The process by which a counterparty will allow an option to expire
or lapse unexercised.
A swap with an increasing principal amount as set out in a predefined schedule.
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.
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.
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.
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
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.
A swap with a decreasing principal amount as set out in a predefined schedule.
A strategy to take advantage of profitable opportunities in different markets
arising from differential price anomalies.
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
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 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).
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.
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.
The process of inputting trades into the DTCC Trade Information Warehouse. The
process includes agreeing the full economics and legal documents between two
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.
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.
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).
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.
One basis point is one hundredth of one percent, or 0.01%.
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.
An interest rate swap where the cash flows that are exchanged between each party
are different types of floating rates or prices.
An option on the weighted average of several underlying instruments.
An option that can be exercised on a number of specific dates within the exercise
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.
The price at which a trader or market maker is willing to purchase a contract.
A payout under a derivative contract that is a fixed amount. This is also known
as digital settlement.
A complex mathematical model used to determine the price of European put or
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.
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.
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.
The DTCC eligible trades which have been matched but cannot be legally confirmed
Business day convention
The convention for adjusting any relevant dates which fall on a bad business
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.
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
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.
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.
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.
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
The market where the physical (non derivative) asset trades. For example, foreign
exchange, bonds or equities.
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.
A CDO structure where the underlying portfolio is made up of one or more other
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.
The price of a bond net of accrued interest.
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.
A transaction that leaves a zero net position in the market. Usually used in
reference to the process following a default.
A bought or sold trade which is used partly to offset an open position, or fully
offset it and close it out.
An acceptable asset posted to/by a counterparty used as a form of credit protection.
The process by which a demand for margin /collateral is issued to a counterparty.
The process by which a counterparty disputes a collateral call.
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.
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.
A bilateral contract to pay for a commodity at a set price at an agreed time
in the future. Commodity futures are exchange traded.
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 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.
A written agreement between two counterparties setting out the terms of an individual
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.
The movement of the cash asset price toward the futures price as the expiration
date of the futures contract approaches.
The curvature in the bond price and yield relationship.
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.
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
A statistical measure of the relationship between the price movements in two
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.
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.
An interest rate swap, often from a fixed rate to a floating rate, or from a
floating rate to a fixed rate.
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.
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
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.
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.
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.
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.
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.
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.
The failure of a counterparty to perform its obligations under a derivative
The market standard provisions by which the terms of a derivative transaction
are described. The definitions are published and maintained
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.
The physical movement from seller to buyer of the underlying asset on which
the derivative is based.
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
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.
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.
An industry electronic post-trade processing platform for OTC derivatives provided
The time period for which the floating rate in a derivative transaction is quoted.
For example, six month USD LIBOR.
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%.
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.
See binary settlement.
The price of a bond inclusive of accrued interest.
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.
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.
Any scheduled trading day on which the relevant exchange or related exchange
fails to open, or upon which a market disruption event occurs.
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.
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.
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.
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.
The date on which obligations under a derivative transaction begin to accrue
or take effect.
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.
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.
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.
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
An option that can only be exercised by the buyer on the expiration date
The principal stock exchange on which the share or the index components are
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.
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.
The process by which the buyer of an option may take up the right to
buy or sell the underlying asset.
A day on which the buyer (holder) of an option may exercise the right to buy
or sell the underlying asset.
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.
A non vanilla option.
The last date on which an option can be exercised. After this date the option
is deemed to lapse or be abandoned.
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.
An extraordinary event that affects the underlying shares or index for example
merger event, tender offer, nationalisation or index disruption event.
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.
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.
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.
An interest rate which does not vary during the life of a transaction.
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.
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.
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.
The process whereby the entire transaction is terminated as opposed to partial
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.
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.
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.
The channeling of the settlement of all futures and options trades through a
single clearing counterparty or through a number of clearing counterparties.
The representation of a derivative contract with full legal status
between two parties within the DTCC Trade Information Warehouse.
Provides investment advisors a comprehensive real time view of their credit
derivative positions in conjunction with the DTCC Trade Warehouse golden record.
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.
A derivative or asset position expressed without netting bought and sold trades.
A person who guarantees to meet certain specified payment obligations of another
party if such other party should default on the relevant obligation.
Haircut (See valuation percentage)
A trading strategy which is designed to reduce or mitigate risk. A
second transaction is entered into to offset the risk of the first.
A basket containing both stocks and indices or underlyings from a combination
of asset classes (such as a foreign exchange rate or a commodity).
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.
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 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
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.
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
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.
The amount that would be realised if an option were immediately exercised.
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).
International Swaps and Derivatives Association, Inc., the global trade association
which represents participants in the OTC derivatives industry.
The percentage of principal value at which the price of a new issue
of securities is fixed.
The borrower in a bond issue. For example a government, government
agency, a bank or
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
An option that becomes effective at the crossing of a predetermined price barrier.
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).
An option which ceases to be in effect at the crossing of a predetermined price
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
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
An option that locks in gains once the underlying asset reaches certain price
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.
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
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
The process by which two counterparties meet to rectify outstanding confirmation
An open bought position in a security or derivative.
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
An option where the holder has the right to buy/sell the underlying instrument
at its lowest/highest price over a specified preceding period.
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.
An entity dealing as an agent or principal with a broker and involved
in the same nature of investment business as the broker.
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.
A dealer who is prepared to make a market by quoting simultaneous bid
and offer prices.
A provider of independent data, portfolio valuations and OTC derivatives trade
processing to the global financial markets.
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
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
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)
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%
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.
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.
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.
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
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).
The process performed to ensure that the expected cash movements of a transaction
(or multiple transactions) are reconciled with the actual cash movements effected.
A mismatch of cashflows between the paying and receiving banks, which occurs
when the expected amount of cash settlement differs from the actual amount.
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.
The day on which a holder of an option must serve notice to exercise.
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).
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.
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.
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).
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).
The price at which a trader or market maker is willing to sell a contract.
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.
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).
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.
A reduction in the notional amount of a derivative contract.
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.
A credit swaption which allows the option buyer the right to buy protection
on a certain date at a certain price.
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
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.
The current principal balance of a particular asset backed bond outstanding
divided by the original issued balance of such bonds expressed as a percentage.
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.
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.
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.
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.
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.
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
The credit default swap counterparty that pays another counterparty to compensate
them in the event that the reference entity suffers a credit event.
The credit default swap counterparty that takes on credit risk of a
reference entity in return for appropriate compensation.
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.
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.
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).
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
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
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).
The amount paid out in the event of an automatic payment knock-out event occurring.
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
The underlying company or Sovereign which issues the debt obligation
or obligations which constitute the reference obligation(s) under a credit derivative.
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.
The principal derivatives exchange on which listed options or futures contracts
on the share or index are traded.
A credit event applicable only to Sovereign reference entities whereby the relevant
Sovereign refuses to acknowledge or honour its debts.
Residential Mortgage Backed
A type of security which has cashflows from a pool of residential debt such
as mortgages, home equity loans and subprime mortgages.
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
A credit event triggered when a reference entity restructures its debt in agreement
with its creditors.
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).
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.
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
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.
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
The process whereby obligations arising under a derivative transaction are discharged
through payment or delivery or both.
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.
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.
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.
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.
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.
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
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.
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.
The price which indicates the credit worthiness
of an underlying asset.
Standard Settlement Instructions for derivative transactions. SSIs outline
the bank account details of legal entities for specific currencies and / or
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).
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
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.
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
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.
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.
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.
An electronic platform used for trade capture and confirmation. SwapsWire®
allows for trade date affirmation and reduces the need for paper confirmations.
An option to enter into a predetermined swap transaction.
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.
Target Redemption Note (TARN)
A note which is redeemed immediately at par when the aggregate coupons paid
under the note reach a specified target.
The process by which derivative trades which have equal and opposite economics
A standard reference source for a master agreement or confirmation which may
either be published by an industry body or agreed between two counterparties.
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.
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.
A term in option theory measuring the time decay of the option value.
An amount of unsecured exposure a counterparty is prepared to accept before
calling for collateral.
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
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.
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.
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.
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.
The short confirmation that evidences a transaction under a Master Confirmation
Agreement (referred to commonly as a
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.
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.
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.
A transaction that cannot be identified by the alleged counterparty to the trade.
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
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.
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.
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.
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.
The measure of volatility in option theory.
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.
An option on an underlying asset which is in the form of a transferable
security and which can be listed on an exchange.
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.
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.
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.
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.