DCG Glossary

A
B
C
D
E
F
G
H
I
J
K
L
M
N
O
P
Q
R
S
T
U
V
W
X
Z

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A

Abandonment
The process by which a counterparty will allow an option to expire or lapse unexercised. 

Accreting swap
A swap with an increasing principal amount as set out in a predefined schedule. 

Accrued interest
The interest which is accumulated on a security, either from the date of issue or the previous coupon payment, to the present. The accrued interest will be paid at determined payment intervals throughout the life of the transaction.

Affirmation
The process by which two counterparties verify that they agree the primary economics of a trade. The affirmation process may be done by telephone, voice recording, email or on an electronic checkout platform. 

AffirmXpress™
An electronic messaging hub for front office trader verification and affirmation of inter-dealer brokered transactions.  

All in cost
The cost of funds in a bond issue after fees and expenses.  

Allocation
The process by which a block trade is executed by an asset manager or hedge fund and is then divided (allocated) to individual funds managed by that fund manager.  

American option
An option that can be exercised at any time during the term of the option, up to and including the expiration date of the option.

Amortising swap
A swap with a decreasing principal amount as set out in a predefined schedule. 

Arbitrage
A strategy to take advantage of profitable opportunities in different markets arising from differential price anomalies.   

Asian option
See Average rate option.  

Asset Backed Index (ABX)
A credit derivative index based on 20 underlying ABS bonds that are backed by subprime mortgages. There are five separate tradable tranches in each series and a new series is issued approximately every six months, market conditions permitting.   

Asset Backed Security (ABS)
A type of bond or note typically issued by a Special Purpose Vehicle (SPV) where the bond or note is backed by an underlying pool of assets. The principal and interest generated by the underlying pool of assets services the principal and interest obligations of the bonds or notes.  

Asset swap
Asset swaps involve both the sale of an asset to a counterparty and an interest rate swap packaged into a single transaction. In the case of bonds, the asset will usually be a fixed rate instrument and the investor is seeking a floating rate return. The investment bank will therefore package the fixed rate bond with an interest rate swap, swapping the fixed return on the bond for a floating return, thereby providing the investor with a synthetic floating asset.

Assignment (see Novation)
The process by which one counterparty (transferor) agrees to transfer to a third party (transferee) its obligations under an existing transaction they have with another counterparty (remaining party). (See also Stepping-in/out). 

Attachment point
A defined point at which the level of losses in the underlying portfolio reduces the notional of a tranche. For example, the notional in a tranche with an attachment point of 3% will reduce after 3% of losses in the portfolio have occurred.  

At the money
An option where the exercise price is equal, or very close to, the current market price of the underlying instrument. This option has no intrinsic value.  

Automatic exercise
A commonly used election whereby an option or swaption transaction is deemed to be exercised provided that it is in the money on the exercise date without the need to serve notice.

Average rate option
An option where the settlement is based on the difference between the strike and the average price of the underlying instrument over a predetermined period. An average rate option is also known as an Asian option.

 

B  

Backload
The process of inputting trades into the DTCC Trade Information Warehouse. The process includes agreeing the full economics and legal documents between two counterparties before
the trade is placed in the warehouse to create the gold record. 

Backload Effective Date (BED)
The date agreed between two parties, at which point the counterparties “snapshot” a portfolio of trades and send them to the DTCC Trade Information Warehouse for revalidation in the backload environment. 

Bad (non working) business day

A day on which it is not possible to make payments, or days on which banks are not open for business. Bad business days depend upon the currency of the particular transaction and the location of the counterparties to the transaction. Exchanges are normally closed on bad business days.

Bankruptcy
A credit event used in all credit default swaps where the reference entity is a corporate (bankruptcy does not apply to Sovereign names).  Bankruptcy events include the reference entity being dissolved, becoming insolvent, making an arrangement for the benefit of its creditors, being wound up or having a judgment of insolvency made against it.

Barrier option
An option which can be exercised (1) if the price of the underlying instrument has not reached or crossed a predetermined level; or (2) only if the price of the underlying instrument has reached
or crossed a predetermined level (see also Knock-in/out).

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

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

Basis point
One basis point is one hundredth of one percent, or 0.01%.   

Basis risk
The risk of loss arising from the difference between the economic or legal terms of two derivative transactions that are intended to hedge each other.    

Basis swap
An interest rate swap where the cash flows that are exchanged between each party are different types of floating rates or prices.

Basket option
An option on the weighted average of several underlying instruments.  

Bermudan option
An option that can be exercised on a number of specific dates within the exercise period.

Bespoke CDO/Bespoke tranche
A synthetic CDO in which the investor is able to select the names in the reference portfolio, the attachment and detachment points, and other trade details.

Bid price
The price at which a trader or market maker is willing to purchase a contract.  

Binary settlement
A payout under a derivative contract that is a fixed amount. This is also known as digital settlement.

Black-Scholes Model
A complex mathematical model used to determine the price of European put or call options.

Block trade
A single trade transacted by an asset manager or hedge fund which is then allocated to a number of different funds, managed by that fund manager.  

Bond
A certificate of debt, generally long-term, under the terms of which an issuer contracts to pay the holder a fixed principal amount on a stated future date and, usually, a series of interest payments during its life. 


Bond basis
An interest calculation using 30 days in each month and 360 days in each year. Many eurobonds use this as the basis on which interest is calculated. A bond basis could also involve a day count which counts the actual number of days elapsed (actual/actual). This is the method used by the US Treasury for interest calculations involving US Treasury notes and US Treasury bonds.   

Bronze records
The DTCC eligible trades which have been matched but cannot be legally confirmed in Deriv/SERV.  

Business day convention
The convention for adjusting any relevant dates which fall on a bad business day.

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C 

Calculation agent
The party designated as such in relation to an OTC derivative transaction. The calculation agent acts in good faith and a commercially reasonable manner to make determinations relating to any adjustments, disruptions, valuations and settlements that occur throughout the life of the transaction. In most cases the calculation agent will be one of the parties to the transaction.  The calculation agent will usually be a professional market maker (for example an investment bank). If both parties to the transaction are market makers then they can be both deemed joint calculation agents and all determinations will need to be agreed by both parties.

Calculation period
The number of days between payment dates or between effective date and the first payment date. The first day is generally included and the last day generally excluded.


Call option
An option which gives the buyer (holder) the right but not the obligation to buy a specified asset on or before a specified date. For physical settlement, the seller (writer) of the option has the obligation to deliver the underlying asset, at the strike price, if the buyer exercises the option. For cash settlement, the seller compensates the buyer for the difference between the underlying price at exercise and the strike price. 

Calypso®
A single integrated platform that supports trading, risk management and processing (real-time monitoring) for credit, interest rate, equity, commodity and foreign exchange derivatives along with equities, precious metals, money markets and discount papers. The functionality includes pricing, structuring, trade capture, risk analysis, limit and deal management, processing and messages, settlements, accounting, reporting, cash and collateral management.

Cap
An upper limit placed on the payoff of a trade, limiting the upside to the buyer and thus the downside to the seller.

Carry (Net financing cost)
The difference between the cost of financing the purchase of an asset and the cash yield of the asset. Positive carry means that the yield earned is greater than the financing cost; negative carry means that the financing cost exceeds the yield earned.   

Carry trade
A trade or strategy where the aim is to generate ongoing positive cashflow.  

Cash CDO (Collateralised Debt Obligation) A structured credit derivative transaction where the underlying is typically a portfolio of bonds or loans, sold to an SPV which then issues tranched securities offering differing risk-reward characteristics. (See equity/first loss tranche)

Cash market
The market where the physical (non derivative) asset trades. For example, foreign exchange, bonds or equities. 

Cash settlement
The discharge of an obligation by payment or receipt of a net cash amount instead of payment or delivery by both parties.  

Central settlement (credit derivatives)
A process by which DTCC will settle cash movements and fees on eligible credit derivative trades using Continuous Linked Settlement (CLS® Bank). DTCC, via CLS, will net these payments to one net payment per currency per counterparty for a given value date.

CDO2
A CDO structure where the underlying portfolio is made up of one or more other CDOs.

CDS protocol
A document published by ISDA following the occurance of a credit event that replaces physical settlement for credit default swaps with cash settlement using the price determined by an auction. Counterparties can override the physical settlement terms of their trades by signing a letter of adherence to the protocol.

CDS index tranche
A synthetic collateralized debt obligation (CDO) based on a CDS index where each tranche (equity, mezzanine, senior, and super senior) references a different segment of the loss distribution of the underlying CDS index.

Cheapest to deliver 

The security which is delivered between two counterparties on physical settlement of a derivative trade at the lowest cost to the deliverer.  

Clean price
The price of a bond net of accrued interest.  

Cliquet
A structure of which the payoff can be likened to that of a series of consecutive forward starting options, the strike price of each being the settlement price of the previous. The profit from each period (being the strike price differential) can either be paid after each period, held to maturity and then paid, or manipulated in a more exotic fashion at maturity.

Close out
A transaction that leaves a zero net position in the market. Usually used in reference to the process following a default.   

Closing trade
A bought or sold trade which is used partly to offset an open position, or fully offset it and close it out. 

Collateral
An acceptable asset posted to/by a counterparty used as a form of credit protection.

Collateral call
The process by which a demand for margin /collateral is issued to a counterparty.

Collateral dispute
The process by which a counterparty disputes a collateral call.

Collateral substitution
The process where one form of collateral is substituted for another for example cash instead of bonds.

Collateralised Debt Obligation (CDO)
A structure used to distribute risk through tranching a portfolio of credit, and issuing notes or swaps of different risk profiles to investors. The risk of the tranche is determined by an attachment point and a detachment point. Riskier tranches will earn a higher investor premium, to reflect the higher risk. The CDO portfolio can be static or managed, depending on the specific terms of the transaction. CDO notes will typically be issued to the investor by an SPV. 

Collateralised Loan Obligation (CLO)
The securities issued by a Special Purpose Vehicle (SPV) where the cashflows payable under such securities are generated from the receivables on a portfolio of loans.  The securities are typically structured in a variety of tranches.  

Commercial Mortgage Backed Index (CMBX) A credit derivative index which is referenced to 25 underlying CMBS bonds. There are five separate tradable tranches in each series and a new series is issued every six months. The index is based on the PAUG product.   

Commercial Mortgage Backed Security(CMBS)
A type of bond or note issued by a Special Purpose Vehicle (SPV) where the bond or note is backed by an underlying pool of commercial mortgage backed securities. The principal and interest generated by the underlying pool of assets effectively services the principal and interest obligations of the bonds or notes.  

Commodity derivative
A derivative contract where the value of the contract is derived from an underlying commodity or commodity index. Commodity derivatives can be physically or cash settled. Primary underlyers include metals, agricultural goods and energy. 

Commodity futures
A bilateral contract to pay for a commodity at a set price at an agreed time in the future. Commodity futures are exchange traded.

Composite
A derivative trade which incorporates foreign exchange risk into the payout. Final and initial levels are converted into the settlement currency at the relevant exchange rate on the respective dates. The performance calculated thus incorporates both the exchange rate fluctuation and the performance of the underlying during the period.

Compounding
The process by which the value of an investment increases by adding the accumulated interest back on the principal amount. In effect, the investment is earning interest on interest as well as principal.

Confirmation
A written agreement between two counterparties setting out the terms of an individual OTC transaction. 

Constant Maturity Swap (CMS)
An interest rate derivative in which one leg periodically fixes against a certain maturity on the swap curve, for example the 5 year fixed swap rate.  The other leg is typically a vanilla floating leg based on LIBOR.

Continuous Linked Settlement (CLS®)
A service offered by CLS Bank International that reduces settlement risk through a simultaneous global multi-currency settlement system.  

Contract For Difference (CFD)
A cash settled total return swap or forward where the parties agree to exchange on the maturity of the contract the difference between the opening price and closing price of the underlying.    

Convergence
The movement of the cash asset price toward the futures price as the expiration date of the futures contract approaches.   

Convexity
The curvature in the bond price and yield relationship. 

Copula
A statistical tool describing how the distribution of single risks join together to form joint risk distribution. Copulas are used in the valuation of synthetic CDO tranches and other correlation sensitive products.

Corporate
In the credit derivative market a corporate is a term used to describe a borrower that is a limited company (or similar entity) other than a government, bank or insurer.

Correlation
A statistical measure of the relationship between the price movements in two financial instruments. 

Correlation swap
A structure in which one party sells an option on a basket and simultaneously buys individual options on each of the basket constituents. The buyer of this structure will be in the money if the basket components are negatively correlated. 

Coupon
The nominal annual rate of interest paid on a financial instrument and expressed as a percentage of the principal value or as a floating rate based on a reference rate such as LIBOR.
The interest is paid to the holder of the security by the borrower. The coupon is generally paid annually, semi-annually or, in some cases, quarterly depending on the type of instrument.   

Coupon swap
An interest rate swap, often from a fixed rate to a floating rate, or from a floating rate to a fixed rate.  

Covered bonds
A debt security backed by cashflows from mortgages or public sector loans. They are similar to asset backed securities created in securitisation, however covered bond assets remain on the issuer’s consolidated balance sheet.

Covered option
A written option which is matched by an opposing cash or stock position in the underlying asset, or by an opposing option position of specific characteristics.   

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

Credit default swap on asset backed securities
A physically settled credit default swap on an ABS or a PAUG swap.  

Credit derivative (see credit default swap)
An over the counter (OTC) financial derivative instrument that enables the isolation and separate transfer of credit risk.

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

Credit Event Notice (CEN)
A notice where the counterparty triggering the credit event (normally the protection buyer) informs the other counterparty that a credit event has occurred, describing what the triggering party believes constitutes the credit event.

Credit Index (CDX)
A family of credit derivative indices, where the underlying reference entities are a defined basket
of North American credits. See iTraxx indices. 

Credit Support Annex (CSA)
The legal document which contains the agreed collateral terms between the two parties to OTC derivatives under an ISDA master. For example thresholds, independent amounts, minimum transfer amounts.

Cross currency interest rate swap
An interest rate swap where the interest payments are in two different currencies and the exchange rate, for the final exchange of notional, is agreed at the outset of the transaction. 

Currency future
A contract which requires delivery of a specific amount of one foreign currency at a specified future date in return for a given amount of a second currency.   

Currency swap
A foreign exchange agreement between two parties to exchange a given amount of one currency for another currency for spot delivery, and to reverse the transaction for forward delivery at an agreed rate after a specified period of time. 

 

D  

Day count fraction
The number of days between coupon payment dates (calculation period) divided by the number of days in the year as specified in the applicable day count convention. Day count fraction is then input to calculate the accrued interest and the present value of the coupon.

Dealer poll
The process of finding a reference price for an asset by obtaining quotes from multiple dealers in that asset. Dealer polls also determine the value of a defaulted bond or loan following a credit event.

Default
The failure of a counterparty to perform its obligations under a derivative contract.   

Definitions
The market standard provisions by which the terms of a derivative transaction are described.  The definitions are published and maintained
by ISDA. 

Deliverable obligation
An asset that is eligible to be delivered to the protection seller following a credit event or that can be used to provide the reference price for cash settlement of a credit derivative.

Delivery
The physical movement from seller to buyer of the underlying asset on which the derivative is based.   

Delta
The change in the monetary value of an instrument for a one basis point change in the price of that instrument.

Depository Trust and Clearing Corporation (DTCC)
A holding company that, through its subsidiaries, provides clearance, settlement and information services for equities, corporate and municipal bonds, government and mortgage-backed securities, money market instruments and over-the-counter derivatives. DTCC provides OTC derivatives post-trade processing services, including electronic matching, clearing, credit event processing and settlement, through its wholly-owned Deriv/SERV LLC subsidiary.

Derivative
A financial instrument that transfers risk from one party to the other. It derives its value from the price or rate of some other underlying assets such as bonds, loans, equities, currencies, commodities, indices, published rates or combinations of those assets.

Deriv/SERV
An industry electronic post-trade processing platform for OTC derivatives provided by DTCC.

Designated maturity
The time period for which the floating rate in a derivative transaction is quoted. For example, six month USD LIBOR.

Detachment point
The detachment point defines the point after the attachment point where losses in the underlying portfolio no longer reduce the notional of a tranche. For example, the notional in a tranche with an attachment point of 3% and a detachment point of 6% will reduce after there has been 3% of losses in the portfolio. The reduction in notional no longer occurs after 6%. 

Determining party
In the event of a cancellation as a result of an extraordinary event, a payment (cancellation amount) needs to be determined. As the determining party is theoretically a neutral third party, they will have no costs or liabilities tied up in the transaction and as a result, their cancellation amount will be zero. The election of a third party as determining party ensures that a valid cancellation amount will be established.

Digital settlement
See binary settlement.

Dirty price
The price of a bond inclusive of accrued interest. 

Discount
The condition of the price of a bond that is lower than par. The discount equals the difference between the price paid for a security and the security’s par value. If a bond with a par value
of $1,000 is currently selling for $990 dollars
(or 99% of par), it is selling at a discount. 

Dispersion trade
A structure in which one party sells an option on an index and simultaneously buys individual options on each of the index constituents. The buyer of this structure will be in the money if the index components are negatively correlated. 

Disrupted day
Any scheduled trading day on which the relevant exchange or related exchange fails to open, or upon which a market disruption event occurs.

DocGenerator
The part of the Scrittura™ software platform consisting of web-enabled document production that creates trade-related documents. It supports the management of financial, legal and operational risk.

DocManager
The part of Scrittura™’s software platform which provides structured, single-source storage for all trade-related documentation, including support for automatic indexing, version control, and flexible search criteria.

Duration
A measure of the effective maturity of a bond. Duration is an approximation for the price change of a bond for a given change in the interest rate, and is used as a measure of sensitivity of bond prices to market changes. Duration is measured in units of time. It includes the effects of time until maturity, cash flows and the yield to maturity.

 

E  

Early closure
The closure, on any exchange business day, of the exchange (or if an index transaction, the exchange(s) in respect of 20 percent or more of the securities comprising the index) or related exchange prior to its scheduled closing time – unless one hour’s notice is given of the early closure.

Effective date
The date on which obligations under a derivative transaction begin to accrue or take effect.

Equity derivative
An OTC contract whose value is derived from one or more equity linked underlyings for example shares or an equity index.

Equity index swap
An obligation between two parties to exchange cash flows based on the percentage change in one or more stock indices for a specific period with previously agreed re-set dates. The swap is cash settled and based on notional principal amounts.  

Equity/stock option
An option where the underlying is an individual equity or share. On exercise of the option the specified amount of shares, or the difference between the market value of the shares and the strike price, is exchanged between the buyer and the seller.

Equity swap
A derivative contract where payments are linked to the change in value of an underlying equity, basket of equities or index. The equity return payer pays to the equity return receiver any increase in the value of the underlying plus any dividends received. The equity return receiver pays the equity return payer any decrease in the value of the underlying plus funding cost.   

Equity/first loss tranche
The first loss and riskiest tranche in a CDO where there is no subordination. For example, a tranche with a 0% - 4% attachment/detachment point.    

Eurobond
A bond that is denominated in a currency other than that of the country of the issuer.  For example, a USD denominated bond issued by a
UK corporate.

European option
An option that can only be exercised by the buyer on the expiration date

Exchange
The principal stock exchange on which the share or the index components are traded.

Exchange business day
Any scheduled trading day on which each exchange and related exchange in respect of a trade are open for trading for their respective trading sessions.

Exchange disruption
An exchange disruption is any event (other than an early closure) that disrupts or impairs the ability of market participants to effect transactions in, or to obtain market values for: the share (or if an index transaction, 20 percent or more of the securities comprising the index) or listed options or futures contracts on the underlying.

Execution only (give-up agreement)
A tri-party agreement that is signed by the executing broker, the clearing broker and the client. This agreement sets out the terms by which the clearing broker will accept business on behalf of the client.  

Exercise
The process by which the buyer of an option may take up the right to buy or sell the underlying asset. 

Exercise day
A day on which the buyer (holder) of an option may exercise the right to buy or sell the underlying asset. 

Exercise price
The fixed price, per share or unit, at which an option buyer (holder) has the right to buy (call) or sell (put) the underlying asset.

Exotic option
A non vanilla option. 

Expiration date
The last date on which an option can be exercised. After this date the option is deemed to lapse or be abandoned.

Extraordinary dividend
The definition of what constitutes an extraordinary dividend is at the determination of the calculation agent, unless specified within a confirmation. Essentially they are unexpected dividends paid outside of the normal practice of an issuer.

Extraordinary event
An extraordinary event that affects the underlying shares or index for example merger event, tender offer, nationalisation or index disruption event.

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F  

Failure to pay
A credit event that is triggered if the reference entity fails to make interest or principal payments due under the terms of a reference obligation after a permitted grace period.

Financial future
A futures contract based on a financial instrument such as a currency, interest rate, debt instrument or financial index.  

First to default basket
A credit derivative transaction where the payoff is based on the first asset to default in a basket of underlying reference entities. Once a default occurs the transaction terminates and is settled.  

Fixed income
The interest calculated as a constant specified percentage of the principal amount, paid at the end of specified periods on a security. The periods are usually annual or semi-annual.  

Fixed rate
An interest rate which does not vary during the life of a transaction. 

Floating rate
An interest rate which is reset at predetermined intervals by reference to a market reference rate (such as LIBOR). 

Floating Rate Note (FRN)
A bond which pays a floating rate of interest.  

Floor
A lower limit placed on the payoff of a trade, guaranteeing a minimum payoff to the buyer.

Following business day convention
A type of business day convention where payment days that fall on a bad business day roll forward to the next good business day regardless of whether or not it falls in the next calendar month.

Foreign exchange derivative
A derivative contract where the underlying is a currency or basket of currencies.

Forward
A contract involving the sale by one party and the purchase by another party of a predefined amount of an underlying instrument, at a predefined price and a predefined date in the future.

Forward Rate Agreement (FRA)
An OTC contract, similar to a future contract, but where the tenor of the contract is bespoke to that specific contract. On a future contract the tenor is fixed by the exchange. 

Full termination
The process whereby the entire transaction is terminated as opposed to partial termination.   

Futures
An exchange traded agreement to take or make delivery of an asset (buy or sell) at a specific time in the future for a specific price agreed today.  

Futures price valuation
A method of valuation for equity index derivatives, the settlement price being sourced from the exercise price of a listed contract on the index rather than the level of the index at such time.

 

G

Gamma
A term in option theory measuring the rate of change of delta. Gamma is used as a measure of how quickly the outright exposure to the underlying can change. In correlation transactions, gamma can be classified as single name gamma or cross gamma: single name gamma is an exposure to a single name in the basket moving; cross gamma is an exposure to all names in the basket moving simultaneously.  

Gearing
The characteristic of derivatives which enables a far greater reward (or loss) for the same, or much smaller, initial outlay. It is the ratio of exposure to investment outlay; for example an investment of $1 gives an exposure equivalent to a $10 investment and hence a gearing of 10.  

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

Gold record
The representation of a derivative contract with full legal status between two parties within the DTCC Trade Information Warehouse. 

Goldsync+                              
Provides investment advisors a comprehensive real time view of their credit derivative positions in conjunction with the DTCC Trade Warehouse golden record.

Grace period
A period, normally 30 days, in which a borrower is permitted to make interest or principal payments that it has missed.

Grace period extension
An optional term in a credit default swap which applies a grace period to a potential failure to pay credit event in order to determine whether an actual credit event has occurred.

Gross
A derivative or asset position expressed without netting bought and sold trades. 

Guarantor
A person who guarantees to meet certain specified payment obligations of another party if such other party should default on the relevant obligation.

 

H  

Haircut (See valuation percentage)

Hedging
A trading strategy which is designed to reduce or mitigate risk. A second transaction is entered into to offset the risk of the first.  

Hybrid basket
A basket containing both stocks and indices or underlyings from a combination of asset classes (such as a foreign exchange rate or a commodity).

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I  

ICE® (IntercontinentalExchange®)
ICE® facilitates the electronic exchange of energy commodities and is linked directly to individuals and firms looking to trade in oil, natural gas, jet-fuel, emissions, electric power and commodity derivatives. ICE® also facilitates the exchange of emissions contracts and over-the-counter energy exchange.

IMM®
The International Monetary Market is a division of the Chicago Mercantile Exchange (CME®) that deals with the trading of currency and interest rate futures and options. Delivery or trading months are March, June, September and December with delivery on the third Wednesday of the contract month. If the third Wednesday is not a business day, then delivery is made on the next business day.

Independent amount / initial margin
An additional collateral that is requested over and above the mark to market of a trade or portfolio of trades to cover any fluctuations in the value of the collateralised portfolio which may occur between review periods.

Independent clearing organisation
An independent clearing organisation which is capitalised without recourse to the members of the exchange. The organisation will guarantee to each member the performance of the contracts by the contract registered in the organisation’s name, thus removing counterparty risk against the other clearing members. 

Index adjustment events
If the underlying of an index trade is permanently cancelled and no successor is found, this constitutes an index cancellation and the trade will be adjusted by the calculation agent in accordance with the fallback provision selected in the confirmation. Additionally, if the index (or the method of determining the index level) is materially amended (an index modification), or
the index sponsor fails to calculate or publish
a level on a day (an index disruption), the trade will similarly be adjusted or cancelled by the calculation agent.

Interest rate cap
An option product where the holder (buyer) is guaranteed a maximum borrowing cost over a specified term.   

Interest rate collar
An option product where the holder (buyer) is guaranteed a maximum and minimum borrowing cost over a specified term.  

Interest rate derivative
A derivative product that involves the exchange of cash flows calculated on a notional amount using specified interest rates.

Interest rate floor
An option product where the holder (buyer) is guaranteed a minimum yield on a deposit over a specified term.

Interest rate futures
A futures contract for securities and deposits whose prices are determined by interest rates. 

Interest rate straddle
An interest rate transaction where the buyer pays a premium to the seller to buy a cap and a floor with identical details including the cap and floor rates. At set intervals the buyer receives from the seller the difference between the pre-agreed rate and the current floating rate. The buyer of a straddle believes that the market is very volatile and is unsure which direction the rates will move.

Interest rate swap
An agreement to exchange interest rate cash flows, based on a specified notional amount from a fixed rate to a floating rate (or vice versa) or from one floating rate to another. Such swaps are commonly used for both hedging and speculating.

Interest rate swaption
An option to enter into a predetermined interest rate swap, wherein the holder of the option has the right but not the obligation to enter into a swap on a specified future date and at
a specified future rate and term. Typically, interest rate swaptions can be European, American or Bermudan in style. 

Interest shortfall
The payment from the seller to buyer compensating for any reduced coupon payment on the underlying bond on a PAUG swap. If the reduced coupon is subsequently made up in future coupon payments this will result in an interest shortfall reimbursement from buyer to seller. 

Interpolation (linear interpolation)
A method of estimating an unknown price or yield of a security. This is achieved by using other related known values that are located above and below the unknown value.

Interwoven®
An application that enables banks, broker dealers and trading desks to automate their middle and back-office operations. It’s services also include automation of documentation, contracts and agreements related to trades and counterparties, post-trade confirmation and affirmation processing for OTC derivatives, integration with DTCC’s Trade Information Warehouse and specialised commodity derivatives operations. It also provides
peer-to-peer messaging between counterparties.

In the money
A position which has intrinsic value, for example a portfolio acquired at a rate which is more advantageous than current market rates.  

Intrinsic value
The amount that would be realised if an option were immediately exercised. 

Inverse floater
An interest rate swap where the floating rate has a coupon which rises when the underlying floating rate falls. Thus when the market floating rate falls the payout increases. (See Reverse floater).

ISDA®
International Swaps and Derivatives Association, Inc., the global trade association which represents participants in the OTC derivatives industry.

Issue price
The percentage of principal value at which the price of a new issue of securities is fixed.  

Issuer
The borrower in a bond issue. For example a government, government agency, a bank or
a corporate.  

iTraxx indices
A family of credit derivative indices, where the underlying reference entities are a defined basket of European credits. The benchmark indices include iTraxx Europe, comprising the top 125 names in terms of CDS volume traded in the previous 6 months; iTraxx Europe HiVol, comprising the top 30 highest spread names from iTraxx Europe; iTraxx Europe Crossover, where the 45 reference entities are sub-investment grade. The indices are highly liquid and traded using ISDA standard documentation, to standard maturities. They are used by both buy side and sell side institutions for creating credit exposure as well as hedging. The underlying reference entities are reassessed every 6 months, following dealer liquidity polls.  

 

K

Knock-in option
An option that becomes effective at the crossing of a predetermined price barrier.

Knock-in event
An addition of a knock-in event to an option will result in the option not being active unless a certain price (knock-in price) is reached by the underlying. This will have the effect of reducing the option premium, (see barrier option).

Knock-out option
An option which ceases to be in effect at the crossing of a predetermined price barrier.

Knock-out event
A feature added to a vanilla option which will result in, when a certain price (knock-out price) is reached by the underlying, the option either:  no longer being exercisable at expiration or automatically being exercised upon the occurrence of such knock-out event, resulting in the payment of the rebate amount. This will have the effect of reducing the option premium, (see barrier option).

KYC documentation
The documentation required to be produced by a trading counterparty to ensure that “Know Your Client” or Anti-Money Laundering (AML) requirements are adequately fulfilled. In order to comply with relevant legal and regulatory requirements a firm will typically have to obtain and review the counterparty’s constitutional documents, evidence of due incorporation and good standing, financial statements, details of significant shareholders and proof of identity of the directors.

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L  

Ladder option
An option that locks in gains once the underlying asset reaches certain price levels.  

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

Leveraged loan CDS
A credit default swap on a leveraged loan which uses the general CDS template for loan specific issues.  

LIBOR
The London Inter-Bank Offered Rate is the rate used when one bank borrows from another bank. It is the benchmark used to price many capital market and derivative transactions. 

Loan-Only Credit Default Swap (LCDS)
A credit default swap where the underlying is a syndicated secured loan rather than any other asset class (for example bond, unsecured loan or asset backed security).

Lock in
The process by which two counterparties meet to rectify outstanding confirmation issues.   

Long
An open bought position in a security or derivative.  

Long form
A confirmation that is independent of any master agreement incorporated by reference. Since the inception of Master Confirmation Agreements (MCAs), this term has also been used to refer to the MCA, which incorporates a set of ISDA market definitions.

Lookback option
An option where the holder has the right to buy/sell the underlying instrument at its lowest/highest price over a specified preceding period. 

 

M  

Margin
The sum of money which must be deposited, and maintained, in order to provide protection against default by a counterparty to a trade.

Mark to market
The process of revaluing an OTC or exchange traded product each day. Mark to market gains or losses are the difference between the closing price on the previous day against the current market price. For exchange traded products the mark to market is used to determine the variation margin. 

Market counterparty
An entity dealing as an agent or principal with a broker and involved in the same nature of investment business as the broker.   

Market disruption
A market disruption event occurs when there is, during the one hour period before valuation, either a trading disruption or an exchange disruption; or if there is an early closure.

Market maker
A dealer who is prepared to make a market by quoting simultaneous bid and offer prices.  

Markit™
A provider of independent data, portfolio valuations and OTC derivatives trade processing to the global financial markets.

Markit™ BOAT™
A MiFID-compliant trade reporting platform which enables investment firms to meet their pre-trade quoting and post-trade reporting obligations for
all their European OTC equity trades. The platform collects, collates, validates and stores OTC trade data and publishes it to the market in real-time.

Markit™ RCD calculator
An industry tool which enables calculation of asset backed CDS trades for all monthly settlements within two business days of bond payment date, taking into consideration asset components such as interest shortfalls, principal shortfalls, writedowns and all reimbursements. The RCD calculator engine simplifies complex settlement calculations and reduces failure rates with payment matching and clearing.

Markit RED™ (Reference Entity Database)                                   
A market standard reference entity database providing critical reference data used to document and confirm credit derivative transactions. Markit RED™legally verifies the relationship between reference entities and reference obligations which trade in the CDS market, known as pairs. The most liquid reference obligations are flagged as the market standard RED ‘preferred’ and are widely used for electronic trading, matching and clearing.  Markit RED™ has been further developed to support the growth in trading LCDS by providing transparent reference data. Markit RED™ verifies the reference entities, credit agreements and loan facilities used as reference obligations in the LCDS market.

Markit™ Trade Processing
A web based suite of solutions for automating processing of OTC derivative trades. The platform provides increased counterparty transparency while reducing trading risk, trade disputes, outstanding confirmations and overall operational risk.

Master Confirmation Agreement (MCA)
An agreement between two counterparties which sets out the terms and conditions that will apply between them in relation to a particular type of derivative transaction. The MCA is supplemented by a Transaction Supplement which records the economic terms specific to each transaction. A variety of MCA templates are published and maintained by ISDA.

Maturity (See Scheduled Termination Date)  

Mezzanine tranche
A tranche in the capital structure that is subordinated to the senior tranche, but is senior to the equity tranche.  For example, a tranche with a 4%-8% attachment/detachment point. 

Merger event
The term used in a credit derivative when there is a transfer of ownership of 100% of shares of a company to another individual/entity. Acceptance of an offer is sufficient to be considered a merger event as actual completion of the merger may take months or years.

Minimum transfer amount
A de minimis amount specified in a collateral agreement.  It is designed to avoid the movement of insignificant collateral balances.

Misys Summit
A trading, risk management and operationsfront-to-back platform utilised across multiple asset classes to provide treasury and capital market solutions. Summit provides trader tools and risk management modules combined with rules-based workflow and real-time trade processing.

Modified following
A type of business day convention where payment days that fall on a bad business day roll forward to the next good business day unless that day falls in the next calendar month, in which case the payment day will roll backwards to the preceding good business day.

Multi-colour rainbow
A strategy which pays out the weighted performance of each of the constituents of a basket; the key being that the weightings assigned to each basket constituent are not known on inception but are assigned at valuation, usually based on the performance of each constituent for example the best performing may receive highest (or lowest) weighting and the worst performing will receive lowest (or highest) weighting.

Mutual termination clause
A bilaterally agreed clause that allows both counterparties to a transaction to terminate the trade early under certain defined circumstances (for example a credit rating down grade of one counterparty below a certain threshold).

 

Nostro reconciliation
The process performed to ensure that the expected cash movements of a transaction (or multiple transactions) are reconciled with the actual cash movements effected.

Nostro/settlement break
A mismatch of cashflows between the paying and receiving banks, which occurs when the expected amount of cash settlement differs from the actual amount.  

Note
A short-term debt instrument (for example with a maturity of between one and ten years) whereby the issuer agrees to make periodic payments and/or deliveries to the buyer in exchange for a cash investment that will be returned (in part or in full) when the note matures.

Notice day
The day on which a holder of an option must serve notice to exercise.

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

Novation (see Assignment)
The process by which one counterparty (transferor) agrees to transfer to a third party (transferee) its obligations under an existing transaction they have with another counterparty (remaining party), (see also Stepping-in/out).

Novation 2.0™
The platform that allows on-line ad hoc enquiry and automated reconciliation of a novated trade between a prime broker and the Trade Information Warehouse. Novation 2.0™ technology ensures that there is an audit trail and automated reconciliation between the trade capture environment of both the remaining party institution and stepping-in party institution.

Novation protocol
A document published by ISDA that defines the market standard procedures for novating interest rate and credit derivative transactions. Protocol demands that the stepping-out party informs the remaining party that they (stepping-out party) have assigned a trade to a new dealer.

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O  

Obligation acceleration
A credit event term used in a credit derivative  when one or more of the obligations of the reference entity have become declared due and payable before they would otherwise have been, due to an event of default of the reference entity (other than failure to pay).

Obligation default
A credit event term used in a credit derivative  when one or more of the obligations of the reference entity have become capable of being declared due and payable before they would otherwise have been, due to an event of default of the reference entity (other than failure to pay).  Normally caused when the obligation(s) under question are subject to cross-default provisions with the defaulted obligation(s).

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

Option
The right, but not the obligation, to buy (call) or sell (put) a financial instrument at an agreed upon price during a certain period of time (American), on a specific date (European) or on a number of specific dates in the exercise period (Bermudan).  

Out of the money
A position which has no intrinsic value, for example one acquired at a rate which is less advantageous than current market rates.  

Outperformance
A strategy whereby each party pays to the other party the performance of a different asset, resulting in a net payout of the outperformance of one asset relative to the other.

Over The Counter (OTC) transaction

A derivative transaction between two counterparties where the terms of such transaction are freely negotiated (as distinct from an exchange traded transaction where the terms are prescribed by the rules of the relevant exchange).   

 

Path dependent
When the payout of a swap is determined by the path taken (rise or fall) of the underlying rate.

Partial cash settlement
The cash amount paid by a buyer to a seller when a buyer of protection is unable to deliver all of the deliverable obligations. The cash value is determined by the calculation agent seeking quotations from dealers. Partial cash settlement allows the obligation to be settled as a combination of both cash and physical settlement. There are further procedures which the definitions cater for in case the calculation agent cannot obtain the necessary required quotations.

Partial termination
A reduction in the notional amount of a derivative contract.  

Par value
The principal amount of a bond. Also known as the face value.

Pay As You Go Swap (PAUG)
A credit default swap transaction on an underlying ABS or RMBS transaction. The seller compensates the buyer over the life of the transaction for any cash flow deficiencies for example interest shortfalls, principal shortfalls or writedowns. PAUG is cash flow driven as opposed to single event driven as in corporate credit derivative. Calculations and determinations are made based on the servicer report.  

Payer
A credit swaption which allows the option buyer the right to buy protection on a certain date at a certain price.

PayRec
A payment matching and netting service provided by DTCC Deriv/SERV for OTC derivative transaction payments that cannot be settled through Deriv/SERV’s Trade Information Warehouse.  

Physical settlement
The meeting of a settlement obligation under a derivative contract through the receipt or delivery of the actual underlying instead of through cash settlement. For example, in a physically settled CDS, the buyer of protection must deliver the deliverable obligations it has specified in the notice of physical settlement to the seller of protection.

Pool factors
The current principal balance of a particular asset backed bond outstanding divided by the original issued balance of such bonds expressed as a percentage. 

Portfolio reconciliation
A process of mutual trade recognition which occurs in an event of a collateral dispute over the mark to market value of the collateralised portfolio. The process highlights any difference in the number/value of trades that need to be rectified.

Post Trade Events (PTE)
An event that occurs after a trade is confirmed in DTCC Deriv/SERV.  

Pre-Backload
The ‘ETL’ (Extract, Transform and Load) process undertaken by firms to clean-up and reconcile a portfolio of OTC derivative trades and data prior to submission for backloading to the Trade Information Warehouse.  

Preceding business day convention
A type of business day convention where payment days that fall on a bad business day roll backwards to the preceding good business day.

Premium
The sum of money paid by the buyer, to the seller, for acquiring the rights inherent in an option. It is the sum of the intrinsic value and the time value of the option. 

Present value
The current value of a sum which is to be paid
(or received) on a future date. It is calculated as the amount that would have to be invested today at a specified rate for a specified period to obtain a known amount at the end of the period. In effect, it is a method of compounding in reverse. Also called fair value.

Price return equity swap
Similar to a total return swap, except that dividends are not passed through to the buyer.

Principal shortfall
A payment from the seller to the buyer compensating for any reduced principal payment on the underlying bond in a PAUG swap. If the reduced principal is subsequently made up in the future the principal payment will result in a principal shortfall reimbursement from buyer to seller. 

Property derivative
A derivative where the underlying is commercial property. For UK commercial property transactions the derivative is based on data from the Investment Property Databank (IPD). Property derivatives are mostly in the form of swaps where one party pays the return on the index if positive versus the other party paying LIBOR. 

Protection buyer
The credit default swap counterparty that pays another counterparty to compensate them in the event that the reference entity suffers a credit event.

Protection seller
The credit default swap counterparty that takes on credit risk of a reference entity in return for appropriate compensation.  

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

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Q 

Quanto
A product where the underlying is denominated in one foreign currency but settled at a fixed rate in another currency. It uses a floating rate of a foreign interest rate but applies this to a notional amount in a domestic currency. Such are common amongst speculators looking to gain exposure to foreign assets yet still shielding themselves from exchange rate fluctuations.

Quanto swap/differential swap
An interest rate swap where one of the floating rates is a foreign interest rate, but it is applied to a notional amount in the domestic currency.   

 

Rainbow
A strategy which pays out the performance of the asset comprised in a basket which has performed the best/worst in a given time period relative to the other assets comprised in such basket. (Also known as a best of or worst of).

Range accruals
A form of interest accrual in which the coupon rate is only earned on days when another rate from which the coupon is derived falls within a specified range. As such, there is no standard coupon rate that can be counted on for interest payments.

Ratchet swap
A swap whereby the fixed rate is adjusted by small increasing/decreasing amounts at each reset date, should the applicable floating rate fall by more than the agreed amount.

Realised correlation swap
A swap that uses the observed correlation between each component in a basket as a basis for the payoff calculation, (see Correlation Swap, Dispersion).

Rebate amount
The amount paid out in the event of an automatic payment knock-out event occurring.

Receiver
A credit swaption giving the option buyer the right to sell protection on a certain date at a certain price.

Recovery rate swap
A credit derivative where the payoff is based on the difference between a preset fixed recovery rate and the recovery rate which is observed at the time of the credit event. 

Reference entity
The underlying company or Sovereign which issues the debt obligation or obligations which constitute the reference obligation(s) under a credit derivative.

Reference obligation
A bond, loan or other payment obligation, issued by the reference entity. The failure by the reference entity to comply with the material terms of a reference obligation will constitute a credit event under a credit derivative. 

Related exchange
The principal derivatives exchange on which listed options or futures contracts on the share or index are traded.

Repudiation/Moratorium
A credit event applicable only to Sovereign reference entities whereby the relevant Sovereign refuses to acknowledge or honour its debts.

Residential Mortgage Backed
Security (RMBS)
 
A type of security which has cashflows from a pool of residential debt such as mortgages, home equity loans and subprime mortgages. 

Reset date
The date on which terms for payment within that swap calculation period become effective. Should payment for the transaction be set in arrears, this will be the first day of the next calculation period. In all other cases, the reset date will be subject to adjustment in accordance with an appropriate business day convention. 

Restructuring
A credit event triggered when a reference entity restructures its debt in agreement with its creditors.

Reverse floater
An interest rate swap where the floating rate has a coupon which rises when the underlying floating rate falls, thus when the market floating rate falls, the payout increases, (see Inverse floaters).

Risk reversal
A strategy, such as an interest rate collar, whereby a party wishing to limit the potential downside of holding a long position in an underlying buys an out of the money put and offsets the premium payable on such put with the sale of an out of the money call.  Alternatively this can be a strategy whereby a party wishing to limit the potential downside of holding a short position in an underlying buys an out of the money call and offsets the premium payable on such call with the sale of an out of the money put.

 

S  

Scheduled termination date
The scheduled date on which a derivative contract ceases to be effective.

Scheduled trading day
A day on which each exchange and related exchange in respect of a trade are scheduled to be open for trading for their respective trading sessions (for example each Monday to Friday barring national holidays or other non-trading days).

Scrittura™
A web-delivered technology platform that provides management and straight through processing for derivative documentation. The three components of Scrittura are DocGenerator for document generation and event tracking, DocManager which provides structured storage with automatic indexing, version control, and a flexible search criteria, while workflow manager integrates disparate systems and structures complex business processes into a unified framework.

Servicer report
A report provided by the trustee or administrator on a specific ABS to the holders of those ABS to provide details of interest shortfalls, principal shortfalls and writedowns. 

Settlement
The process whereby obligations arising under a derivative transaction are discharged through payment or delivery or both.

Settlement pre-matching
A process of matching payments via phone or  electronic platform such as DTCC Deriv/Serv, in which counterparties can bilaterally match payments in advance of a settlement date.

Settlement method election
A process where the electing party (determined at time of trade) has the choice of using cash settlement or physical settlement at expiry rather than specifying at time of trade which settlement method will be used.  If no choice is made, there will be a default method specified in the confirmation. The choice must be made prior to
a specified date.

Short
The sale of a borrowed security, commodity or currency with the expectation that the asset will fall in value. In the context of options, it is the sale of an options contract.

Short form (transaction supplement)
A confirmation that supplements an MCA and incorporates by reference the terms of such MCA.  The MCA and Transaction Supplement removes the need for non-economic terms to be defined on a transaction by transaction basis.

Snowballs
A structured interest rate derivative transaction where for an initial term the coupon is specified. Thereafter each coupon is defined in terms of the previous coupon. There is a guaranteed high initial coupon, but coupon payments thereafter are determined by the speed with which the floating rate rises or falls. Snowballs are typically callable. 

Snowblades
A derivative similar to snowballs in that they have the similar high coupon for the initial term of the swap and thereafter each coupon is defined in terms of the previous coupon. The difference between a snowball and a snowblade is that snowblades are in the form of target redemption (whereas snowballs are typically callable), in that when the agreed target total of coupon amounts paid is reached, the note will redeem.

Sophis
A vendor solution offering a cross product, end to end derivative platform. There are two platforms, Sophis “Risque” aimed at sell-side clients, Sophis “Value” at the buy-side.

Sovereign
A borrower that is a national government or a government agency. Sovereigns account for a large proportion of all emerging market reference entities, but are generally less common than corporates or financial institutions in the credit derivatives market.

Special Purpose Vehicle (SPV)
A corporate entity used for a wide variety of purposes including to securitise loans in order to help spread the credit and interest rate risk of their loan portfolios over a number of investors. SPVs are typically ring-fenced for the purposes of insolvency to provide investors with recourse to a specific portfolio of assets.  

Spot price/rate
The price of a commodity, security or currency that is quoted for immediate payment and delivery.  

Spread (bid offer)
The difference between the bid and the offer rate.  The bid offer spread is a measure of liquidity and counterparty risk.

Spread (credit)
The price which indicates the credit worthiness
of an underlying asset. 

SSIs
Standard Settlement Instructions for derivative transactions.  SSIs outline the bank account details of legal entities for specific currencies and / or products.

Stepping in
The process in a novation when a third party replaces one of the original parties to a transaction upon identical terms to the original transaction (see assignment).

Stepping out
The process where one of the original parties exits a transaction, and instead of terminating, a third party steps in upon identical terms and assumes the rights and obligations of the party that is stepping out (see assignment). 

Stock index futures/options
A financial contract based on the value of an underlying stock index such as the FTSE 100 in the UK, the Dow Jones and the S & P 500 index in the USA and the Nikkei 225 and 300 in Japan. Delivery of the contract is fulfilled by the payment or receipt of cash against the exchange calculated delivery settlement price.  

Strike price
The price at which an option contract is executed.

Strike price differential
The difference between the settlement price and the strike price at the point of option exercise.

Subprime
The term used for lending to borrowers at a higher rate than the prime rate as they have a higher risk of default. Subprime borrowers typically have low credit scores due to prior bankruptcy, missed loan payments, home repossession etc.

Succession event
In credit derivative documentation, an event such as a merger or spinoff that leads to one entity succeeding to the debt obligations of another entity.

Super senior tranche
The least risky tranche in a CDO capital structure. For example, a tranche with a 8 – 100% attachment/detachment point. 

Swap
A derivative where two counterparties exchange streams of cashflows with each other. These streams are known as the legs of the swap and are calculated by reference to a notional amount. 

Swapclear (LCH)
Through Swapclear the London Clearing House acts as central counterparty in certain classes of OTC products, specifically interbank interest rate swaps, repos and cash bonds trades executed by its members.

SwapsWire®
An electronic platform used for trade capture and confirmation. SwapsWire® allows for trade date affirmation and reduces the need for paper confirmations.   

Swaption
An option to enter into a predetermined swap transaction.

Synthetic CDO
A structure which typically has a non-physical asset portfolio. This structure is often issued as single tranche deals. The risk profile of the tranche will be bespoke, in line with investor requirements.   

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Target Redemption Note (TARN)
A note which is redeemed immediately at par when the aggregate coupons paid under the note reach a specified target.

Tear up
The process by which derivative trades which have equal and opposite economics are cancelled.  

Template
A standard reference source for a master agreement or confirmation which may either be published by an industry body or agreed between two counterparties.  

Tender offer
The transfer of ownership of greater than 10% but less than 100% of shares of a company to another individual/entity. As with merger events, the offer is sufficient to trigger the fallbacks for this event.

Term sheet
A document produced prior to execution indicating the financial terms and conditions of a specific transaction. The term sheet does not constitute a confirmation, or a binding commitment to trade.

Theta
A term in option theory measuring the time decay of the option value.

Threshold
An amount of unsecured exposure a counterparty is prepared to accept before calling for collateral.

Thunderhead NOW®
A technology platform used for OTC trade confirmations and term sheet generation. Thunderhead NOW® provides the straight through processing support required for automating back office document generation such as OTC trade confirmations while also providing real-time, exception handling of documents required for the front office and operations areas. Thunderhead NOW® also provides integrated support for industry standards such as FpML and the DTCC Deriv/SERV electronic matching process.

Tie out
The process where bronze records are matched in the DTCC Trade Information Warehouse. These matched trades are not legally binding and are known as bronze records as opposed to gold records which are legally binding.

Time value
The amount by which the premium of an option exceeds its intrinsic value. Where an option has no intrinsic value the premium consists entirely of time value. 

Total return swap (TRS)
A swap where one party makes payments based on an increase in the value of the underlying and the other party makes a payment based on any decreases in the underlying. In addition the payer pays any dividends and coupons received on the underlying to the seller and the seller pays the buyer the funding cost. In effect the seller is synthetically long the underlying asset and the buyer short the underlying asset.  

Trade date
The date on which the terms of a derivative transaction are agreed.

Trade Information Warehouse (TIW)
The centralised and secure global infrastructure for OTC derivatives, currently covering credit contracts.  The TIW is the comprehensive trade database containing the ‘legal record’ for all contracts eligible for electronic confirmation. The TIW will also automate and standardise post trade processes such as payments, notional adjustments and credit event processing.  

Trading disruption
A trading disruption event occurs when there is a suspension of or limitation imposed on trading by the relevant exchange or related exchange.

Tranche A piece or portion of a structured deal, or one of several related securities that are issued together but offer different risk-reward characteristics.

Transaction Reference Indicator (TRI)
The unique, DTCC assigned reference number for a confirmed trade in the Trade Information Warehouse. The TRI is common to both counterparties.  

Transaction supplement
The short confirmation that evidences a transaction under a Master Confirmation Agreement (referred to commonly as a
“short form”).

TriOptima®
Third party vendor providing post trade services to the derivatives market in an effort to reduce costs and operational risks for their subscribers.  Services include triReduce, which terminates unnecessary trade inventory in a tear-up process, and triResolve which reconciles the terms of bilateral derivative trade portfolios between counterparties. 

T-Zero™
An electronic trade affirmation tool used to communicate and enrich credit default swap trade information between dealers and clients. T-Zero™ electronically transfers the actual trade record from the trade capture system of the dealer to the client who affirms or rejects the trade. Fund managers use T-Zero™ to allocate trades across multiple funds which enables accurate trade capture in the dealer’s system at the fund level. T-Zero™ supports novation processing in compliance with the ISDA novation protocol and has functionality for real time trade submission to Deriv/SERV. 

 

U  

Underlying
An asset, basket of assets, index or rate upon the basis of which the value and cash flows or deliverables under a derivative transaction are calculated.   

Unrecognised trade
A transaction that cannot be identified by the alleged counterparty to the trade.

 

V  

Valuation agent
The party who values a derivative transaction or portfolio of derivative transactions and demands a payment or delivery of collateral - usually the party making the collateral call.

Valuation date
A date upon which a collateral call or the value of an asset is determined.

Valuation percentage (haircut)
The percentage by which the market value of the collateral will be reduced to allow for price volatility and instrument liquidity in respect of the relevant collateral between collateral calls.

Valuation time
The time at which the collateral portfolio and collateral balance is valued for the purposes of a collateral call.

Value at Risk (VaR)
A statistical measure which calculates the maximum loss that any financial instrument may be expected to suffer over a defined period with a specified confidence level (e.g. a 95% confidence level on a 100 day VaR measure assumes that the maximum loss would not be exceeded on 95 days out of 100).  VaR is a valuable risk management tool as it allows risk across diverse asset classes to be pooled into a single measure of potential aggregate loss.

Vanilla (flow/market standard)
A derivative transaction which has a very basic structure, likely to be most commonly traded in the relevant market.  

Variance option
An option that uses the variance (being the volatility squared) of an underlying’s price movement over a period as the basis for determining whether or not the option will be exercised.

Variance swap
A forward that uses the variance (being the volatility squared) of an underlying’s price movement over a period as the basis for the payoff calculation.

Vega
The measure of volatility in option theory.

Volatility
The variability of movements in a security or underlying instrument’s price. It is a measure of the amount by which an asset’s price is expected to fluctuate over a given period of time. It is normally measured by the annual standard deviation of daily price changes.   

 

W  

Warrants
An option on an underlying asset which is in the form of a transferable security and which can be listed on an exchange.  

Wedding cake
An option with a fixed payout which is based upon the fluctuations of an underlying floating rate, which is set within the parameters of predetermined barriers. The highest coupon is paid if the applicable rate remains within the inner range, whilst the coupon becomes gradually less
if it moves outwards.

Writedown
A payment in a PAUG from seller to buyer which arises from a permanent diminution in the value of the underlying ABS, for example the underlying assets are insufficient to pay the liability to the ABS holder. The result of the payment is the principal amount outstanding of the ABS is written down to the value of the underlying assets. The PAUG documentation provides for implied writedown for those bonds that have no specific writedown clause.    

 

Y  

Yield to maturity
The amount of interest on an annual compound basis, which a bond would pay if held until redemption or the maturity date. Also, the interest rate that, if used to discount all cash flows, would yield the current price.

 

Z 

Zero coupon swap
A swap where one counterparty pays a floating rate (for example three month LIBOR) throughout the life of the swap while the other counterparty makes one lump sum payment once the swap reaches maturity.

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The Fed metrics terminology  

The Derivatives Consulting Group would like to thank Markit for their support in the writing of the Fed terminology. Markit is responsible for collating and producing the Markit Metrics™.   

Markit Metrics™ are reported by participating banks to their primary regulators. 

Affirmation
The process by which two counterparties verify that they agree on the primary economics of a trade. The affirmation process may be done by telephone, voice recording, e-messaging or on an electronic checkout platform.   

Auto matching of confirmations
The process of matching trade confirmations on an electronic platform, (such as DTCC or Swapswire).  

Breaks/mismatches
Incidences where two sides of the trade do not match. These incidences can be cash breaks or documentation mismatches.  

Business days
22 days each calendar month.  

Business days outstanding
The number of outstanding confirmations divided by the monthly deal volume multiplied by 22 business days.  

Cash flow matching (DTCC)
The matching of derivative cash flows made on the quarterly roll date using DTCC cashflow matching module.  

Cash flow matching percentage (DTCC)
The success ratio of cashflows matched on DTCC as a percentage of total cashflows submitted. 

CDS Electronic/vanilla T+5 to T+8 ratio  The percentage of credit derivative electronic confirmations outstanding which have been risk mitigated via checkout of key trade economics on or before T+8 business days divided by the total number of credit derivative electronic confirmations outstanding at T+5 business days, as per steady state targets.   

CDS trade checkout
The percentage of the population of total CDS outstanding confirmations that have been subjected to risk mitigation procedures.  Risk mitigation includes any technique facilitating checkout of key trade economics, including telephone and/or email of economics, exchange of spreadsheets with main economics, broker checks, Bloomberg messages, etc.

Confirmation Matching
Process of reconciling the terms of a transaction as confirmed by each counterparty, either manually or on an electronic platform such as DTCC or Swapswire®. 

Credit derivative - deal volume
The total number of credit derivative trades transacted each month per dealer. The volume
is based on absolute numbers, one deal equals one confirmation. The volume includes all
external facing business deals, but excludes all inter-company or intra-desk trades. Prime broker activity or intermediation is reported as two deals. Allocation splits are reported as the number
of funds to which a block trade is allocated. 

Dealer group (G18)
The dealers that are part of the G18. 

Electronic Confirmation
A confirmation which is submitted to an electronic platform for matching, (such as Swapswire®,
DTCC or Swift).   

Electronically confirmed ratio T+1
The percentage of total derivative electronic confirmations submitted for auto matching by close of business T+1.  

Electronically confirmed ratio T+5
The percentage of total derivative electronic confirmations submitted for auto matching by close of business T+5. 

Electronically eligible trades – credit and rates
Any trades on products that are supported by DTCC (or other electronic matching platforms) for auto matching.   

Electronically eligible trades – equities
Any trade for which there is a master confirmation in the market (ISDA or non ISDA). These trades can be matched on any electronic platform. The trades are limited to single name, index options and variance swaps (Europe, US and Japan). 

Electronically eligible client trades – equities
Any trade that is not with a G18 counterparty that is deemed eligible for the client electronic matching targets.  These include index and single name European options and index and single name European, US, Asia Ex-Japan and Japan Variance Swaps. 

Equity derivative - deal volume
The total number of equity derivative trades transacted each month per institution. The volume is based on absolute numbers, one deal equals one confirmation. The volume includes all external facing business deals, but excludes all inter-company or intra-desk trades. Prime broker activity or intermediation is reported as two deals. Equity combos (a generic term for a single trade with multiple legs) are also reported as two deals. Allocation splits are reported as the number of funds to which a block trade is allocated. 

Fed metrics
The key metrics on operations, collated by Markit and the Derivatives Consulting Group, which participating dealers can elect to report to regulators on their derivatives operations. 

Interest rate derivative - deal volume
The total number of interest rate derivative trades transacted each month per institution. The volume is based on absolute numbers, one deal equals one confirmation. The volume includes all external facing business deals, but excludes all inter-company or intra-desk trades. Prime broker activity or intermediation is reported as two deals. Allocation splits are reported as the number of funds to which a block trade is allocated.  

Intermediation
The process by which a dealer steps into a transaction between a client and a counterparty. The dealer becomes the principal counterparty to both parties and has credit exposure to both. 

Markit Monthly Market Data Report
A report based on the collation of monthly metrics including average, median, quartile and total statistics for each reporting category. This report is delivered by participating firms to their regulators.  

Match rate percentage
The officially published percentage of trade confirmations matched in DTCC as a percentage of total trade confirmations submitted to DTCC. Match rates are reported in time buckets: percentage of trades matched on T+0, T+1, T+2, T+3, T+4, T+5 and over T+5. 

Non-electronic confirmation
A confirmation which is not submitted to an electronic platform for matching, but is sent by
fax or post. 

Non-electronic confirmed T+10/manually confirmed  The number of derivative non-electronic confirmations which are not issued by close of business T+10, under steady state.  

Non-electronic confirmed T+30/manually confirmed
The number of derivative non-electronic confirms
which are not executed or completed by close of business T+30.  

Non-electronically eligible trades 
Any trades on products that are not currently supported by any electronic matching platform.   

Non-electronic/non-vanilla percentage T+3 ratio The percentage of credit derivatives non-electronic confirmations issued but unconfirmed at T+3 business days which have been risk mitigated via checkout of
key trade economics, under steady state. 

Operations Management Group (OMG)
The steering group of dealers, hedge funds and asset managers who work together on industry initiatives and who agree reporting metrics, definitions and performance targets for the monthly metrics. The OMG also includes representatives from industry organisations such as the Managed Fund Association, the Securities Industry and Financial Markets Association and ISDA, previously known as SOG. 

Outstanding confirmations The total number
of electronic and non-electronic confirmations not
closed out at month end. Closed out refers to either matched on an electronic matching platform for electronic confirmations, or signed by both counterparties for non-electronic confirmations.
The number of confirmations include:  

• confirmations not drafted and not yet issued;
• confirmations drafted and not yet issued;
• confirmations not yet received;
• confirmations issued and sent but not yet returned.  

Outstanding confirmations alleged
The number of outstanding confirmations a firm alleges it currently has with a G18 counterparty.  

Outstanding confirmations alleged against
The number of outstanding confirmations that each G18 counterparty alleges to currently have with another G18 counterparty.  

Outstanding fails to nostro breaks ratio
The number of fails arising from the last quarterly roll with a nominal value greater than or equal to $1,000 divided by the total number of settlements (post or pre netted) at the last quarterly roll. The number of fails includes:  

• fails outstanding at month end which are subsequently matched and not true fails;
• the number of ledger items outstanding and number of statement items outstanding;
• the non-receipt of funds, partial receipt of funds, and overpayment of funds and return of funds associated with a valid trade.

Funds received on a roll date, across all derivative products that are as yet unapplied, are also included.  

Outstanding nostro breaks
The total number of nostro breaks with a nominal value of greater than or equal to $1,000 still outstanding. These breaks are time bucketed by which quarterly roll the break occurred.  

Post-netted settlements
The actual number of settlements for the quarterly roll made after counterparty cross-transaction netting.  

Pre-netted settlements
The gross number of settlements for the quarterly roll before applying any netting.

Quarterly credit derivative swap roll cycle (quarterly roll date) 

The payment and receipt of cash on the 20 March, 20 June, 20 September and 20 December.

Reduction levels
The percentage reduction in the number of outstanding confirmations at a certain point in time divided by the benchmark level of outstanding confirmations agreed upon by the OMG and the G18. For credit derivatives this benchmark level was the level as at September 30th 2005. For equity derivatives this benchmark is the highest number of outstanding confirmations greater than 30 days old between July 1st and September 30th 2006 inclusive. 

Risk mitigation
Any technique facilitating checkout of key trade economics, including telephone and/or e-mail of economics, exchange of spreadsheets with main economics, broker checks or Bloomberg messages.  

Settlement Pre-Matching
Process of matching payments via an electronic platform such as DTCC, in which counterparties can bilaterally match payments in advance of a settlement date.

Steady state
The state of the industry once G18 targets for confirmation turnaround times and backlog reductions are achieved. 

Top 20 Client – equity only

The top 20 ranked clients for each major dealer in terms of average monthly deal volume. The list of top 20 clients is maintained by the individual dealer and is used for the client electronic processing targets. Dealers have the right to exclude certain client sectors from the list where it is envisaged client documentation standardisation and electronic matching on-boarding is not practicable.

Unrecognised Trade
Transaction that cannot be identified by the alleged counterparty to the trade.

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