not owned by the seller in the expectation that the price of these securities will fall and can be bought later at a lower price or as part of an arbitrage.

Short Selling Selling stock that you do not own. Requires the borrowing of securities to settle the trade.

Short-term Security Generally an obligation maturing in less than one year.

Short Termism An investment view that assumes a quick realization of profits.

SGX The merged central Stock Exchange of Singapore and the derivatives exchange SIMEX.

SICAV Abbreviation for the French: Societies d’Investissement a Capital Variable. A UCIT domiciled in Luxembourg or France.

SICOVAM CSD for French corporate securities and OATs (now merged with Euroclear).

Simple interest Interest calculated on the assumption that there is no opportunity to reinvest the interest payments during the life of an investment and thereby earn extra income.

Single Currency Interest Rate Swap An interest rate swap where the interest payments are exchanged in the same currency.

Sinking Fund In the case of a loan repaid by instalments, each instalment can be considered to consist of two parts. One portion of each instalment represents the interest payable on the loan, the other portion, which represents the repayment of capital, is known as the “sinking fund.”

SIS SEGA Inter Settle—CSD for Switzerland.

Slump An excessive long-term recession with disastrous economic implications.

Soft Commodities Description given to commodities such as sugar, coffee, and cocoa, traded through exchanges such as the NYSE Liffe.

Sovereign Debt Securities Bonds issued by the government of a country.

Sovereign Wealth Funds Investment management operated on behalf of a country, for example, the Abu Dhabi Investment Authority.

SPAN Abbreviation for Standardized Portfolio Analysis of Risk. A form of margin calculation which is used by various clearing organizations.

Speculation A deal undertaken because the trader or investor expects prices to move in his favor and thereby realize a profit.

Speculator The speculator is a trader or investor who wants to assume risk for potentially much higher rewards.

Sponsored Member Type of CREST member whose name appears on the register but has no computer link with CREST.

Spot delivery A delivery or settlement of currencies on the value date, two business days later.

Spot market Market for immediate as opposed to future delivery. In the spot market for foreign exchange, settlement is in two business days ahead.

Spot Month The first month for which futures contracts are available.

Spot Rate The price prevailing in the spot market.

Spread 1.    The difference between bid and asked price on a security. 2.    Difference between yield on or prices of two securities of different types or maturities. 3.    In underwriting, difference between price realized by an issuer and price paid by the investor. 4.    Difference between two prices or two rates. What commodities traders would refer to as the basis.

Spread cont’d A trading strategy in which a trader buys one instrument and sells another, related instrument with a view to profiting from a change in the price difference between the two. A futures spread is the purchase of one futures contract and the sale of another; an option spread is the purchase of one call (or put) and the sale of another.

Spread cont’d The difference between the bid and offer prices in a quotation.

Spread cont’d The difference between one price or rate and another, for example, the extent to which a swap fixed-rate is higher than a benchmark Treasury bond yield, or the extent to which the floating-rate in a swap is above or below LIBOR.

Splitting Rights This is where an investors using a formula work out how many rights to sell to take up the rest of their entitlement for no cost.

SSRC/CSCCRC The China Securities Central Clearing & Registration Corporation (CSCCRC) is responsible for the central depository, registration, and clearing of securities. It carries out the T + 1 settlement for A shares and T + 3 for B shares.

Stamp duty Tax on purchase of property including shares in the UK.

Stamp Duty Reserve Tax (SDRT) (UK) Tax payable on the purchase of UK equities in uncertificated form (ie, those held within the Euroclear system).

Standard and Poors US indices on which futures and options contracts are based. CME introduced S&P 500 index futures as the first index based derivative.

Standard Settlement Instructions Instructions for settlement with a particular counterparty which are always followed for a particular kind of deal and, once in place, are therefore not repeated at the time of each transaction.

Standing Instruction Default instruction, for example, provided to an agent processing payments or clearing securities trades; provided by shareholder on how to vote shares (eg, vote for all management recommended candidates).

Standing Order An instruction to a bank to pay regular agreed amounts on specified dates. These cannot be altered by the bank.

Stepped A stepped coupon is one that rises or falls in a predetermined way over the life of an arrangement.

Stock In some countries (eg, the United States..), the term applies to ordinary share capital of a company. In other countries (eg, UK), stock may mean share capital that is issued in variable amount instead of in fixed specified amounts, or it can describe government loans, for example, “gilt edged stocks.” Can also form part of the balance sheet of a company being the amount of assets held

Stock Dividend Dividends paid by a company in stock instead of cash. Also called scrip dividend.

Stock Exchange Electronic Trading System (SETS) Electronic dealing system for some stocks on the London Stock Exchange. It is an order book system.

Stock Market Indices They show how a specified portfolio of share prices are moving in order to give an indication of market trades. Each stock market of the world is represented by at least one index. The FTSE 100 Index, for example, reflects the movements of the share prices of the UK’s largest 100 quoted companies.

Stock market Term used to describe where securities are/have been traded, that is, “today on the stock market shares closed higher.”

Stock Index Futures/Options Based on the value of an underlying stock index like the FTSE 100 in the UK, the S&P 500 index in the United States and the Nikkei 225 and 300 in Japan. Delivery is fulfilled by the payment or receipt of cash against the exchange calculated delivery settlement price. These are referred to as both indices and indexes.

Stock Lending Process of lending, for a fee, securities against collateral.

Stock Lending Agreement The terms under which the lender and borrower enter into the loan and which carries important information about early termination of the loan, substitution of collateral etc. A Global Master Securities Lending Agreement has been created by the International Securities Lending Association (ISLA).

Stock (or Bond) Power A legal document, either on the back of registered stocks and bonds or attached to them, by which the owner assigns his interest in the corporation to a third party, allowing that party the right to substitute another name on the company records instead of the originals owner’s.

Stock Split When an issuer splits its equity, it divides existing shares on a ratio, for example, 1 × 50 p nominal share becomes 5 × 10 p nominal shares or 1 share with a price of €50 becomes 4 shares with a price of €12.50. There is no change to the overall value of the investors holding.

STP See Straight through Processing.

Stop (Order) An owner of a physical security that has been mutilated, lost or stolen will request the issuer to place a stop (transfer) on the security and to cancel and replace the security. Also used when placing a deal, that is, “stop loss” sell or buy if a certain price is hit after I have traded.

Straight Debt A standard bond issue, without right to convert into the common shares of the issuer.

STRATE Electronic settlement and depository organization for the Johannesburg Stock Exchange (Share Transactions Totally Electronic).

Straddle The purchase (or sale) of a call combined with the purchase (or sale) of a put at the same strike (generally purchased with both at-the-money).

Straight-through processing (STP) Computer transmission of the details of a trade, without manual intervention, from their original input by the trader to all other relevant areas—position keeping, risk control, accounts, settlement, and reconciliation.

Street Name Securities held in street name are held in the name of a broker or another nominee such as a custodian.

Strike price The fixed price, per share at which an option (or warrant) conveys the right to call (purchase) or put (sell) the underlying shares.

Strike price/rate Also exercise price. The price or rate at which the holder of an option can insist on the underlying transaction being fulfilled.

Strip The purchase or sale of a series of consecutive interest rate futures contracts or forward rate agreements.

Stripped Bonds (Strips) Bonds where the rights to the interest payments and eventual repayment of the nominal value have been separated from each other and trade independently. Facility introduced in the UK for gilts in Dec. 1997.

Structured Product A package of products, often but not always derivatives, created to meet the needs of a specific investor or group of investors. Can be designed in response to a request from a client or by a bank and then marketed to clients.

Stump period A calculation period, usually at the beginning or end of a swap, other than the standard ones normally quoted.

Subcustodian A firm in a foreign country that acts on behalf of the global custodian as its custody agent.

Subscription Price Price at which shareholders of a corporation are entitled to purchase common shares in a rights offering or at which subscription warrants are exercisable.

Subscriptions In a bond issue, the buying orders from the lead manager, comanagers, underwriters and selling group members for the securities being offered. The amount payable by investors to acquire units or shares in a fund or new securities being offered by way of an offering or corporate action.

Subsidiary A company, at least 50% of which is owned by another company. See Holding Company.

Surrender Value The value for which a life assurance policy can be cashed in for prior to maturity.

Swap A transaction where two parties agree directly or through an intermediary to exchange flows and sometimes assets. Examples are interest rate swaps where interest flows based on a notional amount and a benchmark floating rate against a fixed rate are exchanged and currency swaps where the currencies and interest rates are exchanged at the beginning and end of the swap. Traditionally traded over the counter but some swaps are now being standardized and traded on exchanges.

Swap Spread The difference between the bid and offered side of a swap. Can also refer to the spread over treasuries—that is, the difference between the yield on the treasury note and the bid or offer on the swap.

SwapClear A clearing-house and central counterparty for swaps operated by LCH Clearnet.

Swaption An option convertible into a predetermined swap transaction. Options can be payers or receivers, American or European.

SWIFT Society for Worldwide Interbank Financial Telecommunications—secure electronic communications network between banks and other financial market institutions.

Switching The facility to move the money invested in a unit-linked policy or other type of investment from one fund to another.

Syndicate A group of bond houses which act together in underwriting and distributing a new securities issue or a group of insurers who operate as a syndicate each taking some of the exposure to the risk.

Takeover When one company obtains more than 50% of another company’s shares.

Tap Stocks A portion of Gilt-edged securities that are held over after the day of issue and made available by the government broker to satisfy demand and to control interest rates, market prices, and liquidity. Tap issues are so called because amounts of the total issue can be issued as and when, that is, by turning on or off the “tap.”

TARGET(2) Trans European Automated Real time Gross settlement Express Transfer—system linking the real-time gross settlements for euros in the 15 European Union countries. Now superseded by TARGET2.

TARGET2 Securities (T2S) A project to create a single securities and payment system in Europe to replace the current country by country systems.

Tax Avoidance The legitimate arrangement of a taxpayer’s affairs so that he receives income or gains in such a way that takes him out of the tax regime altogether or reduces his tax liability. Tax avoidance is not illegal.

Tax Evasion Tax evasion means ignoring or concealing a tax liability which has already arisen, Tax evasion is a criminal offence.

Tax Haven Another name for an international financial center where favorable tax laws apply.

Tax Reclaim The process that a global custodian and/or a holder of securities performs, in accordance with local government filing requirements, in order to recapture an allowable percentage of taxed withheld.

Tender Short futures positions that will, depending on the specific exchange, be tendered for delivery on expiry of the contracts or during a defined delivery period.

Tender Offer Formal offer to buy made to holders of a particular issue by a third party. Detailed offer is made by public announcement in newspapers and sometimes by personal letter of transmittal to each stockholder.

TER Abbreviation for Total Expense Ratio.

Terms For a new securities issue, the characteristics of the securities on offer: coupon, amount, maturity.

Termination The cancellation of a swap or other derivative, agreement or contract. The terms and conditions under which termination can and will take place is set out in the documentation agreed between the parties to the trade or the agreement or contract.

Termination date The end date of a swap.

Tier Capital Capital adequacy related capital of a bank. Tier 1 is core capital Tier 2 is other undisclosed reserves, subordinated loan etc.

Theoretical Spot Rate The rate used as a discount factor to derive the zero-coupon yield curve.

Theoretical Value Another term for fair value of a futures or options contract.

Thin Market A period of sparse trade on the stock market that can affect prices and the ability to trade.

Tick Size The value of a one point movement in the contract price of a future.

Tied Agent An individual or business which only sells one company’s products (such as life assurance) making no pretext of offering independent advice on all the products available.

Time Deposit Deposit on an account held with a financial institution for a fixed term or with the understanding that the depositor can withdraw only by giving notice.

Time Value The amount by which an option’s premium exceeds its intrinsic value. Where an option has no intrinsic value the premium consists entirely of time value. The element in the price of something that relates to the time to maturity, for instance it is part of the “fair value” of a futures contract.

Tom-Next Money placed on the money market from tomorrow for repayment the day after.

Tom/Spot Week Money placed on the money market from tomorrow for repayment one week after (Tom/Spot Month).

Total Expense Ratio (TER) A measurement of the expenses of an investment fund against the return of the fund.

Total Return Swap A total return swap is a derivative where one party, the ratepayer, makes periodic fixed or floating rate payments to another, the total return payer, and receives from the other the total return on some reference asset. Used in relation to credit and is therefore a term sometimes used in relation to credit derivatives.

Touch The best prices available for a stock on the stock market, looking at all market makers or other prices available.

Tracking Error The difference in returns between a fund and its benchmark; also the extent to which a tracker fund tracks its benchmark.

Trade Date The date on which a trade is made.

Trade Guarantees Guarantees in place in a market which ensure that all compared or netted trades will be settled as compared regardless of a counterparty default.

Trade Repository An organization that records and reports to regulators noncentrally cleared OTC transactions.

Traded Option An option which is traded on an exchange.

Trader An individual who buys and sells securities with the objective of making short-term gains.

Transfer Change of ownership of securities or other assets. Final process of settlement of a trade or the movement of collateral.

Transfer Agent(Agency) Agent appointed by a corporation to maintain records of stock and bond owners, to cancel and issue certificates and to resolve problems arising from lost, destroyed or stolen certificates. Maintains the record of subscriptions, redemptions, and the register of ownership of units and shares in an investment fund. Also responsible for carrying out CDD and communicating with investors. Is an element of the fund administration process.

Transfer Form Document which owners of registered documents must sign when they sell the security. Not required where a book entry transfer system is in use.

Transparency The degree to which a market is characterized by prompt availability of accurate price and volume information which gives participants full knowledge of the details of transactions being executed on the exchange.

TRAX See Xtrakter.

Treasury Arm of Government responsible for all financial decisions and regulation of the financial services sector, for example, HM Treasury in the UK. Also Division within a firm dealing with funding, capital liquidity and cash flow management.

Treasury Bill Money market instrument issued with a life of less than one year issued by the United States and UK governments.

Treasury Bonds (US) US government bond issued usually with a 30 year maturity. (also known as the “long” bond.

Treasury Note A government obligation usually with maturities of 1–10 years, carrying a fixed rate of interest.

Treasury Notes (US) US government bond issued with 2-, 3-, 5-, and 7-year maturity.

Treasury Operations The management of excess cash and funding requirements through purchasing and issuing financial instruments and the depositing and taking of cash deposits. Treasury Operations teams support this process by recording and settlement of the transactions.

Tri-party Repo Repo which utilizes an intermediary custodian to oversee the exchange of securities and cash.

Triple A—rating The highest credit rating for a bond or company by Standard & Poors—the risk of default (or nonpayment) is negligible.

Trust A legal arrangement where one person (the trustee) holds property (the trust property) on behalf of one or more other persons (the beneficiaries).

Trust Property The property put into trust by the settlor.

Trustee A trustee is appointed to oversee the management of certain funds. They are responsible for ensuring that the fund is managed correctly and that the interests of the investor are protected and that all relevant regulations and legislation are complied with including the trust deed, offering documents, prospectus etc. The trustee owns the assets of the fund on behalf of the investors and only the trustee can create or cancel units in a unit trust.

Turn See Spread.

Turnaround Securities bought and sold for settlement on the same day.

Turnaround Time The time available or needed to settle a turnaround trade.

Turquoise Turquoise is a multilateral trading facility established by nine leading European investment banks, It is a competitor to exchanges but is now owned by the London Stock Exchange.

Two-way Price Simultaneous prices in a stock quoted by a market maker, the lower at which he is willing to buy and the higher at which he is willing to sell. Some unit trusts are quoted on a two or dual pricing basis being the price at which the manager is prepared to buy or liquidate units or sell or create new units. The pricing mechanism is controlled by regulations.

UCITS A European Union Directive for a retail fund template when authorized in a member state and complied with can then be marketed in all EU countries without need for further authorization. It stands for “Undertaking for Collective Investments in Transferable Securities” and it is currently operating under its 4th version with UCITS V already in process.

Uncovered Dividends A dividend that is not paid out of profits and therefore means that the organization has had to liquidate assets to make the payments.

Underlying Asset or Underlying The asset or product from which the future or option’s price is derived and which may be deliverable. Another term used is reference entity

Undersubscribed Circumstance when people have applied for fewer shares than are available in a new issue.

Underwrite Accept financial responsibility for (a commercial project); sign and issue (an insurance policy), thus accepting liability.

Underwriter(s) As part of a syndicate, a dealer who purchases new issues from the issuer and distributes them to investors. Also the structurer of a CDO. Institutions which agree to take up shares in a new issue if it is undersubscribed. They will charge an underwriting fee. Insurance underwriters take on the risk of the insurance usually through syndication.

Unit Investment Trust A closed end fund used by small investors to spread investment risk.

Unit Linked Policy An endowment or whole life policy which invests in a unitized fund and the value of the policy is the value of the units purchased.

Unit Trust A system whereby money from a number of investors is pooled together and invested collectively on their behalf under trust law. Each owns a unit (or number of them) the value of which depends on the value of those items owned by the trust.

Unrealized profit Profit that has not arisen from a sale or purchase that offsets the original transaction—an increase in value of an asset for long position and a decrease in value for a short position. There can also be an unrealized loss on a position.

Up-and-in option A knock-in option where the trigger is higher than the underlying rate at the start. See down-and-in option, up-and-out option, down-and-out option.

Up-and-out option A knock-out option where the trigger is higher than the underlying rate at the start. See up-and-in option, down-and-in option, down-and-out option.

Value Added Tax A type of sales tax used in Europe.

Value at Risk (VaR) The maximum amount which a bank expects to lose, with a given confidence level, over a given time period.

Variance/Volatility Swap Swaps based on the volatility of an underlying index not the price or value.

Variation Margin The process of revaluing an exchange traded product each day. It is the value created by recalculating the position using the closing price on the previous day versus the current closing price. It is physically paid or received each day by the clearing organization to members and by members with their clients, although in the latter case a cash position in the client account is updated. The calculation is done on a mark-to-market basis.

Vega Another part of the “Greeks” and is a measure of the rate of change in an option’s price caused by changes in volatility.

Venture Capital Funds Funds that are designed to raise capital from investors and to then invest the capital in newly formed unquoted or private equity companies.

Venture Capital Trusts Trusts set up to encourage investment in small to medium size businesses by investing in a range of companies thereby reducing some of the risk.

Volatility The degree of scatter of the underlying price or market when compared to the mean average rate. A volatile market experiences high degrees of scatter whereas a price or market lacking volatility is experiencing little movement away from the average Volatility trades like volatility swaps or option straddles use the degree of volatility change during a period.

Vostro A vostro account is another bank’s account held at our bank in our currency.

VPC Swedish Central Securities Depository (Värdepappercentralen).

Wall Street Term used to describe the financial center around the New York Stock Exchange, which is situated on the corner of Wall Street. Much the same as the Square Mile in London also known as the “City.”

Warehouse A swap portfolio held by a market-maker. The market-maker may enter into a swap and put it in the warehouse until a suitable counterparty can be found. Used for storage of commodities during the delivery.

Warehouse cont’d “Warehousing” may also be a term used when a large order for securities or derivatives is being completed over a period of time. The trades done are “warehoused” until the order is completed and allocated to the client or accounts within a client.

Warrants An option style product which can be listed on an exchange and raise money for the issuer, with a lifetime of generally more than one year. Warrants are also issued for some commodities like for instance copper and these warrants entitle the holder to delivery of a certain amount of the metal, for example, Copper warrants on the LME in London.

Warrant agent A bank appointed by the issuer as an intermediary between the issuing company and the (physical) warrant holders, interacting when the latter want to exercise the warrants.

Waterfall A term given to the order of the distribution of return in a private equity fund.

Withholding Tax In the securities industry, a tax imposed by a government’s tax authorities on dividends and interest paid to a person or entity outside of that country, which may be reclaimed if a tax treaty exists between the jurisdiction and the investor’s jurisdiction.

World Bank Survivor along with the International Monetary Fund of the 1944 Bretton Woods agreement. Officially the International Bank for Reconstruction and Development, its aim is to lend or guarantee loans to poorer countries by utilizing aid from member countries.

Writer A person who has sold an open derivatives contract and is obliged to deliver or take delivery upon notification of exercise from the buyer.

Writer cont’d In the insurance market the company, person, or syndicate that is issuing the insurance, that is, the “writer” of insurance. See also “underwriter.”

XETRA Dealing system of the Deutsche Börse.

Xtrakter MarketAxess operated trade repository for OTC derivatives and owner of the TRAX trade matching, transaction reporting, market and reference data system.

Yankee bond A US dollar bond issued in the United States of America by a non-USA issuer.

Yield Internal rate of return expressed as a percentage.

Yield Curve For securities that expose the investor to the same credit risk, a graph showing the relationship at a given point in the time between yield and current maturity. Yield curves are typically drawn using yields on government bonds, corporate bonds, swaps etc. of various maturities. In effect a forecast of future returns that can be then used to present value instruments like IRS etc.

Yield to Maturity The rate of return yielded by a debt security held to maturity when both interest payments and the investor’s capital gain or loss on the security is taken into account.

Zero coupon Bond A bond issued with no coupon but at a price substantially below par (discount) so that only capital is accrued over the life of the loan, and yield is comparable to coupon bearing instruments.

Zero-Coupon Yield Curve When the theoretical spot rates are constructed as a curve to show yield over time.

Zloty Polish currency.

Important Note:

The contents of this glossary of terms have been compiled from reliable sources and are believed to be correct, however The DSC Portfolio Ltd, Loader Associates Limited, and Computer Based Learning Limited can take no responsibility whatsoever for any loss, claim, or damages caused in whatever manner as a result of the reader using information taken from this work.

© The DSC Portfolio Ltd and Loader Associates Ltd January 2016 No reproduction in any form whatsoever is permitted without prior permission.

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