Terms & Definition

A ‘give-up’ trade

A brokerage firm may ‘give-up’ a trade for markets in which it has neither an exchange membership (or a market making position) nor clearing/settlement facilities.  In this capacity the brokerage firm will act as an ‘introducing broker’ and give-up the trade to another broker for entire transaction processing in return for a fee/commission.

Accounting Department

Keeps formal accounting records for the brokerage firm including:

Assets

Liabilities

Profit & loss

Income such as interest, commissions, dividends, coupons, and trading revenues

Expenses such as payroll, rent, capex, utilities, etc.

Accounting entries representing the firm’s trading activities are typically stored in a ‘trading ledger’ supplied by the settlement system that in turn feeds the accounting department’s ‘general ledger’.  The trading ledger forms part of the overall content of the general ledger, which additionally contains information such as payroll costs.  The task of calculating the trading P&L can be handled by either the middle office or the accounting department.

Acknowledgment ‘ACK’

Confirmation from market infrastructures that an activity or message has been successfully received and processed.

AFB Agreement ‘AFBA’ ‘FBF’

French market master agreement for over- the-counter derivative transactions. Similar to the German Rahmenvertrag or ISDA Master Agreement, which cover the German based agreements and global agreements respectively.

Affirmation

The process by which two counterparties verify that they agree the primary economics of a trade. The affirmation process is where one party sends information to another party and the second party confirms whether or not the information is correct. This may be done by telephone, voice recording, email or an electronic affirmation platform.

Agency for the Cooperation of Energy Regulators ‘ACER’

Assists National Regulatory Authorities in exercising, at community level, the regulatory tasks that they perform in the Member States and, where necessary, to coordinate their action and work towards the completion of the single European Union energy market for electricity and natural gas.

Agency trades

Similar to principal trade above but done on client’s behalf

Agent

A person or entity who acts on behalf of another person or entity. A common example is a fund manager signing a document or performing an action on behalf of its funds.

Alternative Instrument Identifier ‘Aii’

Used where the ISIN is not the industry method of identification of a security such as options, shares, equities or derivatives. Consists of six separate mandatory elements which are collectively known as the Aii.

Alternative Investment

An investment that is not one of the three traditional asset types (equities, bonds and cash). Most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals because of their complex nature, limited regulations and relative lack of liquidity.

Alternative Investment Fund ‘AIF’

A fund that does not invest in one of the three traditional asset types (equities, bonds and cash). Most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals because of their complex nature, limited regulations and relative lack of liquidity.

Alternative Investment Fund Manager ‘AIFM’

The person(s) whose regular business is performing portfolio and/or risk management to an alternative investment fund.

Alternative Investment Fund Manager Directive ‘AIFMD’

A European Union directive, which regulates Alternative Investment Fund Managers (AIFMs) and their funds. The scope of the AIFMD is broad and, with a few exceptions, covers the management, administration and marketing of alternative investment funds (AIFs). Its focus is on regulating the AIFM rather than the AIF.

Anti-Money Laundering ‘AML’

Policies, procedures, laws and regulations designed to combat the practice of introducing funds generated through criminal conduct into legitimate financial systems.

Appreciation

An increase in the value of an asset over time. The increase can occur for a number of reasons including increased demand or weakening supply, or as a result of changes in inflation or interest rates.

Approved Reporting Mechanism ‘ARM’

The systems set up by the FCA through which all reportable transactions have to be reported. The systems have to comply with specific requirements detailed in Article 12 of the MiFID Level 2 regulation.

Back Office

The back office provides administrative support for a financial institution. The back office provides support, such as processing orders and maintaining records, so that the front office can run efficiently. 

Bank

A financial institution licensed as a receiver of deposits and lender of debt. There are two types of banks: commercial/retail banks and investment banks. In most countries, banks are regulated by the national government or central bank.

Bank Identifier Cod

A unique address that identifies the financial institutions involved in international financial transactions. It consists of eight or eleven characters, comprising the first three or all four of the following components: Bank Code, Country Code, Location Code and Branch Code. Example of where BICs are used is during the settlement instruction process to move funds from one institution to another.

Bankruptcy

A credit event used in all credit default swaps where the reference entity is a corporate. Bankruptcy events include the reference entity being dissolved, becoming insolvent, making an arrangement for the benefit of its creditors, being wound up or having a judgment of insolvency made against it.

Basel Committee on Banking Supervision ‘BCBS’

A committee of central bankers providing a forum for regular cooperation between its member countries on banking supervisory matters. Formulates broad supervisory standards and guidelines and recommends statements of best practice by central banks.

Basel minimum standards

The minimum standards for the supervision of international banking groups and their cross-border establishments, issued by the Basel Committee on Banking Supervision in July 1992.

Basis Point ‘BP’

A unit that is equal to 1/100th of 1% (or 0.01%) and is used to denote the change in price of a financial instrument. The basis point is commonly used for calculating changes in interest rates, equity indexes and the yield of a fixed-income security.

Basis Swap

An interest rate swap where the cash flows that are exchanged between two parties at usually done to limit interest rate risk that a company faces as a result of having differing lending and borrowing rates.

Beneficial owner

In relation to a corporate body, any individual who ultimately owns or controls more than 25% of the shares or voting rights in the corporate body or otherwise exercises control over the management of it. In relation to a partnership (other than a limited liability partnership) a beneficial owner is any individual who ultimately is entitled to or controls (whether the entitlement to control is direct or indirect) more than 25% share of the capital or profits of the partnership or more than 25% of the voting rights in the partnership or otherwise exercises control over the management of the partnership. In relation to a trust, the beneficial owner is any individual who is entitled to a specified interest in at least 25% of the capital of the trust property. In relation to the estate of a deceased person in the course of administration, the beneficial owner is the executor, original or by representation, or the administrator.

Beneficiary ID

A unique identifier for a financial institution set up to distinguish the beneficiaries from the non-beneficiaries and to protect against fraud and duplicate payments.

Bilateral Collateralization

A collateral agreement between two counterparties that requires either party to post security, depending on the value of the portfolio of contracts and the level of unsecured credit limits that have been established.

Bilateral Netting

An arrangement between two parties that transactions be summed, rather than settled individually. Bilateral netting not only streamlines the settlement process, it also reduces risk by specifying that, in the event of a default or some other termination event, all outstanding contracts are likewise terminated. CLS, TriOptima, exchanges and clearing houses perform netting. Firms can bilaterally net positions and/or cash flows. EMIR encourages greater bilateral netting through mandatory use of CCP.

Binomial option pricing model (BOPM)

A tree style option model that gives better precision for the “what if” scenario.  Normally considered a better option than that of the Black Sholes model when pricing sensitivity or long dated options.

Black-Scholes Model ‘BSM’

A model of price variation over time of financial instruments such as stocks that can, amongst other things, be used to determine the price of a European call or put option. The model assumes that the price of heavily traded assets follow a geometric Brownian motion with constant drift and volatility. When applied to a stock option, the model incorporates the constant price variation of the stock, the time value of money, the option’s strike price and the time to the option’s expiry.

Block Trade

A block trade is an initial overall size of notional executed, which is then allocated to individual legal entities. There are number of rules around how block trades can be executed, such as: 1) is made available for trading on a swap execution facility or designated contract market 2) occurs off the swap execution facility’s or designated contract market’s trading system or platform pursuant to the swap execution facility or designated contract market rules; 3) is consistent with the appropriate minimum block size requirements in the proposed rules; and 4) is reported in accordance with the swap execution facility’s or designated contract market’s rules and procedures.

Bond

A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at an interest rate.

Books & Records

The official record of an organization’s trading activity, securities positions and cash positions.

An organization’s books & records will maintain the following records:

Trades:  a complete record of all trades executed

Trading positions (also known as ownership position):  the net sum (by quantity) of all trades in each security

Open trades:  trades which have yet to settle and which are outstanding with counterparties

Settled trades:  trades which have settled at the custodian and which are no longer outstanding with the counterparty

Location position:  the sum of open trades and the settled position

Settled positions:  the net sum of all settled trades in each security, and in each currency

Failure to maintain up-to-date and accurate books & records of its trading and settlement activity will open a brokerage firm up to operational risk

Affects ability to assess risk of counterparties failing to settle trades

For purchases, affects prediction of incoming securities and outgoing cash

For sales, affects accurate prediction of outgoing securities and incoming cash

Affects accurate cash management and minimal banking costs

Broker ID

In the case that a broker acts as intermediary for the reporting counterparty without becoming a counterparty, the reporting counterparty shall identify this broker by a unique code. In the case of an individual, a client code shall be used.

Brokerage firm

A business whose primary purpose is to intermediate between buyers and sellers to facilitate a transaction.

Bundesanstalt für Finanzdienstleistun. gsaufsicht ‘BAFiN’

The German Federal Financial Supervisory Authority for German regulated entities

Business Requirement Document ‘BRD’

A formal document that effectively provides a contract between a supplier and a client. The document describes in detail every business need and is written in response to a known business problem or shortcoming.

Capital

Financial assets or the financial value of assets, such as cash

Cash seizure

Cash confiscated by law enforcement which is believed to have been acquired through illegal activities or going to be used for illegal activities.

Cash Transactions

Cash transactions are typically used for covering actual or projected overdrafts of cash at a brokerage firm’s custodians (negative nostro cash position) resulting from the settlement of purchases.  These activities are commonly referred to as funding.

Central Counterparty

An organization that is counterparty to both buyer and seller, and which practices clearing, resulting in the identification of net settlement movements

Central European Time ‘CET’

A standard time which is 1 hour ahead of Coordinated Universal Time (UTC).

Central Securities Depository ‘CSD’

An infrastructure service that allows the registration, safekeeping and settlement of securities in exchange for cash and efficient processing of securities transactions in financial markets.

Central Securities Depository ‘CSD’

A financial organization that holds securities on behalf of its clients in either physical or electronic form, allowing the ownership of these assets to be transferred between clients at one location.

CFTC Interim Compliant Identifier ‘CICI’

An identifier for all legal entities dealing in over-the-counter derivatives falling under CFTC jurisdiction, where they do not have an existing Unique Counterparty Identifier (UCI) or unique Legal Entity Identifier (LEI).

Change Request ‘CR’

A document requesting an adjustment to a system or project. It sets out what needs to be accomplished but omits how to carry out the changes.

Classification of Financial Instruments ‘CFI’

A standard for identifying the type of instrument and their core high-level characteristics.

Classification of Financial Instruments Code ‘CFIC’

A code used to define and describe in an internationally valid, standardized format, classification of financial instruments which could be used as a uniform set of codes by all market participants.

Clean Price

The price of fixed-interest security not including any accrued interest

Clearing

The procedure by which an organization acts as an intermediary between two parties and assumes the role of a buyer and seller for transactions in order to service orders between transacting parties.

 

The practice (post trade execution and pre-settlement) of defining settlement obligation and assigning responsibility for effecting settlement.  In marketplaces where there is a central counterparty, this central counterparty is responsible for clearing the transaction but settlement of the obligation still occurs at the relevant custodian specified in the settlement instructions.

Clearing Brokers ‘CB’

Acts as a liaison between a counterparty and either a Clearing Member or a clearing corporation. A Clearing Broker can be a clearing member and face the exchange directly or it can face a clearing member who in turn faces the exchange.

Clearing House ‘CCP’

A financial institution that provides clearing and settlement services for market participants to mitigate credit risk between individual market participants. Clearing houses are also known as Central Clearing Counterparty (CCP).

Clearing Member

A member of an exchange that acts as a liaison between counterparty or Clearing Broker and an exchange.

Clearing Member ID

The unique code that identifies an institution that provides clearing services for market participants. The clearing member will face the CCP on behalf of their counterparty.

Clearing Obligation

An obligation under EMIR for all financial counterparties (FCs) and non-financial counterparties (NFC+) to clear their eligible trades via a clearing house.

Clearing Threshold

The total exposure (in terms of total notional amount) a non-financial counterparty can reach before being obliged to clear its trades centrally. It is the dividing line between NFC- and NFC+. The threshold only covers speculative trades and varies per asset class.

Client

A person or entity that maintains an account and/or has a business relationship with a bank or one on whose behalf the account is maintained. Clients can also be beneficiaries of transactions conducted by professional intermediaries, including stock brokers, chartered accountants, and solicitors. A client can also be any person or entity connected with a financial transaction that can pose significant reputational or other risks to the bank, say, a wire transfer or issue of high value demand draft as a single transaction.

Client account

An account operated by a professional or organization for one of their clients.

Client Asset Sourcebook ‘CASS’

A set of rules implemented by the FCA to minimize risk of financial loss to consumers and firms through failures in controls. The FCA aims to ensure clients are confident that assets are held by firms with robust client asset controls and strong risk management systems. Clients can also be assured that assets are safe and will be returned within a reasonable timeframe in the event of firm failure.

Client Classification

Clients can be classified under EMIR as either a financial counterparty, non-financial counterparty +, or non-financial counterparty in order to determine the applicability of certain EMIR rules

Client classification

A process of grouping clients, using the information already obtained about the client, according to the type of investment service provided. It categorizes the perceived level of the client’s investment expertise, and sets out different levels of independence in investment decisions. The categories are retail client, professional client or ECP defined by MiFID.

Client Due Diligence ‘CDD’

As per The Money Laundering Regulations, CDD comprises of identifying the client and verifying their identity on the basis of documents, data or information obtained from a reliable and independent source, identifying where there is a beneficialowner who is not the client, and obtaining information on the purpose and intended nature of the business relationship. CDD must be conducted when either establishing a business relationship, carrying out an occasional transaction, there is a suspicion of money laundering or terrorism financing or if there is a doubt about the veracity or adequacy of documents, data or information previously obtained for the purpose of CDD.

Client On-boarding

The processes and procedures that need to be performed before a client can trade or buy services from a financial institution. For example: KYC, legal agreements, provision of account information and Legal Entity Identifier.

Client Reference Data

Static reference data associated with a client to allow the applications and functional processes to support client activity for example Legal Entity Identifier, BIC code, Location of Client Head Office.

CME

Chicago Mercantile Exchange is one of the largest exchanges in the world.  It offers the widest global trading assets from financial assets classes to energy and agricultural products.

Collateral

Property or other assets that a borrower offers a lender to secure a loan. If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup its losses. In trading, collateral is posted from one counterparty to another to offset the risk of losses associated with its position.

Collateral Portfolio Management

Collateral is posted from one counterparty to another to offset the risk of losses associated with its position within the overall portfolio of positions.

Collateral Support Document ‘CSD’

A legal agreement which sets forth the terms and conditions of collateralization

Collateralized Debt Obligation (CDO)

A tranche style structure product that includes multiple debt obligations including Mortgage Back Securities.  These structures pay a cash coupon based upon the debt obligations in each tranche.  These are categorized by their grade which goes from AAA to BBB and the payout will go from lowest to highest based on risk.

Collateralization

The pledge of collateral to act as a safeguard against default.

Commercial bank

A financial institution that provides services, such as accepting deposits, giving business loans and asset financing, mortgage lending, and basic investment products like savings accounts and certificates of deposit.

Commercial paper

A debt instrument that is used by corporations to raise short term funds (life of <=1 year).

Committee of European Securities Regulators ‘CESR’

An independent committee of European Securities Regulators set up to improve the coordination among securities regulators through networking. The CESR provides advisory support to the European Commission in the field of securities to ensure more consistent implementation of community legislation.

Committee on Payment and Settlement System ‘CPSS’

A committee made up of the central banks of G10 countries that monitors developments in payments, settlements and clearing systems.

Commodities Future Trading Commission ‘CFTC’

An independent U.S. federal agency established by the Commodity Futures Trading Commission Act of 1974. The Commodity Futures Trading Commission regulates the commodity futures, options and derivatives markets.

Commodity

A raw material or primary agricultural product that can be bought and sold, such as copper or coffee. Commodities are most often used as inputs in the production of other goods or services.

Commodity Swap

An agreement whereby a floating price based on an underlying commodity is traded for a fixed price over a specified period. The floating leg is based on the price of underlying commodity, for example oil or sugar.

Common Data

A set of 59 fields which is common to both parties to a trade including contract type and transaction details e.g. trade ID (UTI), notional amount, currency, maturity date, etc. To avoid inconsistencies, common data needs to be agreed between counterparties before submission to a trade repository for EMIR regulatory reporting purposes.

Company charter

A document filed with a US state by a company’s founders, detailing the major components of a company such as its objectives, structure and planned operations. Also known as documents of incorporation.

Compliance

A function ensuring internal controls, policies and regulatory processes are carried out, that records are kept and that issues are identified, reported and managed such that a business meets all its legal and regulatory obligations and its reputation is protected.

Compliance Risk

The risk of monetary or reputational loss due to failure to comply with key regulations governing the organization’s operations and business dealings.

Compliance risk

The risk of monetary or reputational loss due to failure to comply with key regulations governing the organization’s operations and business dealings.

Conduit Affiliate ‘CA’

Client can be classified under US legislation as Conduit Affiliates. This classification will determine the applicability of certain rules. Factors relevant to determine classification include: (i) the non-US person is a majority-affiliate of a US person; (ii) the non-US person is controlling, controlled by or under common control with the US person; (iii)the financial results of the non-US person are included in the consolidated financial statements of the US person (iv) the non-US person, in the regular course of business, engages in swaps with non-US third party(ies) for the purpose of hedging or mitigating risks faced by, or to take positions on behalf of its US affiliate(s), and enters into offsetting swaps or other arrangements with its US affiliate(s) in order to transfer the risks and benefits of such swaps with third-party(ies) to its US affiliates; (v) Conduit Affiliate does not include affiliates of Swap dealers.

Confirmation

A legal agreement to all terms of an individual over-the-counter transaction between two counterparties. A confirmation shall legally supersede any previous agreements. Confirmations can be produced electronically or manually in paper form.

Confirmation Timestamp

The date and time of when the confirmation was fully legally executed

Conflict of Interest‘ COI’

A situation where an individual or an institution has a vested interest which may make them an unsuitable source. The interest could be money, status, knowledge or reputation.

Continuation Data

Requirement under Dodd Frank to report life cycle event data (e.g., assignments, novations and full or partial terminations) to ensure that the trade repository record remains current and accurate.

Continuous Linked Settlement ‘CLS’

CLS operates the largest multi-currency cash settlement system to mitigate settlement risk between members of the system. The system takes members gross cash flows and nets them with other members to reduce the size and number of cash flows between participants, thereby reducing settlement risk.

Controller

An individual entitled to exercise significant influence over the management or finances of the company, despite being neither a shareholder nor a director.

Corporation

A business created by a group of shareholders who have ownership of the company but limited liability.

Cost of Carry

Costs incurred as a result of holding a particular asset for a specific period of time. These costs can include financial costs, such as the interest costs on bonds, interest expenses on margin accounts and interest on loans used to purchase a security, and economic costs, such as the opportunity costs associated with taking the initial position.

Counterparty ‘CP’

Every transaction needs to have two parties to conclude a transaction. The two parties are known as counterparties to a trade.

Counterparty Data

A set of 26 fields, specific to a counterparty including counterparty ID, name of counterparty, country of domicile, beneficiary information, clearing broker ID. Under EMIR, counterparty data must be reported to a trade repository independently by both counterparties.

Coupon

An amount due on a transaction as a result of an interest rate calculation.

Credit Default Swaps ‘CDS’

A contract designed to transfer the credit exposure of debt obligation between parties. The buyer of a credit swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the underlying security. In a CDS, the risk of default is transferred from the holder of the security to the seller of the swap. Most credit derivatives take the form of credit swaps.

Credit Derivative

An over-the-counter financial derivative instrument that enables the isolation and separate transfer of credit risk.

Credit Event

An event linked to the deteriorating credit worthiness of an underlying reference entity in a credit derivative. The occurrence of a credit event usually triggers full or partial termination of the transaction and a payment from protector seller to protector failure to pay, restructuring, obligation acceleration, obligation default and repudiation/moratorium.

Credit Event Notice ‘CEN’

A notice where the counterparty triggering the credit event (normally the protection buyer) informs the other counterparty that a credit event has occurred. CEN must contain a description in reasonable detail of the facts relevant to the determination that a credit event occurred.

Credit Risk

The risk of loss of principal or loss of a financial reward stemming from a borrower’s failure to repay a loan or otherwise meet a contractual obligation. Credit risk arises whenever a borrower is expecting to use future cash flows to pay a current debt. Investors are compensated for assuming credit risk by way of interest payments from the borrower or issuer of a debt obligation.

Cross-margining

The practice of margining across products, asset classes or clearing houses, resulting in netting benefits due to overall lower margin requirements.

Cum-dividend

When a buyer of a security is entitled to receive a dividend that has been declared but not paid.

Custodian

A financial institution that holds clients’ securities for safekeeping to minimize the risk of their theft or loss. A custodian holds securities and other assets in electronic or physical form.

Default waterfall

A pre-determined sequence of actions taken by a clearing house and/or clearing members in the event of a default of one or more members of the clearing house in order to prevent systematic risk.

Delegated Reporting ‘DR’

EMIR permits counterparties to ‘delegate’ its transaction reporting obligation to the other counterparty to the trade or to a third party service provider

Deliverable Obligation

In a credit event, if the physical settlement option is selected, an obligation must be delivered. Deliverable obligation other than the Reference Obligation must be payable in any amount equal to its outstanding principal balance.

Delta

The ratio which compares the change in the price of the underlying asset to the corresponding change in the price of a derivative. Sometimes referred to as the “hedge ratio.”

Depository Trust & Clearing Corporation ‘DTCC’

A holding company consisting of 5 clearing corporations and 1 depository, making it the world’s largest financial services infrastructure corporation dealing with post trade transactions. DTCC is a utility that provides clearance, settlement and information services and it is owned by major investment banks

Depot (custodian) transfer

Executed when a brokerage firm needs to move securities from one custodian to another.

Depots/Nostros or Custodians

Local agents (in the financial center where a security originates from) that exchange securities and cash on behalf of their brokerage firm clients

Securities are held within custodian securities accounts (also known as a depot accounts) on behalf of the custodian’s clients

Cash is held within custodian cash accounts (also known as a nostro accounts) on behalf of the custodian’s clients

Derivatives Clearing Organizations ’DCOs’

A clearing house, clearing association, clearing corporation, or similar entity that enables each party to an agreement, contract, or transaction to substitute, through novation or otherwise, the credit of the DCO for the credit of the parties. DCO provides clearing services by multilateral settlement or netting of obligations and by mutualising and transferring the credit risk from the transactions to the members of the clearing organization.

Designated Contract Markets ‘DCM’

Boards of trade (or exchanges) that operate under the regulatory oversight of the CFTC, pursuant to Section 5 of the Commodity Exchange Act (CEA), 7 USC 7. DCMs are like traditional futures exchanges in that they may allow access to their facilities by all types of traders, including retail customers

Dirty Price

The price of a fixed-interest security which includes the accrued interest since the last coupon date.

Discussion Paper ‘DP’

A document intended to stimulate debate and launch a process of consultation on a particular topic.

Dispute Processes

Processes for identifying, clarifying, monitoring and documenting disputes between counterparties. Dispute processes normally arise from differences in margining, transaction assessment or in case of adjustment of transaction data.

Dividend

A distribution of a portion of a company’s earnings to a class of its shareholders decided by the board of directors.

Dodd Frank Act ‘DFA’

A financial regulation, primarily affecting financial institutions and their customers based in US that the Obama administration passed in 2010 in response to the commitments agreed at the G20 2009 Pittsburgh Summit.

Dodd-Frank Protocol 1 ‘DFP1’

An ISDA Protocol aimed at assisting the over-the-counter derivatives industry in implementing regulatory requirements under Title VII of the US Dodd-Frank Act. It allows market participants to: (i) supplement the terms of existing ISDA Master Agreements under which the parties to the agreements may execute individual swaps and derivatives transactions; and (ii) enter into an agreement to apply selected Dodd-Frank compliance provisions to their swaps and derivatives trading relationship.

Dodd-Frank Protocol 2 ‘DFP2’

Part of ISDA’s Dodd-Frank documentation initiative. The protocol is intended to aid compliance with the CFTC’s internal business conduct rules for swap dealers and major swap participants. It addresses: (i) swap transaction confirmation (ii) swap portfolio reconciliation (iii) swap portfolio compression (iv) swap trading relationship documentations v) the commercial end-user exception from mandatory swap clearing requirements (vi) swap clearing determinations under s.2(h) of the US Commodities Exchange Act

Effective Date

In the US, this is the date on which shares can start trading as declared by the Securities & Exchange Commission (SEC). This usually refers to the date when shares become available for sale in an initial public offering. At the same time this date is commonly referred to as when a transaction starts accruing interest.

End of Day ‘EOD’

The end of the trading day in financial markets, when markets have closed.

Equity Derivative

A derivative instrument with underlying assets based on equity securities. An equity derivative’s value will fluctuate with changes in its underlying asset’s equity, which is usually measured by share price. Examples of equity derivative include equity options, equity swaps, equity index swap, warrants and convertible bonds.

Equity Forward

An equity forward is a contract for the purchase of an individual stock, a stock portfolio or a stock index at some future date.

European Banking Authority ‘EBA’

A body formed in 2011 that has taken over all existing and ongoing tasks and responsibilities from the CEBS. The EBA is comprised of EU and national bodies safeguarding the stability of the financial system, the transparency of markets and financial products, and the protection of depositors and investors.

European Central Bank ‘ECB’

The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed in Germany in June 1998 and works with the other national banks of each of the EU members to formulate monetary policy that helps maintain price stability in the European Union.

European Commission

The European Commission is the executive body of the European Union responsible for proposing legislation, implementing decisions, upholding the Union’s treaties and day-to-day running of the EU.

European Economic Area ‘EEA’

The EEA comprises three member states of the European Free Trade Association (EFTA), Iceland, Liechtenstein and Norway, and 27 member states of the European Union (EU). It was established on 1 January 1994 and it allows the EFTA-EEA states to participate in the EU’s Internal Market without being members of the EU. They adopt almost all EU legislation related to the single market, except laws on agriculture and fisheries.

European Economic Area ‘EEA’

An area including all EU member states and European Free Trade Association (EFTA) member states.

European Insurance and Occupational Pension Authority ‘EIOPA’

A European Union financial regulatory institution that replaced the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS). It is established under EU Regulation 1094/2010.

European Markets Infrastructure Regulation ‘EMIR’

The European Union regulation on derivatives, central counterparties and trade repositories (EMIR) introduces new requirements to improve transparency and reduce the risks associated with the derivatives market. EMIR also establishes common organizational, conduct of business and prudential standards for CCPs and trade repositories. EMIR is Europe’s response to the commitments agreed at the G20 2009 Pittsburgh Summit.

European Parliament

The Parliament, which together with the Council of the European Union and the European Commission exercises the legislative function of the EU.

European Securities and Markets Authority ‘ESMA’

An independent European Union financial regulatory institution and European Super visory Authority overseeing European securities trading across all of the EU member states. It safeguards the stability of the European Union’s financial system by ensuring the integrity, transparency, efficiency and orderly functioning of securities markets, as well as enhancing investor protection. Its role is to write the rules based on the guidelines set out in the EMIR legislation.

European Supervisory Authorities ‘ESAs’

This body oversees the regulation of financial services across Europe and consists of the separate agencies: European Securities and Markets Agency (ESMA), European Banking Agency (EBA) and European Insurance and Occupational Pensions Authority (EIOPA).

European Union ‘EU’

An economic and political union of 28 European countries which participates in the world economy as one economic unit and operates mostly under one official currency, the Euro. The EU’s goal is to create a barrier-free trade zone and to enhance economic wealth by creating more efficiency within its marketplace.

Exchange

A marketplace in which securities, commodities, derivatives and other financial instruments are traded. The core function of an exchange is to ensure fair and orderly trading, as well as efficient dissemination of price information for any securities trading on that exchange. Products traded on an exchange are standardized compared to over- the-counter products, which are customized.

Exchange Traded Fund ‘ETF’

An investment fund traded on stock exchanges. An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. Most ETFs track an index, such as a stock index or bond index.

Exchanged Traded Derivatives ‘ETD’

Exchange-traded derivatives are standardized derivative contracts such as futures contracts and options that are transacted on an organized futures exchange. They require payment of an initial deposit (margin), settled through a clearing house and margined daily.

Ex-dividend

A classification of trading shares when a declared dividend belongs to the seller rather than the buyer. A stock will be given ex-dividend status if a person has been confirmed by the company to receive the dividend payment.

Execution

An agreement by the parties (whether orally, in writing, electronically, or otherwise) to the terms of a financial instrument that legally binds the parties to such financial instrument terms under applicable law.

Exempt Individual

Individual trading in a personal, non- commercial capacity are exempt from the requirements of EMIR.

Exotic Option

A trade that differs from common American or European options in terms of the underlying asset or the calculation of how or when the investor receives a certain payoff. These options are more complex than options that trade on an exchange and generally trade over the counter.

Extra-territorial reach (extra- territoriality)

The enforcement of a rule/law/regulation outside the borders of a local jurisdiction e.g. non-EEA entities falling in the scope of EMIR for portfolio reconciliation when trading with EEA counterparties.

Failure to Pay

Failure to Pay is a failure of the reference entity to make, when and where due, any payments under one or more obligations. Grace periods for payment are taken into account.

Federal Deposit

An independent agency created by the Insurance US Congress to maintain stability and public Corporation ‘FDIC’ confidence in the nation’s financial system by insuring deposits, examining and supervising financial institutions, and managing receiverships.

Figuration

Calculation of the trade cash value in order to know the cash cost to pay for securities purchased from counterparties or the cash proceeds to receive when delivering securities to counterparties

Figuration is usually possible if the above minimal trade information is captured (price * quantity).

Figuration typically performed by the middle office (i.e. trade support area), or the settlement department

Financial Accounting Standards Board (FASB)

An independent group that establishes financial and accounting rules and reporting standards for publicly traded companies in the United States.

Financial Conduct Authority ‘FCA’

The FCA is a non-governmental institution which regulates the financial services industry in the UK. The aim of the FCA is to protect consumers and to ensure that the financial services industry remains stable.

Financial Counterparty ‘FC’

Under EMIR definitions, FC includes investment firms, credit institutions, insurance undertakings, assurance undertakings, reinsurance undertakings, undertakings for collective investment in transformable securities ‘UCITS’ and their management companies, institutions for occupational retirement provision, and alternative investment funds managed by alternative investment fund managers. In each case these firms are authorized or registered in accordance with applicable EU legislation

Financial Entity

An establishment that focuses on dealing with financial transactions, such as investments, loans and deposits. Financial institutions are composed of organizations such as banks, trust companies, insurance companies and investment dealers.

Financial Market Infrastructure ‘FMI’

Processes and systems which are used for clearance and settlement of transactions in the financial markets as well as the movement of money and securities around the world. FMIs include payment systems, central securities depositories, central counterparties and TRs.

Financial sanctions

Restrictions on free access by designated individuals or entities to any funds and economic resources owned or controlled by physical or legal persons, groups or entities appearing in the annexes to the EU regulations. All funds and economic resources must be frozen. The HMT is responsible for the implementation and administration of international financial sanctions in effect in the UK, for domestic designations under the Terrorist Asset-Freezing Act 2010, licensing exemptions to financial sanctions and directions given under schedule 7 to the Counter Terrorism Act.

Financial Services Act 2012

The Act came into force from the 1st April 2012 and implemented the UK Government’s commitment to strengthen the financial regulatory structure in the UK. The regulation delivered a reform of the regulatory system by dividing responsibilities for financial stability between the Treasury, the Bank of England and FSA. The FSA ceased to exist from the 1st April 2013. The Act transferred responsibility to a new regulator, the PRA, which was established as a subsidiary of the Bank of England. In addition, the act created a new conduct of business regulator - the FCA. The FCA supervises all firms to ensure that business across financial services and markets is conducted in a way that advances the interest of all users and participants.

Financial Services Authority ‘FSA’

The regulatory body for all providers of financial services in the United Kingdom. FSA is an independent, non-governmental entity that receives its statutory powers through the Financial Services and Markets Act of 2000. On 1st April 2013 the FSA was split into two new agencies: Prudential Regulation Authority and the Financial Conduct Authority.

Financial Stability Board ‘FSB’

An international board set up to coordinate the work of national financial authorities and international standard setting bodies. Its role is to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies in the interest of global financial stability.

Fixed Rate Day Count

The day count fraction used in interest rate swaps. It is one divided by the number of interest payments per year. The coupon payments are thus always the same (with any small difference in the number of days ignored).

Floating Rate

Any interest rate that changes on a periodic basis (as opposed to a fixed rate which remains constant). The change is usually tied to the movement of an outside indicator, such as the prime interest rate (e.g. LIBOR). Movement above or below certain levels is often prevented by a predetermined floor and ceiling for a given rate.

Foreign Account Tax Compliance Act ‘FATCA’

A US act that requires persons from the United States, including individuals who live outside the US, to report their financial accounts held outside of the US, and requires foreign financial institutions to report to the Internal Revenue Service (IRS) about their American clients. FATCA was implemented in order to combat offshore tax evasion and to recoup federal tax revenues.

Foreign exchange derivative

A foreign exchange derivative is a financial derivative whose payoff depends on the foreign exchange rate(s) of two (or more) currencies

Foreign Exchange ‘FX’

A global decentralized market for the trading of currencies.

Foreign (FX) Exchange Transactions

To cover an overdraft by executing a FX transaction with funds from a nostro account that has a credit balance in another currency.

The cash management function within the treasury department normally executes FX transactions with counterparties (e.g. banks, other trading organizations).

FX transactions are also executed for purposes other than funding.  For example, a FX trade will be required when a brokerage firm’s client wishes to pay or receive cash in a currency other than the usual ‘traded’ currency of the security.

Forward Rate Agreement ‘FRA’

An FRA is an agreement between two parties who agree on a fixed rate of interest to be paid or received on a fixed date in the future. The contract will determine the rates to be used along with the termination date and notional value. FRA’s are used to assist companies manage their interest rates exposure

Front Office

The sales & trading personnel and corporate finance employees in a financial services company. It's in the front office where revenues are generated.

Frontloading

Frontloading refers to the period between the point at which a clearing house – also known as a central counterparty (CCP) – is authorized and the date on which the clearing obligation for a particular derivatives contract takes effect.

Fully collateralized

A term used for collateral agreement, where both parties post initial margin and variation margin.

Fund Manager ‘FM’

The person responsible for implementing a fund’s investing strategy and managing its portfolio trading activities.

Futures

A standardized contract between two parties to buy or sell a specified asset of standardized quantity and quality for a price agreed upon today (the futures price) with delivery and payment occurring at a specified future date (the delivery date). Futures are traded on exchanges under standardized contracts.

FX Forwards

  • A forward contract is a non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed today. This is in contrast to a spot contract, which is an agreement to buy or sell an asset today. The party agreeing to buy the underlying asset in the future assumes a long position, and the party agreeing to sell the asset in the future assumes a short position. The price agreed upon is called the delivery price, which is equal to the forward price at the time the contract is entered into.
  • The difference between the spot and the forward price is the forward premium, generally considered in the form of a profit, or loss, by the purchasing party.
  • Why trade these? Forwards can be used to hedge risk (typically currency or exchange rate risk)
  • It is a completed contract and the underlying currency will be delivered, unlike an option which offers a choice of whether or not to complete the trade.
  • Unlike futures contracts, forwards are not contracts with standard terms. They are tailor-made between the buyer and seller for each deal and are traded over the counter (OTC) and not on an exchange.

FX Futures

  • A futures contract to exchange one currency for another at a specified date in the future at a price (exchange rate) that is fixed on the purchase date
  • Most contracts have physical delivery, so for those held at the end of the last trading day, actual payments are made in each currency. However, most contracts are closed out before that. Investors can close out the contract at any time prior to the contract's delivery date.
  • As with other futures, the conventional maturity dates are the IMM dates, namely the third Wednesday in March, June, September and December
  • Futures resemble forward contracts in that they involve buying or selling an item for receipt or delivery in the future, but are different from them in that they are standardized contracts.
  • Every futures contract has standard terms that dictates the minimum quantity that can be bought or sold, delivery procedures, contract months, etc. They must be traded on a recognized exchange.
    • Example 10 contracts of Sept CME Euro FX Futures at 1.4 USD/ Euros
  • Unlike forward contracts, delivery of a futures contract is rare. As the delivery date draws near most investors close out their positions by making an equal and opposite trade.

FX Market

The foreign exchange market determines the relative values of different currencies

Uses:

  • Assists international trade and investment by enabling currency conversion.
  • It also supports direct speculation in the value of currencies, and the carry trade, speculation on the change in interest rates in two currencies

How did the modern FX market start? What enabled it?

  • The modern foreign exchange market began forming during the 1970s after three decades of government restrictions on foreign exchange transactions, when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the Bretton Woods system.

Fluctuations in exchange rates are usually caused?

FX Options

  • A FX option gives the owner the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. Unlike the sale or purchase of a futures market contract where the holder has to fulfill the contract at some future date an option gives holder the choice of whether to exercise or not.
  • An option contract specifies a future date on or before which it can be exercised, the expiry date. An option's strike price or exercise price is the price at which the underlying asset can be bought or sold.
  • Most trading is over the counter (OTC) and is lightly regulated, but a fraction is traded on exchanges like the International Securities Exchange, Philadelphia Stock Exchange, or the Chicago Mercantile Exchange for options on futures contracts.
  • Example: a GBP/USD contract could give the owner the right to sell £1,000,000 pounds and buy $2,000,000 on December 31. In this case the pre-agreed exchange rate, or strike price, is 2.0000 USD per GBP (or GBP/USD 2.00 as it is typically quoted) and the notional amounts (notionals) are £1,000,000 and $2,000,000.
  • This type of contract is both a call on dollars and a put on sterling, and is typically called a GBPUSD put
  • If the rate is lower than 2.0000 on December 31 (say at 1.9000), meaning that the dollar is stronger and the pound is weaker, then the option is exercised, allowing the owner to sell GBP at 2.0000 and immediately buy it back in the spot market at 1.9000, making a profit of (2.0000 GBPUSD – 1.9000 GBPUSD)*1,000,000 GBP = 100,000 USD in the process. If they immediately convert the profit into GBP this amounts to 100,000/1.9000 = 52,631.58 GBP.
  • Benefits - They allow investors to benefit from favorable price movements while limiting the consequence of unfavorable price movements. Option holders have to pay a premium for this protection as with any insurance contract.
  • There are two kinds of option; a call option, which gives the holder the right to buy the underlying instrument at the strike price and a put option, which gives the holder the right to sell it at the strike price. More than one option transaction can be combined to create a spread. These strategies usually involve the simultaneous purchase and sale of options with different prices, or expiry dates.
  • American options can be exercised at any time before the expiry date, whereas European options can be exercised only at the expiry date and not before.

FX Spots

  • A foreign exchange spot transaction is an agreement between two parties to buy one currency against selling another currency at an agreed price for settlement on the spot date. The exchange rate at which the transaction is done is called the spot exchange rate.
  • The spot market is the market for immediate delivery and settlement of currencies.
  • The spot exchange rate is highly sensitive to changes in an economy.
  • If a standard spot deal does not settle by T + 2, interest will start to accrue against the party which has failed to deliver.
  • The standard settlement timeframe for foreign exchange spot transactions is T + 2 days; i.e., two business days from the trade date. A notable exception is the USD/CAD currency pair, which settles at T + 1.

FX Swaps

  • A foreign exchange swap consists of two legs: a spot and a forward
  • Simultaneous borrowing and lending of one currency for another with two different value dates.
  • For example, a company may have costs it must pay in Swiss francs while its revenues are in U.S. dollars. Another company may have the opposite requirement. A bank, for a fee, arranges a currency swap, which meets both requirements.
  • Can you only have exchanges of spot vs. forwards? – NO, it is also common to trade forward-forward, where both transactions are for (different) forward dates.
  • By far and away the most common use of foreign exchange swaps is for institutions to fund their foreign exchange balances.
  • Once a foreign exchange transaction settles, the holder is left with a positive (or long) position in one currency, and a negative (or short) position in another. In order to collect or pay any overnight interest due on these foreign balances, at the end of every day institutions will close out any foreign balances and re-institute them for the following day. To do this they typically use tom-next swaps, buying (or selling) a foreign amount settling tomorrow, and then doing the opposite, selling (or buying) it back settling the day after.
  • The interest collected or paid every night is referred to as the cost of carry. As currency traders know roughly how much holding a currency position will make or cost on a daily basis, specific trades are put on based on this; these are referred to as carry trades.
  • The relationship between spot and forward is known as the interest rate parity.

G10

The Group of 10 or G10 refers to the 11 countries that work together to drive global financial and economic stability. The original 10 countries were Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, the UK and the US. Switzerland was added in 1964 to make 11 countries but the group kept the original G10 title.

G20

The group of finance ministers and central bank governors from 19 countries plus the European Union.

G20 Commitments

Commitments made by the G20 group of countries. For example, at the G20 2009 Pittsburgh Summit, the participating countries committed to improve the over- the-counter derivatives market through: 1. Reporting over-the-counter derivatives to Trade Repositories, 2. Increased use of central counterparties, 3. Execution of over- the-counter derivatives on electronic trading platforms, 4. Increase use of collateral and risk mitigation techniques.

Generally Accepted Accounting Principles ‘GAAP’

GAAP refer to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards or standard accounting practice. These include the standards, conventions, and rules that accountants follow in the preparation of financial statements. GAAP may vary depending on the jurisdiction they are used in.

Global Financial Markets Association

An industry trade association to represent the common interests of the world’s leading financial and capital market participants. The association speaks for the industry on the most important global market issues. GFMA’s mission is to provide a forum for global systemically important banks to develop policies and strategies on issues of global concern within the regulatory environment.

Global Trade Repository ‘GTR’

A DTCC owned central repository which maintains the records of derivative trades. The GTR provides full coverage of all cleared and uncleared over-the-counter derivatives products within each major asset class globally.

Guaranteed Affiliate ‘GA’

Clients can be classified under US legislation as Guaranteed Affiliates, where they are: (i) affiliated with a US person, and (ii) their trading activity is supported by a “guarantee”* from any US person. *A Guarantee in this sense: - is not a traditional guarantee of payment or performance of the related swaps - is the substance, rather than the form, of the arrangement that determines whether the arrangement should be considered a guarantee; and- includes other formal arrangements that support the non-US person’s ability to pay or perform its swap obligations with respect to its swaps.

Haircut

A haircut is a percentage that is subtracted from the market value of an asset that is being used as collateral. The size of the haircut reflects the perceived risk associated with holding the asset.

Hedging

Hedge trades are used to mitigate the risk and exposure that exists with positions. Under EMIR, trades used for hedging purposes directly linked to commercial or treasury financing activity are exempt from a number of the EMIR rules.

Historical Trades

Trades from a previous period of trading that are used to plot trends in the market.

Holding Company

A corporation whose principal assets are shares in other companies. Holding company structure is commonly used in legitimate businesses for variety of reasons, such as separation of different lines of business, tax efficiency, financial structuring and managing cross-border operations. Holding companies are important in EMIR because banks must report trades to trade repositories and the reporting firm must know the correct legal schedule of the counterparties they are reporting for.

Index

A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is an imaginary portfolio of securities representing a particular market or a portion of it. Each index has its own calculation methodology and is usually expressed in terms of a change from a base value.

Individual Client Segregation

A type of cash and collateral segregation where the CCP has to keep separate records and accounts enabling the clearing member to distinguish between the assets and positions held for the account of one client from those held for the account of another client.

Initial Margin ‘IM’

The amount required to be collateralized at a start of a new transaction. It is a percentage of the notional amount and is determined by a set of factors, such as strike price, price of underlying instrument, volatility, time to expiration etc.

Inter-Dealer Broker ‘IDB’

An Inter-Dealer Broker is an institution that brings together a buyer and a seller of a financial instrument.

Interest Rate

The amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. Interest rates are typically noted on an annual basis, known as the annual percentage rate (APR).

Interest Rate Swap ‘IRS’

An over-the-counter transaction whereby two parties agree to exchange interest rate cash flows, based on a specified notional amount from a fixed rate to a floating rate (or vice versa) or from one floating rate to another. Interest rate swaps are commonly used for both hedging and speculating.

Intermediary Financial Institutions

A bank or financial institution that serves as a facilitator between two parties to a financial arrangement. A financial intermediary is often required to guarantee payment to one party to provide access to funding or completion for agreement.

International Securities Identification Number ‘ISIN’

Unique 12-character alpha-numerical code that is used to identify a security such as options, shares, equities or derivatives.

International Standards Organization ‘ISO’

The world’s largest developer of voluntary International Standards which give specifications for products, services and good practice, helping to make industry more efficient and effective. Developed through global consensus, they help to break down barriers to international

International Swaps and Derivatives Association ‘ISDA’

Global Trade Association for over-the-counter derivatives sector, with over 800 member institutions and the aim to improve the effectiveness of the over-the-counter derivatives market. ISDA fosters safe and efficient derivatives markets to facilitate effective risk management for all users of derivative products.

Intra-group transaction

Transaction occurring between two counterparties which are within the same financial group. Under EMIR all intra-group transactions need to be reported

Investment Firm ’IF’

A company whose main business is holding securities of other companies purely for investment purposes. The investment company invests money on behalf of its shareholders who in turn share in the profits and losses.

ISDA 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol

A standard agreement which helps participants to carry out the EMIR requirements for portfolio reconciliation and dispute resolution. It also includes a disclosure waiver to help ensure parties can meet the various reporting and record keeping requirements under EMIR without breaching confidentiality restrictions. Signing up to this agreement eliminates the need to create bilateral agreements between counterparties. If counterparty signs the protocol, then that counterparty has signed up to all the other counterparties who have also signed the protocol.

ISDA DF Protocol Extension

The ISDA DF Protocol Extension permits parties that have adhered to DFP2 to agree bilaterally to use their existing DFP2 arrangements as a substitute for formal adherence to the ISDA 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol. The Protocol Extension either modifies or restates provisions in DFP2 to bring that protocol document into compliance with certain requirements under EMIR

ISDA Master Agreement

A basic, standardized swap contract created by ISDA. The standard agreement identifies the two parties entering the transaction; describes the terms of the arrangement, such as payment, events of default and termination; and lays out all other legalities of the deal.

ISO 9362 (also known as SWIFT-BIC, BIC code, SWIFT ID or SWIFT code)

The standard format of Bank Identifier Codes approved by the International Organization for Standardization (ISO). It is the unique identification code of a particular bank. These codes are used when transferring money between banks, particularly for international wire transfers, and also for the exchange of other messages between banks. The codes can sometimes be found on account statements.

Issuer

A legal entity that develops, registers and sells securities for the purpose of financing its operations

Jurisdiction

The power or the right of a legal or political agency to exercise its authority over a person, subject matter, or territory.

Know Your Client ‘KYC’

The due diligence activities that financial institutions and other regulated companies must perform to ascertain relevant information about the suitability of their clients for the purpose of doing business with them.

Know Your Client ‘KYC’

The due diligence activities that financial institutions and other regulated companies must perform to ascertain relevant information from their clients for the purpose of doing business with them. This relates to the information the financial institution requests from the client, how it uses that to identify its clients, how it verifies the client’s identity and the steps it takes to risk assess its clients and monitor the ongoing activity on the client’s account.

Large Notional Swap

A large notional swap is an off-facility swap that has a notional or principal amount at or above the appropriate minimum block size applicable to such publicly reportable swap transaction and is not a block trade as defined in Section 43.2 of the Commission’s regulations. Similar to block trade, however it is not available for trading or execution on a swap execution facility (SEF) or designated contract market (DCM). A large notional swap must be consistent with the appropriate minimum size requirements in the proposed rules. Additionally, a large notional swap must be reported in accordance with the appropriate time delay in the proposed rules.

Legal entities

An association, corporation, proprietorship or trust that has legal standing and the capacity to enter into agreements or contracts, assume obligations, sue and be sued in its own right, and to be held responsible for its actions.

Legal Entity Identifier ‘LEI’

A code that identifies a counterparty uniquely. LEI was initially recommended by the Office of Financial Research (OFR) in the US. It is similar to the CFTC Unique Counterparty Identifier Code (UCI) and has been endorsed by the FSB as the unique code to describe legal entities globally.

Leverage

The magnification of gains and losses by only paying for part of the underlying value of the instrument or asset.

Limited Liability Company ‘LLC’

A hybrid business entity having certain characteristics of both corporation and partnership or sole proprietorship. It is unincorporated, although it does have limited liability. It is often more flexible than a corporation and it is subject to less public disclosure compared to an incorporated company.

Limited Liability Partnership ‘LLP’

A partnership in which LLP itself is responsible for any debts it incurs, not the individual partners.

Limited Partnership ‘LP’

An LP consists of one or more persons called general partners who are liable for all debts and obligation of the firm and one or more persons called limited partners who contribute a sum or sums of money as amount. Limited partners are not liable for the debts and obligations of the firm beyond the amount contributed. Limited partners may not draw out or receive back any part of their contribution to the partnership during its lifetime, take part in the management of the business or have power to bind the firm.

Liquidity

Liquidity is a market’s ability to facilitate an asset being traded quickly without having a material impact on the assets price.

Local Operating Unit ‘LOU’

A market infrastructure that provides LEI codes to legal entities that require them. Due to the decentralized nature of regulation around LEIs, a number of LOUs exist across Europe but follow consistent standards to generate LEIs.

London Clearing House ‘LCH’

A London and Paris based CCP providing central counterparty and clearing services for securities and derivative transactions.

London Inter-Bank Offered Rate ‘LIBOR’

The interest rate that London based banks lend to each other intra-day. LIBOR is calculated by taking quotes from 16 banks and coming up with an average rate once a day at 11.45am.

London Stock Exchange ‘LSE’

The primary stock exchange in the U.K. and the largest in Europe. The Financial Times Stock Exchange (FTSE) 100 Share Index, or “Footsie”, is the dominant index, containing 100 of the top blue chips on the LSE.

Major Swap Participant ‘MSP’

Under Dodd Frank Act, MSP is a person that satisfies any of the following: 1. It maintains a “substantial position” in any of the major swap categories, excluding positions held for hedging or mitigating commercial risk; 2. A person whose outstanding swaps create “substantial counterparty exposure that could have serious adverse effects on the financial stability of the United States banking system or financial markets.” 3. It is “highly leveraged relative to the amount of capital such entity holds and that is not subject to capital requirements.

Margin Balance

The total balance of a margin account. If the balance is negative, a margin call can be issued at any time.

Margin Call

A broker’s demand on an investor using margin to deposit additional money or securities so that the margin account is brought up to the minimum maintenance margin. Margin calls occur when your account value depresses to a value calculated by the broker’s particular formula. Under EMIR, new rules around dispute resolution require counterparties to agree the margin call within a mandatory time frame. Margin call must be reported to the regulator if not resolved within the timeframe.

Mark to Market ‘MTM’

A measure of the fair value of a trading position. Mark to market should be reported daily and the increase and the decrease in the MTM should be reported daily in the PnL. The MTM will also affect the net margin call.

Mark to Model

The pricing of a specific investment position or portfolio based on financial modeling. Mark to Model is used where Mark to Market is unavailable.

Market Abuse Directive ‘MAD’

One of the main measures in the EU Financial Services Action Plan which is designed to help complete a single market in financial services for the EU and a framework for establishing a proper flow of information to the market.

Marketing in Financial Instruments Directive ‘MiFID’

A set of EU guidelines that created common regulations across the investment services in member states. MiFID authorizes member states to regulate their own financial firms, requires that firms offer sufficient transaction transparency and requires the best trade execution for clients.

Markets in Financial Instruments Directive ‘MiFID’

A directive that aims to integrate the European Union’s financial markets and to increase the amount of cross border investment orders. The MiFID plans to implement new measures, such as pre- and post-trade transparency requirements and capital requirements that firms must hold. The directive officially took effect on November 1st, 2007.

Markets in Financial Instruments Directive II ‘MiFID II’

MiFID II is the re-write of MiFID but will be replaced by the MiFIR regulation as, unlike MiFID, the new legislation will be a regulation and not a directive

Markets in Financial Instruments Regulation ‘MiFIR’

Regulation provides for net position limits and reporting of positions in derivatives and securities products. Unlike MiFID, which was a directive translated into law by European member states, MiFIR is the re-write of MiFID II but as a regulation rather than directive

MarkitSERV/ MarkitWire

A confirmation platform supporting affirmation and matching of over-the-counter derivative transactions across all major asset classes. MarkitSERV was the joint venture between MarkitWire and DTCC DerivSERV. MarkitWire was the affirmation platform for rates and equity derivatives, where as DTCC DerivSERV was the matching platform for credit and equity derivatives.

Maturity Date

A date at the end of which a financial instrument will cease to exist and the principal is repaid with interest

Middle Office (also known as trade support or trader support) responsibilities:

Keying trade details to trading systems on behalf of traders thereby allowing traders to focus on trading (trade substantiation)

Agreeing with counterparties on trade details

Investigation of trade detail discrepancies with firm’s counterparties

New counterparty and security set-up within internal systems

Production of the detailed trading P&L reporting (i.e. valuation) from the firm’s books and records

Reconciliation of trading positions (i.e. the quantity of specific securities within each trading book) between the books & records system and the trading systems.  Also called risk and position management.

Minimum Transfer Amount ‘MTA’

The minimum amount that can be transferred for a margin call

Money laundering

This is the generic term used to describe the process by which criminals disguise the original ownership and control of the proceeds of criminal conduct by making such proceeds appear to have derived from a legitimate source so that they can be retained permanently or recycled to fund further crime. There are three main stages in the money laundering process: placement, layering and integration.

Mortgage Backed Security (MBS)

An asset backed security that uses one or more mortgages to create a debt obligation that pays interest.  These securities are identified by the rating of the debt obligations contained in the security.

Multilateral Netting

An arrangement among multiple parties that transactions be summed rather than settled individually. Multilateral netting not only streamlines the settlement process, it also reduces risk by specifying that, in the event of a default or some other termination event, all outstanding contracts are likewise terminated. CLS, TriOptima, exchanges and clearing houses perform netting. Firms can multilaterally net positions and/or cash flows. EMIR encourages greater multilateral netting through mandatory use of CCPs.

Multilateral Trading Facility ‘MTF’

A trading system that facilitates execution of financial instruments between multiple parties. MTF provides pre-trade transparency by disclosing the buy and sell price of contracts and disclosing the trading volumes between executing counterparties.

Mutual Fund

An investment vehicle made up of pooled funds from many investors to be invested along the lines specified in the fund prospectus

National Competent Authority

An organization that has the authority to monitor the financial activities of counter- parties within a particular regulatory jurisdiction.

Natural Person

A human being, as opposed to an organization or business entity.

Negative Acknowledgment / Not Acknowledged ‘NACK’

The act of replacing one participating member of a contract with another. For example, in clearing the bilateral trade is novated into two separate trades where the counterparty is facing the CCP.

Net Settlement Value (NSV)

Sum of the Gross Cash Value (GCV) and Additional Trade Amounts

GVC = price * quantity

Additional Trade Amounts = accrued interest, stamps, duties, taxes, etc.

Nominee Accounts

A nominee account is a type of account in which a stockbroker holds shares belonging to clients, making buying and selling those shares easier. In such an arrangement shares are said to be held in street name.

Nominee Company

A company formed by a bank or other fiduciary organization to hold and administer securities or other assets as a custodian on behalf of beneficial owners under a custodial agreement.

Non-bank Financial Institution

A financial institution that does not have a full banking license or is not supervised by a national or international banking regulator.

Non-centrally cleared contract

Contracts which are not cleared by central counterparties. Higher charges can be expected when not cleared centrally. Also knows as a non-cleared trade.

Non-Delivery Forwards (NDFs)

  • A NDF is similar to a regular forward foreign exchange contract, except at maturity the NDF does not require physical delivery of currencies, and is typically settled in an international financial center in U.S. dollars.
  • A forward foreign exchange contract is an obligation to purchase or sell a specific currency on a future date (settlement date) for a fixed price set on the date of the contract (trade date)
  • For an NDF contract at maturity, settlement is made in U.S. dollars—the other currency, usually an emerging market currency with capital controls, is “nondeliverable”.

Non-Financial Counterparty ‘NFC’ +/-

Under EMIR client classification, non-financial counterparties are separated into two categories:  - NFC+ is an NFC that has outstanding derivative transactions with a gross notional value which exceeds EUR 1 billion for credit and equity derivatives or EUR 3 billion for rates, FX and commodity transactions. An NFC+ will be subject to the same EMIR obligations as a financial counterparty (FC). - NFC- is an NFC that has not breached the above thresholds. An NFC- will be exempt from clearing and margining EMIR obligations, but will still be required to comply with transaction reporting, timely confirmations and portfolio compression and reconciliation.

Nostro transfer (nostro account is synonymous with the custodian cash account)

Transfer of cash (in the same currency, i.e. no foreign exchange involved!) from another account within the same custodian or from an account held at another bank.

To cover an overdraft at its custodian from an account elsewhere with a credit balance.

Cheapest method of funding an overdrawn account.

Notional

The amount of principal underlying the derivative contract, to which interest rates are applied in order to calculate periodic payment obligations.

Notional Currency

The denomination of the notional which could be in any of the standard ISO currencies.

Novation

The act of replacing one participating member of a contract with another. For example, in clearing the original bilateral trade is novated to two separate trades where each counter- party now faces the central counterparty (CCP) as opposed to facing each other, as was the case in the original trade.

Off-facility Swap

A swap that is not traded on the rules of a SEF or DCM.

Office of Financial Research “OFR”

An office created within the US Department of Treasury to manage data in the financial industry. The office will set standards for financial reporting and improve the quality of data that supervisors and other market participants use to manage risk.

Office of Foreign Assets Control (OFAC)

This group is part of the US Treasury Department and is responsible for identifying and enforce economic sanctions against countries, regimes, terror groups and other groups that pose a risk to national security.  They do this by restricting transactions within the US, freeze assets in the US and by applying sanctions.

Official Journal ‘OJ’

The official gazette of record for the European Union (EU). It is published every working day in all of the official languages of the member states.

Omnibus Client Segregation

A type of collateral segregation where the CCP keeps separate records and accounts enabling the clearing member to distinguish the assets and positions of the clearing member from the assets and positions held for the account of its clients (all clients’ collateral is kept together).

One way collateralized

Type of collateral agreement which states that only one party will be posting some form of collateral (whether it’s variation, initial or both).

Opting-down

A client can elect a MiFID classification which offers more protection than the classification assigned by the financial institution. It is at the discretion of the institution to accept or decline the opting-down of classification.

Opting-up

A client can elect a MiFID classification which offers less protection than the classification assigned by the financial institution. It is at the discretion of the institution to accept or decline the opting-up of classification.

Options

A financial derivative that represents a contract sold by one party (option writer) to another party (option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date).

OTC Derivatives Regulators Forum‘ODRF’

Comprised of international financial regulators including central banks, banking supervisors, market regulators, and other governmental authorities. The forum monitors the over- the-counter derivatives market infrastructure providers and the major over-the-counter derivatives market participants.

Over-the-counter ‘OTC’

A financial instrument traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase “over- the-counter” can be used to refer to financial instruments that trade via a dealer network as opposed to an exchange.

Parent Company

An entity that owns another or has enough voting rights to control a subsidiaries’ operation

Partially collateralized

Collateral agreement where both parties regularly post variation margin (but not initial margin).

Partnership

An organization in which two or more people manage the business and share the profits. The partners are equally liable for the organization’s debts.

Partnership

An organization in which two or more people manage the business and share the profits. The partners are equally liable for the organization’s debts.

Pension fund

Any plan, fund or scheme which provides retirement income.

Portfolio

Collection of transactions

Portfolio Compression

Portfolio compression is a risk reduction technique in which two or more counter- parties terminate some or all of their derivative contracts and replace them with another derivative whose market risk is the same as the combined notional value of all of the terminated derivatives. Under EMIR, firms must use a portfolio compression technique to reduce the number of transactions in a portfolio that need to be managed in the trade life cycle. This reduces the overall operational risk of the portfolios by reducing the gross nationals outstanding.

Portfolio margining

Nets within one account in the same security rather (vs. within the total entity.

 

1.  two most widely used strategies: married puts and covered calls. A married put consists of long stock and long a put option on that stock.

 

2.Assume one bought 1,000 shares of IBM at $97 per share and also purchased 10 of the April 95 put options. The margin requirement under the old rules would be $49,400. Under the portfolio margining rules, only $3,650, a 92% reduction in capital, is required to establish this position. For a covered call, that is, buying 1,000 shares of IBM and selling 10 of the April 100 calls, the margin goes from $47,000 down to $12,700, a 72% reduction.

Portfolio Reconciliation

Portfolio reconciliation is the practice of comparing one counterparty’s portfolio to another’s. It provides a means of ensuring that parties’ books and records remain synchronized and that details are accurately captured.

Positive Acknowledgment ‘ACK’

A message from a market infrastructure provider acknowledging that all activities have been received and processed successfully.

Premium

Typically considered either the cost of buying an option or the additional amount one would need to pay for a certain asset or debt obligation.  In options, paying the premium gives the buyer the right, not the obligation to enter into the underlying transaction.  In a debt obligation, such as US government treasury, it would represent the additional value of the bond over par value.

Prescribed Market

A market that has been prescribed by the UK Treasury as a market that comes within the scope of the market abuse regime contained in Part VIII of ESMA.

Price Alignment Interest ‘PAI’

PAI is the overnight cost of funding collateral. It is debited from the receiver and transferred to the payer to cover the loss of interest on posted collateral.

Primary Economic Terms ‘PET’

A sum of the high level technical terms of a trade required by CFTC to be reported.

Prime broker

A broker that acts as settlement agent providing custody for assets, financing for leverage, and prepares daily account statements for its clients. They also often offer clearing facilities, so that collateral and hedges can be netted across all transactions handled by that prime broker.

Principal Place of Business

The primary location where the business of an organization is conducted, as opposed to where the trade is processed.

Principal shareholder

The entity that owns the greatest percentage of a company’s shares.

Principal trades

The purchase or sale by a trading firm on a proprietary trading basis resulting in an exchange of securities and cash without agreement to return the assets at some later point in time.

Private Entity

Any entity that is not a unit of government including, but not limited to, corporation, partnership, company, non-profit organization or other legal entity, or a natural person

Private entity

An individual or organization that is not a unit of government, including but not limited to a corporation, partnership, company, non-profit organization or other legal entity.

Process Agent

Where an entity is incorporated outside of England and Wales, they are required to appoint a process agent within England and Wales which allows their counterparty (incorporated in England or Wales) to send any legal documents or notices to the agent.

Profit and Loss (PnL)

Realized trading P&L (occurs when position finally closed, i.e. sold-off)

Unrealized trading P&L (a kind of mark-to-market P&L assessment of a position)

Prudential Regulation Authority ‘PRA’

A UK financial services regulatory body set up as one of the successors to the Financial Services Authority (FSA) and owned by the Bank of England. It is responsible for the prudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms.

Public Sector Exempt

EMIR requirements, except the reporting obligation, do not apply to public sector entities within the meaning of point (18) of Art.4 of Directive 2006/48/EC where these entities are owned by central governments and have explicit guarantee arrangements provided by central governments.

Rahmenvertrag für Finanzterming eschäfte ‘DERV’

German market master agreement for over- the-counter derivatives transactions. Similar to the French AFB agreement which covers the French based agreements, or ISDA Master Agreement which covers global agreements.

Real-Time Reporting ‘RT’

The minimum number of fields on a trade that must be reported as soon as the trade has been executed between two parties and reported to the CFTC.

Registered Address

The location at which a company is officially listed with the appropriate bodies.

Regulated Market‘RM’

A medium for the exchange of goods or services over which a government body exerts a level of control. This control may require market participants to comply with environmental standards, product-safety specifications, information disclosure requirements and so on.

Regulatory Technical Standards ‘RTS’

A set of criteria, processes and practices aimed at outlining the regulatory frame- work around the implementation of EMIR.

Rehypothecation

The practice by market participants to use collateral posted in one jurisdiction to cover exposures in another jurisdiction. Under EMIR and DFA there are rules around what can and cannot be rehypothecated.

Reporting Consent

As a result of ongoing global regulatory reform, financial markets regulators increasingly require reporting of transaction data to increase market transparency and enable regulators to monitor systemic risk. In order to report data as required, counter- parties have to obtain each other’s consent. Consent can be required from a counterparty which does not fall directly in scope for a certain regulation (i.e. a non-US person entity transacting with a US person entity).

Reporting Entity ID

In case the reporting counterparty has delegated the submission of the report to a third party or to the other counterparty, this entity has to be identified in this field by a unique code. Otherwise this field shall be left blank. In case of an individual, a client code shall be used as assigned by the legal entity used by the individual counterparty to execute the trade.

Reporting Time Stamp

Time and date reported to the transaction repository.

Repurchase Agreement

A form of short-term borrowing for dealers in government securities. The dealer sells the government securities to investors, usually on an overnight basis, and buys them back the following day.

Repurchase (repo) transactions (also called RPs or buybacks)

A form of secured cash borrowing whereby a brokerage firm uses securities held at its custodian (usually U.S. government securities) to deliver to a cash lender (e.g. a bank) as collateral/security for the cash that it is borrowing.

The borrowed cash is then used by the borrower to satisfy overdrafts of its nostro account at its custodian that result from the settlement of a principal trade.

On the closing value date of the repo transaction, the securities are returned to the borrower and the lender receives its cash plus interest.  This type of repo is referred to as a classic repo.

Another type of repo transaction includes the buy/sell-back where securities are sold outright to the lender and the borrower has to ‘repurchase’ the securities at the agreed upon price that includes the cash interest payable.

In this example, repos can be used to tap the money market for access to low interest rates.  Repos can be of a fixed maturity or open repos (callable at any time) but are typically of short duration. 

Repos can also be used as investment vehicles for companies with excess cash that are willing to loan to banks on a temporary basis.

Retail Client

Under MiFID classifications, this category offers the most protection and imposes the most requirements in terms of communication, disclosure and transparency. Retail clients are clients that do not belong in professional or ECP client categories.

Risk Mitigation Techniques

Financial and non-financial counterparties entering into an over-the-counter derivative contract that is not cleared by a CCP must ensure that appropriate procedures and arrangements are in place to measure, monitor and mitigate operational risk and counterparty credit risk. EMIR prescribes a number of techniques: portfolio reconciliation, portfolio compression, dispute resolution, etc.

Secure File Transfer ‘STF’

Managing data between organizations or infrastructions in a secure and controlled manner.

Securities and Exchange Commission ‘SEC’

A government commission created by the US Congress to regulate the securities market, protect investors and monitor corporate takeovers.

Securities dealers

An individual or firm purchasing and selling securities such as stocks, bonds and shares acting as a principal rather than as an agent.

Securities lending and borrowing

Security lending transactions result in a temporary exchange of assets between the parties of the transaction.

Lender receives a fee agreed with the borrower for the lending of securities.

Lent securities are subsequently returned to the lender by the borrower against delivery of the borrower’s collateral on the closing value date.

Securities Industry and Financial Markets Association ‘SIFMA’

An industry trade association that represents firms of all sizes in all financial markets in the U.S. and worldwide. SIFMA is committed to enhancing the public’s trust and confidence in the markets, delivering an efficient, enhanced member network of access and forward-looking services, as well as premiere educational resources for industry professionals and the investors they serve.

Settlement

The exchange of both securities and cash by the buyer and seller in order to fulfill their contractual obligations.

·         Delivery versus Payment (DvP)

a.       Risk-free method of settlement whereby there is a simultaneous exchange of securities and cash between buyer and seller through their custodians

b.       For most trades, method of settlement is assumed to be DvP

·         Free of Payment (FoP)

a.       One (or both) parties to the trade agree to deliver securities or payment of cash prior to taking possession of the other asset from the counterparty.  Due to counterparty risks, brokerage firms avoid settling in this manner

Settlement Date

The date on which a trade settles i.e. the date when the buyer pays the seller.

Settlement Failure

Reasons for settlement failure include:

a.       Incorrect counterparty custodian added to the trade detail and firm’s custodian cannot receive confirmation from them.

Shell bank

A credit institution, or an institution engaged in equivalent activities, incorporated in a jurisdiction in which it has no physical presence involving meaningful decision making and management, and which is not part of a financial conglomerate or 3rd country financial conglomerate.

Shell corporation

A non-trading organization generally formed as a vehicle for business transactions without having any significant operations or assets itself.

Single-Currency Margining

A service offered by clearing members where collateral is posted in the base currency as opposed to the multiple currencies of the underlying transactions. This reduces the FX and settlement exposure between counterparties.

Special Purpose Vehicle ‘SPV’

A legal entity created by a firm with a specific purpose. SPVs usually have a special legal status that makes their obligations secure even if the parent company goes bankrupt.

Speculation

The act of trading in an asset, or conducting a financial transaction, that has a significant risk of losing most or all of the initial outlay in expectation of a substantial gain. With speculation, the risk of loss is more than offset by the possibility of a huge gain; otherwise, there would be very little motivation to speculate.

Spot Rate/ Spot Price

The price quoted for immediate settlement on a commodity, a security or a currency. It is based on the value of an asset at the moment of the quote. This value is in turn based on how much buyers are willing to pay and how much sellers are willing to accept, which depends on factors such as current market value and expected future market value. The spot rate is the rate used in the market in two days time. TOM rate is the rate used tomorrow.

Spread Indicator

An indicator that shows the difference between the bid and ask price of a security, currency or asset. The spread indicator is typically used in a chart to graphically rep resent the spread at a glance, and is a popular tool among forex traders. The indicator, displayed as a curve, shows the direction of the spread as it relates to the bid and ask price. Usually, highly liquid currency pairs have lower spreads

Static Data Department responsibilities

·         Maintain securities static data (e.g. interest rate on a particular bond)

·         Maintain counterparty static data (e.g. client address to send confirmations)

·         Only with high quality static data along with accurate trade data support can Straight-Through Processing be achieved

Stock Option/ Share Option

A privilege, sold by one party to another, that gives the buyer the right, but not the obligation, to buy (call) or sell (put) a stock at an agreed-upon price within a certain period or on a specific date.

Straight Through Processing ‘STP’

A term used to explain how a trade or a piece of activity moves through the process (series of steps) without manual involvement.

Structured product

A structured product is generally a pre- packaged investment strategy based on derivatives, such as a single security, a basket of securities, options, indices, commodities, debt issuance and/or foreign currencies, and to a lesser extent, swaps.

Subsidiary

A company that is at least 50% owned by another company, the latter being a parent or holding company.

Support Operating Model ‘SOM’

Describes how a business organizes its resources to ensure its day-to-day operations support its strategy. The purpose of the model is to support rapid and effective change within a business. Any significant change to a business can fail if the operating model does not support the proposed change.

Swap

Agreements between two parties to exchange sequences of cash flows for a set period of time. Usually, at the time the contract is initiated, at least one of these series of cash flows is determined unknown variable, such as an interest rate, foreign exchange rate, equity price or commodity price.

Swap Data Repository ‘SDR’

SDR is the US regulatory abbreviation for a transaction repository aimed at providing transparency around over-the-counter derivatives in response to the commitments agreed at the G20 2009 Pittsburgh Summit.

Swap Dealer ‘SD’

An individual who acts as the counterparty in a swap agreement for a fee called a spread. In the US, swap dealers are the market makers for the swap market. The equivalent terminology used in Europe is a “Financial Counterparty”.

Swap Execution Facility ‘SEF’

A trading system or platform that enables many participants to execute or trade swaps. A swap execution facility generates the Unique Trade Identifier (UTI) for both parties to a swap and reports the executed transaction to the regulated transaction repository. SEF is the US regulated abbreviation for electronic trading platform

SWIFT

The Society of Worldwide Interbank Financial Telecommunications is a platform that allows secured financial messages and payments to be sent around the world.

Termination Date

The day on which a swap contract ends. Trades can be terminated before maturity if both counterparties agree. In this case, this would be the termination date.

Third Country Entities ‘TCE’

An entity that would be subject to the relevant EMIR obligation as if they were established in the EEA even though they are not.

Third Party Trade

A party who is indirectly involved and not a principal party to an arrangement contract, deal, lawsuit, or transaction. A transaction that involves the selling and buying of a financial instrument.

Trade Affirmation Platform

An infrastructure that allows one party to provide the details of a trade to another party and to allow that other party to affirm they agree with the trade details.

Trade Date ‘T’

The date in which a trade is initiated. Consequent days will follow the form of T+1, T+2, etc.

Trade Life-Cycle Events

The trade events from initiation of a trade to maturity including settlement, amendment, modification, rate reset, increase, partial novation, termination, exercise, corporate action, etc.

Trade Repository ‘TR’

TR is the global regulatory abbreviation for a transaction repository aimed at providing transparency around over-the-counter derivatives in response to the commitments agreed at the G20 2009 Pittsburgh Summit.

Trading Book

Traders and market makers involved in proprietary trading within a brokerage firm are responsible for the profitability of their particular trading portfolio (typically referred to as a trading book), which may be operated by an individual or by a small team of traders (a.k.a. a trading desk) or market makers.

Basic (i.e. minimal) ‘trade skeleton’ level detail captured by the front office trader in a trading system:

Name or code of trader executing trade

Trading book name or code

Trade date

Trade time

Value (settlement) date

Operation (buy or sell)

Quantity

Security

Price

Counterparty

Trading book transfer

One trading book executing a trade with another trading book within the same legal entity.

Each trading book needs to be updated to reflect new trading positions in each book.

If securities positions for both trading books held externally within same account at the firm’s custodian, no securities or cash movement (and hence issuance of settlement instruction) is necessary.

Tranche

One or more types of securities that make up a structured product.

Transaction Monitoring Unit ‘TMU’

A unit at FCA which is responsible for the surveillance of UK Markets. The TMU reviews the collation of transaction reports and compliance with transaction reporting rules for the reporting firms.

Transaction Reference Identifier

The identifier associated with the transaction.

Transaction Reporting

Rules set out by EMIR where all eligible transactions must be reported to the regulator by the end of the following business day.

Transaction Reporting User Pack ‘TRUP’

A consolidated point of reference created by the FCA to assist firms in understanding and complying with their transaction reporting obligations.

Treasury Department

Responsible for obtaining funds as cheaply as possible in order to finance the traders’ positive trading positions.  The treasury department typically has lines of credit set up in advance with other banks on a secured and unsecured basis.  The activities of the repo trader and the treasury department are normally closely linked.

TriOptima

Service Provider for reconciliation and portfolio compression cycles.

Trust

A legal entity or arrangement in which assets are given from one entity (the trustor) to another entity (the trustee) to hold in trust for the benefit of another person or group of persons (the beneficiaries).

Uncollateralized

A trade where no initial margin and no variation margin is posted by either party.

Unique Counterparty Identifier ‘UCI’

An identifier for all legal entities dealing in over-the-counter derivatives falling under CFTC jurisdiction, where they do not have an existing CICI or LEI.

Unique Product Identifier ‘UPI’

A unique code to describe a financial product for the purpose of regulatory reporting.

Unique Swap Identifier ‘USI’

A unique trade ID allowing both participants to recognize specific trade. The USI is used for reporting under Dodd Frank.

Unique Trade Identifier ‘UTI’

A unique trade ID allowing both matched participants to recognize the specific trade. UTI is used for reporting under EMIR

United Kingdom Independent Commission on Banking ‘UKICOB’

A UK government inquiry looking at structural and related non-structural reforms to the UK banking sector to promote financial stability and competition in the wake of the financial crisis of 2007–08. It was established in June 2010 and produced its final report and recommendations in September 2011.

Unsecured borrowing and lending

Borrower receives cash from a lender/counterparty to cover overdraft at custodian without pledging collateral to the transaction.

Since no security is provided, the cost of borrowing cash on an unsecured basis is higher than for a repo transaction.

Unsecured borrowing and lending transactions are typically executed by the treasury department of a brokerage firm.

US Person

The CFTC defines a person to be a US person under the Dodd Frank regulation if:  1) they are a natural, legal resident of the United States of America; 2) they are an enterprise which is either incorporated or has its place of business in the US (with the exception of funds, and collective investment vehicles) as of 1 April 2013; 3) pension funds for US employees of the above entities; 4) they are a collective investment vehicles – including hedge funds – that are majority-owned by US persons, or a trust of a US citizen or administered under US jurisdiction; 5) there exists an account in which the beneficiary is any of the above entities.

USA Patriot Act

The Act designed to deter and punish terrorist acts in the US and around the world, to enhance law enforcement investigatory tools, and other purposes including: strengthening US measures to prevent; detect and prosecute international money laundering and financing of terrorism and subjecting to special scrutiny foreign jurisdictions; foreign financial institutions and; classes of international transactions or types of accounts that are susceptible to criminal abuse.

Valuation Date

Date of the last mark to market or mark to model valuation.

Valuation Time

Time of the last mark to market or mark to model valuation

Value Date, Settlement date

Agreed intended date of delivery

Variation Margin ‘VR’

Collateral, required in addition to the initial margin that must be collected as a result of price movements

Vickers Report

A report that proposes fundamental change in how UK banks are organized. The main proposal is that UK banks should separate retail banking “utility” from investment banking and corporate finance. It also propose that banks retain higher capital/ loss absorbing reserves than under the Basel Rules. Many of the recommendations of Vickers were given effect by provisions in the Financial Services (Banking Reform) Act 2013.

Volcker Rule

The US equivalent of the Vickers Report. The Volcker Rule separates investment banking, private equity and proprietary trading (hedge fund) sections of financial institutions from their consumer lending arms. Banks are not allowed to simultaneously enter into an advisory and creditor role with clients, such as with private equity firms. The Volcker Rule aims to minimize conflicts of interest between banks and their clients through separating the various types of business practices financial institutions engage in.

W-8

An IRS form that grants a foreigner exemption from certain information reporting and withholding requirements.

W-8BEN

Certificate of Foreign Status of Beneficial Owner for US Tax Withholding.

W-9

Request for TIN and Certification.

Warning Acknowledgment ‘WACK’

Confirmation from market infrastructures that activities or messages have been successfully received and processed, but there is still a potential outstanding.