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A TRANCHE
Generally, the earlier
amortizing (5 year final maturity) tranche of an 8 year loan. See B Tranche.
ACCEPTANCE
See Bankers Acceptance,
Trade Acceptance.
ACCOUNT ANALYSIS
A monthly report prepared
by a bank for each of its commercial checking account customers that shows the
services used by the customer, the price of those services, and the
compensation received by the bank. It is essentially the bank’s profit and loss
statement for that customer for that month.
ACCOUNT RECONCILIATION
A service offered by a bank
that, in effect, balances a company’s checkbook for it.
ACCOUNTS PAYABLE
A/P. Money a company owes
as a result of purchasing a product or service, but for which payment has not
yet been made. See Accounts Receivable.
ACCOUNTS RECEIVABLE
A/R. Money owed to a
company as a result of the sale of a product or service, but for which payment
has not yet been received. See Accounts Payable.
ACCRUAL
The process of counting as
income interest which has yet to be received in cash (anticipated
interest payments), on the assumption that timely collection will occur. The
objective is to smooth out the income stream. See Non-Accrual Loan.
ACCRUED INTEREST PAYABLE
Interest due to a customer
on a deposit but not yet paid out by the bank. See Accrued Interest
Receivable.
ACCRUED INTEREST RECEIVABLE
Interest earned on a loan
or investment but not yet received by the bank. See Accrued Interest
Payable.
ACH
Automated Clearing House. A
method of electronic funds transfer for moving money by wire relatively
inexpensively. Generally provides next day value rather than same day value,
but at a much lower cost than Fedwire or CHIPS.
ACQUIRER
The bank that services a
merchant who accepts credit cards, as opposed to the bank that issues the
cards, the issuer.
ACTIVE INVESTMENT MANAGEMENT
A method of choosing
investments whereby the investment manager continuously makes decisions
regarding investments, and allocates funds based on assessments of the outlook
for those specific investments. See Passive Investment Management.
ACTUALS
Transactions in the
physical (cash, or spot) commodity markets, rather than in the futures markets.
ADDITIONAL PAID-IN CAPITAL
See Surplus.
ADDITIONAL SETTLEMENT OBLIGATION
ASO. A method for
increasing assurance of settlement finality on the CHIPS system. Each CHIPS
participant furnishes collateral. In the event a CHIPS participant is unable or
unwilling to settle, the collateral of that participant, as well as that of
the other participants, will be used to cover the obligations of the
participant who is unable to settle, according to a predetermined loss-sharing
arrangement.
ADMINISTRATION
A term for bankruptcy in
some countries.
ADMINISTRATOR
An individual or
institution appointed by a court to settle the estate of someone who has died
intestate.
Also, the provider of
certain administrative services to a mutual fund, such as printing the
prospectus, handling the legal work, doing the auditing, etc.
Also, one who oversees the
operations of a retirement plan.
Also, in some countries,
someone appointed by a court to oversee the operations of a person or company which is in administration (bankrupt).
ADR
American Depositary
Receipt. A method of owning foreign-issued securities without the difficulties
associated with clearing and settlement overseas, currency conversion, receipt
of dividends, etc. The ADR is actually a receipt issued by a depository
representing shares of a foreign stock that have been deposited with it. The
receipt is denominated in US currency and trades in the US like a US-issued
security. The depository handles all the foreign clearing and settlement,
currency conversions, etc.
ADVANCES
Loans.
ADVICE
Notification by a bank to a
customer that a certain transaction has taken place (for example, a receipt of
funds into an account). The advice may be by phone, mail, telex, fax, SWIFT, or
electronically.
ADVISED LINE
Advised line of credit.
Also called a confirmed line of credit. An understanding between a bank and its
customer that the bank will lend up to a certain specified limit (the amount of
the line), assuming no material adverse change in the borrower’s financial
condition, within a certain period of time. It represents an expression of
willingness on the part of the bank to lend (a moral obligation), but is not
considered to be legally binding. See Guidance Line.
ADVISORY ACCOUNT
See Non-Discretionary
Account.
AFFILIATE
Companies with common
ownership.
AFFIRMATION
A communication from one
party in a securities transaction to a second party in that transaction which
indicates that the details of a confirmation sent by the second party are
correct. It binds both parties to the transaction as agreed.
AFFIRMATIVE COVENANT
See Covenant.
AG
Aktiengesellschaft. A form of public, incorporated company in parts of
Europe.
AGENT
One who acts for another
(the principal), upon that party’s instructions, and by its authority.
Also, the bank that handles
the administrative aspects of a loan syndication on behalf of the other banks
(documentation, wire transfers, bookkeeping, etc.), and for which it will
receive a fee.
AGREEMENT CORPORATION
Similar to an Edge Act
Corporation, but state chartered. It has agreed to abide by the same federal
regulations that apply to an Edge Act.
ALCO
Asset/liability committee. See
Asset/Liability Management.
ALLFINANZ
See Universal Banking.
ALL-IN RATE
An interest rate quoted to
a customer that will contain all the elements of the bank’s compensation built
into it. It is the total return the bank earns, and is effectively the
borrower’s true cost.
ALLOWANCE FOR LOAN LOSSES
See Reserve for Loan
Losses.
ALSI
Johannesburg Stock
Exchange/Actuaries All Share 40 index. An index of stocks traded in South
Africa. Similar in concept to the S&P 500.
AMERICAN DEPOSITARY RECEIPT
See ADR.
AMORTIZATION SCHEDULE
The amounts and dates of
loan repayments.
ANNUAL PERCENTAGE RATE
See APR.
ANNUAL REPORT
Financial schedules
published annually by many companies describing the company’s operating and
financial results for the fiscal year.
ANNUITY
Generally refers to a
stream of payments that goes on for the life of the annuitant, or for a specified
number of years. Income from certain types of annuities is often exempt from
taxes until withdrawn.
APACS
Association of Payment and
Clearing Services. An umbrella organization for coordinating all payment
methods in the UK.
APR
Annual percentage rate. The
real cost of a loan, factoring in any fees that may be charged, the effect of
compounding, etc.
ARBITRAGE
In its simplest form, the
process of simultaneously buying and selling the same commodity at slightly different
prices, and profiting from the difference. For example, buying gold in New York
at $380/ounce, and selling it at the same time in London at $382/ounce would
net $2/ounce. If you can execute the two transactions for less than $2/ounce
(and not move the market in doing so), you make money.
AS AT
As of. Used in reference to
the closing date for a balance sheet. “As at” is the British term which is
becoming popular with the increasing emphasis by US banks on merchant banking.
ASIAN EXERCISE
An option in which the
payoff is based on the average price of the underlying over a period of
time.
ASKED PRICE
The price a seller is
asking for the commodity it owns, in order to be induced to sell it. Sometimes
called offered price. See Bid Price.
ASO
See Additional
Settlement Obligation.
ASSET
That which a business owns
or is owed to it.
Also, a use of a business’
money. See Liability, Stockholders’ Equity.
ASSET-BACKED SECURITY
A security representing an
interest in payments made by a pool of assets, such as residential mortgages,
automobile loans, credit card loans, etc. See Mortgage-Backed Security, Securitization.
ASSET/LIABILITY MANAGEMENT
The coordination of the
assets and liabilities of a bank’s balance sheet, in order to maintain
appropriate balance between safety, liquidity, and income. It is carried out by
an asset/ liability committee.
ASSET MANAGEMENT
See Investment
Management.
ASSIGNMENT
A method of purchasing a
loan, whereby one bank assumes the rights and responsibilities of another with
respect to a loan. Similar in concept to a participation, with some subtle legal
and operational differences.
AT THE MONEY
An option in which the
market price of the underlying is equal to the strike price. See In The
Money, Out Of The Money.
ATM
See Automated Teller
Machine.
AUDIT
A (presumed) independent
examination of a company’s books.
AUTHORIZED SHARES
The maximum number of
shares a corporation is permitted by its articles of incorporation (as
amended) to have issued. See Issued Shares, Outstanding Shares, Treasury
Stock.
AUTOMATED CLEARING HOUSE
See ACH.
AUTOMATED TELLER MACHINE
ATM. A machine, usually
built into the side of a bank building, but sometimes freestanding or built
into other buildings (supermarkets, for example), that permits the withdrawal
(and sometimes the deposit) of cash, balance inquiries, and other banking
transactions.
AVAILABLE FOR SALE
See Investment
Portfolio.
AVAILABLE FUNDS
See Federal Funds.
AVAL
An endorsement by a bank of
a draft, guaranteeing its payment.
A – B – C – D – E – F – G – H – I – J – K – L – M – N – O – P – Q – R – S – T – U – V – W – X – Y – Z
B TRANCHE
Generally, the later
amortizing (8 year final maturity) tranche of an 8 year loan. See A Tranche.
BACK MONTH
See Distant.
BACKUP LINE
See Commercial Paper
Backup Line.
BACKWARDATION
A futures market term which
indicates that nearby futures contracts are more expensive than the distant
contracts. See Contango.
BAKEOFF
See Beauty Contest.
BALANCE SHEET
A statement (or listing) of
the assets, liabilities, and stockholders’ equity of a corporation at a given
point in time. For banks, also called a statement of condition. See Income
Statement.
BALLOON LOAN
A loan with relatively
small periodic principal payments, and one large payment (the balloon) at
maturity. See Bullet Loan.
BANCASSURANCE
Banks (as opposed to
insurance companies) selling insurance.
BANK
As defined in the Bank
Holding Company Act, an institution that accepts demand deposits and makes
commercial loans. See Non-Bank Bank.
BANK HOLDING COMPANY
A legal entity that owns
one or more banks, in order to provide certain services that a bank may not
legally provide. Users of these services often neither know nor care about the
distinction.
BANK HOLDING COMPANY ACT
An act of Congress that
limits ownership of banks to banking companies, and restricts interstate
banking. There have been a number of exceptions since the act became law in
1956. See Douglas Amendment, Gramm-Leach-Bliley Act, Riegle-Neal Act.
BANK INVESTMENT CONTRACT
BIC. A contract offered by a bank to retirement
plans that will pay a guaranteed rate of interest for an agreed upon period of
time, but will allow the principal amount to be withdrawn at face value without
penalty, upon the occurrence of certain prespecified conditions (disability
of a retiree, for example). Similar in concept to a GIC.
BANKERS ACCEPTANCE
A draft whose payment at
maturity has been assured by a bank. See Trade Acceptance.
BANKRUPTCY
Technically, where
liabilities exceed assets.
Also, the legal state that
prevents creditors from taking action against a debtor while a plan is
developed to allow it to pay some or all of its debts. Chapter 7 results
in liquidation of assets to pay debts, Chapter 11 is intended to
reorganize a company and help it emerge as a going concern, while Chapter 13
reorganizes the debts of individuals. Chapter
9 covers municipal bankruptcies,
and Chapter 12 reorganizes the debts of farmers.
In some countries,
bankruptcy is called administration. See Insolvency.
BARRIER
Barrier or path-dependent
option. An option that only becomes effective (knock-in) or is disabled
(knock-out) when the underlying increases to a prespecified barrier level (up
and in or up and out) or decreases to the barrier (down and in or down and
out). These options are generally cheaper than plain vanilla options.
BASE RATE
See Reference Rate.
BASIS
In futures markets, the
difference between the cash price and the futures price.
In terms of interest rates
regarding loans and deposits, See Interest Basis.
BASIS POINT
1/100 of a percent. There
are 100 basis points in one percentage point. The difference between a rate of
11.30% and 11.27% is 3 basis points.
BBA
British Bankers
Association.
BEAR
An investor whose view of
the market is that it will go down. See Bull.
BEARER
As applied to securities,
it means that the physical holder of the security is considered to be the
owner. See Registered.
BEAUTY CONTEST
A competition held by a
company issuing securities to select a lead underwriter. Sometimes called a
bakeoff.
BEF
SWIFT code for the Belgian
franc.
BENEFICIARY
In funds transfers, the one
who will receive the proceeds of the transfer.
In letters of credit, the
one who will receive payment when the conditions of the L/C have been
satisfied.
In trusts and estates, one
who will receive income or property.
BHD
Berhad. Malaysian for “inc.”
BIC
See Bank Investment
Contract.
BID PRICE
The price a buyer of a
commodity is willing to pay for the commodity. See Asked Price.
BID WEEK
The last week of the month
during which producers and consumers arrange their sales and purchases of
natural gas for the following month.
BIF
The Bank Insurance Fund.
That part of the FDIC that insures bank deposits (although some thrifts are
also insured by the BIF). See SAIF.
BIG BANG
October 27, 1986. The day
the UK deregulated its stock markets.
BILATERAL LIMIT
A limit each CHIPS
participant must set for every other participant, representing the maximum net
amount it is willing to receive from each of those banks. Since CHIPS
payments are not final until late in the day, the bilateral limit sets the
maximum risk each bank would face should a counterparty be unwilling or unable
to settle.
BILL OF EXCHANGE
See Draft.
BILL OF LADING
A receipt for and title
document to goods in transit, issued by a shipping company. It is evidence that
the goods have been accepted for shipment. Generally used in a letter of credit
transaction. The importer needs the bill of lading to take possession of the
goods, but the exporter doesn’t want to release it until he gets paid.
BIS RATIO
See Total Risk-Based
Capital Ratio.
BLACK MONDAY
Monday, October 19, 1987.
The day the DJIA dropped 500 points.
BLACK-SCHOLES
A mathematical model used
to determine the price of an option.
BLACK WEDNESDAY
Wednesday, Sept. 16, 1992.
The day the Exchange Rate Mechanism collapsed.
BLOOMBERG
An on-line information
service that furnishes quotes on financial instruments to its subscribers.
Similar to Reuters.
BLOTTER
The record of a trader’s
transactions, showing quantity bought or sold, price, and counterparty.
BLUE SKY LAWS
State laws which regulate
the sale of securities within the state. See Series 63.
BMV
Bolsa Mexicana de Valores. The Mexican
stock exchange.
BOLERO
A system for automating the
exchange of trade finance documents using the internet. A form of EDI.
BOLSA
What some countries call
their stock exchanges.
BOND
A long-term secured
borrowing issued under the terms of an indenture. A corporate IOU. See
Debenture.
BOND COUNSEL
A law firm retained by an
issuer of bonds prior to issuance to assure that the issuer has the legal right
to issue the securities and that it can comply with the terms of the indenture.
BOND MARKET ASSOCIATION
A trade group of securities
dealers.
BOOK BUILDING
The process, conducted by
the underwriters, of determining investor interest in securities to be issued.
BOOK ENTRY
Book entry security. A
security issued in certificateless form, with holders’ records maintained
electronically by a depository. No paper certificate is issued. In this
context, See Definitive.
Also, a transaction in
which the debit and credit parties have accounts with the same institution.
BOOK RUNNER
The lead or managing
underwriter who keeps the records of the securities being sold.
BOOK TRANSFER
A transfer of funds or
securities in which both parties have accounts with the same institution, so
the transfer is effected by entries on the books of that single institution. See
Non-book Transfer.
BOOK VALUE
The value of an ownership
interest (for example, a share of stock) as per the books of a corporation.
Also, the value at which an
investment is carried on a company’s books (which may or may not be equal to
its market value).
BOOK VALUE WRAPPER
The product that guarantees
the full return of principal in a synthetic GIC or BIC.
BOURSE
What some countries call
their stock exchanges.
BOVESPA
Bolsa de Valores de São
Paulo. The São Paulo stock exchange, and an index of stocks traded on
that exchange, similar in concept to the S&P 500.
BRANCH
For banks, a branch is an
office at which deposits are accepted, loans are made, or checks are paid. The
McFadden Act prohibited banks from branching outside their home state, unless
permitted by the other state. See Riegle-Neal Act.
BREAKUP FEE
A fee received by a M&A
advisor even if the proposed acquisition isn’t completed.
BRIDGE LOAN
In corporate finance, a
short term loan, typically to enable an M&A transaction to be completed
(so the investment bank can get its fee). The bridge loan would be repaid by
the issuance of junk bonds.
BROKER
One who buys or sells on
behalf of others, with no liability or risk on the part of the broker. See
Principal.
BROKER/DEALER
A generic term to indicate
an institution whose primary business is securities, such as a stockbroker,
investment bank, or securities underwriter.
BROKERED DEPOSITS
Time deposits (usually just
under $100M, the FDIC insurance limit) brought into a bank by an independent
third party (the broker), who receives a fee from the bank for doing it. It is
a way for a bank to raise money outside its own market area. Since the deposits
are insured, the depositors usually don’t care who the bank is.
BROKER’S LOAN
A loan to a securities
dealer, usually to enable the dealer to purchase securities, and collateralized
by the securities being purchased.
BTAN
Bons du Trésor à Intérêts Annuels. French
government securities with original maturities of 2 and 5 years.
BTF
Bons à Taux Fixe. French government treasury
bills, issued at a discount, with maturities of 13, 26, and 52 weeks.
BUILDING SOCIETY
A UK financial institution
whose primary function historically has been to take deposits and make
residential housing loans. Changes in legislation now permit them to offer a
much wider variety of banking services. They are somewhat similar to thrifts in
the US.
BULL
An investor whose view of
the market is that it will go up. See Bear.
BULLET LOAN
A loan with no periodic
amortization of principal. The total amount is paid at maturity. See Balloon
Loan.
BUND
Bundesobligationen. A German government security.
BURN RATE
As used in venture capital,
it is the speed with which the company is using up the venture capital funds it
has received.
BUY SIDE
In the stock and bond
markets, refers to institutional buyers of these securities such as pension
funds, mutual funds, insurance companies, etc. See Sell Side.
BV
Besloten Vennootschap. Dutch for a privately
held, limited liability company (“inc.”). See NV.
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CABLE
FX dealer’s slang for
pounds sterling.
CAC-40
CAC quarante. An index of
40 stocks listed on the Paris stock exchange. Similar in concept to the S&P
500. CAC stands for Compagnie des Agents de Change,
the association of French stockbrokers.
CALL
The right of the issuer of
a debt security to pay it off prior to its contractual maturity date.
Also, a type of option in
which the seller or writer gives to the buyer, for a fee, the right to purchase
a specified amount of the underlying commodity for a fixed price called the
strike or exercise price (regardless of the market price at the time of
purchase), up to a certain date (American-style option) or
on a certain date (European-style option). See Put.
CALL BLENDING
A characteristic of some
call centers that allows switching between outbound and inbound functions
depending on the relative volumes of each.
CALL CENTER
A large room or building
filled with people whose function is to call you at dinner time to sell their
products (outbound) or to receive your inquiries and complaints (inbound) via a
toll-free number. Commonly used for telemarketing.
CALL MONEY
A form of time deposit,
common outside the US, where the depositor has the right to receive the deposit
back upon demand or sometimes with two days notice to the bank.
CALL PROTECTION
A certain period of time
after issuance (often 10 years) before a callable bond can be called (paid off
early).
CALLABLE BOND
A bond which, under certain
conditions, the issuer has the right to pay off early, generally after a
certain period of time (often 10 years) has elapsed. See Puttable Bond.
CAMEL(S)
A rating system used by
bank regulators to judge the health of a bank. It uses a 1 - 5 scale (1 being
the best), rating a bank on its capital, asset quality, management
ability, earnings, liquidity, and sensitivity to market
risks. A composite, or overall rating, is given as a summary of the 6 component
ratings.
CAP
Sender net debit cap. A
limit to the maximum daylight overdraft a bank may incur on Fedwire or CHIPS.
Initially set up in March, 1986 in order to reduce the chance that a bank may
be unwilling or unable to make a payment while in an overdrawn position on the
payments system. The risk to the payments system is similar to that of a bank
when it pays a check for which there are insufficient customer funds to cover
it. The cap is a function of the bank’s total capital and its management and
operational capabilities, among other factors.
Also, a capital markets
product in which the writer or seller of the cap guarantees to the buyer that a
given reference rate (interest, foreign exchange, or commodity) will not exceed
a certain value. If it does, the writer will make payments to the buyer based
on the difference in rates and the notional principal agreed to. See Collar,
Floor, Forward Rate Agreement.
CAP RATE
The rate above which a cap
will begin to make payments. See Floor, Floor Rate.
CAPITAL
A measure of the protection
a company affords its creditors against losses. In banking, capital consists of
stockholders’ equity, plus possibly a number of other equity-like instruments.
See Risk-Based Capital, Tier 1 Capital, Tier 2 Capital, Tier 3 Capital,
Total Risk-Based Capital.
CAPITAL ADEQUACY
The capital a bank has in
relation to the size of the bank’s assets. See Risk-Based Capital.
CAPITAL INTELLIGENCE LIMITED
A Cyprus-based company
which evaluates the creditworthiness of middle-Eastern, African, and Asian
banks.
CAPITAL MARKET
Traditionally defined as
the markets in which money would be raised for periods of over 1 year, and
which would therefore consist of the stock and bond markets. A more
comprehensive definition would include all financial services other than pure
bank lending, covering transactions such as securities underwriting and
trading, swaps and other derivatives, private placements, M&A, FX, and
corporate finance. See Money Market.
CAPITAL SURPLUS
See Surplus.
CAPITALIZATION
Market capitalization,
market cap. The number of shares of a company that are outstanding multiplied
by the market price per share. The total market value of the company.
CARRY
The difference between the
rate earned on an asset, and the cost of funding it. Positive carry
means you’re earning money, negative carry means you’re losing money.
CARVE-OUT
The public sale of minority
ownership in a company’s subsidiary in order to create a second company with
more attractive growth and market valuation prospects than the parent.
CASH
Currency and coin.
Sometimes called vault cash.
CASH BASIS LOAN
See Non-Accrual Loan.
CASH LETTER
A group of checks, along
with a listing of those checks, sent by one bank to another for collection. It
is essentially one bank’s deposit in another.
CASH MANAGEMENT SYSTEM
A fee-based service offered
by banks to optimize the availability of funds for corporate customers. It’s
designed to reduce the time it takes for funds to become available for the
corporation’s use (collection system), or to maximize (within limits) the time
that funds remain in the corporation’s accounts (disbursement system). The
corporation can therefore either invest more, or borrow less, increasing its
profits. See Controlled Disbursement Account, Lockbox.
CASH PRICE
In the futures markets, it
refers to the price for immediate (as opposed to future) delivery of the
commodity. Sometimes called the spot price.
CASH SETTLEMENT
An options or futures
transaction in which the party obligated to make a payment will do so in cash,
rather than in a specific underlying commodity (such as shares of stock or
barrels of oil). See Deliverable.
CBOE
Chicago Board Options
Exchange. An exchange for the trading of options.
CBOT
Chicago Board of Trade. An
exchange for the trading of futures and options.
CCD/CCD+
Cash concentration and
disbursement (plus). Forms of ACH transactions generally used for intracompany
payments. The CCD moves money only, the CCD+ moves money and a limited amount
of information about the payment. See CTP, CTX.
CD
See Certificate of
Deposit.
CEDEL
Cedel International. Centrale
de Livraison de Valeurs Mobilières. A securities depository,
clearance, and settlement system. See Clearstream.
CENTRAL BANK
A bank, usually but not
always part of the national government, that is typically responsible for:
distribution of currency and coin; control of the money supply, interest rates and
inflation; managing the value of the currency in foreign exchange markets;
chartering, supervision and regulation of banks and sometimes other financial
institutions; and compilation and publication of economic statistics. Not every
central bank will carry out every one of these functions. The specific functions for which a particular
central bank is responsible will vary from country to country.
CENTRAL REGISTRATION DEPOSITORY
CRD. A central file of all
securities brokers in the US.
CENTRAL SECURITIES DEPOSITORY
CSD. A central location
within a country or region for holding, clearing, and settling securities and
securities transactions (typically but not always electronically). Examples are
CREST, DTC, Euro-clear, and Clearstream.
CERTIFICATE OF DEPOSIT
CD. A time deposit, often
negotiable, evidenced by a certificate. See Other Time Deposits.
CETE
Certificados de la Tesoreria de la Federacion. A
Mexican government security, denominated in Mexican pesos.
CFTC
See Commodity Futures
Trading Commission.
CHAPS
Clearing House Automated
Payments System. The sterling funds transfer system used in London. It is
similar in concept, but not identical to, Fedwire. Eurochaps is used to
transfer euros.
CHAPTER 7/9/11/12/13
See Bankruptcy.
CHARGE-OFF
To reduce all or part of
the value of an asset to zero, to reflect the fact that the charged-off part is
essentially worthless. Sometimes called write-off.
CHECK
As defined in the Uniform
Commercial Code in the United States, a check is a draft drawn on a bank,
payable upon demand. More generally, a paper-based payment or transaction mechanism.
CHECK CLEARING
The process of checks being
transported for payment from the bank in which they are deposited to the bank
on which they are drawn, and subsequent payment for those checks.
CHEQUE
Variation of check.
CHF
SWIFT code for the Swiss
franc.
CHICAGO MERCANTILE EXCHANGE
CME. The Merc. An exchange
for the trading of futures and options.
CHIPS
Clearing House Interbank Payments
System. A funds transfer system run by the New York Clearing House Association.
It is the primary means of settling eurodollar and FX transactions for large
New York City banks, as well as many others engaged in international transactions.
Final settlement of daily CHIPS transactions occurs via Fedwire, on a net
basis, at the end of the day.
CHURNING
The excessive buying and
selling of securities in a brokerage account by a broker in order to generate
commission revenue.
CITY
See The City.
CLASSIFIED
A loan or other asset that
has been cited by an examiner as being of questionable collectibility. Degrees
of classification are (in order of increasing severity) substandard, doubtful,
and loss. A loss asset must be charged-off.
CLEAN COLLECTION
A bank product, similar to
a documentary collection, but where no documents are involved. Examples are
collecting a check drawn on an overseas bank, or collecting a bond coupon.
CLEARING
In securities transactions,
the matching of trade information by buyers and sellers, to assure each has the
same understanding of the transaction, and the subsequent receipt of (and
payment for) the securities.
In check processing, See
Check Clearing.
CLEARING BANK
A bank to whom a customer
(generally another bank, broker/dealer, or institutional customer) would bring
checks or securities for subsequent presentation to (and collection of funds
from) another institution (or from whom they would be received in
exchange for payment).
CLEARING BROKER
See Introducing Broker.
CLEARINGHOUSE
An institution set up to
clear, net, and settle financial transactions (checks, securities, FX, etc.).
In certain types of
securities transactions, a clearinghouse is used to guarantee payments. Once
the details of a trade have been agreed upon by the parties involved, the
clearinghouse becomes the counterparty to each.
CLEARINGHOUSE FUNDS
See Federal Funds, Next
Day Funds.
CLEARSTREAM
A securities depository,
clearance, and settlement system, headquartered in Luxembourg. A joint venture
of Cedel and Deutsche Börse Clearing, the German clearinghouse. Similar in concept
to Euro-clear and DTC.
CLOSE OUT
To reduce a risk position
to zero by selling (or buying) an equal amount of the identical securities or
commodity bought (or sold).
CLOSED END FUND
A mutual fund that will
only issue a certain number of shares. After those shares have been sold, the
only way to get some is to buy them from another investor. See Open End
Fund.
CLS
See Continuous Linked
Settlement.
CME
See Chicago Mercantile
Exchange.
CMO
See Collateralized
Mortgage Obligation.
COLLAR
Sometimes called a
cylinder. Buying a cap and selling a floor. Taken together, they would place
upper and lower limits on interest rate (currency, commodity price)
fluctuations. A zero-cost collar is where the fee paid for buying
the cap is exactly offset by the fee received for selling
the floor.
COLLATERAL
Property pledged by a
borrower to reduce a lender’s risk in making a loan. The collateral will
generally be sold in the event of a default on the loan. Usually, a loan should
never be made on the strength of collateral alone.
COLLATERALIZED MORTGAGE OBLIGATION
CMO. A form of
mortgage-backed security, backed by residential mortgages formed into various
pools or tranches. The pools have different risk, return, and maturity
characteristics. See Pass-Through.
COLLECTED BALANCE
The balance in a checking
account that has actually been collected. It omits uncollected funds (float). See
Ledger Balance.
COLLECTED FUNDS
Funds that have gone
through the check clearing process and are available for use by a bank or its
depositor. See Float.
COLLECTIVE INVESTMENT FUND
See Common Trust Fund.
COMMERCIAL LENDING
Corporate lending. The
function within a bank that lends to businesses (as opposed to lending to
individuals, called consumer lending).
COMMERCIAL PAPER
Short-term (maximum 270
days in the US), unsecured corporate IOU’s generally sold at a discount and
redeemed at maturity at par. For the largest, most creditworthy banks and
corporations, it is an important source of funds. Commercial paper is the
corporate equivalent of a US government treasury bill - the only difference is
the issuer.
COMMERCIAL PAPER BACKUP LINE
Backup line. An agreement
by a bank to lend money to a commercial paper issuer if the issuer is unable to
rollover its maturing commercial paper.
COMMITMENT
Agreement by a bank to lend
money. A legal commitment legally obligates the bank to lend the money. There
are varying degrees of the bank’s obligation.
COMMITMENT FEE
The fee a bank charges for
agreeing to provide funds to a customer at some point in the future. It is
normally charged on the unused portion of those commitments that a bank is
legally obligated to honor.
COMMITMENT OVERHANG
See Unfunded Commitment.
COMMITTED FACILITY
A loan commitment evidenced
by a written contract between the bank and borrower listing all the specific
terms and conditions of the loan. See Uncommitted Facility.
COMMODITY
Generally means a futures
contract traded on a commodities exchange such as the CME, CBOT, NYMEX, Eurex,
LIFFE, MATIF, etc. Commodities may be agricultural (cotton, wheat, cattle,
etc.), metals and other physicals (gold, silver, oil, etc.), financial (eurodollars,
treasury bonds, currencies, etc.) or index (S&P 500).
COMMODITY EXCHANGE ACT
The 1936 act of Congress
that set the framework for the regulation of futures trading in the US.
COMMODITY FUTURES TRADING COMMISSION
CFTC. An organization,
similar in concept to the SEC, that regulates the commodity futures business in
the US. Established in 1974.
COMMODITY POOL OPERATOR
CPO. An entity that invests
a pool of money from a group of investors in commodities. Similar in concept to
a mutual fund.
COMMODITY TRADING ADVISOR
CTA. An investment advisor
for commodities.
COMMON STOCK
See Stock.
COMMON TRUST FUND
A collective investment
fund. An investment vehicle operated by a bank, in which assets of customers
are pooled and invested collectively. Similar in concept to a mutual fund, but
is not registered nor regulated as a mutual fund. It is available only for the
bank’s trust customers.
COMMUNITY BANK
Generally used to indicate
a relatively small bank, operating only in a single community or very limited
area, with just a few branches (sometimes only one). See Money Center Bank,
Regional Bank, Supercommunity Bank.
COMMUNITY REINVESTMENT ACT
CRA. A 1977 act of Congress
that requires banks to affirmatively meet the credit and banking needs of their
community. Banks have had their merger, acquisition, branching, and expansion
plans denied on CRA grounds.
COMPANION CLASS
Support class. The tranche
of a CMO that accepts the major part of the prepayment and extension risk of a
PAC or TAC, and receives a higher expected total return in exchange.
COMPENSATING BALANCE
A non-interest-bearing
demand deposit maintained at a bank, as part of the compensation for a loan or
service provided. These deposits are very valuable to the receiving bank, since
they do not pay interest on them. See Correspondent.
COMPETITIVE ADVANCE FACILITY
See Competitive Bid
Facility.
COMPETITIVE BID FACILITY
A form of loan syndication,
normally occurring in conjunction with a revolving credit. The borrower
solicits bids from each bank, who will then specify the interest rate at which
they will lend. The borrower chooses the bank with the lowest rate. Sometimes
called a competitive advance facility.
COMPETITIVE UNDERWRITING
See Underwriting.
COMPOUNDING
Compound interest. A method
of computing interest on a deposit account. The interest earned is periodically
added into the account, which then earns interest on the interest. Simple
interest lacks this feature. See Present Value.
COMPUTER TELEPHONY INTEGRATION
CTI. Integrating computer
hardware and software into call center functions, so that the call center
representative is provided immediate information on the caller and their
relationship with the company via caller ID and database integration.
CONFIRMATION
The exchange of the details
of a transaction by the two parties to that transaction to assure that each has
the same understanding of the transaction. The exchange may take place via
phone, fax, telex, SWIFT, internet, or other means.
Also, an agreement by a
bank to make a payment under a letter of credit if the bank that issued the L/C
doesn’t.
CONFIRMED LINE
See Advised Line.
CONSOLIDATED
An accounting term
regarding financial statements of a company. It indicates that the results
include those of essentially all of the company’s subsidiaries, on a combined
basis.
CONSUMER
A class of bank customer
whose deposits generally are under the FDIC insurance limit. Also called retail
customers.
CONSUMER LENDING
The function within a bank
that lends to individuals (as opposed to lending to businesses, called commercial
lending).
CONTANGO
A futures market term which
indicates that distant futures contracts are more expensive than nearby
contracts. See Backwardation.
CONTINGENT DEFERRED SALES CHARGE
See Load.
CONTINGENT LIABILITY
A potential obligation of a
bank to make a payment if, for example, someone else doesn’t (as in a standby
letter of credit). Contingent liabilities represent risk in the bank that do
not, at present, appear directly on the bank’s balance sheet, although they
are, under certain circumstances, counted in computing a bank’s risk-based
capital requirements.
CONTINUOUS LINKED SETTLEMENT
CLS. A settlement mechanism
for either money or securities transfers in which net settlement occurs on an
on-going basis, rather than at the end of the day. See Gross Settlement.
CONTROLLED DISBURSEMENT ACCOUNT
A checking account offered
to companies as part of a cash management system in which money is deposited
only as needed to cover the checks being presented for payment that day. See
Remote Disbursement.
CONVERTIBLE
A security (usually a bond
or preferred stock) that may, under certain conditions, be exchanged for shares of common stock, usually
after payment of a specified amount of money.
CONVERTIBLE REVOLVING CREDIT
See Revolving Credit.
CONVEXITY
The rate of change of the
duration of a bond. Using duration without regard to convexity can misstate the
price change of a bond.
COOKE RATIO
See Total Risk-Based
Capital Ratio.
CORE CAPITAL
See Tier 1 Capital.
CORE DEPOSITS
That portion of a bank’s
deposit base that tends to be relatively stable, at least in the near term.
Generally consists of consumer deposits, and certain types of business
deposits. These deposits tend to have some degree of rate and risk
insensitivity and inertia. Core deposits are a major, low cost source of funds
for banks. See Purchased Funds.
CORPORATE ACTION
Corporate events affecting
the status of shareholders, such as stock splits, mergers, proxy solicitations,
voting, etc.
CORPORATE AGENCY
Services performed for the
issuer of stock by a bank, such as transfer agent, registrar, or dividend
disbursing agent. See Corporate Trust.
CORPORATE FINANCE
Investment or merchant
banking services which encompass the financing of corporations. Specific
services include stock and bond underwriting, financial planning, M&A, and
various advisory services.
CORPORATE LENDING
See Commercial Lending.
CORPORATE TRUST
Services performed for the
issuer of bonds by a bank, such as indenture trustee, bond registrar, or paying agent. See Corporate
Agency.
CORPORATION
A form of business
organization in which the owners are legally separate from the company, and who
therefore have limited personal liability for the obligations of the company.
Their risk of loss is limited to the amount of their investment. The company
will be considered incorporated, and, in the US, will generally have “inc.” as
part of the company name. Other countries have similar designations. See
Partnership, Public Limited Company, Sole Proprietorship.
CORRESPONDENT
Correspondent bank. A bank
that provides services for another bank, and for which the other bank (the respondent) generally
maintains compensating balances or pays a fee. Typical services are
check clearing, funds transfers, loan participations, and securities
safekeeping.
COST TO INCOME RATIO
See Efficiency Ratio.
COUNTERPARTY
The other party to a
transaction.
COUNTRY RISK
The risk that a foreign
government might take action to prevent return of an asset (loan, investment, interest
owed, etc.). Also called sovereign, geographic, or political risk.
COUPON
The interest rate or
interest payment on a bond is generally referred to as the coupon, or the
coupon rate.
Also used to indicate the
fact that interest is collected periodically, rather than just at maturity. See
Discount.
COVENANT
A set of conditions imposed
upon a borrower, documented in a loan agreement, as a way of protecting the
lender, who is generally obligated to lend the money unless a covenant is
breached. Affirmative covenants are conditions the borrower must
meet (e.g., make payments on time), negative
covenants are those the borrower must not (e.g., take on
additional debt without the bank’s permission).
COVERED
Covered call writing.
Writing (selling) a call option while owning the underlying. Generally used in
stagnant or declining markets to generate premium income, while giving up much
of the upside potential. See Naked.
CPO
See Commodity Pool
Operator.
CRA
See Community
Reinvestment Act.
CRACK
Crack spread. The
difference in price between the crude oil futures contract and that of refined
products. It is the refining margin.
CRAMDOWN
A security, typically of
the junk or “funny money” type, given in exchange for other securities of the
same issuer. Usually the issuer can’t pay the interest on the original
security, so the holders either accept the cramdown, or are left holding the
original, which then goes into default. The cramdown is generally structured
to avoid cash interest payments for some time, such as through a zero coupon or
PIK structure.
CRD
See Central Registration
Depository.
CREDIT
Lending money, such as
extending credit.
Also, an accounting
transaction that increases a liability account, or reduces an asset account. In
this context, See Debit.
CREDIT CARD
A plastic card, which, when
used, extends credit to the holder by the issuer of the card by making a
payment to the merchant. The holder of the card will subsequently receive a
bill, which may then be paid in full or over time, incurring interest charges. See
Debit Card, Smart Card.
CREDIT ENHANCEMENT
A method of improving the
creditworthiness of some sort of borrowing arrangement. Typical methods
involve cash collateral, or a standby letter of credit.
CREDIT FACILITY
Facility. A bank’s
agreement to extend credit to a borrower. E.g., a $3MM term loan facility.
CREDIT RATING AGENCY
A company that provides
ratings about the ability of a borrower (usually a corporation or a
municipality) to pay principal and interest on its debts. The most common of
the rating scales typically go from AAA (the top grade) down to D (highly
speculative, in default, payment unlikely, etc.). See Investment Grade, Non-Investment
Grade, NRSRO.
CREDIT RISK
Default risk. The risk that
a borrower will be unable to repay a loan. See Interest Rate Risk.
CREDIT UNION
A type of depository
institution in which all the members generally share some common bond or characteristic,
such as the same employer. They typically have low expenses, and are presently
exempt from federal income taxes and the CRA.
CREST
A securities depository,
and clearance and settlement system in the UK.
CRITICIZED LOAN
A classified or OLEM loan.
CROSS RATE
The FX rate between two
non-dollar currencies. E.g., the euro/yen cross would involve buying (or
selling) euro for yen without the US dollar being part of the transaction.
CRUSH
Crush spread. The
difference in price between the soybean futures contract and that of soybean
meal and soybean oil. It is the processing margin.
CSD
See Central Securities
Depository.
CTA
See Commodity Trading
Advisor.
CTI
See Computer Telephony
Integration.
CTP/CTX
Corporate Trade Payment,
Corporate Trade Exchange. Forms of ACH transactions that carry more payment
information than the CCD or CCD+, the CTX being able to carry the most.
CURRENCY RISK
The risk to a bank or
company that the net value of its foreign currency assets and liabilities will
decline.
CURRENT ACCOUNT
A term used in some
countries to denote a checking account. Interest may or may not be paid on these
accounts.
CUSIP
CUSIP number. A unique 9
digit identification number assigned to securities in the US to facilitate
processing. CUSIP stands for Committee on Uniform Securities Identification
Procedures.
CUSTODIAN
One who provides custody
services.
CUSTODY
A service that banks
provide in which they hold securities on behalf of customers, collect interest
and dividends, present called and matured securities, and provide recordkeeping
services. It relieves their customers of the administrative aspects of managing
a portfolio.
CYLINDER
See Collar.
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D/A
See Documentary
Collection.
D/P
See Documentary
Collection.
DAILY LIMIT
The maximum amount a
futures contract can fluctuate in value in a day. Daily limits are set by the
exchanges on which the futures are traded. Not all futures contracts have daily
limits. If the value goes up or down the limit, it is said to be limit up or
limit down.
DATED DATE
The date from which
interest begins to accrue on an interest-bearing security.
DAX
Deutsche Aktien index. An index of stocks
traded in Germany. Similar in concept to the S&P 500.
DAYLIGHT OVERDRAFT
Usually refers to an
overdraft in a bank’s reserve or clearing account during the course of the day.
These overdrafts generally occur because of timing differences in a bank’s cash
flows. Since a large daylight overdraft not cleared up by the close of business
could cause problems in the payments system, many central banks do not permit
them unless fully collateralized. See ASO, Cap.
DDA
See Demand Deposit
Account.
DEALER
See Market Maker.
DEBENTURE
A medium or long-term
unsecured borrowing issued under the terms of an indenture. A corporate IOU. See
Bond.
DEBIT
An accounting transaction
that increases an asset account, or reduces a liability account. See Credit.
DEBIT CARD
A plastic card which, when
used, will cause money to be taken from your checking account and moved to a
merchant’s account. The transaction is similar to a check, except it takes
place electronically and much more rapidly. See Credit Card, Smart Card.
DEBT
Borrowed money. Debt is a
liability.
Also, a security
representing a borrowing.
DEBT SERVICE
The interest to be paid on
borrowed money.
DEBT SERVICE RATIO
The ratio of a company’s profits
to its debt service requirements. It is a measure of how much those profits
could decline and still pay the interest due. A ratio of 1 means there is just
enough to pay the interest. Sometimes called interest coverage ratio or times
interest earned.
DEFAULT
Failure to meet a financial
obligation when due. Most commonly, a missed principal or interest payment.
DEFEASANCE
Providing
collateral (usually cash or US government securities) irrevocably to a trustee
to assure repayment of outstanding debt (usually bonds of some sort). Even
though the bonds are still outstanding, for all practical purposes they are
extinguished. The effect is to release the issuer of the bonds from some or all
of the terms of the indenture.
DEFINED BENEFIT
A type of pension plan in
which the employer guarantees a specific level of pension benefits to its
employees (usually based on length of service and salary), and is obligated to
provide sufficient funding to assure that payout. See Defined Contribution.
DEFINED CONTRIBUTION
A type of pension plan in
which the employer agrees to provide certain annual contributions in the names
of its employees (usually a percentage of salary), and the amount each employee
receives upon retirement depends only on the investment performance of the
funds. No level of benefits is guaranteed. Certain defined contribution plans
allow the employee to make contributions as well. See Defined Benefit.
DEFINITIVE
Definitive security. A
security issued in physical, or certificate form. See Book Entry.
DELIVERABLE
An options or futures
transaction in which the party obligated to make a payment will do so in a
specific underlying commodity (such as shares of stock or barrels of oil),
rather than in cash. See Cash Settlement.
DELIVERABLE GRADE
The quality specifications
a commodity must meet in order to be deliverable into a futures contract to
meet a delivery obligation.
DELIVERY POINT
A location for delivery of
the commodity underlying a futures contract. Each contract will have its own
delivery point or points, which are set by the futures exchange on which the
contract is traded.
DELIVERY RISK
See Settlement Risk.
DELIVERY VS. PAYMENT
DVP. A settlement system in
which the purchased commodity is transferred simultaneously with payment. If
either party is unable to complete its part of the transaction, the transaction
is not consummated. See Payment vs. Payment.
DELTA
The amount by which the
price of an option changes for a given change in the price of the underlying.
DELTA HEDGING
A technique used by option
writers for attempting to assure that changes in the short option position are
offset by opposite changes in a long underlying position, so the position makes
money no matter what happens to the market (a market neutral strategy). Delta
hedging often works better on paper than in the real world, as the conditions
necessary to delta hedge do not always exist in rapidly moving and/or illiquid
markets.
DEM
SWIFT code for the German
mark.
DEMAND DEPOSIT ACCOUNT
DDA. A deposit account from
which the depositor has the right to withdraw upon demand (i.e., a checking
account). In the US, banks may not pay interest on these accounts, and which
are therefore the cheapest source of funds for a bank. See Time Deposit.
DEMAND LOAN
A loan with no specific
maturity date. The bank may legally demand repayment at any time.
DEMATERIALIZE
Replacing the issuance of
paper certificates (stocks, bonds, etc.) with electronic entries on a depository’s
books.
DEPOSIT
Money placed in a
depository institution and subject to withdrawal and possibly the right to earn
interest, under terms and conditions defined by the deposit agreement.
DEPOSIT PLACEMENT
A deposit made (placed) with
a bank. Often, but not always, used to denote a eurodollar deposit.
DEPOSITORY
An institution that holds
securities for others.
DEPOSITORY INSTITUTION
A bank, thrift, or credit
union.
DEPOSITORY TRANSFER CHECK
DTC. An unsigned,
non-negotiable check used solely for moving money from a corporation’s account
at one bank to its account at another bank. Paper DTC’s have largely been
replaced by ACH transactions.
DEPOSITORY TRUST & CLEARING CORP.
DTC. A registered
securities depository, clearing, and settlement system, located in New York
City. Similar in concept to Clearstream and Euro-clear.
DEPRECIATION
An accounting concept that
recognizes that certain types of assets (buildings, equipment, etc.) have
finite lives, and the values thereof decrease every year. In the US,
depreciation is considered an expense that may be deducted from the company’s
income for tax purposes, thereby reducing its taxes.
DEREGULATION
A general term meaning the
removal of restrictions on the banking business, particularly in terms of what
banks can do and the interest rates they can pay, as well as what other kinds
of organizations can perform banking-type services. See Bank,
Gramm-Leach-Bliley Act, Non-Bank Bank.
DERIVATIVE
Derivative security. A
security created (derived) from others, or created to meet a specific
need or to have certain characteristics. For example, selling the interest
payments from a treasury bond separately, rather than as part of the bond
itself (stripping). Most derivatives can be classified either as options or
forwards/futures.
DEUTSCHE BÖRSE CLEARING
See Clearstream.
DILUTION
The reduction in the value
of earnings or stockholders’ equity due to the issuance of additional shares of
stock. Since the earnings (or stockholders’ equity) are divided up into more
pieces, each piece is worth less, unless the earnings (or the stockholders’
equity) increase by at least a proportional amount.
DIRECT SEND
A method of check clearing
in which checks are sent directly by the bank in which they are
deposited to the bank on which they are drawn, without any intervening banks.
DISCOUNT
When a financial instrument
is selling for less than its face (i.e. maturity) value, it is said to be
selling or trading at a discount, or below par (under 100).
Also used to denote debt
instruments that do not have a coupon, but which earn their return by being
issued at a discount, and redeemed at maturity at par. See Commercial Paper,
Par, Premium, Treasury Bill, Zero Coupon Bond.
DISCOUNT BROKER
A stock broker who provides
little or no investment advice or recommendations, only trade execution, and is
therefore generally cheaper than a full-service broker.
DISCOUNT HOUSE
One
of a small number of institutions in the UK with whom the Bank of England would
deal when conducting its open market operations, and which are essentially the
UK equivalent of primary dealers in the US. Their role is not as important as
it had been in the past due to the Old Lady’s use of other financial
institutions in addition to the discount houses for that purpose.
DISCOUNT RATE
The rate at which a Federal
Reserve bank will lend to banks who borrow at the Fed’s discount window.
Also, the rate on a
discounted instrument such as a treasury bill.
DISCOUNT WINDOW
The formal mechanism by
which a bank will borrow from the Federal Reserve.
DISCRETIONARY ACCOUNT
A type of investment
management account in which the client has given the investment manager the
right to make the investment decisions independently, without approval of each
specific investment by the client. This is normally done only after detailed
discussions about the client’s objectives. See Non-Discretionary Account.
DISHONOR
Refusal to pay a check upon
presentation. See Protest.
DISINTERMEDIATION
A term used to describe
funds flowing from the banking system (financial intermediaries) to
non-bank investment alternatives, such as money market mutual funds.
DISTANT
In futures markets, refers
to the futures contract which is furthest from final settlement. Sometimes
called the back month. See Prompt.
DIVIDEND
That portion of a
corporation’s profits that is distributed to stockholders, usually in cash,
rather than being retained in the business. See Retained Earnings.
DIVIDEND DISBURSING AGENT
An institution that makes
the actual dividend payments to stockholders of a corporation (using funds
previously furnished to it by the company) and which keeps the related records.
DJIA
The Dow Jones Industrial
Average. A widely watched indicator of the average price of 30 stocks in the
US. Similar in concept to the S&P 500.
DM
See Mark.
DOCUMENTARY COLLECTION
A trade finance service
provided by a bank in which the bank turns over title documents covering a
shipment to an importer, in return for the importer’s payment (documents against
payment, or D/P), or signed agreement to make a payment (documents
against acceptance, or D/A). The payment (or signed agreement) would then
be sent by the bank to the exporter.
DOCUMENTS AGAINST ACCEPTANCE
See Documentary
Collection.
DOCUMENTS AGAINST PAYMENT
See Documentary
Collection.
DOLLAR VALUE OF A BASIS POINT
See DVBP.
DORMANT
An account which has had no
activity for a certain period of time. See Escheat.
DOUBLE-DATED
A UK term for a callable
bond. The first of the two dates is the earliest call date, the second is the
final maturity date.
DOUBTFUL
See Classified.
DOUGLAS AMENDMENT
An amendment to the Bank
Holding Company Act that prohibits a bank holding company from acquiring a bank
outside its home state, unless the other state allows it. See Riegle-Neal
Act.
DOWN AND IN/OUT
See Barrier.
DOWNTICK
A securities trade made at
a lower price than the previous trade. See Uptick.
DRAFT
A written order by one
party to a second party to make a payment to a third party. As generally used
in international trade, it is a written order to a bank to make a specified
payment at some stated point in time to an exporter, to pay for goods. The
order (i.e., the draft) imposes no liability on the bank unless the bank accepts
it (agrees to make the payment). It then becomes a bankers acceptance. The
bank will be repaid by the importer, who had previously agreed to do so. A
draft is sometimes called a bill of exchange. See Check.
DRAWDOWN
See Takedown.
DTC
See Depository Transfer
Check, Depository Trust &
Clearing Corp.
DUAL INDEX NOTE
A type of structured note.
A debt instrument where the interest rate paid and/or the redemption value
depend not only on the level of two different indices (such as the 5 year and
30 year treasury indices), but on the difference between them as well.
DUE DILIGENCE
A detailed analysis of the
economic and financial value of a company, usually done in conjunction with
(and prior to) the underwriting, financing or acquisition of a company.
DUE FROM
See Nostro.
DUE TO
See Vostro.
DUFF AND PHELPS
A credit rating agency.
DURATION
A measure of how sensitive
the price of a financial instrument is to changes in interest rates. It takes
into account the timing of the cash flows using present value techniques, and
may be used by a bank as part of its asset/liability management program. See
Convexity, Immunization.
DVBP
Dollar value of a basis
point. The amount by which the price of a bond changes for a one basis point
change in its yield.
DVP
See Delivery vs.
Payment.
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€
See Euro.
EAF
Elektronische Abrechnung Frankfurt/Euro
Access Frankfurt. Germany’s interbank payment system.
EAFE
A stock market index,
similar in concept to the S&P 500, but comprised of approximately 1000
stocks from approximately 20 countries in Europe, Australia, and the Far East.
EAR
See Earnings at Risk.
EARLY BIRD FEE
A fee paid to a participant
in a loan syndication for signing on by a certain date.
EARNING ASSET
An asset that earns a
return. See Non-Earning Asset.
EARNINGS ALLOWANCE/CREDIT
A
rate that a bank assumes it earns on a customer’s compensating balances. It
allows the presumed earnings on those balances as a credit towards the cost of
providing services to that customer, reducing what the customer might otherwise
have to pay.
EARNINGS AT RISK
EaR. A risk management tool
for attempting to determine, at some prespecified confidence level (typically
95 or 99%), the maximum amount a company could lose for given changes in the
markets. See Value at Risk.
EARNINGS PER SHARE
EPS. The amount of money a
company makes, divided by the number of shares outstanding. Basic EPS uses the
actual number of shares outstanding as the divisor, while diluted EPS includes
additional shares that might be created due to outstanding stock options,
convertible securities, and other possible dilutive actions.
EASDAQ
European Association of
Securities Dealers Automated Quotation. A pan-European stock market similar to
NASDAQ.
ECB
The European Central Bank,
headquartered in Frankfurt.
ECN
See Electronic
Communications Network.
E-COM
See Electronic Commerce.
ECP
See Electronic Check
Presentment.
ECU
European currency unit. A
weighted-average basket of European currencies. The forerunner of the euro.
EDGAR
The SEC’s Electronic Data
Gathering And Retrieval system for accessing electronically-filed security
regulatory reports such as 10-K’s.
EDGE ACT CORPORATION
An
exception to the McFadden Act restriction that a bank may not accept a deposit
outside its home state. An Edge Act office, which generally contains
“international” as part of its name, is a separately chartered bank that can
do so, as long as those deposits relate to the international business of
those depositors. Named for the congressman who sponsored the legislation in
1919. The Riegle-Neal Act may reduce the need for these offices. See
Agreement Corporation.
EDI
See Electronic Data
Interchange.
EFFICIENCY RATIO
Cost to income ratio.
Overhead ratio. The percentage of a bank’s total revenues that are used up by
expenses. It is a measure of the operating efficiency of the bank and, in
general, the lower the better.
EFT
See Electronic Funds
Transfer.
ELECTRONIC BILL PRESENTMENT AND PAYMENT
A form of electronic
commerce whereby a merchant (generally through a bank or a third-party vendor)
sends a bill to its customer electronically (rather than through the mail). The
customer can then access it via the internet or the bank’s home banking
network, and, while on-line, authorize the payment to be made. The intent is to
eliminate the paper processing cycle.
ELECTRONIC CHECK PRESENTMENT
ECP. A method of clearing
checks in which the data on the check is sent electronically between the banks,
followed by the checks themselves, generally a few hours later. The intent is
to detect return items faster.
ELECTRONIC COMMERCE
E-com. Doing business and
exchanging orders, invoices, shipping instructions, payments, etc.
electronically, including the internet, rather than by paper.
ELECTRONIC COMMUNICATIONS NETWORK
ECN. A securities market
(stocks, bonds, etc.) that operates by matching buyers and sellers
electronically via computer, rather than through a specialist or market maker.
ELECTRONIC DATA INTERCHANGE
EDI. A method by which businesses
can send purchase orders, invoices, sales, shipping, billing and payment
information to each other electronically, rather than by paper. The payments
themselves may or may not be transferred along with the information.
ELECTRONIC FUNDS TRANSFER
EFT. Sending funds
electronically rather than by paper (check). The term is sometimes used to
denote consumer, rather than wholesale, electronic transfers. See ACH, Funds
Transfer.
EMPLOYEE BENEFIT PLAN
Commonly refers to
retirement plans such as defined benefit, defined contribution, 401(k), etc.
EMPLOYEE STOCK OWNERSHIP PLAN
ESOP. A form of employee
benefit plan. Consists of company stock that is distributed to its employees
over time. The employees therefore become (part) owners of the company.
EONIA
Euro Overnight Index
Average. Overnight borrowing rate in euros.
EPS
See Earnings Per Share.
EQUIPMENT TRUST CERTIFICATE
An investment secured by
equipment such as an airplane. Payments for the use of the airplane made by the
airline that issued the certificate will be used to pay the interest and
principal on the certificate to the investors that bought the certificate (who
therefore provided the money to buy the airplane in the first place). Title to
the airplane will be held by a trustee.
EQUITY
See Stockholders’
Equity.
EQUITY KICKER
Generally used in venture capital.
A provision attached to borrowed money that allows the lender to participate in
the growth of the company by allowing the lender to convert some or all of the
debt into the company’s stock, at some predetermined price. If the company does
well, the stock will be worth more to the lender than the value of the debt.
EQUITY RATIO
The ratio of stockholders’
equity to total assets.
ERISA
Employee Retirement Income
Security Act. A 1974 act of Congress that set minimum standards for defined
benefit pension plans, specified that the assets of the plan are not company
assets, but rather belong to the plan participants and their beneficiaries, and
that there be a trustee to hold the assets on behalf of the participants.
ERM
See Exchange Rate
Mechanism.
ESCHEAT
The passing of assets to
the state after a certain period of account inactivity (on the order of 3-7
years, depending on the state). See Dormant.
ESCROW
Property (typically cash) deposited
by one party with a second party (the escrow agent), to be released to a
third party upon fulfillment of certain prespecified conditions.
ESOP
See Employee Stock
Ownership Plan.
ESTATE
Generally, an interest in
property. Often used to mean the assets of someone who has died. See
Executor/Executrix.
EUREX
At this writing, a joint
German-Swiss futures and options exchange. Trading is conducted electronically,
rather than via the traditional open outcry.
EURIBOR
Euro Interbank Offered
Rate. Similar to LIBOR, but with a much broader base of banks used for the
computation of the rate.
EURO
EUR. € . As from January 1,
1999, the new common European currency of the 11 country euroland. It is anticipated
that additional countries will join the euro subsequent to its introduction.
The individual national currencies will be phased out by the year 2002.
EURO LIBOR
Libor, but for borrowings
in euros.
EUROCHAPS
A funds transfer system for
transferring euros, based in the UK.
EURO-CLEAR
Euro-clear Clearance
System, plc. A securities depository and settlement system, headquartered in
Brussels. Similar in concept to Clearstream and DTC.
EUROCURRENCY
Any currency that is on
deposit outside of its home country. E.g.,
eurosterling represents pounds sterling deposited outside of the UK. The
eurodollar is the most common of the eurocurrencies. A eurocurrency should not
be confused with the euro.
EURODOLLAR
As the term is used today,
any dollar that is on deposit in a bank outside of the US is considered a
eurodollar. It need not be in a US bank, and it need not be deposited in Europe.
The eurodollar market is a vast, unregulated market for the buying and selling
of funds that are free from US reserve requirements and FDIC fees. Ultimately,
all eurodollars must appear on the books of a US domiciled bank, but this is
more for accounting purposes than anything else. See Eurocurrency.
EUROPEAN CURRENCY UNIT
See ECU.
EVENT OF DEFAULT
A specific event, listed in
a bond indenture or loan agreement, upon whose occurrence a default has legally
taken place. Such occurrence usually permits legal action to be taken against
the issuer or borrower.
EVENT RISK
The risk of an unforeseen
event (such as a takeover of a company) affecting the credit rating of the
company’s bonds.
EX DATE
The date on or after which
the buyer of a stock is no longer entitled to the currently declared dividend. See
Record Date.
EXCHANGE
A marketplace organized for
the purpose of buying and selling securities. Generally has a physical location
in which the trading takes place. See Over The Counter.
EXCHANGE RATE
The price of one currency
stated in terms of another. See FX.
EXCHANGE RATE MECHANISM
ERM. An agreement by a
number of European countries to keep the values of their currencies within
relatively narrow bands of each other. This was intended as a step towards
monetary union, a single European currency called the euro. See Black
Wednesday.
EXECUTIVE MANAGING DIRECTOR
What the US banks are
calling the executive vice presidents in their merchant banking groups. See
Managing Director.
EXECUTOR/EXECUTRIX
The person (man/woman) or
institution charged with settling an estate. Called a personal representative
in some states.
EXERCISE
Conversion of an option
into a position in the underlying, or receiving, for cash-settled options, the
in-the-money amount.
EXERCISE PRICE
Strike price. The price at
which an option may be exercised.
EXOTIC CURRENCY
A currency that is traded
infrequently, and only by specialists in that currency, rather than by all the
major dealers.
EXPEDITED FUNDS AVAILABILITY ACT
See Regulation CC.
EXPENSE
Money paid out to acquire
an asset or for a service being provided.
EXPENSE RATIO
That portion of a mutual fund’s
average assets that goes to pay expenses (administration, investment
management, custody, etc.).
EXPORT LETTER OF CREDIT
See Letter of Credit.
EXTENSION RISK
The risk that a loan will
be paid off later than expected (even though prior to the contractual maturity
date). See Prepayment, Prepayment Risk, Prepayment Speed.
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FACILITY
See Credit Facility.
FACILITY AMOUNT
The amount of a credit
facility.
FACTORING
The
purchase, at a discount, of a company’s accounts receivable. The factor assumes
the collection risk, and the company is guaranteed to be paid.
FAIL
Most commonly used in
securities transactions. It represents the failure of one party to deliver the
securities sold, or of the other party to provide payment.
FAIR WEATHER BOND
See Range Floater.
FANNIE MAE
See Federal National
Mortgage Association.
FASB
See Financial Accounting
Standards Board.
FASB 115
FASB standard number 115,
which deals with how a bank must value the securities in its investment
portfolio.
FBE
See Fed Book Entry.
FCM
See Futures Commission
Merchant.
FDIC
Federal Deposit Insurance
Corporation. A quasi-governmental agency that insures domestic deposits at
banks and thrifts up to $100M.
FED
The Federal Reserve.
Variously used to indicate the Board of Governors of the Federal Reserve, the
entire Federal Reserve System, or one of the 12 separate Federal Reserve banks.
FED BOOK ENTRY
FBE. A book entry
securities system maintained by the Federal Reserve, for holding US government
securities on behalf of banks.
FED FUNDS
See Federal Funds.
FEDERAL AGENCY
Government agency. As
generally used in financial markets, these refer to securities issued by US
government agencies. Some are truly part of or guaranteed by the government
(e.g., Government National Mortgage Association), while others are
private institutions with no legal backing from the government (e.g., Federal
National Mortgage Association).
FEDERAL FUNDS
Fed funds. Reserves that
banks lend one another, usually on an overnight basis.
Also used to designate
funds that can be used immediately by the recipient or holder (i.e., zero
float), and are called available funds in this context. See Next Day Funds.
FEDERAL HOME LOAN MORTGAGE CORP.
FHLMC. Freddie Mac. A
government sponsored, stockholder-owned enterprise, chartered to promote the
availability of funds for residential mortgages by buying residential mortgages
from banks and thrifts.
FEDERAL NATIONAL MORTGAGE ASSN.
FNMA. Fannie Mae. A
government sponsored, stockholder-owned enterprise, chartered to promote the
availability of funds for residential mortgages by buying residential mortgages
from banks and thrifts.
FEDWIRE
A funds transfer system,
run by the Federal Reserve, used for moving money and, with fed book entry, for
settling US government securities transactions for banks.
FEE-BASED SERVICE
A service that provides fee
income to the bank. I.e., one whose profit is not a function of interest income
and expense.
FERC
Federal Energy Regulatory
Commission. An agency that regulates various aspects of the interstate natural
gas, oil, and electricity business in the US.
FHLMC
See Federal Home Loan
Mortgage Corp.
FIDUCIARY
One who acts for the
benefit of others.
FINANCIAL ACCOUNTING STANDARDS BOARD
FASB (pronounced faz’
bee). The rulemaking body of the accounting industry.
FINANCIAL ENGINEERING
The creation, combining,
and packaging of financial instruments (generally including derivatives) in
order to develop a new financial instrument with specific price, yield, risk,
and/or return characteristics.
FINANCIAL HOLDING COMPANY
See Gramm-Leach-Bliley
Act.
FINANCIAL SERVICES AUTHORITY
FSA. The integrated
financial services regulator in the UK. It is the successor to a variety of
different regulatory agencies.
FINANCIAL SERVICES MODERNIZATION ACT OF 1999
See Gramm-Leach-Bliley
Act.
FIRREA
Financial Institutions
Reform, Recovery, and Enforcement Act of 1989. The thrift industry bailout
bill.
FISCAL YEAR
The period representing a
company’s accounting cycle. Generally, but not always, corresponds to the
calendar year.
FITCH IBCA
A credit rating agency.
FIXED ANNUITY
An annuity whose annual
payments are constant. See Variable Annuity.
FIXED INCOME SECURITY
A fixed rate security
(usually a bond or similar instrument), for which the interest income paid
every year never changes, even if interest rates in the marketplace change.
Fixed income securities give rise to interest rate risk.
FIXED RATE
An interest rate on a loan
or a deposit that does not change over time. See Floating Rate.
FLAT
See Matched Book.
FLOAT
As a general term, it means
uninvested or idle funds.
In terms of checks, it
refers to uncollected funds, which are funds which have not yet become
available for use.
FLOATER
Generally refers to a CMO
whose interest rate goes up (or down) as market rates go up (or down), as
opposed to being fixed. See Inverse Floater.
FLOATING RATE
Variable rate or adjustable
rate. A rate on a loan, bond or deposit that changes over time, as other rates
change. The conditions under which the rate will float are spelled out in the
underlying agreement. See Fixed Rate.
FLOOR
A capital markets product
in which the writer or seller of the floor guarantees to the buyer that a given
reference rate (interest, foreign exchange, or commodity) will not drop below a
certain value. If it does, the writer will make payments to the buyer based on
the difference in rates and the notional principal agreed to. See Cap,
Collar, Forward Rate Agreement.
FLOOR PLAN
A loan to an auto dealer to
finance its inventory of cars. The loan is tied to each specific car, and when
a given car is sold, that part of the loan is to be repaid.
FLOOR RATE
The rate below which a floor
will begin to make payments. See Cap, Cap Rate.
FLOWER BOND
Certain issues of US
treasury bonds that would be accepted by the US government at face value
(regardless of its market value) for the payment of estate taxes. These bonds are
no longer created, although some older ones are still available.
FNMA
See Federal National
Mortgage Association.
FOOTSIE
See FT-SE.
FOREIGN EXCHANGE
See FX.
FOREX
See FX.
FORFAITING
Similar in concept to
factoring, but generally longer term (often years), and typically covers
overseas sales and the political risks associated therewith.
FORTUNE 500
Fortune magazine’s annual
list of the 500 largest US companies. Often used to indicate any large company.
FORWARD CONTRACT
An over the counter
agreement for the delivery of a commodity at some specified future time. The
rate agreed to (the forward rate) is locked in and doesn’t change, even
though delivery (settlement) may not take place for some time, and the value of
the commodity may have changed in the interim. The intent is to protect against
adverse price movements. See Futures Contract, Spot Rate.
FORWARD RATE AGREEMENT
FRA.
An over the counter capital markets product in which the writer or seller of the FRA makes a payment to the
buyer if a given interest rate exceeds a certain value, and the buyer pays the
seller if the rate is below. The amount paid is a function of the difference in
rates and the notional principal agreed to. See Cap, Collar, Floor.
401(k)
A type of defined
contribution plan. Named for the section of the Internal Revenue Code that
governs these plans.
403(b)
A type
of defined contribution plan. Named for the section of the Internal Revenue
Code that governs these plans. They are available to employees of tax-exempt
organizations and school systems.
404(c)
A set of minimum standards
for defined contribution plans, that, if met by the plan sponsor, exempts the
sponsor from liability for breach of fiduciary obligation to the plan
participants. The standards specify the minimum investment choices that must be
offered to the participants, among other features.
457
A form of deferred
compensation plan for employees of state and local governments and non-profit
organizations, similar in concept to a 401(k). Named for the section of the
Internal Revenue Code that governs these plans. In a 457, however, as opposed
to a 401(k), the funds are not set aside, but remain the property of the
employer until paid out.
FRA
See Forward Rate
Agreement.
FREDDIE MAC
See Federal Home Loan
Mortgage Corp.
FREE-RIDING
An illegal practice of
buying and then rapidly reselling securities without paying for them in the
interim.
FRF
SWIFT code for the French
franc.
FRONT-RUNNING
The entering of a buy or
sell order (for securities, commodities, FX, etc.) by a broker for their own
account, ahead of (and with knowledge of) a large customer order to be
executed. The intent is to profit from the market movement caused by the large
order, and is generally considered illegal.
FSA
See Financial Services
Authority.
FSLIC
Federal Savings and Loan
Insurance Corporation. A quasi-governmental agency that insured domestic
deposits at thrifts up to $100M. As part of FIRREA, the FSLIC’s function was
transferred to the SAIF under the FDIC and the FSLIC was dissolved.
FT-A ALL-SHARES
The
Financial Times Actuaries All-Shares index of 750 UK stocks, similar to but
broader-based than the FT-SE. Similar in concept to the S&P 500.
FT-SE
Footsie. The Financial
Times Stock Exchange index of 100 UK stocks. Similar in concept to the S&P
500. See FT-A All-Shares.
FULL-SERVICE BROKER
A stock broker who provides
investment advice and recommendations, as well as trade execution, and is
therefore generally more expensive than a discount broker.
FUNDAMENTAL ANALYSIS
An analysis of the
prospects for a company and its stock based on a detailed examination of
underlying economic conditions and the company itself. See Technical
Analysis.
FUNDING
The process of creating
liabilities of the appropriate mix to be used to support the assets of the
bank. I.e., raising money.
FUNDS TRANSFER
Money transfer. Telegraphic
transfer. Wire transfer. The process of moving money around the world,
generally electronically, through debits and credits to various bank accounts. See
ACH, CHAPS, CHIPS, EFT, Eurochaps, Fedwire, SWIFT, TARGET.
FUTURES
See Futures Contract.
FUTURES COMMISSION MERCHANT
FCM. Essentially, the
equivalent of a stockbroker, but for futures contracts.
FUTURES CONTRACT
Futures. An exchange traded
agreement to take or make delivery of a specified quantity of a commodity, at
some future point in time, and at a price agreed at the time the contract was
entered into, no matter what the actual price may be when delivery occurs and
payment is made. Similar in concept to a forward contract, with some important
legal and operational differences.
FUTURES OPTION
An option to enter into a
futures contract, with the contract price of the futures equal to the strike
price of the option. A call converts, upon exercise, into a long futures
position, a put into a short futures position.
FX
Foreign exchange. Forex.
The process of buying one currency and paying for it with (i.e., selling)
another.
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GAMMA
The amount by which the
delta of an option changes for a given change in the price of the underlying.
GAP
In terms of interest rates,
the difference between assets and liabilities that are repriced (have their
rates adjusted to current or near-current market rates) within a particular
time period (rate sensitive assets minus rate sensitive liabilities for the
period). The same concept can be applied to foreign currencies, and represents
the difference between maturing foreign currency assets and liabilities. The
size of the gap is related to the interest rate or FX rate sensitivity of the
bank (how the bank’s profitability will be affected by changing interest or FX
rates). Gap analysis is a technique using gaps to forecast the effect of
changing rates on a bank’s profit. Spelled both as gap and GAP. See Match
Funding, Mismatch.
GAP ANALYSIS
See Gap.
GBP
SWIFT code for the British
pound.
GEARING
See Leverage.
GEMM
See Gilt-Edged Market
Maker.
GENERAL OBLIGATION
See Municipal Bond.
GENOSSENSCHAFT
German cooperative bank.
GIC
See Guaranteed
Investment Contract.
GILT
Gilt-edged security. Term
for a government security in some countries.
GILT-EDGED MARKET MAKER
GEMM. A market-maker in
gilts (UK).
GINNIE MAE
See
Government National Mortgage Association.
GLASS-STEAGALL ACT
Banking Act of 1933. An act
of Congress that prohibited banks from
engaging in the securities underwriting business. The Gramm-Leach-Bliley
Act removed the restriction. See Section 20.
GLOBAL CERTIFICATE
A single certificate,
representing all the outstanding securities of a company, usually deposited with
a depository, which will then issue book-entry receipts against it.
GLOBAL CUSTODY
A custody service in which
the securities held are issued globally. It is a way of providing centralized custody,
servicing, and accounting for a portfolio no matter where the securities are
issued.
GLOBEX
An electronic futures
exchange. Part of the CME.
GMBH
Gesellshaft mit beschränkter Haftung.
A form of private, incorporated (limited liability) company in parts of Europe.
GNMA
See
Government National Mortgage Association.
GO
See Municipal Bond.
GOODWILL
The price paid above book
value to acquire an asset in a cash transaction. It is an intangible asset
which must be written off as an expense over time.
GOVERNMENT AGENCY
See Federal Agency.
GOVERNMENT NATIONAL MORTGAGE ASSN.
GNMA. Ginnie Mae. A
government sponsored enterprise, chartered to promote the availability of funds
for residential mortgages, by buying residential mortgages from banks.
Obligations of Ginnie Mae are guaranteed by the US government.
GOVERNMENT SPONSORED ENTERPRISE
See GSE.
GRAMM-LEACH-BLILEY ACT
The Financial Services
Modernization Act of 1999. This act removes most of the restrictions concerning
the activities of banks and bank holding companies that are contained within
the Bank Holding Company Act and the Glass-Steagall Act. In particular, it
permits mergers among banks, insurance companies, and securities firms, and
thus will allow newly authorized financial holding companies (either via direct
subsidiaries, or through bank or bank holding company subsidiaries) to
underwrite insurance and securities.
GRANTOR
The creator of a trust.
GREEKS
Quantoid jargon for the
various option pricing parameters which describe the behavior of an option’s
price as factors such as time, volatility, and price of the underlying change.
The common Greeks are delta, gamma, rho, theta, and vega.
GREEN SHOE CONCESSION
The option given to an
underwriter of a security to purchase additional securities (generally up to 15%
additional) at the offering price.
GROSS SETTLEMENT
A
funds or securities settlement system in which each individual transaction
results in the transfer of the gross amount of money or securities from one
party to the other. See Continuous Linked Settlement, Net Settlement, Real
Time Gross Settlement.
GSE
Government sponsored
enterprise. Most commonly refers to FHLMC, FNMA, and GNMA.
GUARANTEED INVESTMENT CONTRACT
GIC. Typically
a contract offered by an insurance
company to retirement plans that will pay a guaranteed rate of interest for an
agreed upon period of time, but will allow the principal amount to be withdrawn
at face value without penalty, upon the occurrence of certain
prespecified conditions (disability of a retiree, for example). Similar to a
BIC.
GUARANTOR
One who agrees to make a
payment if another does not.
GUIDANCE LINE
Guidance line of credit. An
internal limit a bank sets for the maximum amount it will lend to a customer.
The customer is not made aware of the amount of the line. See Advised Line.
GUILDER
NLG. Netherlands guilder.
The Netherlands unit of currency.
GUVVIE
Dealer slang for a US Treasury
security.
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HAIRCUT
A discount applied to the
market value of collateral to allow for possible variations in its price.
HANG SENG
An
index of stocks traded on the Hong Kong stock exchange. Similar in concept to
the S&P 500.
HARD CURRENCY
A currency that tends to
retain its value, and that people are willing to hold, such as the US dollar,
yen, pound, mark, euro, etc.
HEDGE
Reducing
risk by entering into a transaction that will pay off if a certain
(undesirable) event occurs. If the event does not occur, you are out the cost
of the hedge. Health insurance is a form of hedging.
HEDGE FUND
Private investment vehicles
which are exempt from regulation under the Investment Company Act of 1940. They
are usually limited to less than 100 US investors, an unlimited number of
foreign investors, and generally accept only large minimum investments
(typically $250M and up). The term hedge as used in this context is
somewhat misleading, since hedging is a risk-reducing technique. Hedge
funds seek out risk (sometimes in very exotic ways by using various
derivatives, short positions, leverage, etc.) in an attempt to create large
returns.
HEDGE RATIO
The number of futures or
options contracts needed to be bought or sold in order to perfectly hedge a
position.
HELD TO MATURITY
See Investment
Portfolio.
HENRY HUB
The delivery point for the
NYMEX natural gas contract. It is located near Erath, Louisiana.
HERSTATT
Bankhaus Herstatt. See
Settlement Risk.
HIGH NET WORTH INDIVIDUAL
HNWI.
A wealthy person. Every bank will have its own definition of who will fall into
this category.
HIGH YIELD
See Junk Bond.
HLT
Highly leveraged
transaction. See LBO.
HNWI
See High Net Worth
Individual.
HOT MONEY
Investment funds that chase
after the highest rate.
HR-10
See Keogh Plan.
HUB AND SPOKE
Sometimes called
master/feeder. A way of creating a single mutual fund and its attendant legal
structure (the hub), and having other mutual funds (the spokes) buy into the
hub. It eliminates the need for the spokes to go through the entire legal
process to be created. Each spoke must have the same investment objective as
the hub, but they can otherwise be different in terms of fee structure, name of
fund, target investor population, marketing materials, advertising, etc.
HYPOTHECATE
To pledge an asset as
collateral.
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IB
See Introducing Broker.
IBF
International Banking
Facility. A type of banking free-trade zone intended to let US banks compete
for eurodollar business from the US, without having to resort to places like
Nassau, Cayman Islands, London, etc. They are essentially eurodollar
operations, but certain restrictions apply as to the kinds of transactions
they may perform. They are generally exempt from reserve requirements, FDIC
fees, and other banking regulations. This, coupled with the fact that they
represent US country risk, make them (for some) an attractive place to deposit
money.
IMAGE PROCESSING
Processing document or
check images, rather than the physical documents or checks themselves.
IMMOBILIZATION
Holding
definitive securities in a depository’s vault, and issuing book entry
securities against them.
IMMUNIZATION
An investment management
technique which structures a fixed income portfolio in order to minimize the
effect of changing interest rates on the overall portfolio return. The duration of the portfolio is set to equal the
portfolio’s time horizon.
IMPLIED VOLATILITY
The volatility the
underlying would have to have in order for an option to be priced as it is in
the market. I.e., the option pricing model is used to derive the volatility
given the price, rather than deriving the price given the volatility.
IMPORT LETTER OF CREDIT
See Letter of Credit.
IN PLAY
As used in mergers and
acquisitions, means that a company has been publicly identified as a possible
takeover target.
IN THE MONEY
A call (put) option in
which the market price of the underlying is greater (less) than the strike
price of the option. Exercise of the option would therefore result in a profit
(ignoring the premium paid to acquire the option). See At The Money, Out Of
The Money.
IN TRUST FOR
ITF. Used to indicate that
assets are held on behalf of another.
INC.
Incorporated. See
Corporation.
INCOME
Profit. The excess of
revenue over expenses.
INCOME STATEMENT
Also called a P and L
(profit and loss). A statement of the income and expenses of a business for a
particular period of time. See Balance Sheet.
INCORPORATED
Inc. See Corporation.
INDENTURE
A legal agreement between
an indenture trustee and an issuer of debt securities (typically a corporation
or a municipal authority) that specifies the obligations of the issuer
regarding payment of interest and principal, not selling or pledging assets,
etc.
INDENTURE TRUSTEE
The entity (typically a
bank) responsible for enforcing the provisions of an indenture, and protecting
the rights of the holders of the securities. Indenture trustee is a corporate
trust function.
INDEX
An
average of a group of securities, such as the S&P 500 index.
Also,
in the natural gas business, refers to the most common fixed price set during
bid week for a given delivery point for gas to flow the next month.
INDEX ARBITRAGE
See Program Trading.
INDEX FUND MANAGEMENT
See Passive Investment
Management.
INDEX-LINKED
An investment whose return
is linked to the change in the value of some index over time.
INDUSTRIAL REVENUE BOND
IRB. A bond issued by a
municipality to raise money to be lent to a company, often to build a factory.
The company pays rent to the municipality in an amount sufficient to repay the
principal and interest on the bond. The intent
is to raise the money at tax-exempt rates.
INITIAL MARGIN
See Margin.
INITIAL PUBLIC OFFERING
See IPO.
INSOLVENCY
Inability to pay debts as
they become due. Sometimes used to indicate bankruptcy.
INSTALLMENT LOAN
Generally used to indicate
a consumer loan with periodic payments, such as a car loan.
INSTITUTIONAL INVESTOR
Generally used to indicate
any large investor, including banks, corporations, governments and government
agencies, pension funds, insurance companies, mutual funds, hedge funds,
wealthy individuals, etc.
INTANGIBLE ASSET
An asset without tangible
value, such as the value of a brand name, or goodwill.
INTER VIVOS TRUST
See Living Trust.
INTERCHANGE
A fee paid by the acquirer
(the bank servicing a merchant who accepts a credit card), to the issuer
(the bank that issued the card), to compensate the latter for its billing,
collection, servicing, and funding costs. The fee is passed along to the
merchant in the form of a discount on the value of the credit card charge.
INTEREST
A fee paid for the use of
money.
INTEREST BASIS
Sometimes called basis. The
method of computing the daily interest on a loan or deposit, given that you
have the annual rate. For example, you could divide by 365, 366, or 360 to get
the daily rate, depending on the basis used.
INTEREST COVERAGE RATIO
See Debt Service Ratio.
INTEREST ONLY
IO. A type of CMO in which
the holder receives only the interest payments from the underlying pool of
mortgages. See Principal Only.
INTEREST RATE RISK
The risk that fixed
interest payments from an investment would be less than market rates would
generate today, due to a rise in interest rates. This would result in the
investment being worth less than par value. If interest rates had declined, the
investment would be worth more than par value. A floating rate would
reduce or eliminate interest rate risk (and also the opportunity to profit from
changes in rates). See Credit Risk.
INTEREST RATE SENSITIVITY
The sensitivity of a bank’s
profit to changes in interest rates. The profit could go up, down, or stay the
same as rates change, depending on the rate sensitivity of the bank. See
Gap.
INTEREST TO FOLLOW
ITF.
A method of computing interest on a loan. The interest is computed periodically
(quarterly, for example), and then added to any principal to be paid, resulting
in the total payment due, which will therefore be reduced as the principal is
paid down.
INTERNATIONAL BANKING FACILITY
See IBF.
INTESTATE
To die without leaving a
valid will.
INTRINSIC VALUE
The
amount by which an option is in the money, if it is in the money, or zero
otherwise. See Time Value.
INTRODUCING BROKER
IB. A broker with whom a
customer places orders, but the actual trades, confirmations, accounting,
maintenance of funds, clearing, settlement, and record keeping are handled by
another firm, the clearing broker.
INVERSE FLOATER
Generally refers to a CMO
whose interest rate goes down as market rates go up. See Floater.
INVESTMENT
An asset one acquires for
purposes of earning a return or profit.
INVESTMENT ADVISOR
See Investment Manager.
INVESTMENT BANKING
Services to institutions
that generally involve providing financial advice, and being an intermediary,
bringing together suppliers (lenders and investors) and users (borrowers and
issuers of securities) of funds, rather than being a supplier directly. The
objective is to generate fee income without assuming the credit risk. Some of
the major investment banking services include underwriting, M&A, private placements,
and corporate finance.
INVESTMENT COMPANY ACT OF 1940
The act of Congress that
regulates mutual funds.
INVESTMENT GRADE
Securities given one of the
top 4 ratings (AAA, AA, A, BBB/Baa) by a credit rating agency. See
Non-Investment Grade.
INVESTMENT MANAGEMENT
Asset management. Investing
and managing the money of individuals and institutions (corporations, pension
funds, etc.). Investments are usually made in the stock and bond markets, for
which the investment manager receives a fee.
INVESTMENT MANAGER
Investment advisor. One who
performs investment management services for a fee.
INVESTMENT PORTFOLIO
In general, any set of
investments.
As applied to banks, an
account containing various securities (usually US government and federal agencies,
and municipal obligations) intended to provide liquidity and income for the
bank. The portfolio would include securities held to maturity (those
which the bank, when purchasing them, has the ability and intent to
hold to maturity), and those which are available for sale (which may be
sold prior to maturity). As a result of FASB 115, the former are carried at cost,
the latter are carried at fair (essentially market) value, with unrealized
gains and losses being posted to stockholders’ equity. See Trading
Account/Assets.
IO
See Interest Only.
IPC
Indice de Precios y Cotizaciones. An
index of stocks traded in Mexico. Similar in concept to the S&P 500.
IPO
Initial public offering.
The first time a company sells stock to the public. Due to the potential for
rapid price increases, IPO’s are often in great demand.
IRB
See Industrial Revenue
Bond.
IRREVOCABLE TRUST
A trust, which, once it is
set up, can be neither terminated nor changed by its creator (grantor). See
Revocable Trust.
ISDA
International Swap and
Derivatives (formerly Dealers) Association. A group of swap dealers that
has developed standard terminology and documentation for swaps and related
transactions.
ISIN
International Security
Identification Number. A 12 digit code used internationally to identify
securities.
ISITC
Industry Standardization
for Institutional Trade Communications. A worldwide securities trade group
designed to develop global standards for securities transaction messages in
order to facilitate STP.
ISSUED SHARES
The number of shares a
company has actually issued. See Authorized Shares, Outstanding Shares.
ISSUER
An institution which issues
securities.
Also, the issuer of credit
cards. See Acquirer.
ITF
See In Trust For,
Interest To Follow.
ITL
SWIFT code for the Italian
lira.
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JGB
Japanese government bond.
JIBAR
Johannesburg Interbank
Agreed Rate. The rate paid for deposits in South African Rand in Johannesburg.
JOBBER
Trader.
JPY
SWIFT code for the Japanese
yen.
JUNK BOND
A non-investment grade or
unrated obligation. Sometimes called high yield, since they must pay a high
interest rate to compensate for the risk.
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KANGAROO BOND
Australian dollar
denominated bond issued in Australia by a non-Australian issuer.
KEOGH PLAN
A retirement plan for
self-employed individuals. Also called an HR-10.
KIMONO BOND
Bond issued in Japan backed
by loans to purchase kimonos. A form of securitization.
KIWI
NZD. Used to denote the New
Zealand dollar.
KNOCK IN/OUT
See Barrier.
KNOW YOUR CUSTOMER
KYC.
Bank regulations that require a bank to satisfy itself that the source of a
customer’s funds is legitimate, in order to prevent money laundering.
KYC
See Know Your Customer.
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£
See Sterling.
LARGE CORPORATE MARKET
Large companies with which banks
do business. Sometimes called the Fortune 500.
LAUNDRY LIST
See Regulation Y.
LBO
Leveraged buyout. A highly
leveraged transaction (HLT). Typically, a buyout of a company whereby the
buyout group (management, investment/merchant bankers, etc.) puts up a small
amount of its own money (equity) and leverages it by borrowing all the rest
(from banks, by issuing junk bonds, etc.). If the buyout is ultimately
profitable, the owners’ return is usually large, since they put up only a small
amount of money. Due to the large amounts of borrowed money, LBO’s are
unusually sensitive to increases in interest rates or downturns in the economy.
L/C
See Letter of Credit.
LDC
Lesser developed country. Generally
used to refer to those countries having difficulty meeting their debt
obligations.
LEAD MANAGER
The bank or investment bank
which is primarily responsible for lining up other participants in a loan
syndication or securities underwriting.
LEASING
A method of financing in
which one party purchases equipment and “rents” the use of it to another. The
economics of leasing is often dependent upon tax laws.
LEDGER BALANCE
The balance in a checking
account per the books of the bank, recording all check deposits on the day they
were made, without regard to float. See Collected Balance.
LEGAL LENDING LIMIT
Legal limit. The maximum
amount of credit a bank may extend to any single borrower or group of related
borrowers. Currently, a national bank’s unsecured legal lending limit is set at
15% of a bank’s total capital with a few minor adjustments. In some countries,
it is called a loans to one borrower limit. See Overline Loan.
LENDING AUTHORITY
The maximum amount of
credit a lending officer of a bank may extend upon his/her own authority to any
borrower without further approval.
LETTER OF CREDIT
L/C. A means of
substituting the credit of a bank for that of another party. A bank agrees to
make a payment if certain terms and conditions (e.g., the presentation of
specified documents such as a bill of lading) are met. Usually, but not
always, used in international trade transactions.
An import letter of
credit is marketed by the bank to the importer; an export letter of
credit is marketed to other banks, to get them to chose the first bank to
confirm the L/C (for a fee).
LEVERAGE
The use of borrowed money
(debt). Sometimes called gearing.
LEVERAGE RATIO
For a bank, the ratio of
tier 1 capital to average tangible assets.
LEVERAGED BUYOUT
See LBO.
LIABILITY
That which a business owes
(its debts).
Also, a source of a
business’ money. See Asset, Stockholders’ Equity.
LIBID
London Interbank Bid Rate.
The rate which banks in London will pay for dollar deposits. See LIBOR.
LIBOR
London Interbank Offered
Rate. The eurodollar rate. Generally used as the base rate for eurodollar
loans. Technically represents the rate at which banks in London sell (lend)
dollars to one another. See LIBID.
LIEN
A claim by a creditor
against the assets of a debtor. A legal method used by a secured
(collateralized) lender to assure that the collateral may not be sold by the
borrower until the loan is repaid. A mortgage is a form of lien.
LIFFE
London International
Financial Futures and Options Exchange. An exchange for the trading of futures
and options.
LIMEAN
The average of LIBID and
LIBOR.
LIMIT DOWN/UP
See Daily Limit.
LIMITED LIABILITY COMPANY
LLC. A relatively new form
of business, combining the limited liability of a corporation, and the
favorable taxation of a partnership.
LIMITED LIABILITY PARTNERSHIP
LLP. See Partnership.
LIMITED-SERVICE BANK
See Non-Bank Bank.
LINE FUNCTION
Those parts of a bank that
have direct customer contact, such as tellers, relationship managers, sales
personnel, etc. See Staff Function.
LINE OF CREDIT
See Advised Line, Guidance
Line.
LIQUIDITY
The ease with which an
asset may be turned into cash at little or no risk of loss (asset liquidity),
or the ease with which funds may be raised in the various markets to which a
bank may have access (liability liquidity).
LIRA
ITL. The Italian unit of
currency.
LIVING TRUST
Inter vivos trust. A trust
which takes effect while the creator (grantor) is alive. See Testamentary
Trust.
LLC
See Limited Liability
Company.
LLP
See Partnership.
LOAD
A sales charge imposed by
some mutual funds to compensate the salesperson who sold it. The charge may be
imposed when you buy the fund (front-end load), when you sell it (back-end
load, formally called a contingent deferred sales charge), or equally over
a number of years (level load). Some funds have no such charges (no
load funds). Studies have generally shown no difference in performance
between funds that have these charges, and those that don’t.
LOAN AGREEMENT
A formal, legal contract
between a bank and a borrower that stipulates the conditions under which the
loan will be made, and under which the bank may refuse to make the loan.
LOAN FUND
A form of mutual fund that
buys or makes commercial loans, rather than holding securities in the form of
stocks or bonds.
LOAN PRICING
All of the elements
comprising income to the bank on a loan. At a minimum it will consist of the
interest rate, and will usually contain additional compensation in the form of
fees, compensating balances, etc.
LOAN PRODUCTION OFFICE
LPO. A bank office, usually
geographically remote from the bank’s main marketing area, used to call on
customers for the purpose of generating loans.
LOAN TO VALUE
LTV. The percentage of the
value of an asset that a bank is willing to loan with the asset as collateral.
The borrower must put up the remaining piece as equity.
LOANS TO ONE BORROWER LIMIT
See Legal Lending Limit.
LOCKBOX
A post office box into
which payments due to a corporation will be mailed. A bank will periodically
(throughout the day) empty the box, record and then send the payments to be
collected, in order to speed up the collection process. Part of a cash
management system.
LOCKED MARKET
In the futures market, when
the contract is trading (or is bid or offered) at the daily limit price.
LOMBARD
Lombard facility. The provision
of credit to a bank (usually on a short-term, emergency basis) by a central
bank, at a penalty rate (the Lombard rate).
LONG POSITION
A securities position in
which one has an excess of purchases over sales, resulting in a net position of
securities to be received. See Short Position.
LOOKBACK
An option with no early
exercise. It pays the maximum payoff that would have been realized had the
buyer of the option exercised at the optimal moment, with perfect foresight.
These options are more expensive than plain vanilla options.
LORO
See Vostro.
LOSS
See Classified.
LPO
See Loan Production
Office.
LTV
See Loan To Value.
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M&A
See Mergers and
Acquisitions.
MAINTENANCE MARGIN
See Margin.
MANAGED LIABILITIES
See Purchased Funds.
MANAGING DIRECTOR
MD. What the US banks are
calling the vice presidents in their merchant banking groups. See Senior
Managing Director.
MARGIN
As used in the stock and
bond markets, margin is the amount of money an investor must put up in order to
buy a security. The broker is permitted to lend you the rest. Currently, for marginable
stocks, margin is 50% (you put up half, the broker lends you half). For
treasury bills, margin is 10% and the broker can lend you 90%.
As used in the futures
markets, margin is a deposit you make to cover potential losses in your
position. You receive it back if you break even or make a profit.
Initial margin is the amount put up initially; maintenance
margin is the amount below which the margin value may not fall; variation
margin is the amount required to be furnished to bring the value of the margin
to the required level.
MARGIN CALL
A requirement that an
investor provide additional funds to cover a decline in value of an investment
purchased using margin.
MARGINAL FUNDS RATE
A concept used by many
banks to represent the cost of acquiring additional funds in order to make a
new loan or investment. Generally, the new asset would have to earn at least
the marginal funds rate in order to be minimally profitable. See Pool Rate.
MARK
DEM. Deutsche mark, D-mark,
or DM. The German unit of currency.
Also, to determine the
market value of an asset.
MARK TO MARKET
An accounting practice of
periodically valuing an asset at its current market value, and showing the difference
between that value and the value the last time it was done as profit or loss
(or sometimes as an increase or decrease in stockholders’ equity). The
objective is to carry the asset at its market value.
In some circumstances, it
also means to furnish (or release) collateral equal to the change in value.
MARKET CAP
See Capitalization.
MARKET-LINKED CD
A CD whose interest rate is
dependent upon the change in some index (a stock market index, or a foreign
currency rate), rather than being a simple fixed rate. Many market-linked CD’s
guarantee return of 100% of the face value of the CD at a minimum.
MARKET MAKER
Dealer. One who makes a
market in a particular commodity (stocks, bonds, oil, gold, FX, US treasury
securities, baseball cards, etc.). Making a market means that the market maker
agrees to buy or sell the commodity (takes a position) by posting price
quotations (quotes) at which he will buy (the bid) or sell (the asked or
offered). A market maker provides liquidity to the market by acting as a
principal and risking his own money, and hopes to make a profit by doing so. See
Broker.
MARKET NEUTRAL
A trading strategy that
attempts to make money no matter in which direction the market moves. See
Delta Hedging.
MARKET RISK
The risk that the price of
an asset will change due to changes in the market.
MARKET VALUE
The price at which an asset
could be sold (as opposed to its cost value, the price paid for it).
Also, the value placed on
an ownership interest in a business (share) by the marketplace. In this
context, See Book Value.
MASTER CUSTODY
A trust service in which an
institution acts as custodian for a number of related investment portfolios,
in order to provide a single focal point for all transaction activity.
MASTER/FEEDER
See Hub and Spoke.
MASTER TRUST
A trust service in which an
institution acts as trustee for a number of related investment portfolios, in
order to provide a way of viewing the entire set as an integrated whole.
MATCH FUNDING
The process of offsetting
an asset by a liability of like maturity, repricing characteristics, and/or
currency, in order to reduce or eliminate the interest rate or currency risk. A
perfectly match funded asset has a zero gap. See Mismatch.
MATCHED BOOK
A portfolio of assets and
liabilities that exactly offset one another, generally by maturity date,
currency, or other risk factor. A matched book then would not have any of the
underlying risk. For example, a purchase and sale of the same amount of the
same currency to settle on the same day would be a matched book in that
currency, if they were the only transactions in that currency. The value of
the portfolio would be unaffected by changes in the value of the currency,
since the net position is zero, flat, or square.
MATCHED SALE-PURCHASE
See Repurchase
Agreement.
MATIF
Marché à Terme International de France.
A futures and options exchange in France.
MATURITY
The date on which final
payment on a loan, deposit, or similar instrument is due.
MATURITY LADDER
Having a sequence of
investments mature periodically, rather than all at once.
MBS
See Mortgage-Backed
Security.
MCFADDEN ACT
The 1927 act of Congress
that essentially prohibits interstate branching by banks. It lets each state
choose how (or if) the banks in its state can branch. See Riegle-Neal
Act.
MD
See Managing Director.
MERC
See Chicago Mercantile
Exchange.
MERCHANT BANKING
This term has been used to
mean different things. The most common usages include M&A (especially where
the merchant bank invests some of its own money), corporate finance,
stockbroking, investment management, and the various capital markets transactions.
MERGERS AND ACQUISITIONS
M&A. The business of
companies merging or acquiring one another. From a bank’s perspective, it means
assisting the process via advisory services and arranging or sometimes
providing the financing as well.
MERVAL
An index of stocks traded
on the Mercado de Valores de Buenos Aires S.A., the major stock
exchange of Argentina. Similar in concept to the S&P 500.
MEZZANINE
In venture capital
financing, it is the provision of funds to a company that is past the pure
start-up phase, generally has a product, and needs money to develop it further
and bring it to market. Mezzanine financing is senior to equity, but junior to
pure debt, and typically has some sort of equity kicker, such as conversion
into the company’s stock. Mezzanine financing is usually the last stage of
financing prior to an IPO.
MICR
Magnetic
ink character recognition. The funny-looking characters at the bottom of a
check, which contain the information necessary to process the check. The MICR
line is read by automatic processing equipment. A sample is given below.
The digits on the left
represent the check number, those on the right (beginning with “863”) are the
account number, and the nine digits in the middle are the bank’s unique routing
number (sometimes called a transit/routing number, or routing/transit number).
The first four digits of
the routing number (“0213”) represent the federal reserve district and branch
within which the bank is located, the next four digits (“7061”) is the ABA
(American Bankers Association) institution identifier (the ABA assigns these
numbers), and the last digit (“6”) is a check digit, used to assure that the
first eight have been correctly read. The dollar amount of the check would also
be encoded in the MICR line.
The same information is
found in the upper right hand corner of the check in fractional form. A sample
is given below.
50-7061/0213
The three numbers represent
respectively left to right the bank’s city or state, the bank’s identifier as
above, and the federal reserve district and branch code. The city/state code
contained in the fractional form of the routing number does not appear in the
MICR line.
MIDDLE MARKET
That part of the business
market which consists of companies that are larger than the mom and pop stores,
but don’t quite make it to the Fortune 500 list.
MISMATCH
The process, deliberate or
otherwise, of creating an imbalance (gap) between selected parts of a bank’s
balance sheet. If deliberate, it is done in order to create the opportunity for
additional profit (and runs the risk of reduced profit or greater loss). Large,
unintended mismatches should not occur in a well-run bank, as they expose the
bank to risks of which it is not aware. Typical mismatches involve interest
rates or currencies. See Gap, Match Funding.
MITTELSTAND
Small and medium-sized
businesses (Germany).
MOM AND POP
Used by banks to denote the
very small businesses with which they may deal (the corner grocery, dry
cleaner, etc.).
MONEY CENTER BANK
A major bank in New York,
Chicago, Charlotte, and a small number of other cities that offers the full
range of banking services, domestically and internationally. See Community
Bank, Regional Bank, Supercommunity Bank.
MONEY LAUNDERING
The process of entering
illegally obtained funds (drugs, gambling, etc.) into the banking system in
such a fashion so as to mask their illegal origin.
MONEY MARKET
Collectively, those
financial markets in which institutions raise money for periods of 1 year or
less (CD’s, fed funds, repos, eurodollars, commercial paper, treasury bills). See
Capital Market.
MONEY MARKET ACCOUNT
Money market deposit
account. A bank account authorized by 1982 legislation as part of deregulation,
to allow banks to compete with money market mutual funds. They allow the bank to
pay any rate of interest it desires on insured bank deposits, have no
reserves, and permit a limited number of payments to others to be made by
check. The bank has the legal right to require prior notice of withdrawal
(rarely exercised).
MONEY MARKET MUTUAL FUND
Money market fund. A mutual
fund which invests in the money markets.
MONEY SUPPLY
A very loose definition
would be the amount of money in circulation. In the US, there are a number of different
definitions as to what constitutes money (for example, do money market accounts
count towards the money in circulation), and therefore a number of different
definitions of the money supply. The different definitions have names like M-1
(pronounced as the letter “M” followed by the number “one”), M-2, etc.
MONEY TRANSFER
See Funds Transfer.
MOODY’S
A credit rating agency.
MORAL OBLIGATION
An obligation of a company
which is not legally binding, but which nevertheless may be honored. An example
is where a parent company pays off the debt of a subsidiary, even though it is
not legally obligated to do so.
MORTGAGE
A real estate loan whereby
the lender retains an interest in the property as collateral until the loan is
repaid. See Lien.
MORTGAGE-BACKED SECURITY
MBS. A form of asset-backed
security representing an interest in payments made by a pool of mortgages. See
CMO, Pass-Through, Securitization.
MORTGAGE BANKING
The process of originating,
securitizing, selling, and servicing residential mortgages. The intent is to
reduce risk and increase fee income.
MT100
Swift message type used by
banks for sending wire transfers.
MULTICURRENCY LOAN
A loan which could be drawn
in one currency and, at the borrower’s option, repaid in another. The intent is
to reduce or eliminate the currency risk to the borrower, as well as provide
currency flexibility.
MUNI
See Municipal Bond.
MUNICIPAL BOND
A bond issued by a state or
a political subdivision (county, city, etc.). Interest on muni’s is generally
exempt from federal income taxes, and state and local taxes in the state in
which they were issued. General obligation bonds (GO’s) are backed by the
taxing power of the issuer, whereas revenue bonds are repaid solely from the
revenue associated with a specific project (toll road, housing project, etc.).
MUTUAL FUND
Technically, an investment
company. An investment vehicle generally offered by stockbrokers. Money put up
by a number of investors is pooled and invested in various financial
instruments. Each investor earns a return in proportion to the amount of money
put up, less a management fee. Mutual funds are regulated in the US by the
Investment Company Act of 1940.
MXN
SWIFT code for the Mexican
peso.
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NA
See Regulator.
NACHA
National Automated Clearing
House Association. An association that sets standards for ACH transactions.
NAIC
National
Association of Insurance Commissioners.
Also, a credit rating
system used by the NAIC.
NAKED
Uncovered. Writing
(selling) a call option without owning the underlying. Naked call writing is
generally considered speculation. See Covered.
NASD
See National Association
of Securities Dealers.
NASDAQ
The stocks that are traded over
the counter in the US. Also refers to the automated quotation system which
reports prices of those stocks.
NATIONAL ASSOCIATION
See Regulator.
NATIONAL ASSN. OF SECURITIES DEALERS
NASD. The self-regulatory
organization for stockbrokers in the US.
NATIONAL BANK
A
bank chartered by the federal government, as opposed to one chartered by a
state. See Regulator.
NATIONAL CREDIT UNION ADMINISTRATION
NCUA. The regulator for
federally chartered credit unions. It also insures most credit unions.
NAV
See Net Asset Value.
NBE
National bank examiners,
from the office of the comptroller of the currency. Sometimes called NBX. See
Regulator.
NCUA
See National Credit
Union Administration.
NEARBY
See Prompt.
NEGATIVE CARRY
See Carry.
NEGATIVE COVENANT
See Covenant.
NEGOTIABLE
A financial instrument
which may be sold or transferred to someone else.
NEGOTIATED FUNDING SOURCES
See Purchased Funds.
NEGOTIATED UNDERWRITING
See Underwriting.
NET ASSET VALUE
NAV. The total market value
of the assets of a mutual fund, divided by the number of shares of the fund
that are outstanding. The NAV is not necessarily the same as the price per
share of the fund.
NET INTEREST INCOME
The difference (in dollars)
between a bank’s interest income and its interest expense.
NET INTEREST MARGIN
Essentially, the difference
(in percent) between the average rate earned on assets and the average rate
paid on liabilities. Technically, it is net interest income divided by average
earning assets.
NET SETTLEMENT
A funds transfer or
securities settlement system in which individual transaction amounts are not
exchanged between the parties, but rather only the net, generally at the end of
the day or some other prespecified time interval. See Continuous Linked
Settlement, Gross Settlement.
NET WORTH
See Stockholders’
Equity.
NETTING
The offsetting of amounts
due between 2 (bilateral netting) or more (multilateral netting)
parties so that only the net amounts due are actually paid. The intent
is to reduce the volume and size of individual payments and therefore the
risks.
NEXT DAY FUNDS
Funds that are not available
for use until the next business day. Sometimes called clearinghouse funds. See
Federal Funds.
NIKKEI
The Tokyo Stock Exchange’s
225 stock equivalent of the S&P 500.
NLG
SWIFT code for the
Netherlands guilder.
NO LOAD
See Load.
NON-ACCRUAL LOAN
A loan whose payment of
interest is uncertain, and on which income is recognized only when cash is
received. Any income already accrued and booked but not received must be
reversed out when the loan is placed in non-accrual status. Sometimes called
cash basis loans. See Accrual.
NON-BANK BANK
An organization that either
accepts demand deposits, or makes commercial loans, but not both. More formally
called limited-service banks, they can perform all the other functions of a
bank, and represent a way around certain banking regulations. See Bank,
Deregulation.
NON-BOOK TRANSFER
A transfer of funds or securities
in which the two parties have accounts with different institutions, so a third
party is generally needed to effect the transfer. See Book Transfer.
NON-DISCRETIONARY ACCOUNT
Advisory account. A type of
investment management account in which the investment manager only recommends
investments, and the client must specifically approve each choice. See
Discretionary Account.
NON-EARNING ASSET
An asset which does not
earn a return. For example, cash, or a bank’s buildings, as opposed to a loan.
NON-INVESTMENT GRADE
Securities given a rating below
the top 4 ratings (AAA, AA, A, BBB/Baa) by a credit rating agency. Commonly
called junk. See Investment Grade.
NON-MONEY USE
An extension of credit by a
bank that is not evidenced by an actual use of funds. The issuance of a letter
of credit by a bank is an example.
NON-PERFORMING ASSET
Non-accrual loans, restructured
loans, and ORE.
NON-QUALIFIED
A
retirement plan which does not meet standards set by the Internal Revenue
Service, and which therefore does not permit the company a tax deduction for
contributions to the plan. See Qualified.
NON-RECOURSE
A loan sale to a third
party where the seller (usually the original lender) is not liable to the buyer
for any default by the borrower. See Recourse.
NOSTRO
Nostro account. A demand
(checking) or current account, maintained by one bank in another and
denominated in a foreign currency, generally used for settling FX transactions,
and making or receiving foreign payments. Sometimes called a due from
account. See Vostro.
NOTIONAL PRINCIPAL
A hypothetical amount used
to calculate payment flows in swaps and similar products.
NOVATION
The replacing of one or
more contracts or obligations by a single new one. The old ones are legally
extinguished, as if they never existed.
NOW ACCOUNT
Negotiable order of
withdrawal. A type of bank account that lets you write “checks” against an
account that pays interest. The bank has the legal right to require prior
notice of withdrawal (rarely exercised), and therefore these are not legally
considered demand deposits, on which interest could not be paid. Since the
“checks” are technically not payable upon demand, they are in fact not checks
but rather drafts. For all practical purposes, they look, act, and are accepted
and processed as checks. Corporations are currently not permitted to hold NOW
accounts.
NRSRO
Nationally Recognized
Statistical Rating Organization. A credit rating agency whose ratings are
recognized by the SEC. Examples are Duff and Phelps, Fitch IBCA, Moody’s,
S&P, and Thomson Financial BankWatch.
NV
Naamloze Vennootschap. Dutch for a publicly
held, limited liability company (“inc.”). See BV.
NYMEX
New York Mercantile
Exchange. An exchange for the trading of futures and options, primarily energy
related.
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OAT
Obligation Assimilables du Trésor. A long-term
French government security.
OBLIGOR
One who owes money.
Generally, the borrower, although it could also be a guarantor.
OCC
In securities, the Options
Clearing Corporation. A clearinghouse for the clearing of options and futures.
As applied to bank
regulation, See Regulator.
ODD LOT
A trade of a security or
commodity involving a quantity other than a round lot.
OECD
Organization for Economic
Cooperation and Development. Essentially the major industrialized countries of
the world.
OFF THE RUN
A US Treasury security of a
given maturity other than the most recently issued of that maturity (the on the
run security).
OFFERED PRICE
See Asked Price.
OFFICE OF THRIFT SUPERVISION
OTS. A regulator for
thrifts.
OFFSHORE
Any financial, currency, or
securities market that operates outside the regulation of a country is an
offshore market with respect to that country.
OLD LADY
The Old Lady of
Threadneedle Street. The Bank of England.
OLEM
See Other Loans
Especially Mentioned.
ON THE RUN
The most recently issued US
Treasury security of a particular maturity. Due to their liquidity, they are
generally in greater demand than other guvvies of nearly identical maturity
(off the run).
OPAQUE
See Transparent.
OPEN END FUND
A mutual fund that will
continually issue shares as investors request them. The fund can continue to
grow in size. See Closed End Fund.
OPEN INTEREST
A term used in futures and
options to denote the number of contracts that have been bought (or sold) that
have not been offset (closed out) by the buyer or seller. It is an indication
of the liquidity for a particular contract. The greater the open interest, the
greater the liquidity.
OPEN MARKET OPERATIONS
The method by which the
Fed, the Bank of England, and other central banks attempt to control the level
of interest rates and/or the money supply in their respective countries by
buying and selling government securities. See Discount House, Primary
Dealer, SVT.
OPEN OUTCRY
The traditional trading
method for futures exchanges, where participants are face to face and trade via
hand signals and voice, rather than electronically.
OPTION
A financial instrument in
which the seller or writer gives to the buyer, for a fee, the right to buy (call
option) or sell (put option) a specified amount of the underlying
commodity for a fixed price called the strike or exercise price (regardless of
the market price at the time of purchase or sale), up to a certain date
(American-style option) or on a certain date (European-style
option).
ORDINARY SHARES
Common stock.
ORE/OREO
Other real estate (owned).
Real estate which had been collateral for a loan that defaulted, and on which
the bank foreclosed and now owns.
ORIGINATION
The process of making a loan.
ORIGINATOR
The sender of a funds
transfer.
OTC
See Over The Counter.
OTHER LOANS ESPECIALLY MENTIONED
OLEM. A loan with potential
weakness, but not sufficiently so as to warrant classification.
OTHER REAL ESTATE (OWNED)
See ORE/OREO.
OTHER TIME DEPOSITS
A time deposit for which no
certificate has been issued. Rather, the depositor receives only a receipt or
confirmation, and the principal and interest will be paid only to the holder as
recorded on the bank’s books – they are not negotiable. See Certificate of
Deposit.
OTS
See Office of Thrift
Supervision.
OUT OF THE MONEY
An option whose exercise
would result in a loss, and which therefore would not be exercised. See At
The Money, In The Money.
OUT TRADE
A transaction in which the
two parties have different understandings of the trade details.
OUTSOURCING
Farming out services to
providers outside the bank who can generally do it cheaper than the bank can.
Services typically outsourced include cafeteria, reproduction, messenger, and
sometimes legal services and systems development.
OUTSTANDING SHARES
The number of shares of
stock a company has issued, less the number of shares repurchased by the
company (treasury stock). It is the number of shares held by the public.
OVER THE COUNTER
OTC. A market where there
is no face-to-face contact between the participants. It is a group of brokers
and dealers who buy and sell various financial instruments (stocks, bonds,
commodities, etc.) through an electronic or telephone network, rather than on the
floor of an organized exchange, such as the New York Stock Exchange. See
Exchange.
OVERDRAFT
A
negative collected balance in a checking account (writing a check for more than
your balance).
OVERHEAD RATIO
See Efficiency Ratio.
OVERLINE LOAN
The portion of a loan which
is over a bank’s legal lending limit, and which it therefore would legally be
unable to lend.
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PAC
See Planned Amortization
Class.
PAR
Par value, face, or
principal value, or value at maturity. When an instrument is worth its face
value, it is said to be selling or trading at par or 100 (100% of face value).
In this context, See Discount, Premium.
Also, the legal capital per
share of a corporation. A corporation generally may not pay out dividends if
doing so would reduce the book value of a share of stock below its par value.
Most stock is sold at a price well above the par value, the difference going to
surplus.
PARTICIPANT
A member of a loan
syndication.
PARTICIPATION
The purchase of a portion
of a loan. The purchaser assumes the credit risk (risk of default), and shares
in the income on a pro rata basis. See Assignment.
PARTNERSHIP
A form of business
organization in which the partnership itself pays no taxes, but each partner is
taxed individually on his/her share of the partnership profits. The partners
have unlimited personal liability for the obligations of the partnership. A
relatively new form of business organization, the limited liability partnership
(LLP), mitigates this risk to some extent. See Corporation, Sole
Proprietorship.
PASSIVE INVESTMENT MANAGEMENT
A form of investment
management where specific investments are not chosen. Rather, the portfolio is
designed to duplicate the structure and performance of a given index, such as
the S&P 500. Investment selection is automatic, thereby reducing costs.
Sometimes called index fund management. See Active Investment
Management.
PASS-THROUGH
A type of asset-backed or
mortgage-backed security in which the payments are passed through as received
to the holders of the security. See Collateralized Mortgage Obligation.
PATH DEPENDENT
See Barrier.
PAYABLE
See Accounts Payable.
PAYABLE-THRU DRAFT
A draft drawn on a
non-banking company, which uses the payable-thru bank and its check clearing
arrangements solely as a means of physically moving the draft from the bank to
whom it is presented to the drawee company (the company on which it is drawn).
It allows the company to examine the draft, which may then refuse payment or
authorize the bank to make payment.
PAYING AGENT
The entity, usually a bank,
which makes interest and principal payments to the holders of a bond, using
money previously given to it by the issuer.
PAYMENT IN KIND
PIK. A security in which
interest and sometimes principal payments that are due are paid not in cash but
in further securities of the same type.
PAYMENT VS. PAYMENT
PVP. A form of settlement
system in which the counterparties simultaneously exchange money. If either
party is unable to complete its part of the transaction, the transaction in not
consummated. See Delivery vs. Payment.
PAYMENTS SYSTEM
The means of moving money
around the world. See ACH, CHAPS, CHIPS, EFT, Eurochaps, Fedwire, SWIFT,
TARGET.
PAYOFF PROFILE
A graphical representation
of the profit and loss characteristics of an option position.
PAYOR BANK SERVICES
Enhanced services provided
to banks for a fee by Federal Reserve banks, such as early morning electronic
transmission of MICR line data of checks that will be physically presented
later in the day. The banks can then make this information available (for a fee
as part of a controlled disbursement account) to their commercial customers, so
they will have early notification of the checks that will clear their accounts
that day.
PENSION
An agreement by an employer
to pay to its employees a certain (usually periodic) amount upon retirement. See
Defined Benefit, Defined Contribution.
PERFORMANCE LETTER OF CREDIT
A type of letter of credit
whereby a bank agrees to make a payment if another party does not perform as
agreed (usually in relation to a contract of some sort). See Standby Letter
of Credit.
PERP
A perpetual security. A
debt security with no maturity date. Interest is paid forever, but the
principal is never repaid.
PERSONAL REPRESENTATIVE
See Executor/Executrix.
PFANDBRIEFE
Bonds issued in Germany
backed by residential mortgages. A form of mortgage-backed security.
PIBOR
Paris Interbank Offered
Rate. Similar to LIBOR, but in Paris, and for French franc borrowings, rather
than dollars.
PIK
See Payment In Kind.
PIP
The smallest price change
in an FX quote.
PIT
The actual physical arena
in which trading takes place, via open outcry, on a futures exchange. Much of
pit trading is being replaced by electronic trading.
PLACING
Deposit placing. A deposit
made by one bank in another bank. See Taking.
PLAN SPONSOR
One who sets up a
retirement plan, typically the employer.
PLANNED AMORTIZATION CLASS
PAC. A tranche or tranches
of a CMO intended to provide a stable average life over a wide range of
prepayment speeds. See Targeted Amortization Class.
PLC
See Public Limited
Company.
PO
See Principal Only.
POOL RATE
The rate at which a bank
gives credit to a department for bringing in funds, and the rate at which it
charges a department for the use of those funds. See Transfer Pricing.
PORTFOLIO
A holding of investments
such as stocks, bonds, currencies, etc.
POSITION TAKING
Assuming a long or short
position in an investment in the hopes of profiting from price changes.
POUND
See Sterling.
POWER SWAP
A swap in which the
payments to be made are based not on a difference in rates, but rather on the
difference squared.
PREFERRED STOCK
See Stock.
PREMIUM
The price paid to buy an
option.
Also, when an instrument is
worth more than its face (i.e., maturity) value, it is said to be selling or trading
at a premium, or above par (over 100). See Discount, Par.
PREPACK
A bankruptcy term meaning
that the company itself has prepared (prepackaged) a plan to enter and then
leave Chapter 11 bankruptcy with the prior approval of its creditors, rather
than going through the sometimes lengthy and complex legal proceedings to have
its reorganization plan approved by the court and the creditors.
PREPAYMENT
Most commonly, paying off a
loan earlier than its contractual maturity date.
Also, to make a payment on
a loan in addition to the amount due at a particular time.
PREPAYMENT RISK
The
risk that a loan will be paid off early, prematurely terminating the lender’s
cash flow. Most commonly arises in residential mortgage loans. See Extension
Risk, Prepayment Speed.
PREPAYMENT SPEED
The speed with which a pool
of loans will prepay. Most commonly used in conjunction with mortgage-backed
securities. Prepayment speed depends in large part on changes in the levels of
interest rates. See PSA.
PRESENT VALUE
A method for valuing
investments that takes into account the timing of the cash flows. The further
out in time that money is to be received, the less value it has today. Present
value is the mathematical opposite of compounding.
PRESENTMENT POINT
The location at which a
bank will accept checks drawn on its accounts.
PRIMARY CAPITAL
Stockholders’ equity plus
the reserve for loan losses. Replaced as a regulatory mechanism by risk-based
capital requirements.
PRIMARY DEALER
Primary government
securities dealer. In the US, one of a small number (30 at this writing) of
banks, brokers, and investment banks that buy and sell US government securities
with the Fed when the Fed conducts its open market operations. Their UK
equivalents are called discount houses, and in France, SVT, Spécialistes en Valeurs
du Trésor.
PRIMARY MARKET
Whenever securities are
being sold by the original issuer, they are being sold in the primary market. See
Secondary Market.
PRIME RATE
In the past, has generally
meant the rate charged by a bank to its most creditworthy commercial borrowers.
It could therefore be expected to be the bank’s lowest lending rate. Due
primarily to the growth of the commercial paper and eurodollar markets, banks
have been forced to lend money to their better corporate customers at rates below
prime, in order to keep their business. Many banks today call it a reference
rate, with no connotation of creditworthiness, and may lend money at rates
at, above, or below prime (or the reference rate).
PRINCIPAL
The amount of a loan or
deposit due at maturity (par), exclusive of any interest to be paid.
Also, when one acts on
one’s own behalf, for one’s own account, rather than for the account of others.
Or, one who employs an
agent. See Broker, Market Maker.
PRINCIPAL ONLY
PO. A type of CMO in which
the holder receives only the principal payments from the underlying pool of
mortgages. See Interest Only.
PRIVATE BANK
In Switzerland, a bank
whose legal form of organization is generally a partnership or sole
proprietorship (as opposed to the more common corporate form), and whose
partners or owners have unlimited personal liability for the debts of the bank.
These banks generally provide private banking services.
PRIVATE BANKING
The provision of banking
services to high net worth (wealthy) individuals. See Private Bank.
PRIVATE PLACEMENT
Raising money in a way that
bypasses the public securities (stock and bond) markets. The securities are
sold to a small number of private investors, rather than the public. A private
placement reduces the costly fees associated with a public offering, speeds
the process, and avoids having to reveal publicly what might be sensitive
financial information. The securities generally may not be offered for
immediate resale. See Rule 144a.
PRIVATELY HELD COMPANY
See Publicly Held
Company.
PROFIT
Net income. What’s left
over for a company and its owners after all expenses and taxes have been
accounted for.
PROGRAM TRADING
Sometimes called index
arbitrage. Computerized trading of stocks, stock indices such as the S&P
500, and options and futures contracts on those indices, to take advantage of
small differences in what are essentially identical commodities. Program
trading, due to the size and speed of the trades, are thought by some to
magnify price changes in the markets.
PROMPT
Nearby. In futures markets,
refers to the futures contract which is closest to final settlement. See Distant.
PROPRIETARY
As used in mutual funds, it
refers to a fund that a bank makes available to its customers for which the
bank itself is the investment advisor.
Also, in certain countries,
refers to a non-public (private) company. Generally abbreviated as Pty.
PROPRIETARY TRADING
Trading activities of a
bank in which the bank is trading for its own account, rather than trading on
behalf of or in response to its customers.
PROSPECTUS
A detailed document
required to be distributed prior to any public securities offering in the US
and certain other countries. It describes the offering, the company, and its
finances in detail. A red herring (so-called because of red printing on
the cover) is a preliminary prospectus issued before the offering price has
been determined, containing most, but not all, of the required information. See
Registration.
PROTEST
The formal procedure for
presenting an item (such as a check) for payment and receiving written notice
of dishonor (that it will not be paid). It then forms the basis for legal
action against the maker (writer) of the check.
PROVISION FOR LOAN LOSSES
A reduction of current
income, in order to build up the reserve for loan losses.
PROXY
The means by which
shareholder voting rights are transferred to another party.
PSA
Payment Speed Assumption. A
mathematical model of MBS prepayment speeds published by the Bond Market
Association.
PT
Perseroan Terbatas.
Indonesian for “inc.”
PTE
Private. Non-public
company.
PTY
Proprietary. Non-public
(private) company.
PUBLIC LIMITED COMPANY
PLC. The UK equivalent of
“incorporated.”
PUBLICLY HELD COMPANY
One whose shares may be
bought and sold in the various public markets, as opposed to a privately held
company, where the shares are generally held only by a few investors, and are
not usually freely available for purchase.
PUMP AND DUMP
An illegal practice of
generating false publicity about a company in an attempt to drive up the price
of the company’s shares, which are then sold at a profit.
PURCHASED FUNDS
Also called negotiated
funding sources, or managed or purchased liabilities. Sources of funds for a
bank that are rate sensitive (and therefore expensive) as well as risk
sensitive. Tend to have little loyalty to the bank. Consists primarily of
federal funds, commercial paper, and large time deposits (over $100M). Sometimes
called “hot money.” See Core Deposits.
PURCHASED LIABILITIES
See Purchased Funds.
PUT
The right of the holder of
a debt security to require the issuer to pay it off prior to its contractual
maturity date.
Also, a type of option in
which the seller or writer gives to the buyer, for a fee, the right to sell a
specified amount of the underlying commodity for a fixed price called the
strike or exercise price (regardless of the market price at the time of sale), up
to a certain date (American-style option) or on a certain
date (European-style option). See Call.
PUTTABLE BOND
A bond which the holder
(investor) has the right, under certain conditions, to require the issuer to
pay off early. See Callable Bond.
PVP
See Payment vs. Payment.
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QIB
See Qualified
Institutional Buyer.
QUALIFIED
A retirement plan which
meets certain standards set by the Internal Revenue Service. Qualified
retirement plans permit the company an immediate tax deduction for
contributions to the plan, but the income of the plan is not taxed until
withdrawn by the participants in the plan. See Non-Qualified.
QUALIFIED INSTITUTIONAL BUYER
QIB. Essentially, a large
institution that is eligible to purchase Rule 144a securities.
QUANTO
Guaranteed exchange rate
contract. An option denominated in a foreign currency in which the writer of
the option guarantees the rate at which foreign currency profits (if any) will
be converted back into the holder’s own currency.
QUOTE
The bid and asked prices a
market maker furnishes upon request.
Also, to furnish such
prices.
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RANGE FLOATER
A type of structured note.
A debt instrument which pays a higher rate of interest than would otherwise be
available if some index remains between two values, but nothing otherwise.
Sometimes called a fair weather bond.
RAROC
Risk-adjusted return on
capital. A method of assigning capital to bank activities such that riskier
activities are assigned greater capital, meaning such activities must earn a
higher return to make it worthwhile investing in that activity in the first
place. Similar in concept to risk-based capital. Sometimes referred to as
RORAC, return on risk-adjusted capital.
RCPC
See Regional Check
Processing Center.
REAL ESTATE INVESTMENT TRUST
REIT. A pooled investment
vehicle that invests in real estate. Similar in concept to a mutual fund.
REAL TIME GROSS SETTLEMENT
RTGS. A funds or securities
transfer system in which all payments are made individually as each transaction
occurs, rather than netted at the end of some predetermined time period. See
Continuous Linked Settlement, Gross Settlement, Net Settlement.
RECEIVABLE
See Accounts Receivable.
RECORD DATE
The
date on which one must be recorded on the books of a stock’s transfer agent in
order to receive the most recently declared dividend. See Ex Date.
RECOURSE
A loan sale to a third
party where the seller (usually the original lender) remains liable to the
buyer for any default by the borrower. See Non-Recourse.
RED HERRING
See Prospectus.
REFERENCE RATE
Sometimes called a base
rate. The rate used as the basis for computing the interest rate on a floating
rate loan. Common reference rates are the prime rate, the treasury bill rate,
and LIBOR/EURIBOR.
REGIONAL BANK
Medium-to-large size banks
that offer many (but not all) of the possible banking services to their
customers. There are also a growing number of superregional banks, representing
interstate combinations of regional banks, which operate in a number of states,
and offer direct competition to money center banks in the superregionals’
market areas. See Community Bank, Riegle-Neal Act, Supercommunity
Bank.
REGIONAL CHECK PROCESSING CENTER
RCPC. Facilities, usually
in areas geographically removed from major cities, maintained by the Fed for
purposes of accepting and processing checks drawn on or received by banks in
those areas, in order to speed up the collection of the checks.
REGIONAL COMPACT
Banking regulations
prohibited a bank holding company in one state from acquiring a bank in
another. An exception was allowed if the state of the bank to be acquired
permitted it. Groups of states that mutually permitted such acquisitions were
called regional compacts. The Riegle-Neal Act eliminated the need for these
compacts.
REGISTERED
A security whose owner has
been recorded on the books of the issuer or its agent. See Bearer.
REGISTERED REP
See Registered
Representative.
REGISTERED REPRESENTATIVE
Registered rep. An
individual licensed to sell securities. See Series 6, 7, 63.
REGISTRAR
An institution that
maintains the list of a company’s bondholders, or, in the case of stocks,
audits the transfer agent to prevent overissuance of shares.
REGISTRATION
The process through which
all securities to be sold to the public in the US must go. The offering must be
filed with the SEC detailing financial information about the company, its
management, use of the proceeds, etc. The information is then published in a
prospectus. The intent is to allow investors to have the information necessary
to make an informed decision about the investment. Many countries have similar
requirements.
REGULATION CC
A regulation of the Board
of Governors of the Federal Reserve System that covers return item processing,
and implements the Expedited Funds Availability Act, which places limits on
the length of time a bank can hold funds that were deposited by check into an
account.
REGULATION D
A regulation of the Board
of Governors of the Federal Reserve System that sets reserve requirements.
REGULATION DD
Truth in Savings Act. TISA.
A regulation of the Board of Governors of the Federal Reserve System that
specifies how compound interest rates on savings accounts are to be computed,
sets standards as to what constitutes a free account, etc.
REGULATION EE
A regulation of the Board
of Governors of the Federal Reserve System that permits banks to offset (net)
their obligations to each other, so that one bank only owes the difference to
the other.
REGULATION K
A regulation of the Board
of Governors of the Federal Reserve System that governs the overseas activities
of US banks, and the US activities of foreign banks.
REGULATION Q
A regulation of the Board
of Governors of the Federal Reserve System that, until March, 1986, set the
maximum interest rate that banks could pay on deposits. That part of Regulation
Q has been phased out, although Reg Q still prohibits the payment of interest
on demand deposits.
REGULATION Y
Called the laundry list. A regulation
of the Board of Governors of the Federal Reserve System that specifies the
permissible activities for bank holding companies.
REGULATION Z
Truth in Lending Act. A
regulation of the Board of Governors of the Federal Reserve System that
requires banks to reveal the APR of a loan.
REGULATOR
Every bank is regulated and
examined by one or more regulatory agencies, although each bank has a single primary
regulator. At this writing, for commercial banks, the primary regulatory agency
can be the OCC, the Office of the Comptroller of the Currency (national banks,
which contain “national,” “national
association,” or “NA” in their name), the Federal Reserve Board (bank
holding companies and state-chartered banks which are members of the Federal
Reserve System), the Federal Deposit Insurance Corporation (non-member, FDIC
insured state-chartered banks), or a state banking department (non-member,
non-FDIC insured state-chartered banks).
Financial holding companies
(newly authorized by the Gramm-Leach-Bliley Act) have the fed as their primary
regulator.
Thrifts are regulated by
the OTS (Office of Thrift Supervision), often along with the state and the
FDIC, while credit unions are regulated by the National Credit Union Administration
or the state.
REINSURANCE
Laying off part of the
insurance risk, along with part of the insurance premium.
REIT
See Real Estate
Investment Trust.
RELATIONSHIP MANAGER
RM. The person in a bank
who is responsible for coordinating all of the bank’s business with a
particular customer.
RELIT
Règlement et Livraison des Titres. A stock
clearing and settlement system in France, operated by Sicovam.
REMIC
Real estate mortgage
investment conduit. A form of CMO.
REMOTE DISBURSEMENT
A cash management practice,
not widely used today, that consisted of writing checks on a bank as
geographically removed from the recipient as possible, in order to maximize the
time it would take the check to clear, and therefore the time the money stayed
in the check writer’s account. See Controlled Disbursement Account.
REP OFFICE
Representative office. A
banking office that may not directly engage in the banking business (such as
taking deposits or making loans), but which may act in a marketing or liaison
capacity for the head office.
REPO
See Repurchase
Agreement.
REPRESENTATIVE OFFICE
See Rep Office.
REPRICING
The periodic resetting of
the interest rate on a loan or deposit.
REPRICING INTERVAL
The frequency with which
repricing takes place.
REPURCHASE AGREEMENT
Repo. Security sold under
agreement to repurchase. An agreement by one party to sell securities (almost
always but not necessarily government or government agency obligations) for a
period of time, and to buy them back at the end of that period for a previously
agreed upon price. The securities represent collateral for the other party,
who has made a secured loan and has therefore engaged in a reverse repo
(security purchased under agreement to resell, resale agreement, or
matched sale-purchase agreement). In some markets, the repo/reverse terminology
is interchanged.
RESALE AGREEMENT
See Repurchase
Agreement.
RESERVE ACCOUNT
An account in a central
bank in which a bank’s reserve requirement is held. Some central banks pay
interest on the reserve balance (generally at a below market rate). In the US,
interest is not paid on these funds.
RESERVE FOR LOAN LOSSES
An allowance for bad debts
on a bank’s balance sheet, in order to recognize the fact that not all loans
will be fully repaid. It has the effect of showing the loans at their estimated
repayment value, rather than the value at which they were made. Also called the
allowance for loan (or credit) losses. See Provision For Loan Losses.
RESERVE REQUIREMENT
Regulation D requires banks
to set aside a percentage of certain types of deposits in a non-earning account
at a Federal Reserve bank, reducing the amount of loans or investments they can
make, and therefore the potential profit of the bank. Vault cash also counts
towards reserves. Other countries have similar requirements, and some central
banks do pay interest on reserves.
RESIDENTIAL MORTGAGE
A loan to an individual to
buy a house.
RESPONDENT
See Correspondent.
RESTRUCTURED LOAN
A loan where the bank has
agreed to reduce the interest rate, lengthen the maturity, or both, in order to
enable the borrower to make the (reduced) payments. The alternative is generally
bankruptcy for the borrower.
RETAINED EARNINGS
That portion of
stockholders’ equity which represents all the accumulated earnings of the
company that have been kept in the company, rather than having been paid out as
dividends.
RETURN ITEM
A check being returned
without payment by the bank on which it was drawn, most commonly due to
insufficient funds (i.e., a bounced check). See Regulation CC.
REUTERS
An on-line information
service that furnishes quotes on financial instruments to its subscribers.
REVENUE
All the money that comes
into a company. A manufacturing company, for example, receives most of its
revenue from selling its products. For a bank, interest on loans and fee income
are the primary sources of revenue.
REVENUE BOND
See Municipal Bond.
REVERSE REPO
See Repurchase
Agreement.
REVOCABLE TRUST
A trust which can be
changed or terminated at any time by its creator (grantor). See Irrevocable
Trust.
REVOLVING CREDIT
A form of lending by a bank
evidenced by a formal loan agreement, representing the bank’s legal obligation
to lend the money if the terms of the agreement are met. Typically the funds
are borrowed and repaid (in full, part, or not at all) at the borrower’s option
continuously over the course of a (usually) 3 year period. Similar in concept
to the cash advance feature on a bank charge card. Any outstanding balance at
the end of the period (i.e., at maturity) must be fully repaid on that day, and
the credit expires. A convertible revolving credit permits payoff of the
outstanding balance over a period of years like a term loan, rather than all at
once.
RGV
Relit Grande Vitesse. A clearing and
settlement system for fixed income securities in France, operated by Sicovam.
RHO
The amount by which the
price of an option changes for a given change in the risk-free rate.
RIEGLE-NEAL ACT
The Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994. This law essentially permits
nationwide banking in the US. It generally does away with the restrictions on
interstate banking contained in the Bank Holding Company Act, the Douglas
Amendment and the McFadden Act. There are a few exceptions.
RIGHT
A security issued by a
company giving its stockholders the ability to purchase additional shares,
often at a price below the market, for a short period of time. The rights may
sometimes be traded in the marketplace. See Warrant.
RISK-ADJUSTED ASSETS
The total assets of the
bank, after multiplying each asset by the risk weighting specified by the risk-based capital
requirements.
RISK ASSETS
Assets which entail a risk
of loss to the bank. Examples of risk assets are loans and state and local
government securities, while cash and US treasury securities are not considered
risk assets. Other things being equal, a bank with more risk assets would
require greater risk-based capital.
RISK-BASED CAPITAL
A concept relating the
amount of capital a bank has or needs after adjusting for the riskiness of its
assets. A bank with a high percentage of US treasury securities will require
lower risk-based capital than one with fewer of those securities and a higher
proportion of commercial loans. Risk-based capital requirements went into
effect on December 31, 1990. See Capital Adequacy, Risk Assets, Risk Weighting,
Total Risk-Based Capital.
RISK-FREE RATE
The interest rate one could
earn with no credit risk. In the OECD countries, the rate on a country’s
government securities is generally considered the risk-free rate in that
country.
RISK MANAGEMENT
A technique used by banks
and other companies to measure the various risks they are taking (credit,
interest rate, currency, country, etc.), to assure that the risks are within
preset limits.
RISK RATING
A numerical grade given by
a bank, generally to corporate borrowers, reflecting the riskiness to the bank
of lending to that company. Usually is a scale of 1 - 9 or 1 - 10, with 1 being
the least risky.
RISK WEIGHTING
The weighting factor (a
number between zero and 100%) given to various asset classes to reflect their
relative risk. Zero is the least risky weighting (assigned to, among others,
cash and US government and most other OECD government securities), while a
factor of 100% would be applied to most types of loans. It is part of a bank’s
risk-based capital computations.
RM
See Relationship
Manager.
ROA
Return on assets. A measure
of the profitability of a bank, equal to income/average assets. Other things
being equal, the higher the ROA, the greater the profit for a given size bank.
Generally measured in basis points. See ROE.
ROADSHOW
Meetings held with
potential investors by a company issuing securities and its underwriters to
promote the securities.
ROE
Return on equity. A measure
of the profitability of a bank (equal to income/average stockholders’ equity)
which shows how well the stockholders are being compensated for the risk they
have taken in buying the bank’s stock (whether or not they got their money’s
worth). See ROA.
ROLLOVER
The process of extending
the maturity of a loan, deposit, or similar instrument when it becomes due, by
creating a new loan or deposit to “take over” when the old one matures. The old
one is actually paid off, and a new one is set up.
Also, transfer of funds
between retirement accounts in such a fashion so as to continue to qualify for
tax deferral.
RORAC
See RAROC.
ROUND LOT
The normal minimum unit of
trading for a given commodity. For stocks in the US, a round lot is 100 shares.
See Odd Lot.
ROUTING NUMBER
See MICR.
ROUTING/TRANSIT NUMBER
See MICR.
RTGS
See Real Time Gross
Settlement.
RULE 144a
An exception to the
restriction that privately placed securities may not be resold. They may be
resold or traded between QIB’s.
A –
B –
C –
D –
E –
F –
G –
H –
I –
J –
K –
L –
M –
N –
O –
P –
Q –
R –
S –
T –
U –
V –
W – X –
Y –
Z
S&P
Standard & Poor’s
Corporation. A financial information and credit rating agency. See S&P
500.
S&P 500
The S&P 500 market
index. A widely watched indicator of the average price of 500 stocks in the US.
Sometimes referred to as the S&P. See DJIA.
SA
Société Anonyme, Sociedad
Anónima. Various equivalents of “incorporated.” See PLC.
SAFEKEEPING
A service in which a bank
holds a customer’s securities in its vault, and delivers them upon request.
Also, as related to check
clearing, holding the checks at the bank rather than returning them to the
customer at the end of the month. In this context, See Truncation.
SAIF
Savings Association
Insurance Fund. The successor to the FSLIC, created by FIRREA, to insure thrift
institutions. Legally, the SAIF is part of the FDIC. See BIF.
SALLIE MAE
See Student Loan
Marketing Association.
SAME DAY SETTLEMENT
Paying for an item the same
day it is presented for payment.
SAMURAI BOND
Yen denominated bond issued
in Japan by a non-Japanese issuer.
SARL
Société à Responsabilité Limitée.
A form of limited partnership.
SAVINGS ACCOUNT
An account for which there
is no stated maturity date, but for which the bank may require prior notice of
withdrawal. They generally do not permit checks to be written against the
account. See NOW Account.
SCRIPTLESS
A security issued in
book-entry form.
SEC
The Securities and Exchange
Commission, which regulates securities transactions, buyers, sellers, and
exchanges in the US.
SECONDARY MARKET
After securities have been
sold by the original issuer (the primary market), they may be traded (bought
or sold) in the secondary market, which consists of buyers and sellers other
than the original issuer.
SECTION 20
The part of the
Glass-Steagall Act that prevented bank holding companies from being “engaged
principally” in underwriting securities. See Gramm-Leach-Bliley Act.
SECTOR FUND
A mutual fund which invests
in a particular sector of the economy, such as biotechnology, computer makers,
chemicals, finance, etc.
SECURED LOAN
A loan where the lender has
collateral.
SECURITIES ACT OF 1933
Requires disclosure of
information and registration of securities which are to be publicly sold.
SECURITIES EXCHANGE ACT OF 1934
Created the SEC to ensure
that the requirements of the Securities Act of 1933 were carried out.
SECURITIES INVESTORS PROTECTION CORP.
SIPC. A corporation in the
US that protects brokerage house customers against failure of the brokerage
house. It guarantees the value of cash (up to $100M) and securities (combined
limit with cash of $500M) in brokerage accounts. It does not protect
against a decline in the value of the customers’ investments due to price
changes in the market.
SECURITIES LOAN
A loan of securities for a
(generally) short period of time, usually to allow the borrower to cover a fail
or short sale. The securities lender earns a fee for the loan.
SECURITIZATION
The process of making a
security out of an asset so that it can be sold or traded. The objective is to
increase the liquidity of the asset and to generate fee income. Common
securitized assets include residential mortgage loans, automobile loans, credit
card receivables, student loans and commercial loans. See Asset-Backed
Security, Mortgage-Backed Security.
SECURITY
An evidence of
ownership (e.g., shares of stock) or of indebtedness (a bond or debenture).
Also, collateral.
SEDOL CODE
Stock Exchange Daily
Official List. A code used to identify securities.
SELL SIDE
In the stock and bond
markets, refers to the sellers of these securities, primarily the large brokerage
houses, banks, and investment banks. See Buy Side.
SENDER NET DEBIT CAP
See Cap.
SENIOR
A debt security whose
holders are paid interest or principal before holders of other classes of
securities, such as subordinated.
SENIOR MANAGING DIRECTOR
What the US banks are
calling the senior vice presidents in their merchant banking groups. See
Executive Managing Director.
SERIAL BOND
A set of bonds with staggered
maturity dates, issued under a single indenture.
SERIES 6
An exam, administered by
the NASD, that must be taken and passed in order for an individual to be
licensed to sell mutual funds and variable annuities.
SERIES 7
An exam, administered by
the NASD, that must be taken and passed in order for an individual to become a
registered representative (licensed to sell stocks, bonds, mutual funds, and
other securities).
SERIES 63
An exam, administered by
the NASD, that must be taken and passed in order for an individual to be
licensed to sell securities in certain states. Called uniform state law or blue
sky exam.
SERVICING
The handling of the
administrative and operational aspects of a loan. As used in mortgage lending,
the servicing agent receives the principal and interest payments from the
borrower and remits them to the lenders, receives tax, insurance, and other
escrow payments and disburses them appropriately, does the accounting, prepares
and sends annual statements to the borrowers, etc.
SETTLE/SETTLEMENT
In funds transfers, check
clearing, and securities transactions, the process of making payment (in the
latter case, in exchange for the securities).
In estates, the process of
distributing the estate assets to the beneficiaries.
SETTLEMENT DATE
The date on which a
transaction will settle. See Trade Date.
SETTLEMENT RISK
Delivery risk. A risk
involved in buying and selling which arises when one party to a transaction
delivers value (cash, securities, etc.) and the other doesn’t complete its side
of the transaction. It is due to the non-simultaneous nature of most settlement
procedures. Sometimes called Herstatt risk, after the bank involved in
the first major occurrence of this risk in 1974. See DVP, PVP.
SHAREHOLDERS
See Stockholders.
SHAREHOLDERS’ EQUITY
See Stockholders’
Equity.
SHELF REGISTRATION
A way in which a company
can complete registration of securities to be sold, but not actually sell them
until market conditions are favorable.
SHELL
Shell branch. Typically
means a bank branch in another country whose only function is to provide the
legal ability to operate in that country. No physical presence is maintained,
and transactions are generally initiated (and records maintained) by other
offices of the bank.
SHORT AGAINST THE BOX
A short sale of a stock
already owned.
SHORT POSITION
A securities position in
which one has an excess of sales over purchases, resulting in a net position of
securities to be delivered. See Short Selling, Long Position.
SHORT SELLING
The process of selling
something you don’t own. Typically, the commodity to be sold is borrowed and
then sold. Since it’s been borrowed, it must ultimately be replaced. If the
price declines, you can purchase it on the open market and cover the short sale
by replacing what was borrowed with what you just bought, making a profit on
the difference between the higher selling price and the lower purchase price.
The risk in short selling is that the price goes up, and the short sale must be
covered at a higher price than the sale price.
SHORT SQUEEZE
When securities are sold
short, they must ultimately be purchased and delivered. If the securities are
in limited supply in the marketplace, or if those who have them are willing to
sell them only at premium prices, then the short seller is forced to pay
whatever the market demands, and a short squeeze is said to take place. They
are sometimes done deliberately.
SIBOR
Singapore Interbank Offered
Rate. Similar to LIBOR, but in Singapore, and for Singapore dollar borrowings,
rather than US dollars.
SICAV
Société d’Investissement
à Capital Variable. The French equivalent of a mutual fund.
SICOVAM SA
Société Interprofessionnelle pour la Compensation
des Valeurs Mobilières. France’s central securities depository,
and operator of the RGV and Relit clearing and settlement systems.
Also refers to the unique
security identification code assigned by Sicovam.
SIGHT ACCOUNT
An account where payment is
to be made at sight (upon demand). A variation of a checking account.
SIMEX
See Singapore Exchange.
SIMULATION
A computerized method of
analyzing a bank’s future performance under varying conditions. A model of the
bank’s balance sheet is constructed, certain assumptions are made, and the
computer generates the income statement. Usually thousands of runs are made,
using probabilistic assumptions about interest rates. Simulation can also be
used to determine the price of an option.
SINGAPORE EXCHANGE
Stock Exchange of Singapore
and the Singapore International Monetary Exchange (SIMEX). An exchange for the
trading of stocks, futures, and options.
SINKING FUND
Periodic payments made to a
special fund to be used to pay off bonds.
SIPC
See Securities Investors
Protection Corporation.
SLMA
See Student Loan
Marketing Association.
SMART CARD
A multifunction plastic
card. In its simplest form, value (i.e., money) is loaded onto it from a bank
account via an ATM, which may then be used as cash anywhere the appropriate
reader has been installed. Prepaid telephone cards are a form of smart card. See
Credit Card, Debit Card.
SOFT CURRENCY
A currency that people are
not willing to hold, due to unstable economic or political conditions in the
country, high inflation, etc.
SOLE PROPRIETORSHIP
A form of business organization
in which the owner is legally the same as the company, and who therefore has
unlimited personal liability for the obligations of the company. See
Corporation, Partnership.
SOLVENCY OPINION
A statement by an
independent party that a proposed financing or acquisition of a company will
not leave it insolvent. Usually required to protect the lenders or the
acquiring group of investors from subsequent lawsuits.
SOURCE OF FUNDS
A way of raising money. For
a bank, deposits are generally the principal source of funds.
SOVEREIGN RISK
See Country Risk.
SPARKASSE
A German savings bank.
SPC
See Special Purpose
Corporation.
SPECIAL MENTION
See Other Loans
Especially Mentioned.
SPECIAL PURPOSE CORPORATION
SPC. A corporation set up
for the sole purpose of raising money by issuing commercial paper backed by a
specific set of assets (such as accounts receivable), rather than by the credit
of the company creating the SPC.
SPECIALIST
The individual or firm
through whom all transactions are effected in a traditional stock exchange,
such as the New York Stock Exchange. They match buyers and sellers, but are
required to buy or sell for their own portfolio if there is an imbalance in
buy/sell orders. See Electronic Communications Network.
SPECULATION
Taking large (sometimes
excessive) risks, in the hope of making large profits.
SPLIT
Stock split. A distribution
of additional shares of stock in a company to existing shareholders on a
pro-rata basis. In a 2 for 1 split, for example, each shareholder would receive
one more share for each share held. In this case, the market price of the stock
would normally be half of what it was before the split, reflecting the fact
that the company is the same, but it’s been broken up into twice as many pieces
as before.
SPOT PRICE
See Cash Price.
SPOT RATE
A rate for the delivery of
foreign currency on a spot basis. In the FX business, spot usually means
delivery two business days from the trade date. See Forward Contract.
SPREAD
Generally means the
difference between the rate earned on an asset and the cost of funding it.
Also, the difference between any two rates. Typically measured in basis points.
In options trading, means a
position established by buying one contract and selling a similar one.
In futures trading, means a
position established by buying one contract and selling another with a
different expiration date, or on a different commodity.
SQUARE
See Matched Book.
SSI
See Standing Settlement
Instructions.
STAFF FUNCTION
Bank support functions.
Those areas of a bank that generally do not have direct customer contact, such
as human resources, operations, audit and accounting, information technology,
etc. See Line Function.
STANDBY LETTER OF CREDIT
A type of letter of credit
whereby a bank agrees to make a payment if another party does not. Similar in
concept to a guarantee. See Performance Letter of Credit.
STANDING SETTLEMENT INSTRUCTIONS
SSI. A database containing
information about counterparties and their banks or broker/dealer accounts into
which payments or transfers will be made. In the absence of instructions to the
contrary, the SSI information will be used. A key component of STP.
STATE-CHARTERED BANK
A bank chartered by one of
the states, as opposed to one chartered by the federal government, a national
bank. See Regulator.
STATEMENT OF CONDITION
See Balance Sheet.
STERLING
GBP. £. Pound sterling. Cable. The UK unit of currency.
STOCK
Shares of ownership
interest in a corporation, or a security representing such ownership. Common
(or ordinary) shares entitle stockholders to vote and to a proportional interest
in the earnings and the growth of the value of the business. Preferred
shares generally pay a fixed dividend, regardless of how the business may
grow, and usually carry no voting rights. Preferred shareholders get their
dividend before common shareholders get any, and, in the event of liquidation
of the company, preferred shareholders are paid off before the common
shareholders get to share in any residual value. See Stockholders’ Equity.
STOCKHOLDERS
The owners of a corporation.
Also called shareholders.
STOCKHOLDERS’ EQUITY
Shareholders equity. The
money invested and left in the corporation by the owners (shareholders or
stockholders), equal to the difference between assets and liabilities. It is
what the business would theoretically be worth if all the assets were turned
into cash, and then all the debts (liabilities) of the business paid off.
Other things being equal, the greater the stockholders’ equity, the safer the
company from the creditors’ viewpoint, since stockholders have no fixed claim
against the company and never have to be repaid. They only get whatever is left
over, if anything. It is therefore viewed as a cushion or protection against
losses. Also called net worth.
STP
See Straight-Through
Processing.
STRADDLE
An options strategy
consisting of buying both a call and a put with the same strike price and
expiration date. The combination will make money if the underlying moves a
certain amount in either direction.
STRAIGHT-THROUGH PROCESSING
STP. A method of organizing
transactions and entering data so that the data is entered only once, at the
initiation of a transaction, and all subsequent processing is done using the
original data. The intent is to minimize errors caused by continual re-entry of
data into different processing systems, speed up the process, and reduce costs.
STRAITS TIMES
An index of stocks traded
on the Singapore Exchange. Similar in concept to the S&P 500.
STRIKE PRICE
See Exercise Price.
STRIPPING
The process of removing
coupons from a bond and selling each individually as a zero coupon bond.
STRUCTURED NOTE
A type of derivative security.
Typically a debt instrument constructed to have specific (and generally
unusual) risk/return characteristics. It will often pay a higher rate than
would otherwise be available under certain conditions, but less (often much
less) under other conditions. See
Dual Index Note, Range Floater.
STUDENT LOAN MARKETING ASSN.
SLMA. Sallie Mae. A
government sponsored, stockholder-owned enterprise, chartered to promote the
availability of funds for student loans, by buying student loans from banks.
STUPIDITY RISK
Barings, Orange County,
Long-Term Capital Management, First Pennsylvania Bank, Drysdale Government
Securities, Metallgesellshaft, Bre-X, Penn Square, etc.
SUBORDINATED
A debt security whose
holders are paid interest or principal after holders of other classes of
securities, such as senior.
SUBSIDIARY
A
company partially or wholly owned by another.
SUBSTANDARD
See Classified.
SUPERCOMMUNITY BANK
A term sometimes used to
indicate a small or medium-size bank that is very profitable due to some niche
product or specialized service they offer.
SUPER-NOW ACCOUNT
A variation of a NOW
Account. The legal distinction between the two no longer exists, although some
banks still maintain it.
SUPERREGIONAL BANK
See Regional Bank.
SUPPLEMENTARY CAPITAL
See Tier 2 Capital.
SUPPORT CLASS
See Companion Class.
SURPLUS
Capital surplus. Also
called additional paid-in capital. The excess of the price of a share of stock
sold by a company over the par value of the share. If par value is $1, and the
company sells the stock for $10, $9 goes to surplus.
SUSPENSE ACCOUNT
An account into which banks
will temporarily put a transaction when they don’t know where the transaction
actually belongs (often due to missing information). An item should not remain
in a suspense account for any length of time.
SVT
Spécialistes en Valeurs du Trésor.
Primary dealers in French government securities.
SWAP
A capital markets
transaction whereby two parties (none, one, or both of whom might be a bank)
exchange a series of payments. Each needs to make a particular type of payment,
but would rather make the type of payment the other has to make, so they make
each other’s payments. Common types of swaps involve interest rates (interest
rate swaps), currencies (currency swaps), commodities (commodity
swaps), equities (equity swaps), or combinations. The payments to be
made are based upon the various rates or indexes involved, as well as the
notional principal.
SWIFT
Society for Worldwide
Interbank Financial Telecommunication. A telecommunications network, owned by
banks, headquartered in Belgium, and used for sending standardized messages
between banks, most often in different countries. Commonly used for funds
transfers, as well as letters of credit, documentary collections, FX,
securities transactions, confirmations, etc.
SWIFT CODE
A three character code used
by the SWIFT system to represent the currency of the transaction, such as USD,
GBP, CHF, JPY, etc. A list of common SWIFT codes is at the end of this
glossary.
SYNDICATION
A loan made collectively by
a group of banks. Each bank will lend a pro rata share of the total, and assume
the corresponding share of the income and risk. Each bank is a member of the
syndicate, or a participant in the loan.
SYNTHETIC SECURITY
A security created by
combinations of other securities (often including derivatives) whose financial
and risk/return characteristics replicate those of another.
SYSTEMIC RISK
The risk that a bank will
fail owing money to others, causing each of them to fail as a result, and so
on, creating a worldwide domino effect.
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T+1/T+3/T+5
Securities industry
terminology that a trade must be settled on the 1st (next), 3rd, or 5th day
after the trade date. In the US, T+3 is the standard since late 1995 for stocks
(changed from the T+5 in effect for many years). The shorter the settlement
period, the lower the risk of loss due to one party failing to settle because
of changes in the value of the security between transaction and settlement.
Planning for T+1 in many global markets is in the very early talking stages at
this writing. STP is a prerequisite to implementing T+1.
TAC
See Targeted
Amortization Class.
TAKEDOWN
To increase a loan. E.g.,
the borrower took down $1MM of his loan. Also called drawdown.
TAKING
Deposit taking. A deposit
taken from one bank by another bank. See Placing.
TANGIBLE CAPITAL
A company’s capital
excluding goodwill and other intangible assets.
TARGET
Trans-European Automated Real-time Gross
Settlement Express Transfer system. A euroland funds transfer system
for transferring euros.
TARGETED AMORTIZATION CLASS
TAC. Similar to a PAC, but
which protects only against prepayment, not extension risk. A reverse TAC
protects against extension, but not prepayment risk.
TAURUS
A stock clearance and
settlement system in the UK that was scrapped in 1993 due to poor design and
cost overruns, and was replaced by CREST.
TAX CREDIT
A reduction in taxes owed
on a dollar-for dollar basis. See Tax Deduction.
TAX CUSHION
The ability of an
institution to use tax-exempt income. Since tax-exempt income gives a lower
return (in exchange for not having to pay taxes on the income), an institution
that pays no taxes anyway (non-profit organization, for example) has no tax
cushion.
TAX DEDUCTION
A reduction in taxable
income, resulting in a reduction in taxes equal to the tax deduction times the
tax rate. See Tax Credit.
TAX-EXEMPT
A loan or security whose income
is not subject to tax.
TBF
Transferts Banque de France. France’s
real-time, gross settlement funds transfer system.
T-BILL
See Treasury Bill.
TECHNICAL ANALYSIS
An analysis of the
prospects for a company and its stock based on certain quantitative indicators,
such as the stock’s historical price movements, and various balance sheet and
income statement ratios. See Fundamental Analysis.
TELEGRAPHIC TRANSFER
TT. See Funds Transfer.
TELEMARKETING
Selling products via
telephone call centers.
10-K
A detailed, annual
financial statement that companies that sell securities to the public in the US
are required to file with the SEC. See EDGAR.
10-Q
A quarterly financial
statement that companies that sell securities to the public in the US are
required to file with the SEC. See EDGAR.
TFM
See Transaction Flow
Monitor.
TENOR
The original length of time
before the final payment on a loan, deposit, or similar instrument is due.
TERM LOAN
A form of lending by a bank
evidenced by a formal loan agreement, representing the bank’s legal obligation
to lend the money if the terms of the agreement are met. Typically the funds
are disbursed all at once, and principal repayments are in equal monthly,
quarterly, or semiannual installments over a maximum period of approximately 7
years. See Revolving Credit.
TESOBONO
A Mexican government
security, with repayment of principal linked to the US dollar.
TESTAMENTARY TRUST
A trust which takes effect
only upon the death of the creator (grantor). Also called a trust under will. See
Living Trust.
THE CITY
The City of London. The
financial district of London.
THETA
The amount by which the
price of an option changes for a given change in time to expiration of the
option.
THOMSON FINANCIAL BANKWATCH
A credit rating agency.
THRIFT
A term generally meaning
savings banks and savings and loan associations. Thrifts engage primarily in
residential mortgage lending.
TIA
See Trust Indenture Act.
TIER 1 CAPITAL
Core capital. Under the
risk-based capital guidelines, consists primarily of stockholders’ equity less
goodwill.
TIER 1 RISK-BASED CAPITAL RATIO
The ratio of tier 1 capital
to the risk-adjusted assets of the bank.
TIER 2 CAPITAL
Supplementary capital.
Under the risk-based capital guidelines, consists of the reserve for loss
losses (with certain limitations), certain types of subordinated debt, and
certain other instruments.
TIER 3 CAPITAL
Market risk capital. The
additional risk-based capital banks must have to compensate for market risks.
TIME DEPOSIT
A deposit with a stated
maturity date, as opposed to, for example, a demand deposit, which is repayable
upon demand of the depositor. In the US, a time deposit legally must have a
minimum maturity of 7 days. A CD is a form of time deposit.
TIME VALUE
The part of an option
premium that pays for the time remaining until expiration of the option, as
opposed to paying for any intrinsic value the option may have.
TIMES INTEREST EARNED
See Debt Service Ratio.
TISA
Truth In Savings Act. See
Regulation DD.
TOMBSTONE
An advertisement, usually after
the fact, describing a specific financial event (issue of stock or bonds,
merger or acquisition, etc.). Generally done only for public relations
purposes.
TOTAL CAPITAL
See Total Risk-Based
Capital.
TOTAL RISK-BASED CAPITAL
Total capital. Total tier 1, 2, and 3 capital with certain
limitations and deductions.
TOTAL RISK-BASED CAPITAL RATIO
BIS (Bank for International
Settlements) ratio. Cooke ratio. The ratio of total risk-based capital to the
risk-adjusted assets of the bank.
TRADE ACCEPTANCE
A draft whose payment at
maturity has been assured by a non-banking company, such as a manufacturer. See
Bankers Acceptance.
TRADE DATE
Transaction date. The date
on which a transaction actually takes place. See Settlement Date.
TRADE FINANCE
A general term meaning the
different ways in which a bank can finance international trade (imports and
exports). Primarily consists of letters of credit, international funds transfers,
documentary collections, bankers acceptances, and foreign exchange.
TRADING
Buying and selling
currencies, commodities, securities, etc., intending to make a profit. Time
frames tend to be short (minutes, hours, or days) rather than long (weeks,
months, or years), although this is not always the case.
TRADING ACCOUNT/ASSETS
An account on a bank’s
books containing various securities (US treasury, federal agency, municipal
obligations, and others) intended to be managed to make money for the bank. The
profits generally come from underwriting fees, position taking, market making,
and trading in securities. See Investment Portfolio.
TRANCHE
The French word for slice.
A part of a loan or security, or parts of a pool of loans or securities
having common or similar rate, maturity, and/or risk characteristics.
TRANSACTION DATE
See Trade Date.
TRANSACTION FLOW MONITOR
TFM. A system to coordinate
the information flows necessary to implement STP for post-trade securities
processing.
TRANSFER AGENT
An institution that
maintains the stockholder records of a corporation. See Registrar.
TRANSFER PRICING
An internal mechanism by
which a bank charges one department for the use of its funds (for making loans,
for example) and gives credit to another department for supplying those funds
(through deposits, for example). Usually, the branches are net suppliers of
funds, and the commercial lending department is a net user of funds. See
Pool Rate.
TRANSFER RISK
The risk a bank runs by
making a loan to a borrower in a currency other than the home currency of that
borrower. The transfer risk arises if the borrower is unable to generate enough
of the foreign currency to repay the loan, even though it might well have
enough of its own currency.
TRANSIT/ROUTING NUMBER
See MICR.
TRANSPARENT
The property of a market in
which information about prices and activity is generally widely and immediately
available, as opposed to an opaque market.
TREASURY
The department of a bank
that is responsible for the day-to-day management and purchasing of the bank’s
funds.
TREASURY BILL
A short-term borrowing (1
year or less) by the US government. An investor purchases a T-bill at a discount
from par, and is repaid at par by the government. Treasury bills are issued
with a 3 month (13 week), 6 month (26 week) or 12 month (52 week) original
issue maturity. Other countries have similar instruments.
TREASURY BOND
Interest-bearing (coupon)
obligations issued by the US government, with an original issue maturity of
over 10 years - 30 years.
TREASURY NOTE
Interest-bearing (coupon)
obligations issued by the US government, with an original issue maturity of 2 -
10 years.
TREASURY STOCK
Shares of stock which had
previously been issued and were in the hands of the public, but which the
corporation had repurchased. Treasury stock carries no voting or dividend
rights, and is considered issued, but not outstanding. See Authorized
Shares, Issued Shares, Outstanding Shares.
TRIPLE TAX EXEMPT
A loan or security whose
income is not subject to either federal, state, or local taxes.
TRUNCATION
As
used in check clearing, it refers to the bank of first deposit retaining the
physical check, with the information on the check being processed
electronically or via image processing. See Safekeeping.
TRUST
A general term meaning the
managing of the assets of others. Services that banks would consider as trust
services include executor, administrator, investment management, and trustee.
Trust also has a specific
legal meaning, denoting an arrangement whereby a trustee takes legal title to
assets to be managed for the benefit of beneficiaries within a fiduciary relationship.
TRUST COMPANY
A company chartered to
engage in the trust business. Almost all banks have trust powers, and there are
very few pure trust companies today that offer only trust (and not
traditional banking) services.
TRUST INDENTURE ACT
TIA. A 1939 act of Congress
that specifies that most corporate debt securities sold publicly in the US must
be issued under an indenture and have a trustee to enforce the terms of the
indenture, in order to protect the holders of the security. It also sets
minimum standards for the trustee.
TRUSTEE
One who holds legal title
to assets to be managed for the benefit of others. See Equipment
Trust Certificate, Indenture Trustee, Trust.
TRUTH IN LENDING ACT
See Regulation Z.
TRUTH IN SAVINGS ACT
See Regulation DD.
TT
Telegraphic transfer.
12b-1 FEE
A fee charged by some
mutual funds to its fundholders, to pay for the cost of marketing the fund, the
theory being that more fundholders will result in lower expenses for each fundholder.
TXP
A form of ACH transaction
used by a company to make tax payments via the ACH.
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UCC
See Uniform Commercial
Code.
UCC 4A
That part of the Uniform
Commercial Code that covers the rights and responsibilities of parties to a
funds transfer.
UCITS
Undertakings for Collective Investments
in Transferable Securities. These are essentially a non-US
equivalent of mutual funds.
UCP
See Uniform Customs and
Practice.
UIT
See Unit Investment
Trust.
UNCOLLECTED FUNDS
See Float.
UNCOMMITTED FACILITY
A loan commitment not
evidenced by a legal, written contract between the bank and borrower, but
rather only the bank’s good faith efforts
to lend money. See Committed Facility.
UNCOVERED
See Naked.
UNDERLYING
The security, currency,
index, or commodity on which an option contract is written.
UNDERWRITING
Securities underwriting:
the process of distributing securities whereby the securities are purchased
from the issuer by an intermediary (the underwriter), who assumes the risk of
reselling them into the marketplace at a markup. In a competitive underwriting,
various underwriters bid against one another for the business; a negotiated underwriting
is where a single underwriter is chosen, and the price is negotiated with them.
Insurance underwritng: the
assumption of the risk being insured against, in exchange for the insurance
premium.
Credit underwriting:
analyzing the creditworthiness of the borrower.
UNFUNDED COMMITMENT
Commitment overhang. The
amount of money that a bank is contractually (legally) obligated to lend,
should its borrowers request it, over and above what it has already lent.
UNIFORM COMMERCIAL CODE
UCC. The body of law in the
US that covers banking and other commercial transactions. The UCC is adopted by each state individually, and
there are sometimes differences between the versions adopted by the various
states.
UNIFORM CUSTOMS AND PRACTICE
UCP. Uniform Customs and
Practice for Documentary Credits. The set of international regulations
covering letters of credit. Developed by the International Chamber of Commerce.
The most recent version is UCP 500, effective Jan. 1994.
UNIT INVESTMENT TRUST
UIT. A form of pooled
investment vehicle similar in concept to a mutual fund. A set of securities
(generally bonds) is purchased when the trust is formed, and the pool then remains
fixed. No trading takes place. Barring defaults of the underlying securities,
the return and maturity date are known in advance and management costs are
reduced. The securities are considered to be administered, rather than managed.
UNIT TRUST
Essentially, mutual funds
in the UK.
UNIVERSAL BANKING
The concept of providing
banking, insurance, and securities services all within one financial services
group. In Germany, Allfinanz.
UP AND IN/OUT
See Barrier.
UPTICK
A securities trade made at
a higher price than the previous trade. See Downtick, Uptick Rule.
UPTICK RULE
US stock exchange rule
under which a short sale may not be made on a downtick.
US TREASURY OBLIGATIONS
A generic term for the
borrowings of the US government. Usually in the form of treasury bills, notes,
or bonds, and considered the highest grade (i.e., lowest credit risk) of all
securities.
USD
SWIFT code for the US
dollar.
USE OF FUNDS
A way of using money. For a
bank, loans are generally the principal use of funds.
USURY RATE
An interest rate on loans (generally
set by state law), above which it is illegal for a bank to charge. Usually
applies only to consumer transactions.
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VALUE AT RISK
VaR. A risk management tool
for attempting to determine, at some prespecified confidence level (typically
95 or 99%), the maximum amount a company’s value could decline for given
changes in the markets. See Earnings at Risk.
VAR
See Value at Risk.
VARIABLE ANNUITY
An annuity whose annual payments
are a function of the return of some set of investments, typically mutual
funds, and which therefore may vary. See Fixed Annuity.
VARIABLE RATE
See Floating Rate.
VARIATION MARGIN
See Margin.
VAULT CASH
The currency and coin
literally in the vault. Vault cash is counted towards satisfaction of a bank’s
reserve requirement.
VEGA
The amount by which the
price of an option changes for a given change in the volatility of the underlying.
VENTURE CAPITAL
Providing financing to a
(generally) small, start-up company. Due to the risks involved in early-stage
financing, venture capitalists expect a return significantly above what
less-risky investments would offer.
VOLATILITY
As used in options pricing,
it refers to the size of the price fluctuations of the underlying.
VOSTRO
Vostro account. A due to
banks account. It is the other bank’s nostro account. Sometimes called a
loro account.
VULTURE FUND
An investment pool that
invests in the securities of troubled, bankrupt, or nearly bankrupt
companies.
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WAC
Weighted average coupon.
The average interest rate of a pool of mortgages. See WAM.
WAM
Weighted average maturity.
The average remaining maturity of a pool of mortgages. See WAC.
WARRANT
A security issued by a
company giving its stockholders the ability to purchase additional shares,
often at a price below the market, for a long period of time. The warrants may
often be traded in the marketplace. See Right.
WEIGHTED AVERAGE COUPON
See WAC.
WEIGHTED AVERAGE MATURITY
See WAM.
WHEN ISSUED
WI. Securities which trade
prior to their actual issuance, and subject to their issuance.
WI
See When Issued.
WILL
A statement as to how one’s
estate is to be distributed after death.
WILSHIRE INDEX
An indicator of stock
prices similar in concept to the DJIA or S&P 500, but including essentially
the entire universe of stocks in the US, rather than a small subset as in the
other two.
WINDOW DRESSING
Cleaning up the balance
sheet for the last day of the fiscal year (statement date).
WIRE HOUSE
Somewhat archaic name
formerly used to designate the major full-service stockbrokers.
WIRE TRANSFER
See Funds Transfer.
WORKING CAPITAL
Defined as current
assets - current liabilities, it represents the money a company has
available for day-to-day operations (as opposed to for longer-term investment
purposes). For these purposes, current usually means due in 1 year or
less.
WORKOUT
The process of collecting
loans which are in or near default. Usually requires special expertise on the
part of bank personnel.
WRITE-OFF
See Charge-Off.
WRITER
The seller of an option
contract.
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¥
See Yen.
YANKEE BOND
Bond issued in the US by a
foreign issuer.
YEN
JPY. ¥. Japanese yen. The
Japanese unit of currency.
YIELD
Current yield. The annual
income on an investment, as a percentage of its market price.
YIELD CURVE
The relationship between
the yield to maturity on an investment and its time to maturity. If a longer
time to maturity gives a greater yield, it is a normal (positive) yield curve,
whereas if the shorter maturities result in a greater yield it is an inverted
(negative) yield curve.
YIELD TO MATURITY
The total annual return on a debt investment, taking into account interest received as well as any change in price.
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ZERO
See Zero Coupon Bond.
ZERO BALANCE ACCOUNT
A form of checking account
offered to corporations by banks as part of a cash management system. Any
surplus (deficit) funds in the account at the end of the day are transferred to
(from) another account, to keep the closing balance at zero.
ZERO COST COLLAR
See Collar.
ZERO COUPON BOND
A bond which pays no periodic interest (has a zero coupon). All of an investor’s return is built into the increase in price from purchase to maturity. Since no income is received on an ongoing basis, zeros sell at a very deep discount.
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