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.
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-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.
Equivalent Rate (AER) - The notional annual rate of interest applied to current,
deposit and savings accounts assuming that all interest is reinvested or
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
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
(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
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.
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
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.
Maturity - As opposed to average effective maturity, it does not
take account of a potential early call, adjustable coupons, mortgage
prepayments and puts.
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.
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
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.
Swap - An arrangement where payments based on
different floating rates are swapped. The payments can also be denominated in
(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’.
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.
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
Book Entry - An electronic method of registering
ownership of and transferring securities.
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.
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
Cap - A maximum limit on a price, interest
rate or coupon.
Concentration - A cash management technique where
account balances are physically transferred to/from a single master account for
liquidity management purposes.
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.
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
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.
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.
Ownership - A certificate issued to prove ownership of a given
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
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.
(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.
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
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
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
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.
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.
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.
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.
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.
Forward Contract - An agreement to buy or sell a specified amount of a
foreign currency at a future date for a predetermined price.
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.
(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
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.
Services - These include the processing of
securities trades, keeping financial assets safe and servicing the associated
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).
System - A book-entry system for the issue and
registration of debt securities.
Delivery - The final settlement of a securities
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
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.
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 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.
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
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.
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
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.
Treaties - Agreements between countries to
attribute taxing rights and provide relief where double taxation might
Double Taxation - Instances where the same income or profit is subject to
(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.
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.
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.
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
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)
(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.
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.
Funds - Open-ended funds tracking an index that are priced on a
continuous basis and can be bought or sold like shares.
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.
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.
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.
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.
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.
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.
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
Discount - The situation in which the spot price
of a currency is greater than the forward price of that currency.
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
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.
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.
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 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.
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.
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
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
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.
(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.
ICSD - International Central Securities
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.
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
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.
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.
Instruments - Securities on which a specific rate of interest is
required to be paid periodically or at maturity.
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.
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.
Fund - A fund which invests in securities outside the country of
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.
Grade - Securities with a long-term credit
rating equal to or above investment grade, which is currently BBB or higher.
(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.
Certificate of Deposit (CD) - A certificate of deposit with a high face
value generally purchased by institutional investors looking for low-risk
LIBID - Abbreviation for the London Interbank
Bid Rate which is normally 12.5 basis points or an eighth less than LIBOR (see
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
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.
Investments - Securities which have been admitted for trading on an
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.
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
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
The value of an asset based on the
market price at a given point in time, i.e. the tradable value of each
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
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
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.
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.
A mutual fund that invests in a diversified portfolio of
short term, high quality, money market instruments.
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.
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.
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.
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.
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.
Principal Amount (Notional Principal) - In a derivatives contract, the amount of underlying
assets used to calculate the obligations between the different parties.
Offer Price - The price at which currencies, assets,
securities, commodities or instruments are sold or money/funds are lent by
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.
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
(OTM) - A revalued derivative position showing a loss because of
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.
(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.
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
Portfolio - A collection of financial assets
purchased by private or institutional investors in order to achieve a return on
the capital invested.
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.
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
Quotation/Quote - 1. A dealer’s bid or offer price for a
security. 2. A security’s listed market price.
Rate Reset - An amendment, in accordance with a
specific formula, in the rate of interest applied to an adjustable rate debt
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
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
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.
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
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
Market - The market where investors can buy and
sell securities from other investors, rather than directly from the issuing
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
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.
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.
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.
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.
Asset Value (SNAV) - See Constant Net Asset Value (CNAV).
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
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.
Target Balance - The minimum amount that needs to be
maintained in each sub-account under a target balancing scheme.
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.
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.
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
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
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.
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.
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
Volatility - The level of fluctuation in the
rate/price of financial instruments and assets.
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.
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
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
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.
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.
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