An Introduction to Global Financial Markets

by Stephen Valdez & Philip Molyneux

ACCEPTING Signing a bill of exchange signifying an agreement to pay. Subsequent or alternative signature by a bank virtually guarantees payment.
ACCOUNT For equity settlements, exchanges may have an account period, for example 2 weeks, 1 month and so on, with payment due on ‘account’ or ‘settlement’ day. The alternative is a rolling settlement system.

ACCRUED INTEREST The interest accrued so far on a bond and payable by the purchaser. Quoted separately from the ‘clean price’.
adverse selection The process whereby ‘bad’ results occur when buyers and sellers have different information (asymmetric information): ‘bad’ products or services are more likely to be selected. A bank that sets one price for all its cheque processing accounts runs the risk of being adversely selected against by its low-balance, high-activity (and hence least profitable) customers. Another example relates to the demand for insurance, which increases with risk.

ALPHA FACTOR The element in a share price that reflects its individual performance as opposed to the market, which is the beta factor.
alternative investment market (AIM) A new market for smaller companies’ shares set up in the UK in June 1995.
American depository receipt (ADR) The form in which foreign shares can be traded in the US without a formal listing.

ANNUAL YIELD See flat yield.

ARBITRAGE Taking advantage of an anomaly in prices or rates in different markets, for example buying in one and simultaneously selling in the other.

ARBITRAGEURS Those looking for arbitrage opportunities. Applied especially in the US to those trying to exploit takeover possibilities.
Article 65 Article of the Japanese Financial Code that prevented commercial banks from engaging in some investment banking activities (and vice versa); now dismantled.

ASSET-BACKED COMMERCIAL PAPER (ABCP) Money market paper backed by assets.

ASSET-BACKED SECURITY (ABS) Securities that have collateral support. The assets may be backed by real or financial assets, for example mortgage-backed securities/bonds.

ASSETS The side of the bank’s balance sheet dealing with lending.

ASSURANCE The business of life insurance and pensions.

ASYMMETRIC INFORMATION When two parties have different information about contracts or other deals. A depositor knows less about what their deposits are being used for in the bank compared to the bank manager. The bank knows less about how their loans are being used by borrowers.

BACK OFFICE Accounting and settlement procedures.

BAD BANK A company set up at a time of crisis. Bad loans are moved out of troubled banks into the bad bank that is run by the government.

BANK BILL A bill of exchange accepted by a bank on the central bank’s ‘eligible’ list. The central bank itself would rediscount a bill of this type. Also called an eligible bill.

BANK FOR INTERNATIONAL SETTLEMENTS (BIS) The central bankers’ central bank, based in Basel, Switzerland, established by the Hague agreement of 1930.

BASEL COMMITTEE The short form for the Basel Committee on Banking Supervision. Set up by the central bank governors of the G10 countries in 1974, it seeks to improve the supervisory guidelines that central banks or similar regulatory authorities impose on both wholesale and retail banks. It sets banking policy guidelines for both member and non-member countries and resides at the Bank for International Settlements, Basel, Switzerland.

BASE MONEY Notes and coins plus bank reserves held at the central bank; also referred to as ‘high-powered money’.

BASIS POINT (BP) One-hundredth of 1%.

BEARER BOND A bond payable to whoever is in possession, that is, no central register.

BETA FACTOR The effect of overall market movements on a share price (see alpha factor).

BID RATE Rate of interest offered for interbank deposits. Generally, the dealer’s buying price for equities, bonds, foreign exchange and so on.

BIG BANG Deregulation of the UK stock exchange, 27 October 1986.

BILL OF EXCHANGE A signed promise to pay by a receiver of goods or services and kept by the supplier. May be sold at a discount.

BLUE CHIP The most highly regarded shares; the metaphor is from gambling casinos.

BOND A certificate issued by a borrower as receipt for a loan longer than 12 months, indicating a rate of interest and date of repayment.
bond stripping See coupon stripping.

BONOS Bonos del Estado, Spanish government bonds.

BONUS ISSUE Same as scrip issue.

BRADY BOND Bonds issued as part of LDC debt reduction under a scheme devised by Nicholas Brady.

BRETTON WOODS Meetings at Bretton Woods (US) in 1944 set up the World Bank, IMF and foreign exchange system for the period following the Second World War.

BRICs A term that refers to the countries of Brazil, Russia, India and China.

BROKER An agent for buying/selling securities or intermediary for a loan or sale of foreign exchange (also known as a money broker).

BTAN Bons du Trésor à intérêt annuel, French government 2- and 5-year notes.

BTF Bons du Trésor à taux fixe, French government T-bills.

BTP Buoni del Tesoro poliennali, Italian government bond.

BULLDOGS Sterling bonds issued in the UK by foreign organizations.

BULLET REPAYMENT The whole of a bond or bank loan is repaid at maturity, instead of staged payments in the last few years.

BUND Short name for the medium-term German government bond contract on Eurex.

BUNDESBANK The German central bank.

CABLE Shorthand for dollar/sterling rate.

CALL MONEY Money lent by banks to other banks or discount houses, which can be recalled as needed.

CALL OPTION An option to buy a share/bond/index/interest rate contract later at a price agreed today.

CAP An agreement with a counterparty that sets an upper limit to interest rates for the cap buyer for a stated time period.

CAPITAL ADEQUACY The need to maintain adequate capital to cover counterparty risk and position risk.

CAPTIAL GAIN Profit that results from investments in an asset, such as stocks, bonds, property, art works, precious metals and so on. It is the difference between a higher selling price and a lower purchase price, resulting in a financial gain for the investor. Most countries tax capital gains.

CAPITALIZATION Market capitalization of a company is the number of shares multiplied by the current price.

CAPITAL MARKETS= The market for medium- and long-term securities.

CAPITAL RATIO The ratio of a bank’s primary capital to a weighted value of assets (for example cash = 0 weighting).

CERTIFICATE OF DEPOSIT (CD) Issued by banks to raise money – strong secondary market.

CHAPS Clearing House Automated Payments System, for electronic clearing of payments the same day (UK). Used for sterling and euros.

CHICAGO BOARD OF TRADE (CBOT) Was established in 1848 and is the world’s oldest futures and options exchange. In July 2007, it merged with the Chicago Mercantile Exchange (CME) and in 2008, with the New York Mercantile Exchange (NYMEX) to form the CME Group.

CHICAGO MERCANTILE EXCHANGE (CME) One of the world’s largest derivatives exchanges. Initially focused on commodity derivatives but now offers a full spectrum of products. Merged with CBOT in 2007 and the New York Mercantile Exchange (NYMEX) in 2008 to form the CME Group.

CHIPS Clearing House Interbank Payment System, electronic bank clearing system in New York.

CLEAN PRICE Price of a bond not including the accrued interest element.

CLEARING HOUSE Central body guaranteeing contracts in a traded options/futures marketplace.

COLLAR A combination of a cap and floor. Setting a band within which interest rates will apply, for example 10–12%, for a given period. Also used for currency rates.

COLLATERALIZED DEBT OBLIGATIONS (CDOs) These are a type of asset-backed security whose value and payments are derived from a portfolio of fixed income underlying assets. CDO securities are broken down into various tranches according to risk type. The senior tranches are the lowest risk. Interest payments on the tranches are made according to their seniority, with senior tranches offering lower rates than more risky junior tranches. See structured finance.

COLLATERALIZED MORTGAGE OBLIGATION (CMO) A special purpose entity (usually a limited company) that is wholly separate from the institution(s) that create it. The company is the legal owner of a set of mortgages that act as collateral to back bonds issued by the company. Investors in a CMO purchase the mortgage-backed bonds issued in various tranches reflecting different risk/return types. CMOs have been set up by banks to issue a wide range of bond issues, including those backed by commercial mortgages (CMBS) and sub-prime mortgages.

COMMERICAL BANKING The ‘classic’ banking business of taking deposits and lending money, either retail or wholesale.

COMMERCIAL MORTGAGE-BACKED SECURITIES (CMBS) A form of asset-backed security backed by commercial property mortgages.

COMMERCIAL PAPER A short-term security issued to raise money, usually by corporates.

CONSOLIDATION Reorganizing shareholdings so that, for example, 10 shares at 10p nominal are replaced by one at £1 nominal.

CONVERTIBLE A convertible bond may be converted later into equity, some other bond or even a commodity, for example gold, as an alternative to redemption.

CORPORATE FINANCE The department of a merchant/investment bank dealing with takeovers, mergers and strategic advice to companies.

COUNTERPARTY RISK The risk involved if a counterparty fails to settle.

COUPON RATE The annual rate of interest on a security noted on coupons issued with bearer bonds.

COUPONS Issued with bearer bonds to enable the holder to claim the interest.

COUPON STRIPPING Detaching the coupons from a bond and selling the coupons and the principal as individual zero-coupon bonds.

COVER The amount of dividend paid (net) divided into the amount of profit after tax available for distribution.

COVERED BONDS A form of asset-backed security where a special purpose vehicle (SPV) is not used.

CREATION OF CREDIT Banks’ ability to lend money, facilitated by the use of notes and coin for a small percentage of transactions only.

CREDIT DEFAULT SWAP (CDS) Selling credit risk for a premium.

CREDIT DERIVATIVES A general market where credit risk is sold for a premium.

CREDITS RATINGS For example AAA or Aaa, issued by companies like Standard & Poor’s and Moody’s to rate the level of risk of a bond or note issue.

CREST The UK paperless equity settlement system, which started in mid-1996.

CROSS-RATES Rates between two currencies, neither of which is the dollar.

CUMULATIVE Applied to preference shares – if dividend is missed, it is still owed to the holder.

CUSTODIAN An organization that will store the original documentation for, say, bonds or equities and will look after settlement.

CYLINDER Name used for a collar in currency markets.

DEBENTURE In the UK, a bond secured on assets. In the US and Canada, a bond not secured on assets.

DERIVATIVES Products whose price is derived from the price of an underlying asset, for example if ICI shares are the underlying asset, an option to buy or sell them at a given price is the derivative. Applied to options, futures, swaps and so on.

DISCOUNTING Buying/selling a security at less than face value.

DISINTERMEDIATION Direct market borrowing or lending by companies without going through a bank. A bank is traditionally the ‘intermediary’ between depositors and borrowers.

DIVIDEND The proportion of corporate earnings paid out to shareholders, usually quarterly. When a company earns profits, this can be put to two main uses. The funds can be reinvested in the business (‘retained earnings’), or they can be paid to the owners of the business (shareholders) as dividends. Typically, companies do both and retain some earnings and pay the remainder as dividends.

DIVIDEND YIELD The annual percentage return on a share price represented by the current dividend – usually gross.

DODD-FRANK ACT Legislation, more formally called the Wall Street Reform and Consumer Protection Act 2010, which established a new regulatory framework for US financial institutions in the light of the banking crisis.

DRAGON BOND A eurobond issued in Hong Kong or Singapore and targeted for primary distribution to Asian investors.

EAGLEs Emerging and growth-leading economies, a group of emerging markets whose contribution to global economic growth over the next decade or so is expected to be greater than the average of the leading industrialized nations.

EASDAQ European Association of Securities Dealers Automated Quotations – a pan-European trading system, which started in late 1996 but was taken over by NASDAQ in 2001.

ELIGIBLE BILLS Bills of exchange eligible for sale to the central bank when acting as lender of last resort.

E-MONEY Electronic money is a digital equivalent of cash, stored on an electronic device or remotely at a server.

EONIA Euro Overnight Index Average, average of overnight rates in the eurozone.The Eonia rate is the 1-day interbank interest rate for the Euro zone.

EQUITY General term for shares.

EUREX The futures/options exchange, which was established in 1998 by the merger of Germany’s Deutsche Terminbörse (DTB) and Switzerland’s Swiss Options and Financial Futures Exchange (SOFFEX).

EURIBOR Interbank lending rate for the euro in the 17 countries of EMU.

EURO The name of the single currency in Europe’s monetary union.

EUROBOND A bond issued in a market outside that of the domestic currency.

EUROCERTIFICATE OF DEPOSIT  See certificate of deposit.

EUROCOMMERCIAL PAPER See commercial paper.

EUROCURRENCIES Any currency held by banks, companies or individuals outside its country of origin.

EURO LIBOR Interbank lending rate for the euro in London.

EURONEXT Formed in 2000 by the merger of the Paris Bourse and the Brussels and Amsterdam stock exchanges. Lisbon joined in 2002. Owner of Liffe.

EURONIA Euro Overnight Index Average, average of overnight euro rates in the London market. IT is calculated from the unsecured overnight euro deposit trades originated by money brokers in London.

EURONOTE Short-term security denominated in a eurocurrency.

EUROPEAN BANKING UNION This was established in November 2014 when the European Central Bank (ECB) took on supervisory responsibility for banks operating in the euro area. The Banking Union has three pillars. Pillar 1 - the ECB will have direct responsibility for supervising the largest banks but will also have the power to deal with small banks if necessary. Pillar 2 there will be a common resolution fund and mechanisms for dealing with failing banks. Pillar 3 relates to the set-up of a common deposit-insurance scheme to prevent bank runs. (see Single Supervisory Mechanism and Single Resolution Mechanism)

EUROPEAN CENTRAL BANK (ECB) The European Union’s (EU) central bank that administers the monetary policy of the 17 EU eurozone member states. Established by the Treaty of Amsterdam in 1998 and headquartered in Frankfurt, Germany.

EUROPEAN ECONOMIC AND MONETARY UNION (EMU) A single currency area set up for 11 European countries on 1 January 1999. Greece joined later, and notes and coins were included from 1 January 2002. By January 2011, there were 17 member countries.

EUROPEAN MONETARY SYSTEM (EMS)  General agreement on monetary cooperation. Included official use of the ecu, 20% of central banks’ reserves held in a European Monetary Cooperation Fund and exchange rates of member countries kept within a stated range, one to another (ERM). Set up in 1979. Replaced by EMU.

EUROPEAN SYSTEM OF CENTRAL BANKS (ESCB) The ECB, plus the 17 central banks of the member countries in the eurozone. (Legally, the non-eurozone central banks are included but take no part in decisions on monetary policy.)

EUROSYSTEM The ECB plus the 17 central banks of the participating countries only, not including those not in the euro area.

EXCHANGE DELIVERY SETTLEMENT PRICE (EDSP) The price at which certain futures and options contracts expire.

EXCHANGE RATE MECHANISM (ERM) The interim exchange rate system for countries waiting to join EMU.

EXCHANGE-TRADED FUNDS (ETFs) These are listed securities that mimic the behaviour of an index and can be traded just like an ordinary share.

EX DIVIDEND (XD) If a share or bond is marked ‘XD’, this means that the purchaser is not entitled to the forthcoming dividend/interest payment, as the cut-off point has passed.

EXERCISE PRICE  The price at which an option can be exercised (also called ‘strike price’).

EX RIGHTS (XR) In rights issues, if a share is marked ‘XR’, this means that the purchaser is not entitled to the rights, as the cut-off point has passed.

FACTORING Buying trade debts on a regular basis to assist cash flow, usually done by subsidiaries of banks.

FAST MARKET When normal stock market rules are superseded due to chaotic conditions.

FCP Fonds communs de placement, French ‘closed-ended’ fund.

FEDWIRE Electronic payments system between Federal Reserve banks in the US.

FINANCIAL SERVICES AUTHORITY (FSA)  Regulator of the UK’s financial services industry. On 16 June 2010, George Osborne, Chancellor of the Exchequer, announced that the FSA was to be abolished and its responsibilities separated into two new agencies, one to be part of the Bank of England.

FINANCIAL TIMES STOCK EXCHANGE (FTSE) Indices such as FTSE 100.

FLAT YIELD The annual percentage return on a bond taking into account the buying price, for example if £100 nominal worth of an 8% bond is bought for £50, the yield is 16%. Also called ‘annual’, ‘running’ and ‘interest yield’ (see redemption yield).

FLOATING RATE A loan with the interest rate varied at agreed intervals, linked to a base rate, for example LIBOR.

FLOATING RATE NOTE (FRN) An issue where the interest is at floating rate.

FLOOR An agreement with a counterparty that sets a lower limit to interest rates for the floor buyer for a stated time period.

FOREIGN BONDS Bonds in a domestic currency issued by non-residents.

FORWARD CONTRACT A contract to buy or sell a commodity or security for future delivery at a price agreed today.

FORWARD/FORWARD (1) An agreement to lend money at a future point in time for a given period of time, for example in 6 months for 6 months. (2) A forward foreign exchange deal not dated today, but at a later date.

FORWARD RATE A rate agreed now for a future purchase or sale of a currency. Derived from the difference in interest rates in the two currencies.

FORWARD RATE AGREEMENT (FRA) An agreement with a counterparty that agrees on a stated rate of interest to apply to a notional principal sum at a future time to last for a stated time, for example, in 6 months for 6 months.

FRONT OFFICE Dealing room system to facilitate buying and selling.

FUNDAMENTAL ANALYSIS One of the two major approaches used to predict future asset prices. This approaches uses macroeconomic, industry and company analysis to determine future asset price movements (see also technical analysis).

FUTURES CONTRACT Similar to a forward contract, but not expected to go to delivery, as the position will be closed out with the opposite contract.

G7, G10 Meetings of international finance ministers – ‘Group of 7’, ‘Group of 10’ and so on.

GEARING Carrying out financial transactions on the basis of a deposit or borrowed money (called ‘leverage’ in the US).

GEARING RATIO Ratio of equity and long-term debt.

GILTS Term applied to UK and Irish government bonds. From ‘gilt-edged’ or virtually guaranteed. In general use for UK government stock from the 1930s onwards.

GLASS-SEAGALL ACT Passed in the US in 1933, prevented commercial banks from engaging in certain investment banking business (and vice versa); now repealed.

GLOBAL BONDS Designed to be sold in the eurobond market and the US market at the same time.

GLOBAL DEPOSITORY RECEIPT (GDR) A form in which foreign shares can be traded outside their domestic markets.

GLOBALIZATION The movement to integrate world markets regardless of national boundaries.

GOVERNMENT-SPONSORED ENTERPRISES (GSEs) US GSEs, such as Freddie Mac, Fannie Mae, Ginnie Mae, promoted home ownership via their activity in the mortgage-backed securities market.

GREY MARKET The market for sales of a security before the official market opens.

GROSS DIVIDEND YIELD See dividend yield.

GROSS REDEMPTION YIELD See redemption yield.

G-SIFI Global systemically important financial institution. Failure of such an institution may lead to collapse of the global financial system and/or have global consequences or an impact.

HAIRCUT In a stock borrowing/lending agreement, the borrower passes collateral to a value in excess of the market value of the stock (to allow for the price rising). This excess is called a ‘haircut’.

HEDGE FUND An actively managed fund that seeks an absolute return, that is, a return whether markets go up or down.

HEDGING A technique for limiting risk. For example, if a price movement would cause loss, a purchase is made of an options or futures contract giving the opposite result; if a rise in interest rates causes loss, a position is taken with interest rate options/futures so that a rise in interest rates will yield a profit.

HIGH-POWERED MONEY See base money.

HYBRID BONDS Bonds that combine features of equity and debt – perpetual, noncumulative and deeply subordinated.

ILLIQUIDITY  The inability to meet short-term obligations when they fall due. For example, banks may not be able to meet deposit withdrawals if they do not have cash in their vaults to pay depositors.

INDICES Like the S&P 500, the CAC 40, DAX, FTSE 100 and so on.

INELIGIBLE BANK BILLS Bills of exchange accepted by a bank, but one not on the central bank’s list (see bank bill).

INITIAL MARGIN Initial deposit required by a clearing house (as opposed to variation margin).

INITIAL PUBLIC OFFERING (IPO) US term for ‘offer for sale’.

INSURANCE If contrasted with assurance, this is business other than life insurance.

INTERBANK MARKET Bank lending/borrowing one to another.

INTERDEALER BROKER (IDB) Facilitates deals between market makers who can deal in confidence and anonymity.

INTEREST YIELD See flat yield.

INTERNATIONAL MONETARY FUND (IMF) Set up in 1946 to help nations in balance of payments difficulties.

INTRINSIC VALUE The amount by which a call option exercise price is below the market price (or a put option exercise price is above it), usually called ‘in the money’.

INTRODUCTION A method of obtaining a stock exchange quotation. No new shares are issued. Usually they are foreign shares seeking a listing on a domestic market.

INVESTMENT BANKING Banking implying a high involvement with securities – new equity issues, rights issues, bond issues, investment management and so on. Also advice to either party for mergers and acquisitions.

INVESTMENT GRADE A credit rating of BBB (Standard & Poor’s), Baa (Moody’s) or better, that is, a high-quality bond.

INVESTMENT TRUST A company whose whole business is running a wide portfolio of shares. A ‘closed-ended’ fund.

IREEDEEMABLE Same as perpetual.

ISLAMIC BANKING BONDS Issues made to conform to sharia (Islamic) law.

ISSUING Offering a security to the market in the first instance.

JOINT STOCK Having shareholders.

JUNK BONDS Specifically bonds with ratings of BB (S&P), Ba (Moody’s) or less. Generally high-risk, high-yield bonds.

KANGAROO BOND An Australian dollar bond issued in Australia by a non-resident.

LEAD MANAGER Bank(s) taking a key role in a syndicated loan or issue of securities like eurobonds.

LENDER OR LAST RESORT (LLR) An institution that will extend credit when no one else will do so. Mainly used in the context of central banks providing loans to banks so they avoid liquidity problems and maybe bankruptcy. Usually provided to banks viewed as systemically important, or too big to fail.

LEVERAGE American term for gearing or ‘making a small amount of capital go a long way’.

LIABILITIES The side of a bank’s balance sheet dealing with borrowing, that is, deposits, formal loans from others. Also share capital.

LIBID London Interbank Bid Rate, paid by one bank to another for a deposit.

LIBOR London Interbank Offered Rate, charged by one bank to another for lending money.

LIFFE London International Financial Futures and Options Exchange, now part of Euronext.

LIFFE CONNECT The electronic derivatives trading system at NYSE Liffe.

LIQUIDITY  Ability to meet short-term cash obligations when they fall due. These may be predictable liquidity requirements, such as meeting deposit withdrawals, as well as unpredictable requirements, such as large corporates shutting their deposit accounts. Liquidity is held in the form of cash or short-term assets that can be sold quickly to realize cash (T-bills and other money market paper).

LIQUIDITY RATIO Usually a percentage relationship between a bank’s liquid assets and its eligible liabilities.

LOCALS Traders dealing for themselves as speculators.

LONDON METAL EXCHANGE (LME)  Deals in six non-ferrous metals.

LONG To be ‘long’ in shares, bonds or foreign exchange is to own more than have been sold.

LONG-TERM REFINANCING OPERATION (LTRO) Name given to ECB liquidity injection into eurozone interbank markets in December 2011 and February 2012.

LORO Alternative term for vostro.

MARGIN The deposit required by a clearing house.

MARGIN CALLS A call from a broker or clearing house demanding the deposit of cash to cover an adverse price movement of a security.

MARKET MAKER The dealers in stocks and shares as principals, that is, taking the risk in their own name.

MARK TO MARKET Valuing securities or derivatives transactions at the current market price.

MORTGAGE-BACK SECURITY (MBS)   An asset-backed security that represents a claim on the cash flows from mortgage loans via a process known as ‘securitization’. MBS relates to asset-backed securities backed by mortgages on residential property, and commercial MBS (CMBS) to those backed by commercial property.

MATADOR BOND Peseta bonds issued in Spain by non-residents.

MEDIUM-TERM NOTES A flexible facility to issue notes of varying maturity, varying currency and either fixed or floating – all within one set of legal documentation.

MEFF Mercado Español de Futuros Financieros, Spanish futures and options exchange in Madrid and Barcelona.

MERCHANT BANKS UK term for investment banks.

MEZZANINE Just as a mezzanine floor is a floor in between two others, so mezzanine debt is subordinated debt lying between equity and senior debt.

MONEP Marché des Options Négociables de Paris, French options exchange, now part of Euronext Paris.

MONEY AT CALL An interbank short-term loan that may be recalled at any time.

MONEY MARKET The market for money instruments with a maturity of less than 1 year.

MONOLINE INSURERS Special insurance firms that provide services to the capital markets, that is, they provide insurance guaranteeing the timely repayment of bond principal and interest when an issuer defaults. Insured securities include municipal bonds, MBS and CDOs. When bonds are insured, this reduces their risk and can therefore improve their credit rating.

MORAL HAZARD The tendency to take on too many risks when these are not borne by the risk-taker. For instance, a bank that is viewed as ‘too big to fail’ will take on more risk because if it gets into financial difficulties, the government will save the bank (see too big to fail).

MULTIPLE OPTION FACILITY (MOF) A revolving facility from a syndicate of banks permitting the raising of finance with various options – bank loan, banker’s acceptance or commercial paper.

MUTUAL A bank or insurance company that is not a public company, but owned by the members.

MUTUAL FUNDS General name for pooled funds, such as investment trusts and unit trusts.

NASDAQ OMX North American Securities Dealers Automated Quotations, computerized dealing system for US OTC trade outside recognized exchanges; merged with the Swedish/European OMX exchange in 2008.

NATIONAL DEBT The total outstanding debt of the central government, especially bonds and national savings.

NORMAL MARKET SIZE (NMS) This is the classification concept that replaced the three classes, alpha, beta and gamma. It is based on a percentage (currently 2.5%) of an average day’s trading. There are 12 bands, and they are used to decide the minimum quote size and the maximum size for immediate publication of trades (UK).

NOSTRO ‘Our’, the overseas currency account of a bank with a foreign bank or subsidiary.

NYSE EURONEXT Stock exchange formed by the US New York Stock Exchange and European Euronext in April 2007.

NYSE LIFFE The derivatives market of NYSE Euronext.

OATS OBLIGATIONS ASSIMILABLES DU TRESOR, French government bonds.

OFF-BALANCE RISK SHEETS Risks for bankers other than activities that end up as an asset on the balance sheet. For example, standby loans, standby letters of credit, derivatives generally.

OFFER FOR SALE A method of bringing a company to the market. May be at a fixed price or by tender.

OFFER RATE Rate of interest charged for interbank lending of money. Generally, the dealer’s selling price for equities, bonds, foreign exchange and so on. Also called ‘ask rate’ or price.

OPEN MARKET OPERATIONS  Involves the central bank buying or selling financial instruments (government bills, bonds, foreign currencies) in order to influence the quantity of money in circulation.

OPEN OUTCRY Face-to-face trading.

OPTION-DATED FORWARD RATE A forward rate (foreign exchange), but the date is more flexible.

OPTIONS The right, but not the obligation, to buy/sell equities, bonds, foreign exchange or interest rate contracts at a future date at a price agreed now. ‘Traded options’ means the options themselves can be bought and sold.

OPTION WRITER Term used to describe any option trading strategy that involves selling options. The seller is the writer.

OVER THE COUNTER (OTC) The OTC market deals outside a trading exchange, for example a currency option purchased from a bank.

PACMAN DEFENCE In a takeover situation, when the company that is the subject of a bid turns round and tries to take over the bidder.

PANDA BOND A bond issued in China by non-residents.

PAR The nominal value of a security, for example $1,000 for US Treasury bonds or £100 for UK government bonds.
perpetual A security without time limit for redemption.

PITS Trading areas in options, futures and commodity exchanges.

PLACING A method of bringing a company to the market. The shares are placed with institutional investors and some private investors, that is, not ‘offered for sale’ generally.

PLAZA AGREEMENT An example of international cooperation. Following a meeting in October 1975 at the Plaza Hotel, New York, international finance ministers agreed to take measures to reduce the exchange rate for the dollar.

POISON PILL A device to frustrate a hostile takeover bid.

PREFERENCE SHARES Dividend is paid as a fixed percentage. They have preference over ordinary shareholders for dividend payment and in case of liquidation. Usually non-voting. (‘Preferred stock’ in the US.)

PRICE/EARNINGS (P/E) RATIO  Ratio of share price to earnings after tax.

PRIMARY MARKET Markets where securities are sold when first issued.

PRIME BROKER A firm (usually an investment bank) that provides a package of services to hedge funds and other professional investors that need the ability to borrow securities and cash for investment purposes. Typically, prime brokers provide a centralized securities clearing facility so that collateral requirements of, say, hedge funds are netted across all deals. The prime broker also extends credit to hedge funds to finance investment activity.

PRIVATE BANKING Specialist banking services for high-net-worth individuals.

PRIVATE EQUITY Raising money for venture capital for early stage companies or management buyouts.

PRIVATE PLACING When securities are not offered for open sale, but are ‘placed’ with institutional investors.

PROGRAM TRADING Bulk sales or purchases of securities triggered by computer programs.

PURCHASING POWER PARITY (PPP)  PPP theory uses the long-term equilibrium exchange rate of two currencies to equalize their purchasing power. For example, if a representative consumption basket costs $3,000 in the US and £2,000 in the UK, the PPP exchange rate would be $1.50/£. If the actual spot rate were $2.00/£, this would indicate that the pound is overvalued by 33%, or equivalently the dollar is undervalued by 25%.

PUT OPTION An option to sell a share/bond/index/interest rate contract later at a price agreed today.

QUANTITATIVE EASING (QE) Process whereby the central bank purchases government bonds on a massive scale to inject liquidity into the financial system/economy. It is used as a form of monetary policy when interest rates are so low they cannot be reduced further.
redemption Final payment to holders of bonds.

REDEMPTION YIELD The gross redemption yield takes into account the gain or loss to redemption as well as the flat yield (also called ‘yield to maturity’).

REINSURANCE Laying off the original risk with others. Insurance companies insure their own risks in the reinsurance market.

RELIT Règlement livraison de titres, French stock exchange settlement system.

REPO Sale and repurchase agreement. Securities are sold but must be repurchased later.

RESERVES  The proportion of bank’s assets that are held in a liquid form that has to exceed regulatory requirements (known as ‘reserve requirements’). The higher a bank’s reserves, the safer, as less has been lent out.

REVERSE REPO When the buyer of the securities initiates the repo deal.

REVOLVING CREDIT A commitment to lend on a recurring basis on predefined terms.

RIGHTS ISSUE An offer of shares for cash to existing shareholders in proportion to their existing holdings.

RING-FENCE distanced/separated in some way from low-risk retail banking.

ROLLING SETTLEMENT For example ‘five working days’, that is, deal on Tuesday, settle next Tuesday; deal Wednesday, settle next Wednesday, instead of all deals within a given ‘account’ being settled on a given day.

RONIA Repurchase Overnight Index Average, the weighted average of all secured sterling overnight cash transactions. It was introduced in June 2011 and is published daily at around 17.00 UK time by the Wholesale Market Brokers’ Association. It is the wholesale lending rate for secured overnight transactions.

RUNNING YIELD See flat yield.

SAMURAI BONDS A yen bond issued in Japan by non-residents.

SAVINGS AND LOANS ASSOCIATIONS (S&Ls) US institutions similar to UK building societies.

SCHATZE German short-term Treasury issues.

SCRIP DIVIDEND Offer of shares instead of a dividend (optional).

SCRIP ISSUE A free issue of shares to existing holders.

SEAQ Stock Exchange Automated Quotations, the system that came in with Big Bang (UK).

SECONDARY MARKETS The buying and selling of a security after its primary issue.

SECURITIES AND EXCHANGE COMMISSION (SEC) US body controlling regulation of the market.

SECURITIZATION The borrowing of money through issue of securities on international markets (in particular) instead of through a bank loan. Also, converting an existing loan into securities, for example mortgage bonds (see ABS).

SEIGNORAGE The special profit central banks make from printing banknotes whose nominal value is well in excess of their cost to the bank.

SERIES All options of the same class, exercise price and expiry dates.

SETTLEMENT DAY When the money for a given trade is due to be paid (and the securities handed over).

SHADOW BANKING A group of financial firms, infrastructure and practices that support financial transactions that occur beyond the reach of existing regulation. Includes hedge funds, money market funds and structured investment vehicles. Investment banks were blamed for undertaking a lot of securitization business via the shadow banking system, but they are not shadow banking institutions themselves.

SHARES Shareholdings in companies with reward by way of dividend – usually called ‘equity’.

SHARIA Islamic law.

SHELL COMPANY A company with few assets, profits nil or in decline, and a very low share price.

SHORT To be ‘short’ in shares, bonds or foreign exchange is to have sold more than have been bought.

SHORT SELLING An investment strategy based on the price of the security falling. In a typical short sale, stock will be borrowed and sold immediately with a promise to return the stock at a later date. The investor hopes the price will fall, so then it can be purchased and returned to the lender at a profit.

SICAV Société d’investissement à capital variable, French ‘open-ended’ mutual fund.

SINGLE SUPERVISORY MECHANISM (SSM) is the name given to the mechanism whereby the European Central Bank was given responsibility (In November 2014) to supervise banks operating in the euro area. (See Single Resolution Mechanism and European Banking Union)

SINGLE RESOLUTION MECHANISM (SRM) is the mechanism that will be used by the European Central Bank to deal with failing banks under its role as bank supervisor (see Single Supervisory Mechanism and European Banking Union)

SOFFEX  Swiss Options and Financial Futures Exchange, merged with Deutsche Terminbörse in 1998 to form Eurex.

SONIA Sterling Overnight Index Average, average of overnight rates.

SPECIAL PURPOSE VEHICLE (SPV)  Used for the issue of asset-backed securities.

SPLIT Existing shares are reorganized (‘split’) into more shares, for example two shares at 25p are exchanged for each one at 50p (nominal values).

SPOT Today’s rate for settlement in two days.

SPREAD Difference between bid rate and offer rate. More generally between one rate and another.

STOCK BORROWING/LENDING Equity and bond traders may temporarily borrow or lend stock in exchange for collateral – especially useful for a short position. Although called ‘borrowing/lending’, the stock is legally sold in UK law, but this is not necessarily the case elsewhere.

STOCK EXCHANGE ELECTRONIC TRADING SERVICE (SETS) UK order-driven electronic trading system implemented in October 1997.

STOCK INDEX ARBITRAGE Arbitrage between the options, futures and market price of an index at contract closure.

STOCKS Fixed interest securities, for example bonds, debentures, preference shares.

STRADDLE A traded option strategy – simultaneous purchase/sale of both call option and put option for the same share, exercise price and expiry date.

STRATEGIC INVESTOR  An investor that goes beyond simply investing financial resources into a business, in contrast to a financial investor that just buys company and other investments, but has no intention of running the business.

STRIKE PRICE See exercise price (alternative term).

STRUCTURED FINANCE A general term used to refer to an area of finance that uses relatively complex corporate and/or legal structures to create innovative financial transactions. For example, the creation of special purpose vehicles (SPVs) to hold and issue types of asset-backed securities (ABS).

STRUCTURED INVESTMENT VEHICLE (SIV) A type of fund set up by banks to invest in long-term assets (typically asset-backed securities including MBS and CDOs). The funds borrowed money by issuing short-term securities (usually commercial paper) at low interest and then used these funds to purchase longer term securities that earned higher interest rates. SIVs were widely used by banks prior to the credit crisis and were often large in size, ranging from $1bn to $30bn. They were considered low risk and did not need capital backing. When the credit crisis hit, the value of the securities held in SIVs became uncertain, and short-term funding disappeared. Banks had to take the SIV investments back onto their balance sheets, incurring massive losses.

SUBORDINATED DEBT A bond that, in the event of liquidation, can claim only after other senior debts have been met.

SUKUK A bond issued to conform to sharia law.

SWAP Exchange of debt obligations between two parties, either exchange of currencies or fixed to floating rate (and vice versa) and sometimes both. The latter applies to a notional principal sum, and the agreement lasts for a stated time period.

SWAPNOTE A contract offered at Euronext. Actually, a bond contract, but the cash flows of the bond are discounted by the swaps yield curve.

SWAPS YIELD CURVE Based on the appropriate interest rates for top-quality non-government borrowers.

SWAPTION An option to have a swap at a future point in time.

SYNDICATE Managers, underwriters and selling agents of a bond or bank loan.

SYSTEMATICALLY IMPORTANT FINANCIAL INSTITUTION (SIFI) Failure of such an institution may lead to collapse of the financial system.

TAP STOCK In general, in bond markets, further issues of a previously issued bond.

TARGET Trans-European Automated Real Time Gross Settlement Express Transfer, the official interbank euro payment system for the eurozone.

TECHNICAL ANALYSIS One of the two major approaches used to predict future asset prices. This approach uses basic or advanced statistical approaches and mainly past price trends to predict future price movements (see fundamental analysis).

TENDER A bank loan or new security is offered to dealers who must compete for the business. If settled on a strike price basis, all pay the same price. If offered on a bid price basis, all pay the price they bid.

TICKS Smallest price movement of a contract, for example 0.01, or 1/32.

TIME VALUE That part of an option premium that is not the intrinsic value.

TOMBSTONE Formal notice in the press of a syndicated loan, bond issue, commercial paper programme and so on.

TOO BIG TO FAIL (TBTF) Banks or other financial institutions are regarded as too big to fail if failure would result in a systemic crisis, and the government would be expected to avoid such a crisis occurring and would therefore save these institutions. This leads to moral hazard.

TOUCH PRICES The highest bid price and lowest offer price for a particular stock or share.

TRADE BILL A bill of exchange not endorsed by a bank and not eligible for rediscount at the central bank.

TRADE DATE The date a trade is agreed, as opposed to settled.

TRADED OPTIONS An option to buy or sell a share/currency/index/interest rate contract later at a price agreed today. This is a standardized market, and the options can themselves be sold.

TRANCHE  A French word meaning ‘slice’ or ‘portion’. In finance, it is usually used to describe a security that can be split up into smaller pieces and subsequently sold to investors. It may also refer to the part of a loan that is drawn down, for example a $200m loan may be lent in 10 $20m tranches over a certain time period.

TRANCHETTE A smaller slice than a tranche (also known as a sub-tranche). For example, there may be a large issue of an existing bond to meet market demands, and this may be followed by a smaller issue.

TREASURY BILL (T-bill) Issued by governments to raise money. Typically, 3, 6 or 12 months.

UK PAYMENTS ADMINISTRATION  Controls cheque clearing, Bacs and CHAPS in the UK; replaced the Association for Payment Clearing Services in July 2009.

UNDATED Same as perpetual.

UNDERWRITE When a group of financial concerns agree to subscribe for a proportion of a new issue to ensure its full subscription. The other use of the term is in insurance.

UNDERWRITER Anyone offering insurance cover for a premium.

UNIT TRUST A portfolio of holdings in various companies, divided into units that are bought and sold directly. An ‘open-ended’ fund, for example the French SICAV.

UNIVERSAL BANK A term for a bank that is equally engaged in commercial and investment banking, for example Deutsche Bank, UBS and so on.

VALUE AT RISK (VaR) VaR analysis uses sophisticated algorithms to evaluate the risk in a bank’s positions.

VARIABLE RATE NOTE (VRN) A floating rate note where the margin above LIBOR is not fixed, but reset at intervals.

VARIATION MARGIN Further amounts of deposit (debit or credit) calculated by a clearing house.

VENDOR PLACING In a takeover bid where shares are offered instead of cash, if the victim’s shareholders would prefer cash, institutions are found that will buy the shares.

VENTURE CAPITAL Capital provided for high risks that would not normally attract conventional finance.

VICKERS COMMISION The Independent Commission on Banking, chaired by Sir John Vickers, was set up by the UK government and asked to report on structural and related non-structural reforms to the UK banking sector to promote financial stability and competition. The Final Report was published in September 2011 and recommended, among other things, ‘ring-fencing’ investment and retail bank activity.

VOLATILITY An important term in options, used to describe the volatility of an asset’s price movements – this will affect the premium.

VOLCKER RULE A provision in the Dodd-Frank Act that restricts banks proprietary trading activity. Named after the previous governor of the Federal Reserve, Paul Volcker, who had claimed that the crisis was partially due to banks speculative trading activity. There are a number of exemptions to this rule.

VOSTRO ‘Your’, the domestic currency account of a foreign bank with a domestic bank.

WARRANT A certificate attached to a bond or security giving the holder the right to buy equity/bonds later at a set price. May be issued on its own without attachment, for example gilts warrants, currency warrants, CAC 40 warrants, Eurotunnel warrants and so on.
when issued Grey market trading in government bonds prior to the regular auctions.

WHITE KNIGHT In a takeover situation, a more acceptable bidder may be sought – the white knight.

WHITE SQUIRE Alternatively, key blocks of shares are bought by friendly contacts – the white squire.

WHOLESALE MONEY The borrowing and lending of large sums of money – usually between banks, large companies and the institutions.

WORKING BALANCE  An accounting term used to explain the surplus cash balances needed by banks to manage their day-to-day cash activities.

WORLD BANK The International Bank for Reconstruction and Development, commonly known as the World Bank. Set up in 1945.

YANKEE BOND A dollar bond issued in the US by non-residents.

YARD Foreign exchange term for 1,000 million.

YIELD See flat yield.

YIELD CURVE A graph showing the relationship between short-term and long-term yields for a given security or type of borrowing.

UPWARD SLOPING = positive yield curve; DOWNWARD SLOPING = negative yield curve.

ZERO COUPON BOND A bond issued without interest payments, but at a deep discount.