Supporting Literature

A

Accrued Interest (AI) - The interest accumulated on a debt security since its issue date, but not yet paid out. This is accounted for in the actual gross purchase price of the debt security.

Accumulating Net Asset Value (ANAV) - A method of compensating money market fund investors through increasing the net asset value (NAV) of each fund unit rather than through dividend payout. See Stable Net Asset Value (SNAV).

Agent Bank - A custody term designating any bank providing custody services on behalf of a custodian for securities traded in the country where the bank is based.

American Option (American-Style Option) - A type of derivative that it is widely used in the USA. It gives its holder the right to buy or to sell a certain amount of the underlying financial product at any time from its purchase to its date  of expiry.

Amortized Price - A method of valuing assets, based on the acquisition cost, which may include a discount or premium to the face value, adjusted over the life of the security to account for any discount or premium, such that amortized cost equals the principal value at maturity.

Annual Equivalent Rate (AER) - The notional annual rate of interest applied to current, deposit and savings accounts assuming that all interest is reinvested or compounded.

Annualized - A rate of return for a given period that is less or more than one year, but that is adjusted to show the return this would equate to over a 1 year period.

Arbitrage - The process by which profits are generated from the buying of an asset in one market and the simultaneous sale in another market of the same asset or its economically equivalent derivative. Arbitrage occurs when there is a price differential for the same asset in two different markets.

Arm’s-Length Principle - The arm’s-length principle assumes that pricing for transfers between affiliated companies should be identical to that applied to transfers between fully independent companies. See transfer pricing, transfer pricing regulations.

Asian Option - A type of option where the amount that needs to be repaid is determined by the underlying asset’s average value over a specific period of time.

Ask Price - The offered (selling) price of traded securities or other instruments, i.e. the price which a buyer would be expected to pay.

At-the-Money (Option) - A situation where the strike price of an option is equivalent to the underlying instrument’s current market price.

Authorization - A key control in treasury. Authorization needs to be provided for all transactions in treasury and given only by a small number of people with the appropriate (seniority) qualifications.  The individuals with power of authorization should be listed in a document also specifying the various transactions that can be authorized, procedures for controlling authorization, etc

Authority Limits - Limits set by treasury to the number of dealers allowed to carry out transactions, the value of the transactions they can execute and the number of people giving authorization.  More generally, limits can also be applied to the financial risk that a company or organization is willing to bear. Limits can, for example, be set for the proportion of foreign exchange exposures and the time period within which they should be hedged. The company/organization may also, for liquidity reasons, limit the types of deals that it wants to have transacted.
Another area of authority limit concerns the level of counterparty credit exposures resulting from deals such as those in derivative products. In some exceptional situations, the dealer may have to exceed the risk and authority limits set by the management. In such cases, it is essential for the dealer to have the transaction approved by the relevant responsible manager.

Average Effective Maturity - 1. A calculation of the maturity of a bond taking account of any potential early redemption.  2. A calculation of the weighted average of the maturities of bonds in a portfolio, which includes all adjustable coupons, mortgage prepayments and puts.

Average Maturity - The amount of time needed for all securities held in a portfolio to reach maturity, weighted by the amount of assets invested in each security.

Average Nominal Maturity - As opposed to average effective maturity, it does not take account of a potential early call, adjustable coupons, mortgage prepayments and puts.

Average Weighted Maturity (Weighted Average Maturity – WAM) - A calculation of the weighted average of the maturities of the fixed rate periods for instruments held in a portfolio. Average weighted maturity is correlated to the interest rate risk profile of the portfolio, i.e. a longer WAM implies greater price volatility.

B

Back Office - The part of the treasury organization that administers and supports the trading activities of the treasury front office. The back office’s main functions are to process, confirm, verify, settle, reconcile and record financial market transactions. The back office is also responsible for ensuring that the organization’s treasury management policy and controls are followed, as well as ensuring general compliance with rules and regulations. In a more general sense, the term refers to all administrative functions that support an organization and includes areas such as payroll and expenses, accounts payable, accounts receivable and accounting.

Backwardation - The extent to which a spot price of a foreign currency plus carrying costs exceeds the forward price.

Barrier Option - An option that is initiated or terminated if the underlying asset’s value exceeds or goes below a reference price threshold.

Base Currency - Generally this means the currency to which other currencies are compared. In a multicurrency liquidity arrangement, refers to the currency in which the master account is denominated and to which all other currencies are converted. The base currency also serves as the basis for all interest rate calculations.

Basis - In futures markets, the price differential between the price of the asset underlying the futures contract and the price of the futures contract.

Basis (Rate) Swap - An arrangement where payments based on different floating rates are swapped. The payments can also be denominated in different currencies.

Basis point (bp) - One-hundreth of one percent, i.e. 1% is equal to 100 basis points. Yields of money market instruments and money market funds are often quoted in basis points as opposed to fractions.

Bearer Bond or Bearer Security - A bond/security that is not registered in the name of a specific owner. The owner of the bond is the person who holds it. Thus, title to the bearer bond is transferred through delivery.  Principal and interest were historically paid, upon presentation of coupons, to a paying agent, although nowadays bearer bonds usually operate by book entry, whereby investors buy and sell their interests in a global note representing the entire issue and held within the clearing system.

Benchmark - A standard set by the market (such as a stock market index) or by an institutional investor (such as an internally developed benchmark) against which the performances of a fund or portfolio can be managed and tracked.

Beneficiary - The party that is named by the grantor, settler or creator of the trust and is entitled, according to the terms in the respective trust deed, to benefit from the revenues of the trust.

Best Ask - Dealer’s instruction to sell securities or assets at the highest price possible.

Best Bid - Dealer’s instruction to buy securities or assets at the lowest price possible.

Bid and Ask - Quote (quotation) at a given point in time that simultaneously includes the highest bid price (bid) for a security and the lowest offer price (ask). The spread between the highest bid and lowest offer is referred to as ‘the touch’.

Bid Offer Spreads - The difference between the prices that a holder or trader of assets (generally a financial institution or financial intermediary) is willing to buy and sell those assets. There is generally no bid-offer spread for the purchase or sale of units in a money market fund.

Bid price - The market-maker's buying price of securities or assets.

Bid Rate - The price at which banks and other market participants are willing to buy currencies, securities, commodities, instruments, derivatives or to take deposits.

Black–Scholes Model - A method of determining the price of an option contract by taking into account the price of the underlying asset, strike price, date of expiry, risk-free interest rate and volatility of the option.

Book Entry - An electronic method of registering ownership of and transferring securities.

Book-entry System - An accounting system that allows the transfer of claims (e.g. securities) without the physical movement of paper documents or certificates.

Broker - An individual or a firm (also called a broking house) that acts as an agent for investors by dealing in securities. Usually, the broker will charge commissions (called brokerage) for his advisory and trading services. A broker does not buy or sell on his own account but acts as an agent for his clients.

C

Call - The act of paying/redeeming a security’s principal before its actual maturity date in line with the rules laid out in the bond documentation.

Call Option - The option to buy a certain amount of an underlying financial product on (a) specific date(s) at a predetermined price.

Cap - A maximum limit on a price, interest rate or coupon.

Cash Concentration - A cash management technique where account balances are physically transferred to/from a single master account for liquidity management purposes.

Cash Flow Forecast - A regular report sent by the company’s operations and subsidiaries to the treasury management headquarters informing it about any cash excesses and deficits that they may have in the future.

Cash Flow Management - The monitoring, analyzing and adjusting of cash flow to organization requirements.

Cash Pooling - A cash management technique aimed at improving liquidity management by pooling an organization’s account balances either under the form of a cash concentration or a notional pooling arrangement.

Central Counterparty - An institution, acting in one or more securities or cash markets, that is interposed between two trading parties. The central counterparty guarantees the performance of the underlying transaction by acting as a matching seller to the buyer and a matching buyer to the seller.

Central Securities Depository (CSD) - A facility for holding securities that allows securities transactions to be processed by book entry. Physical securities may be immobilized by the depository or securities may be dematerialized (solely recorded as electronic records). In addition to safekeeping, a central securities depository may provide comparison, clearing and settlement functions.

Certificate of Ownership - A certificate issued to prove ownership of a given security.

Certificates of Deposit - A certificate of deposit, or CD, is a bank-issued investment instrument where a bank typically agrees to repay the principal plus interest on a fixed maturity date. CDs are typically negotiable, meaning they can be sold on the secondary market, allowing the principal and accrued interest to be redeemed before maturity.

Clean Price - The price of a bond excluding any interest accumulated.

Clearance - The process of transmitting, reconciling and, in some cases, confirming payment orders or security transfer instructions prior to settlement, possibly including netting of instructions and calculating final positions for settlement. Sometimes the term is used (imprecisely) to include settlement. Outside the securities market this process is generally referred to as clearing.

Collar (Interest Rate or Foreign Exchange Rate Collar) - A risk management arrangement where the purchase of an option and sale of another occur contemporaneously for the same underlying financial product. The payment acquired from the sale reduces the cost of the purchase. If both the payment and receipt match exactly, this is known as a zero-cost collar. The collar places a band around the potential outcome for this risk-hedging technique.

Commercial Paper - Commercial paper, or CP, is a short-term, unsecured promissory note. It is usually issued in bearer form, meaning it is a negotiable instrument. By issuing the paper, the issuer promises to pay the bearer the face value of the paper on a fixed maturity date. CP is usually issued at a discount.

Compounding - The process of accumulating the time value of money forward in time. When money is invested at compound interest, each interest payment is reinvested to earn additional interest in subsequent periods. See time value of money.

Confirmation - A document through which a market participant notifies its counterparties or customers of the details of a trade/transaction and, typically, allows them time to affirm or question the trade/transaction. The issue and matching of confirmations is one of the key controls in treasury dealing activity. Increasingly confirmations are being transmitted and matched by electronic means, but the same rules, relating to the separation of the dealing function from the confirmation function, still apply.

Constant Net Asset Value (CNAV) Money Market Fund - A money market fund that seeks to maintain shares in distributing share classes at a constant price of 1.00, achieved through valuing assets at amortized price. Distributing units accrue income daily, which is either paid out to the investor or used to purchase more units in the fund. Accumulation units may also be offered that price assets on an amortized basis, but that accumulate income which is reflected in a rising fund price.

Continuous Linked Settlement (CLS) - A global real-time settlement system for foreign exchange transactions that eliminates foreign exchange settlement risk caused by delays arising from time-zone differences; the so-called Herstatt risk.

Corporate Bonds - Debt instruments issued by companies which can vary in maturity from less than one year to over 20 years. These are typically issued in bearer form, meaning they are negotiable. Money market funds may use corporate bonds in certain circumstances where they meet clear maturity and credit requirements and the investment manager determines that there is sufficient secondary market liquidity.

Counterparty - One of the opposing parties involved in a transaction.

Coupon - The periodic rate of interest paid on bonds and money market securities, stated as a percentage of the principal and usually paid out once or twice a year, depending on the terms of the issue.

Coupon Rate - The rate of interest, expressed as an annual percentage, to be paid on debt securities.

Credit Derivative - A contract allowing for the transfer of credit risk via a derivative instrument.
The party transferring credit risk is obliged to pay a fee to the transferee.

Credit Enhancement - The increasing of the creditworthiness of securities. There are three main methods of credit enhancement:  1. Junior/senior tranches: the entire debt is divided into so-called junior and senior tranches, with the former bearing all the first losses. Thus, the credit standing of the remaining senior tranches is raised considerably.  2. Insurance: a third party, usually an insurance company, undertakes to insure the credit risk of the respective securities (called ‘wrapping’).  3. Collateralization: securities may be backed by other financial assets, usually equity, of higher values. The difference serves as collateral for the repayment of the debt (over-collateralization). The issuing company may also put collateral on the differential between the respective security’s original and market values (margin).

Credit rating - A standardized assessment, expressed in alphanumeric form, of the creditworthiness of an entity raising debt capital. Ratings are issued by credit ratings agencies based on their published methodology for rating the relevant instrument.

Credit Rating Agency - Independent institutions that assess the creditworthiness or credit risk of issuers and provides credit ratings which are publicly available and used by investors as well as analysts as a guide for investment decisions.

Credit Risk - The risk that an issuer of a debt instrument will fail to repay, in whole or in part, the principal and/or accrued interest to the investor. Where a money market fund holds the debt of an issuer which has defaulted, the final recovery value will be impacted by the standing of the security held in insolvency proceedings.

Credit Spread - 1. The difference in yield between a given security and a comparable benchmark government security. It gives an indication of the issuer’s credit quality.  2. The difference in value of two securities with comparable maturity and yield but different credit qualities.

Cross-Border Sweeping - A cash management technique used to automatically concentrate funds derived from different countries into a bank account located in a different jurisdiction.

CSD - Central Securities Depository.

Currency Forward Contract - An agreement to buy or sell a specified amount of a foreign currency at a future date for a predetermined price.

Currency Futures - Exchange traded, and therefore standardized, contracts to buy or sell a specified amount of foreign currency at a specific price and at a specific date in the future.

Currency Option - A derivative giving its holder the right, but not the obligation, to buy or to sell a certain amount of a foreign currency at a predetermined price on a specified date.

Current Yield (Running Yield) - The annual return in the form of dividend or interest payment on an investment. It is equal to the coupon/ dividend divided by the market price, expressed as a percentage. Also known as flat yield or income yield.

Custodian - A bank, financial institution or other entity responsible for maintaining accurate and up-to-date registration details of the beneficial owners of those securities for which it has custodial responsibility. Custodians are also responsible for the administration of the assets they hold (including trade settlement), the collection of interest or dividends, exercising the voting rights attached to certain types of securities if so required, as well as being able to provide other services such as the production of portfolio valuations and performance measurement.
As a result of dematerialization, the need to hold and safe-keep securities in physical form has been largely removed in many of the world’s major securities markets. See global custodian, local custodian.

Custody - The registration and administration of securities and financial instruments on behalf of investors.

Custody Risk - This is the risk of loss of securities held in custody occasioned by the insolvency, negligence or fraudulent action of the custodian or of a sub-custodian.

Custody Services - These include the processing of securities trades, keeping financial assets safe and servicing the associated portfolios.

D

Day Count - 1. The number of days within a specific interest payment period in which interest payments are due.  2. The convention governing the way such interest payments are to be calculated (e.g. 360/365 days).

Debt Book-Entry System - A book-entry system for the issue and registration of debt securities.

Delivery - The final settlement of a securities transaction.

Delivery Versus Payment (DVP) System or Delivery Against Payment System - A mechanism in an exchange-for-value settlement system that ensures that the final transfer of one asset occurs only if the final transfer of (an)other asset(s) take(s) place. Assets are, among others, monetary assets (this includes foreign exchange), all types of securities and other financial instruments.

Demand Deposit Account (DDA) - A type of non-interest-bearing bank account available in the USA and Canada that allows the account holder to transfer funds to a third party via check, wire transfer, or an automated clearing house (ACH) transfer and to withdraw funds on demand.

Dematerialization - The elimination of physical certificates or documents of title which represent ownership of securities, so that securities exist only as accounting records.

Depository - An agent whose primary function is to record securities either physically or electronically and to keep records of the ownership of these securities.

Depository Trust Company (DTC) - (USA) A subsidiary of the Depository Trust & Clearing Corporation (DTCC), the DTC is an automated central securities depository. It is a member of the US Federal Reserve System, a limited-purpose trust company under New York State banking law and a registered clearing agency with the Securities and Exchange Commission.

Derivative (Derivative Security) - An instrument, such as an option, future or swap, of which the criteria and value are determined by those of an underlying asset such as a stock, currency or commodity.

Differential Swap - An arrangement involving the exchange of payments denominated in different currencies and with a different floating exchange rate. However, actual payments are always denominated in the same base currency.

Discount - The difference between a financial instrument’s market price and its face value or redemption price when its market price is the lower of the two.

Discount Instruments - Securities that are sold at a discount to face value.

Discount Note - A short-term note (with a maximum maturity of 360 days) issued at a discount to its par value.  It pays out no interest but investors receive par value upon maturity.

Discount Rate - 1. The generic name for the rate of interest at which the future cash flows of an investment are discounted in order to obtain the net present value of the cash flows. The choice of discount rate should reflect the risks of the investment/project.  2. In the USA, the interest rate that member banks pay the Federal Reserve when the banks use securities as collateral. The discount rate acts as a benchmark for interest rates issued. Other central banks also have similar discount rates.

Discounted Cash Flow (DCF) - A method for the evaluation of investments. This is calculated by discounting the future cash flows at an appropriate discount rate of interest in order to arrive at a single net present value (NPV) figure, which can be compared with other investments.

Dividends - Distributions, representing income earned less expenses, paid either in cash or additional shares by a fund.

Domestic Fund - A mutual fund which only invests in securities originating from a single country, which is more often than not the country in which the fund is domiciled.

Domicile - The country of a fund’s creation.

Double Tax Treaties - Agreements between countries to attribute taxing rights and provide relief where double taxation might otherwise apply.

Double Taxation - Instances where the same income or profit is subject to tax twice.

Duration (Macaulay Duration) - The weighted average timing of the cash flows of an instrument, weighted by the present values of the cash flows. Macaulay’s duration uses the yield to maturity of the instrument to work out the present values to use for weighting in the duration calculation. The longer the duration, the more a security’s price is likely to be affected by changes in interest rates. Duration is also used as a measure to compare debt securities that have different maturities and yields.

DVP - Delivery vs. payment.

E

Embedded Option - 1. A provision in a debt security which allows the issuer or the holder to exercise an option – this is generally a call option (issuer) or a put option (holder). The option is generally linked to specific dates and may be subject to other conditions.  2. A provision in a debt security which links payments on the security to pre-specified changes in an underlying security, currency, index or commodity.

Euro Interbank Offered Rate (Euribor) - Sponsored by the European Banking Federation, Euribor is the benchmark rate at which EUR interbank term deposits within the eurozone are offered by one prime bank to another prime bank at 11:00 CET. Euribor is calculated daily and covers periods ranging from one day to one year.

Euro Overnight Index Average (EONIA) - An effective overnight rate computed as a weighted average of all overnight unsecured lending transactions in the interbank market, initiated within the eurozone by the contributing panel banks. Eonia is widely used as the underlying rate for derivatives transactions within the eurozone.

Eurobonds - International long-term debt securities with maturities over one year denominated in any Eurocurrency. International distribution is a key feature and they are usually in bearer form, but the bonds can be issued in any currency or any interest basis.

Eurocurrency - Generic term for deposits held or financial instruments which may be issued and held outside the country/countries in whose currency they are denominated, though this does not usually exclude purchases by domestic investors.

EURONIA - A euro overnight index average that tracks actual average market euro overnight funding rates each day for settlement that day. It is based upon all unsecured euro overnight cash transactions brokered in London by Wholesale Market Brokers’ Association (WMBA) member firms.

European Option (European-Style Option) - A derivative that gives its holder the right to buy or to sell a certain amount of the underlying financial product on its date of expiry or for a short specific period (i.e. one day) just beforehand.

European Securities and Markets Authority (ESMA) - An independent EU Authority made up of the national securities regulators of the European Union member states. ESMA was set up in 2011, as a successor to CESR, and its aim is to enhance the protection of investors and reinforce stable and well-functioning financial markets in the European Union.

Exchange-Traded Funds - Open-ended funds tracking an index that are priced on a continuous basis and can be bought or sold like shares.

Exchange-Traded Option - An option that is traded on an exchange, as opposed to over the counter, i.e. with a bank or other financial institution.

Ex-Coupon - Debt securities that are sold without the right to receive the next or due coupon.

Exercise Price - The predetermined price in a contract at which the option holder can either purchase or sell the underlying security, instrument or commodity.

Exotic Option - A range of options with unconventional payout structures and underlying securities/commodities.

Expiry Date - The final day that an option holder can purchase or sell an underlying security/commodity.

F

Face Value (Par Value/Principal Value/Nominal Value) - The nominal amount indicated on the security which is the basis for interest or dividend payments.

Fair Value (or Fair Market Value) - The price at which an asset can be bought or sold in transparent/perfect markets, i.e. where contracting parties are informed and act in their best interest. It represents the theoretical equilibrium price of securities or derivatives on open markets, i.e. neither buyers nor sellers perceive them as either over-priced or under-priced.

Federal Funds Rate - (USA) The rate of interest charged on overnight loans from banks’ deposit accounts held at the Federal Reserve (the USA’s central monetary authority) to other banks.

Firm Bid/Firm Offer - Unconditional order to purchase or sell securities during a specific period at a specified price.

Floor - The minimum interest rate paid on a security or under a derivative agreement.

Foreign Currency Option - A contract where the buyer/holder has the right, but not the obligation, to purchase/sell a fixed amount of a foreign currency at a specific price within a specific timeframe.

Foreign Exchange Portal - A browser-based electronic marketplace that regroups several foreign exchange providers who provide online quotes in real time, thereby enabling foreign exchange products to be traded on a fully automated basis. Foreign exchange portals are increasingly being used for smaller foreign exchange trades that do not require human intervention.

Foreign Exchange Swap - A contract where it is agreed that certain amounts of a particular currency are exchanged between two parties on a specific date, combined with a reverse exchange of the same two currencies at a future date and at a rate agreed at the outset, which will normally be different.

Forward Discount - The situation in which the spot price of a currency is greater than the forward price of that currency.

Forward Foreign Exchange Contract - Foreign exchange contracts that are constructed to mature and be settled at a future date.
They are priced by adjusting the spot rate to reflect the interest rate differential between the two currencies involved for the forward period. They are used to hedge against future value fluctuation by locking in future price or rates.

Forward Foreign Exchange Rate - The agreed exchange rate on the day a transaction is entered into for a foreign currency transaction that settles more than two days in the future. The rate is determined by adjusting the spot rate to reflect the interest rate differential between the two currencies involved for the forward period.

Forward Market - A marketplace that allows same-day price fixing of currencies, commodities and securities that will be delivered at a future date.

Forward Premium - The premium that has to be paid when a traded currency’s forward price is greater than its spot price.

Forward Price - The price for a transaction that has a start date in the future, or later than the spot date.

Forward Rate - A fixed rate to be applied to a transaction that will come into force at a specific date in the future.

Forward Rate Agreement (FRA) - A bilateral forward contract that fixes the interest rate on the day of the agreement for payment at a future settlement date; this can be up to two years later. FRAs are used to hedge against interest rate exposure, in the sense that one of the parties pays a fixed rate and the other a variable rate. If, at the settlement date, the market rate is lower than the previously agreed rate, the purchaser will indemnify the seller for that difference and conversely, if the market rate has risen, the seller will compensate the purchaser.

Forward Start Swap - Swap arrangement where the commencement of the swap is delayed for a period exceeding the market standard. The pricing and terms of the transaction are agreed at the outset.

Front Office - The part of the treasury function that executes transactions for the cash investment, funding, foreign exchange and risk hedging requirements of the company. The front office is the unit of the treasury which interfaces with the group’s entities or subsidiaries, and provides treasury services to them, and which interacts most with the company’s lenders and other financial counterparties.

Futures (Futures Contracts) - Contracts stipulating the purchase or sale of commodities, currencies or securities of a specified quantity, at a specific price and on a predetermined date in the future. Futures tend to be standardized in terms of quantity, price and maturity periods.

G

Global Custodian - An international financial institution that is able to provide custody services to leading international investors in several financial markets. See Custodian.

Global Fund - A mutual or investment fund that has its assets invested in all major financial markets.

Government Money Market Fund - A money market fund which invests exclusively or primarily in debt instruments issued by a particular government, or agencies or entities with the express backing of that government. Government funds may also use repurchase agreements backed by such governments or government agencies.

H

Hedge Accounting - Under International Financial Reporting Standards (IFRS) a hedge and the underlying transaction being hedged are accounted for separately. Hedge accounting ensures that both items receive similar accounting treatment, to reflect that the transactions are economically self-cancelling. There are qualifications that must be satisfied in order that hedge accounting may be used, for example that the hedge can be shown to be effective.

Hedging - The implementation of a set of strategies and processes used by an organization with the explicit aim of limiting or eliminating, through the use of hedging instruments, the impact of fluctuations in the price of credit, foreign exchange or commodities on an organization’s profits, corporate value or investments.

High-yield Bond (or Junk Bond) - A bond with a sub-investment (speculative) grade credit rating. This type of bond is used particularly to finance leveraged buy-outs and to pay higher yields to investors than bonds with higher ratings do. The term, therefore, increasingly refers to financial instruments with speculative credit ratings.

I

ICSD - International Central Securities Depository.

Implied Volatility - The volatility of the asset, liability, security or commodity underlying a derivative, which is derived from the option pricing formula and the anchor price of the option itself.

Institutional Money Market Funds Association (IMMFA) - The trade association for providers of triple-A rated money market funds within Europe. Its members currently have funds domiciled in Dublin, Luxembourg and the Channel Islands.

Interest - The price paid by the borrower or issuer of debt securities to the lender or investor for providing funds. It is usually expressed as a percentage rate over a period of time (usually one year), and is paid out once or twice a year. See Coupon.

Interest Rate Swap (IRS) - A swap arrangement where interest payments on a certain amount of principal are exchanged between two parties on a specific date. One of the payment streams involved is usually based on a fixed interest rate, while the other is based on a floating rate.

Interest-bearing Instruments - Securities on which a specific rate of interest is required to be paid periodically or at maturity.

Internal Rate of Return (IRR) - An accounting method for calculating the return achieved on a (potential) investment by equating the net present value (NPV) of cash inflow over time to zero.

International Central Securities Depository (ICSD) - A central securities depository that provides clearing and settlement facilities for cross-border transactions in domestic securities and/or international securities transactions.

International Fund - A fund which invests in securities outside the country of the investor.

Inverted/Negative Yield Curve - A situation where securities with short-term maturities attract higher interest rates than those with long-term maturities. So called because the term premium is negative.

Investment Grade - Securities with a long-term credit rating equal to or above investment grade, which is currently BBB or higher.

ISDA (International Swaps and Derivatives Association) - An international trade association, composed of over 600 members, for institutions dealing in derivatives, swaps and options.

Issue - The creation of new securities by a private or public entity in exchange for cash or assets.  An issue can involve one or more types of debt and/or equity security.

Issuer - A company or other entity that borrows or raises capital via the financial markets through the issuance of securities.

J

Jumbo Certificate of Deposit (CD) - A certificate of deposit with a high face value generally purchased by institutional investors looking for low-risk investments.

K

L

LIBID - Abbreviation for the London Interbank Bid Rate which is normally 12.5 basis points or an eighth less than LIBOR (see LIBOR).

LIBOR - Abbreviation for London Interbank Offered Rate, the interest rate at which major international banks in London will lend cash to each other, and hence an indicator rate for international lending.

Liquid Assets - Liquid assets are those that can be converted to cash quickly with minimal impact to the price, or assets that will mature at par on the following day.

Listed Investments - Securities which have been admitted for trading on an official exchange.

Local Custodian - Provides custody services for securities traded and settled in the country in which the custodian is located.

Long-dated Swap - A long-term agreement between two parties to exchange a set of cash flows for a minimum of one year and up to 15 years in the future.

M

Mandates - Agreements regulating the dealing relationship between the company and its counterparties, authorizing people to conduct transactions, possibly applying limits to the size of deals and procedures concerning settlement, and regulating the opening and closing of transactions. Mandates are a key element of treasury control and are an essential mechanism for reducing the company’s dealing risk.

Margin - In the context of the securities markets, where securities are bought using credit supplied by the broker, margin is the cash collateral put up by the purchaser. The margin amount is subsequently adjusted to reflect changes in value of the securities broker. In the context of derivatives, margin is cash collateral paid by market participants to protect their counterparties in the market against the risk of a default.

Marking to Market - The practice of revaluing securities and financial instruments using current market prices. In some cases, unsettled contracts to purchase and sell securities are marked to market and the counterparty with an, as yet, unrealized loss on the contract is required to transfer funds or securities equal to the value of the loss to the other counterparty.

Mark-to-Market Price - The value of an asset based on the market price at a given point in time, i.e. the tradable value of each security.

Master Account - Account in a cash pooling structure used to fund zero/target/threshold balance accounts automatically or concentrate funds from participating accounts automatically. The master account may be interest-bearing. A master account is also known as central account or concentration account.

Matching - The process used by market participants before settlement of a transaction to ensure that they agree with respect to the terms of the transaction. This is usually done by matching transaction confirmations sent to a counterparty with those received from that counterparty.

Middle Office - With the front and back offices, the middle (or mid-) office completes the key best practice division of duties and responsibilities in the treasury operation. Its basic responsibilities include treasury reporting, accounting for treasury and determining and monitoring the internal treasury control framework. Many companies may not have operations that are sizeable enough to require a middle office; in these cases, its role is performed by the back office or the accounting department.

Mid-Market Price (Mid Price) - The average value of the bid price and offer price of a security or fund unit.

Money Market - The financial market in high quality short term negotiable debt securities. The money market is used for borrowing and lending for short periods of a few days up to 1 year.

Money Market Funds - A mutual fund that invests in a diversified portfolio of short term, high quality, money market instruments.

Multicurrency Cross-Border Pooling - A cash management technique in which excess funds from companies’ accounts in different countries, which are denominated in different currencies, are concentrated and used to offset deficits for the purpose of determining interest earned or owed.

Multicurrency One-country Pooling - A cash management technique in which excess funds from companies’ accounts in the same country, which are denominated in different currencies, are concentrated and used to offset deficits for the purpose of determining interest earned or owed.

Mutual Fund - A pool of capital provided by small as well as institutional investors, and invested in a portfolio of securities. There are two types of mutual fund: open-ended and close-ended. While close-ended mutual funds have a predetermined amount of capital to be invested, open-ended mutual funds do not.

N

Net Asset Value (NAV) - The market price of an investment fund’s portfolio of securities (after the deduction of debt to be repaid) calculated by dividing the total value with the total volume of securities.

Net Present Value (NPV) - Refers to the present value of an investment based on the calculation of its future cash flows minus the costs. See Internal Rate of Return (IRR).

Netting - An agreed offsetting of positions or obligations by trading partners or participants. The netting reduces a large number of individual positions or obligations to a smaller number of obligations or positions, thereby reducing the overall credit, liquidity and settlement risk. Netting may take several forms that have varying degrees of legal enforceability in the event of default of one of the parties.

Non-Investment Grade - A rating attributed to a security that is deemed speculative, i.e. less certain in respect of the preservation of capital, in the opinion of a credit rating agency such as Fitch Ratings, Moody’s or Standard & Poor’s.

Notional Pooling - A cash management technique where account balances are offset without physical movement or co-mingling of funds, for the purpose of interest compensation by the bank.

Notional Principal Amount (Notional Principal) - In a derivatives contract, the amount of underlying assets used to calculate the obligations between the different parties.

O

Offer Price - The price at which currencies, assets, securities, commodities or instruments are sold or money/funds are lent by market participants.

Offset - Ability to set assets against liabilities in multiple bank accounts. Also used in netting transactions.

Offshore - This term is generally used in the context of transactions with (or) a company resident in a tax haven.

Offshore Fund - Any fund or investment company (in the case of a unit trust or FCP) that is legally established outside the country of the investor. Popular offshore fund locations are Bermuda, Luxembourg, Ireland and the Channel Islands.

Open-Ended Investment Company (OEIC) - A limited company listed on the stock exchange whose sole aim is to invest in securities issued by other entities. Unlike an investment trust, there is no limitation on the number of shares that can be issued (i.e. it is an open-ended structure). The value of the shares is determined by the OEIC’s underlying assets; however, there is no bid–offer spread. OEICs can be the underlying structure for a single fund or the umbrella fund for a family of sub-funds.

Option - A derivative giving its holder the right, but not the obligation, to buy or to sell a certain amount of the underlying financial product, usually a security, on a specific date at a predetermined price.

Out-of-the-Money (OTM) - A revalued derivative position showing a loss because of market changes.
Outsourcing - The contracting of all or part of the treasury operation to a specialist third-party service provider, rather than it being performed in-house. This is now a commonly used model and has particular application where treasury needs change due to some form of corporate restructuring or change.

Over-the-Counter (OTC) - A market for the trade of securities that are not listed on the stock exchange consisting of bilateral dealing contracts between brokers. As opposed to an organized stock exchange, prices in the OTC markets are set by direct negotiation between dealers, and not by an auction system. The OTC market is a market for companies which do not fulfill the listing requirements of the official stock exchange markets, or for derivatives or other financial instruments that do not have a liquid market.

P

Par value - Face value of the security.

Paying Agent - An institution, a company or a bank which, on behalf of the issuing company, makes interest payments and repayment of the principal upon presentation of coupon and/or bond certificates.

Plain-Vanilla - Instruments that have only the standard features.

Portfolio - A collection of financial assets purchased by private or institutional investors in order to achieve a return on the capital invested.

Positive Yield Curve - Where yields increase as maturities lengthen.

Present Value - The current equivalent value of cash available immediately for a future payment or a stream of payments to be received at various times in the future. The present value will vary with the discount (interest) factor applied to the future payments.

Primary Market - The market for new issues of securities with the aim of raising new capital.

Prime Funds - A money market fund that invests in a range of short term securities issued by financial institutions and corporates, as well as governments.

Principal - The face value of a debt instrument. The principal amount of a trade is the face value of the debt instrument involved in the trade.

Private Placement - The sale of securities by a lead manager directly to a limited number of institutional investors, instead of to a wider group of investors as is the case with a public offering. Securities sold via private placement are not listed on the stock exchange.

Put Option - The option to sell a certain amount of an underlying financial product on (a) specific date(s) at a predetermined price.

Q

Quotation/Quote - 1. A dealer’s bid or offer price for a security.  2. A security’s listed market price.

R

Rate Reset - An amendment, in accordance with a specific formula, in the rate of interest applied to an adjustable rate debt security.

Redemption - The paying off or buying back of a debt security by the issuer on or before its stated maturity date. The redemption can be made at par value or at a premium, as is the custom when exercising a call option.

Repurchase Agreements - Also known as a repo, or a sale and repurchase agreement, is the sale of securities together with an agreement to buy them back at a future date, in return for a short term loan. The repo seller, who is receiving the loan, is offering securities as collateral against the loan.

Reset Date - The date on which the interest rate of an adjustable rate security is reset, in accordance with a pre-agreed formula.

Rule 2a-7 - This is the section of the US Investment Companies Act of 1940 which specifically defines investment restrictions for money market funds.

S

Safekeeping - The physical holding and preservation of securities, or the maintenance of up-to-date CSD records, for the beneficial owners of securities by an agent bank, custodian or fund administrator. See Custody.

Same-day Funds - Money balances that the recipient has the right to transfer or take out of the account on the same day as the funds are received. The value date is equal to the date on which the funds transfer is initiated.

Secondary Market - The market where investors can buy and sell securities from other investors, rather than directly from the issuing company.

Securities Settlement System (SSS) - A system which permits the transfer of securities: either free of payment, i.e. free delivery (for example in the case of pledge), or against payment. Settlement of securities occurs on securities deposit accounts held with a central securities depository (private CSDs or a central bank acting as a CSD) or with a central bank (safe custody operational accounts).  In the latter case, the central bank acts as the intermediate custodian of the securities.  The final custodian is normally a CSD. Settlement of cash occurs in an interbank funds transfer system (IFTS), through a settlement agent.

Settlement - The exchange of securities between buyer and seller and the corresponding transfer of money between the two contractual parties.

Settlement Agent - An institution that is responsible for managing all aspects of the settlement process (including the calculation of settlement positions and the monitoring of the exchange of payments) on behalf of transfer systems or other settlement arrangements.

Settlement Date - The date on which a security transaction is settled i.e. payment is made and securities are delivered. In reference to an investment in a money market fund, this is the date on which subscription proceeds must be sent to the fund or that redemption proceeds must be paid by the fund to the redeeming investor.

7-Day Yield - An annualized historical yield calculated on the date shown based on the preceding seven days level of income earned by the fund.

Short Term Debt Instruments - Fixed income securities with initial or remaining maturities ranging from 12-18 months or less. Examples include, commercial paper, medium term notes, variable rate notes, floating rate notes, bankers acceptances, government bonds, treasury bills, Eurobonds, asset backed security and corporate bonds.

Single Legal Account Pooling - A cash management technique based around a single legal master account structure in the name of the parent or group financing company where the other participant accounts act as memo accounts of that legal account. This cash management technique is widely used
in Northern Europe (Nordic and Baltic countries).

SONIA  - The Sterling Overnight Interbank Average. This is the average interest rate used for bank borrowing in sterling outside of business hours.

Spot Market - A market in which a currency or commodity is traded for immediate delivery and against cash payment. Settlement usually occurs within two business days. Also known as cash market.

Spot Price - The rate or price applying to the immediate delivery of a commodity or currency.

Spot Rate - 1. The annual rate of return on a zero-coupon instrument.  2. Synonym for spot price, particularly when involving currency transactions.

Spot Transaction - A transaction where both parties agree to pay each other a specific amount in a foreign currency either on the same day or within a maximum two days of each other.

Spread - 1. The differential between the yields of two fixed-income securities, mostly expressed in basis points.  2. The difference between the bid and ask prices quoted for a security.

Spread to Treasury/ Governments - The spread differential between the yields of a non-government fixed income security and that of a treasury/government security with the same or similar characteristics, whereby the latter acts as a benchmark.

Stable Net Asset Value (SNAV) - See Constant Net Asset Value (CNAV).

Sterling Overnight Interbank Average (SONIA) - A sterling overnight index average that tracks actual average market sterling overnight funding rates each day for settlement that day. It is based upon all unsecured sterling overnight cash transactions brokered in London by Wholesale Market Brokers’ Association (WMBA) member firms.

Strike Price - The price in an option contract at which the option can be initiated, i.e. the price at which the option’s underlying security/commodity can be bought or sold.

Sub-Custodian - Any company/institution providing custody administration services on behalf of other custodians who may not have an operation in the country concerned.

Swap - An agreement between two parties to exchange (or swap), under specified conditions, a set of cash flows at a future point in time.

Swaption - An option on a swap where the buyer of the option has the right, but not the obligation, to enter into a specified swap at a specific future date.

Sweep Account - A bank account that automatically transfers excess balances into an overnight interest-earning investment with the same bank.

T

Target Balance - The minimum amount that needs to be maintained in each sub-account under a target balancing scheme.

Target Balancing - A cash concentration technique whereby all account balances are physically transferred into a nominated account leaving a predetermined amount in the sub-accounts. Also known as target concentration or sweeping.

Taxable Equivalent Income (Taxable Equivalent Yield) - Adjusting method that allows tax-free income or yield to be compared to gross taxable income before any taxes are deducted in order to determine how much taxable income/yield is required to equal the income or yield generated by a tax-free investment.

T-bill Rate - (USA) The yield derived from the interest rate achieved on the weekly auctions of the three-month treasury bill.

Tenor - The period between the issue date and the final maturity of a security.

Threshold Balancing - A cash concentration technique where the balances of the sub-accounts are physically transferred in their totality into a nominated account each time the sub-accounts’ balances reach a predetermined threshold.

Time Deposits - A product offered by banks whereby the bank agrees to pay a fixed rate of interest in exchange for the depositor agreeing to deposit the principal for a fixed period, ranging anywhere from overnight to two years and beyond. Generally, the rate of interest offered will be higher the longer the term of fixed deposit.

Time Value of Money - The concept that the value of money is linked to time because of its capacity to earn interest over time. Thus, a given amount of money available today is worth more than a given amount of money to be received tomorrow, because the amount available now can be invested immediately.

Total Return - Return on an investment, taking into account reinvested income as well as capital appreciation.

Trade date - The date on which a transaction is executed following which settlement will occur on the agreed settlement date. Also known as transaction date.

Tranche - One part of a number of different securities that are issued by the same company at the same time. Such securities may differ in terms of risk, yield and/or (most commonly) maturity.

Transfer Agent - An individual or company that records, on behalf of a company, the sale and purchase of a company’s securities as well as maintaining detailed ownership records of the company’s shares and other registered securities. Sometimes called a registrar in the USA.

Treasury Funds - A money market fund which invests exclusively in securities issued by the U.S. Treasury. Some Treasury funds may have the ability to use repurchase agreements backed by U.S. Treasury securities. Treasury Inflation-indexed Securities (TIIS), Treasury Inflation-protected Securities (TIPS) (USA) Government securities which are inflation-protected in respect of their real value through their linkage to the consumer price index.

U

UCITS - Undertaking for Collective Investment in Transferable Securities. This is the acronym for the pan-European regulation governing collective investment schemes (mutual funds). This European regulation contains requirements such as minimum diversification requirements, product disclosure etc.

V

Variable Net Asset Value (VNAV) - A form of money market fund whose value fluctuates on account of marking to market the value of the investments held in the fund’s portfolio.

Volatility - The level of fluctuation in the rate/price of financial instruments and assets.

W

Weighted Average Life (WAL) - The weighted average days to maturity of a portfolio of securities, based on the final maturity of all instruments including those with a floating interest rate.

Weighted Average Maturity (WAM) - The weighted average days to maturity of a portfolio of securities, based on the reset date of floating rate instruments, and the final maturity of other instruments.

Withholding Tax - Tax retained at source, generally on dividend and interest income.

Working Capital - The short-term assets a company has at its disposal to produce assets. These include items such as cash, accounts receivable, inventory and marketable securities. The amount by which these exceed the company’s short-term liabilities is the net working capital or net current capital.

X

Y

Yield - The annual rate of return from income paid out on an investment in securities or a money market fund, expressed as a percentage of the current market prices of the relevant securities.

Yield curve - A graphical representation of demonstrating the relationship between yield and maturity on comparable debt securities with different maturities, usually for a single issuer or a very closely related group of issuers.

Yield Spread - The difference in the effective rate of interest offered by two debt securities.

Yield to Maturity (YTM) - The return on a security held to maturity, taking account of the coupon and reinvestment rates and the buying price compared to its face value. YTM assumes that all coupons are fully paid out on their due dates and reinvested at the same yield and that the principal is paid back in full upon maturity. It is an internal rate of return calculation performed on the security’s expected cash flows.

Z

Zero Balance Account (ZBA) - A bank account that is automatically brought to a zero balance each day. Debits are covered by a transfer of funds from a master account at the same bank. Credit balances are automatically transferred to the master account.

Zero Balancing - A cash concentration technique where all account balances are physically transferred into a nominated master account.