Knowledge

The process of inputting historical or legacy activity into a trade repository or any other market infrastructure. The process includes agreeing the full economics and legal documents between two counterparties before the trade is backloaded into the repository.

A rate fixed at the end of an accrual period and paid on the same date.

An option that “Balloons” in size once a certain trigger is reached. It is most commonly used in FX markets but can also be used in interest rate, equity and commodity markets.

The mission of the Bank for International Settlements (BIS) is to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks.

A unique address that identifies the financial institutions involved in international financial transactions. It consists of eight or eleven characters, comprising the first three or all four of the following components: Bank Code, Country Code, Location Code and Branch Code. Example of where BICs are used is during the settlement instruction process to move funds from one institution to another.

The Bank of England is the central bank of the United Kingdom. Sometimes known as the ‘Old Lady’ of Threadneedle Street, the Bank was founded in 1694 with a founding charter that stated its purpose was to ‘promote the public good and benefit of our people’.

A credit event used in all credit derivatives where the reference entity is a corporate. Bankruptcy events include the reference entity being dissolved, becoming insolvent, making an arrangement for the benefit of its creditors, being wound up or having a judgment of insolvency made against it.

A modified interest rate cap that only pays a return to the buyer when the underlying index, usually LIBOR, is above the defined barrier level. When above this level the barrier cap payout is the same as the payout on a traditional interest rate cap. The barrier feature is usually applied to each LIBOR period separately. A traditional interest rate cap can be considered as a barrier cap where the cap strike and cap barrier are set at the same level. A barrier cap with a maximum dollar payout is known as a bounded Barrier floor.

A modified interest rate floor that only pays a return to the buyer when the underlying index, usually LIBOR, is below the defined barrier level. When below this level the barrier floor payout is the same as the payout on a traditional interest rate floor. The barrier feature is usually applied to each LIBOR period separately. A traditional Interest rate floor can be considered as a barrier floor where the floor strike and floor barrier are set at the same level. A barrier Floor with a maximum dollar payout is known as a interest rate floor.

An option that pays off or ceases to exist if the underlying asset has reached or exceeded a specific price until exercise. This is a path dependent instrument.

Implied correlations of tranches with an attachment point of zero (equity tranche). The base correlation number for a hypothetical tranche is created by combining multiple tranches.

This is also known as the primary currency of a foreign exchange transaction and is usually the domestic currency.

A committee of banking supervisory on authorities established in 1974 which provides a forum for regular cooperation on macro and micro banking supervisory matters.

One hundredth of one percent per annum, i.e. 1 bp = 0.01%. When applied to a price rather than a rate, the term is often expressed as annualized basis points.

The difference in the price of a security when the yield changes by 1 basis point. Sometimes also called a DV01.

The risk that the relationship between the differences (spread) of the price or rates of two closely linked financial instruments will change over time.

An interest rate swap where the cash flows that are exchanged between two party at different floating rates or prices. This is usually done to limit interest rate risk that a company faces as a result of having differing lending and borrowing rates. Also called a floating-floating swap.

A basket default swap is similar to a single entity default swap except that the underlying is a basket of entities rather than one single entity. There are several types of basket default swaps. The popular ones are first-to-default, n-th-to-default, n-out-of-m-to-default and all-to-default swaps. With a single entity, a credit event is usually a default of the entity. With a first-to-default swap, a credit event occurs the first time any of the entities defaults. A similar definition holds for an n-th-to-default swap. An n-out-of-m-to-default swap protects the buyer against losses related to the first defaults of the m-entity basket. Similarly, an all-to-default swap protects against losses resulting from credit events of any of the entities in the basket.

An option whose payoff depends on the value of a portfolio (or basket) of assets.

A unique identifier for a financial institution set up to distinguish the beneficiaries from the non-beneficiaries and to protect against fraud and duplicate payments.

Call or put option which can be exercised on pre-specified days during the life of the option. It is a hybrid between an American and European option.

A collateral agreement between two counterparties that requires either party to post security, depending on the value of the portfolio of contracts and the level of unsecured credit limits that have been established.

An arrangement between two parties that transactions be summed, rather than settled individually. Bilateral netting not only streamlines the settlement process, it also reduces risk by specifying that, in the event of a default or some other termination event, all outstanding contracts are likewise terminated.

An option in which its payoff is a fixed amount if the underlying is at or above the strike price when it expires. The amount of payoff does not change by the amount of the difference between the underlying and the strike price.

A method to calculate possible paths that might be followed by the underlying asset’s price over the life of the option. The model works by dividing the time to expiration into a number of time intervals and over each time interval, the model assumes that the price of the underlying moves up or down to certain values. Then from the up or down prices at the next time step, the up and down price is calculated for each scenario until the expiry date. The magnitude of these moves is determined by the volatility of the underlying and the length of the time interval.

A method to calculate the price of a European style option (exercise on expiry date only) assuming that the underlying instrument pays a constant dividend, extraneous costs such as taxes are ignored, a constant risk-free interest rate, constant volatility and the price follows a probability distribution that is lognormal (a mathematical statistic: the logarithm of the price is normally distributed) until expiration. Although this model produces a theoretical value, it is considered the industry standard.

A block trade is an initial overall size of notional executed, which is then allocated to individual legal entities.

A day count method which assumes that each month has 30 days and each year consists of 360 days (30/360).

An agreement whereby the short position (seller) agrees to deliver pre-specified bonds to the long (buyer) at a set price and within a certain time frame. The forward contract is an agreement between two counterparties to exchange bonds at an agreed price and time in the future. The futures contract is typically traded on an exchange and the underlying bond is “standardized”. “Standardized” means that it is a fictional bond.

Option to purchase or sell a particular debt security. Exchange traded options are usually on government bonds. Over the counter options are often embedded in corporate debt issues.

A process to determine an interest rate or volatility at a particular time by plotting known rates on a graph to create a curve.

Has the features of both a barrier cap and a bounded cap. A barrier cap only pays a return to the buyer when the underlying index, usually LIBOR, is above the defined barrier level, but the bounded barrier cap limits this payout to a defined dollar maximum over the life of the cap.

Has the features of both a barrier floor and bounded floor. The barrier floor only pays a return to the buyer when the underlying index, usually LIBOR, is below the defined barrier level, but a bounded barrier floor limits this payout to a defined dollar maximum over the life of the floor.

An option strategy comprised of a long call and a short put with the same strike price as well as a long put and a short call having the same strike price that is higher than the first two options (long call and short put).

An interest rate swap where the floating rate is calculated using the average one-day Brazilian interbank deposit rate (CDI rate) which is an annual rate calculated daily by the C?mara de Cust?dia e Liquida??o (CETIP). It represents the average rate of all inter-bank overnight transactions in Brazil. The swap has only one payment, which occurs at maturity.

A forward contract that permits the holder to profit if the price of foreign exchange rises, but puts a floor on losses if it falls. This payoff profile can be obtained using both FX options and forward contracts. Also known as cancelable forward FX contract.

A forward rate that when combined with the yield earned from a short term deposit produces the same average return as a single long term deposit. This is referred to as the parity method of obtaining a forward rate.

In the case that a broker acts as intermediary for the reporting counterparty without becoming a counterparty, the reporting counterparty shall identify this broker by a unique code. In the case of an individual, a client code shall be used.

The German Federal Financial Supervisory Authority for German regulated entities.

The convention for adjustment of event dates relating to a financial transaction towards a valid business day.

A jurisdictional holiday list used to adjust reset and coupon dates.

An option strategy involving three call or put options with strike prices that are equally apart. Buy or sell the option with the lowest strike price, sell or buy twice the quantity at the central strike price and buy or sell the option at the highest strike price. The payoff diagram for this option strategy resembles a picture of a butterfly.

An option strategy comprised of a long call, a short call having a strike price higher than the long call as well as a short call having a higher strike price than the long call.

A financial derivative that allows, but does not require, its owner to buy (?call?) an asset from the option seller at a certain price (the strike price) at a specific future date. The option is of value to its owner if the market price of the asset rises above the strike price.

The amount that the purchaser of a call option pays to the seller (writer) to buy (purchase price) a call option. The difference between the call price of a bond and the par value of the bond.

An option strategy designed to limit costs and losses (and lower returns) which involves purchasing a call option and selling another call option (at a higher strike price), with both options having the same expiry date.

An option strategy comprised of a long call, a short call having a higher strike price than the long call as well as a short put having a strike price usually, but not always the lowest.

An interest rate cap where the fixed rate payer has the right, but not the obligation to terminate the swap at one or more pre-determined times during the life of the swap. A Swap where the fixed rate receiver has the right to terminate is known as a putable swap. Both callable and putable swaps are also known as cancellable swaps. The foreign exchange version of the cancellable swap is known as a break forward or cancellable forward.

See Break Forward Contract.

A cancelable interest rate swap provides the right to cancel the swap at a given point in the future. An example would be a swap with a tenor of 5 years that can cancelled after year three. This can be broken into two components. The first is a vanilla five year swap paying floating and receiving fixed. The econd component is a payer swaption exercisable into a two year swap three years from today. The result is that when the original bond is called, the swaption is exercised and the cash flows for the original swap and that from the swaption offset one another. If the bond isn?t called, the swaption is left to expire.

One of the interim dates of caps each with an expiry date generally on the date which the forward rate is set in a multiple period cap agreement. A cap is not a continuous guarantee which means claims can only be made on specified dates selected by the purchaser.

An interest rate swap with a cap in which the floating payments of a swap are capped at a certain level. A floating-rate counterparty can thereby limit its exposure to rising interest rates above a certain level.

A Caption is simply the right but not the obligation to buy or sell an Interest Rate Cap at some defined point in the future for a defined premium.

A hedge that includes a derivative with a periodic settlement based upon cash flows such as interest rate changes on variable rate debt (FRNs) which are swapped for a fixed rate to offset the variability of the cash flow of a balance sheet item.

A tolerance defining the maximum amount of cash to be paid or received in a triReduce portfolio compression unwind proposal.

Annualized amount that the buyer of a CDS (credit default swap, see below) must pay the seller over the length of the contract, expressed as a percentage of the notional amount.

Difference in the credit spread on a credit default swap (CDS) and the underlying reference bonds. See also Credit default swap and Basis.

Markit credit default swap (CDS) indices focused on North America. Investment Grade, High Yield, and Emerging Markets are the three major sub-indices.

An entity that interposes itself between counterparties, becoming the buyer to sellers and the seller to buyers in what would otherwise be bilateral arrangements between sellers and buyers.

An infrastructure service that allows the registration, safekeeping and settlement of securities in exchange for cash and efficient processing of securities transactions in financial markets.

An identifier for all legal entities dealing in over-the-counter derivatives falling under CFTC jurisdiction, where they do not have an existing Unique Counterparty Identifier (UCI) or unique Legal Entity Identifier (LEI).

Given the list of deliverable securities into the futures contract, the cheapest to deliver bond has the lowest delivery-adjusted spot price (spot price divided by conversion factor).

A modification of the flexible cap. While the number of cap “uses” is still limited, the buyer can choose when to use the cap rather than have it automatically exercised. A chooser flexible cap where the notional amount increases each time the cap is not exercised is known as a super flexible cap.

A modification of the flexible floor. While the number of floor “uses” is still limited, the buyer can choose when to use the floor rather than have it automatically exercised. A chooser flexible floor where the notional amount increases each time the floor is not exercised is known as super flexible floor.

An option where the investor has the opportunity to choose whether the option is a put or call at a certain point in time during the life of the option. The underlying options are assumed to be European options on the same asset. At the expiry date of the chooser option, it is assumed that a rational holder of the chooser option will choose the more valuable of the put or call option. In doing so, the less valuable option, not chosen, will die.

A standard for identifying the type of instrument and their core high-level characteristics.

A code used to define and describe in an internationally valid, standardised format, classification of financial instruments which could be used as a uniform set of codes by all market participants.

The price of fixed-interest security not including any accrued interest.

The process of transmitting, reconciling and, in some cases, confirming payment orders or security transfer instructions prior to settlement, possibly including the netting of cash flows and the establishment of final positions for settlement. It can be bilateral or multilateral.

Acts as a liaison between a counterparty and either a Clearing Member or a clearing corporation. A Clearing Broker can be a clearing member and face the exchange directly or it can face a clearing member who in turn faces the exchange.

A financial institution that provides clearing and settlement services for market participants to mitigate credit risk between individual market participants. Clearing houses are also known as Central Clearing Counterparty (CCP).

A CM is a member of a clearing house. In a CCP context, a CM clears on its own behalf, for its customers, and on behalf of other market participants. Non-clearing members use CMs to access CCP services. All trades are settled through a CM.

The unique code that identifies an institution who provides clearing services for market participants. The clearing member will face the CCP on behalf of their counterparty.

An obligation under EMIR for all financial counterparties (FCs) and non-financial counterparties (NFC+) to clear their eligible trades via a clearing house.

The total exposure (in terms of total notional amount) a non-financial counterparty can reach before being obliged to clear its trades centrally. It is the dividing line between NFC- and NFC+. The threshold only covers speculative trades and varies per asset class.

Clients can be classified under EMIR as either a financial counterparty, non-financial counterparty +, or non-financial counterparty – in order to determine the applicability of certain EMIR rules.

Firms who are not direct members of a clearing house must rely on having their trades cleared by an intermediary, who is a direct member of the Clearing House.

The processes and procedures that need to be performed before a client can trade or buy services from a financial institution. For example: KYC, legal agreements, provision of account information and Legal Entity Identifier.

Static reference data associated with a client to allow the applications and functional processes to support client activity for example Legal Entity Identifier, BIC code, Location of Client Head Office.

Options that provide a guaranteed minimum return in exchange for capping the maximum return over the life of the contract.

A close match is a mismatch on one or two fields of lesser importance in a triReduce portfolio compression operation.

A legal provision in master agreements, allowing for the nondefaulting party to offset receivables and payables when one party defaults. When default occurs, termination of the contract is triggered and a single net amount due between the counterparties becomes payable.

A type of spread option strategy where an investor purchases (or sells) a call option while at the same time sells (or purchases) a put option both of which are out of the money with the same expiry date. If the strikes are chosen so that the purchase price of the call option and the sale price of the put option exactly match, then this is called a costless collar.

A collar on a swap. The transaction is zero-cost ? the purchase of the cap is financed by the sale of the floor. The collar allows the floating-rate receiver to gain slightly if rates go down.

Property or other assets that a borrower offers a lender to secure a loan. If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup its losses. In trading, collateral is posted from one counterparty to another to offset the risk of losses associated with its position.

The issuing of a demand for margin / collateral is sent to a counterparty following the calculation of the collateral requirement.

The process by which a counterpart disputes a collateral call.

Collateral that is due to be sent or returned but has not yet settled.

Collateral is posted from one counterparty to another to offset the risk of losses associated with its position within the overall portfolio of positions.

A legal agreement which sets forth the terms and conditions of collateralisation.

The pledge of collateral to act as a safeguard against default.

A financial instrument that is linked to a diversified pool of credits or credit derivatives which are mostly backed by corporate bonds or other corporate debt. The credits can be assets, such as bonds or loans, or simply defaultable names, such as companies or countries. There are two categories of CDOs: Cash CDOs and Synthetic CDOs

An independent committee of European Securities Regulators set up to improve the coordination among securities regulators through networking. The CESR provides advisory support to the European Commission in the field of securities to ensure more consistent implementation of community legislation.

A committee made up of the central banks of G10 countries that monitors developments in payments, settlements and clearing systems.

A forward contract which is very similar to a futures contract, except that the terms and conditions can be specified to meet the particular needs of the counterparty. These contracts are primarily on agricultural or precious metal commodities and can be used for hedging, arbitraging and speculating against the future price of the underlying asset.

A simultaneous purchase or sale of a series of commodity forwards. The fair value of a commodity strip is the sum of the fair values of each of the commodity forwards.

A futures contract is an agreement between two counterparties that commits one party to sell a standardized quantity of a commodity at a given price on a specified future date. These contracts are primarily on agricultural or precious metal commodities and can be used for hedging, arbitraging and speculating against the future price of the underlying asset. These contracts are standardized and traded on an exchange, in contrast to a forward.

The Commodity Futures Trading Commission (CFTC) is an independent US federal agency established by Congress in 1974, whose mandate is to regulate the commodity futures, options and derivatives markets in the US. The mandate of the agency has been most recently renewed by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

A commodity call option gives the holder the right to buy a commodity at a specified price (the exercise or strike price) for a certain time. The seller of a call option assumes a corresponding obligation to sell the commodity if and when the call option holder decides to exercise his right to buy. A put option gives the holder the right to sell a commodity at a specified price for a certain time. The seller of a put option assumes a corresponding obligation to buy the commodity if the put option holder decides to exercise his right to sell.

A simultaneous purchase or sale of a series of call or put options. The fair value of a commodity option strip is the sum of fair values of the individual options.

An agreement whereby a floating price based on an underlying commodity is traded for a fixed price over a specified period. The floating leg is based on the price of underlying commodity, for example oil or sugar.

A set of 59 fields which is common to both parties to a trade including contract type and transaction details e.g. trade ID (UTI), notional amount, currency, maturity date, etc. To avoid inconsistencies, common data needs to be agreed between counterparties before submission to a trade repository for EMIR regulatory reporting purposes.

The undiscounted interest differential for a Forward Rate Agreement (FRA).

The risk of monetary or reputational loss due to failure to comply with key regulations governing the organisation?s operations and business dealings.

An option on an underlying which is itself an option; therefore, there are two strike prices and two expiry dates (where the underlying option?s expiry date is equal to or greater than the compound option?s expiry date). The underlying option is assumed to be a European Style option on an asset which follows a lognormal random walk (such as a basic Black-Scholes call or put option).

The number of times per year that interest is credited to a deposit. Annual compounding is once per year, semi-annual is twice per year, quarterly is four times per year and monthly is 12 times per year.

An interest rate swap which compounds interest over more than one fixing period.

TriOptima, through its triReduce service, offers market neutral compression of trades and gross notional. See also Multilateral Termination.

An options strategy comprised of a long call (or put) and another long call (or put) having different strike prices as well as two short calls (or puts) having their strike prices equally spaced between the two long options.

Client can be classified under US legislation as Conduit Affiliates. This classification will determine the applicability of certain rules. Factors relevant to determine classification include: (i) the non-US person is a majority-affiliate of a US person; (ii) the non-US person is controlling, controlled by or under common control with the US person; (iii)the financial results of the non-US person are included in the consolidated financial statements of the US person (iv) the non-US person, in the regular course of business, engages in swaps with non-US third party(ies) for the purpose of hedging or mitigating risks faced by, or to take positions on behalf of its US affiliate(s), and enters into offsetting swaps or other arrangements with its US affiliate(s) in order to transfer the risks and benefits of such swaps with third-party(ies) to its US affiliates; (v) Conduit Affiliate does not include affiliates of Swap dealers.

A legal agreement to all terms of an individual over-the-counter transaction between two counterparties. A confirmation shall legally supersede any previous agreements. Confirmations can be produced electronically or manually in paper form.

The date and time of when the confirmation was fully legally executed.

Credit default swap (CDS) contracts where the spread is reset periodically, for example every six months, based on changes in the market spread for a benchmark CDS tenor.

A derivative where the payoffs are based on interest rate swap rates or bond yields (multiple payments) but the payoffs are calculated as if the rates or yields were zero coupon rates. The term constant maturity swap (CMS) is used when the derivative is based on swap rates and the term constant maturity treasury (CMT) is used when the derivative is based on bond yields.

An interest rate swap where the interest rate on one leg is reset periodically but with reference to a market swap rate rather than LIBOR. The other leg of the swap is generally LIBOR but may be a fixed rate or potentially another constant maturity rate. Constant maturity swaps can either be single currency or cross currency swaps.

A hybrid credit derivative which, in addition to the occurrence of a credit event requires an additional trigger, typically the occurrence of a credit event with respect to another reference entity or a material movement in equity prices, commodity prices, or interest rates.

An interest rate cap where the buyer pays a small up front premium but may have to pay a further premium instalment if LIBOR fixes above a pre-determined “contingency level”. The total premium is therefore contingent upon market events.

Generic term for an interest rate swap that is activated when rates reach a certain level or a specific event occurs. Swaptions are often considered to be contingent swaps ? the specific event in this case being the exercise of the option. Other types of swaps, e.g., droplock or spreadlock swaps, are activated only if rates drop to a certain level or if a specified level over a benchmark is achieved.

Requirement under Dodd Frank to report life cycle event data (e.g., assignments, novations and full or partial terminations) to ensure that the trade repository record remains current and accurate.

CLS operates the largest multi-currency cash settlement system to mitigate settlement risk between members of the system. The system takes members gross cash flows and nets them with other members to reduce the size and number of cash flows between participants, thereby reducing settlement risk.

The percentage amount of the principal amount used to determine cashflow amounts.

The time of delivery at which the cash price and the futures price are finally equal because the cost of carry decreases over time.

The amount that must be added to the forward rate yield to give the expected future rate (yield) in order to calculate the expected payoff.

From the Latin word, meaning ?to bond”, a copula is a statistical measure that links many variables together and has been applied to option pricing and portfolio value-at-risk to help identify various risks to deal with skewed distributions in finance.

The amount of money spent during the course of owning an investment such as interest expenses plus the amount of money that could have been made otherwise (opportunity costs) had the investment not been purchased.

The other party involved in the transaction or trade.

Every transaction needs to have two parties to conclude a transaction. The two parties are known as counterparties to a trade.

A set of 26 fields, specific to a counterparty including counterparty ID, name of counterparty, country of domicile, beneficiary information, clearing broker ID. Under EMIR, counterparty data must be reported to a trade repository independently by both counterparties.

The risk faced by one party in a contract that the other, the counterparty, will fail to meet its obligations under the contract.

An option that settles periodically and resets the strike at the worst of (a) the then spot level, and (b) the original strike set in period one. It is a series of options, but where the total premium is determined in advance. The payout on each option can be paid at final maturity, or paid at the end of each reset period.

An amount due on a transaction as a result of an interest rate calculation.

The periodic interest payments on a bond

The percentage of the annual dollar amount of coupon payments to the bond?s par value

An option strategy where the investor owns a stock and writes a call option on the same amount of the stock. If the holder exercises the option, the stock owner must deliver the stock. This strategy is used if the stock owner believes that the stock price may decline in which case the holder will not exercise and he or she keeps the premium. If the price of the stock goes up and the option is exercised, the risk is minimal as the writer already owns the stock.

During linking in a triReduce portfolio compression cycle, this term is used for trades that are submitted by the counterparty, but not by the participant.

An option to buy or sell the underlying CDS index at a specified date.

A portfolio of single-entity credit default swaps where the premium notional is variable. The most popular CDISs are the so-called standardized CDISs. In these standardized contracts the reference entity pool is homogeneous, that is, all the reference entities have the same notional and the same recovery rate. Typical examples of standardized CDISs are the CDX index and the ITRAXX index

Also known as a credit default swaption, it is an option on a credit default swap (CDS). A CDS option gives its holder the right, but not the obligation, to buy (call) or sell (put) protection on a specified reference entity for a specified future time period for a certain spread. The option is knocked out if the reference entity defaults during the life of the option. This knock-out feature marks the fundamental difference between a CDS option and a vanilla option. Most commonly traded CDS options are European style options.

Credit derivatives whose payoffs are triggered by a credit event, such as bankruptcy, obligation acceleration, repudiation, restructuring and failure to pay.

A financial contract under which an agent buys or sells risk protection against the credit risk associated with a specific reference entity (or specified range of entities). For a periodic fee, the protection seller agrees to make a contingent payment to the buyer on the occurrence of a credit event (usually default in the case of a credit default swap).

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

A credit derivative notice where the counterparty triggering the credit event (normally the protection buyer) informs the other counterparty that a credit event has occurred. The notice must contain a description in reasonable detail of the facts relevant to the determination that a credit event occurred.

A credit exposure of a financial instrument to a counterparty is the amount lost when the counterparty defaults. There are two types of potential credit exposures, worst credit exposures and expected credit exposures. A worst credit exposure at a given time is the largest possible loss of the instrument at certain confidence level when the counterparty defaults. An expected exposure is the expected loss of the instrument at a given time.

The risk that one of the parties to a financial transaction will fail to fulfill its obligation to pay.

Options where the payoffs are dependent on changes to credit spreads, that is, an option whose payoff is based on the credit spread between the debt of a particular borrower and a Treasury security having similar maturity

The Credit Support Annex (CSA) is a standard form collateral agreement which enables parties to an ISDA Master Agreement to receive and provide collateral in order to reduce counterparty risk. In practical terms, the bilateral agreement establishes the day-to-day management of the risk, which involves computing the mark-to-market of the parties? exposure across all the ISDA Master Agreements OTC derivatives and allowing the in-the-money party to make calls for collateral from the out-of-the-money parties.

A legal agreement between the two parties to an OTC derivative transaction which contains the agreed collateral terms under an ISDA Master Agreement.

The risk of loss caused by changes in the credit spread of a counterparty due to changes in its credit quality (also referred to as the market value of counterparty credit risk). Under Basel II, the risk of counterparty default and credit migration risk were addressed but mark-to-market losses due to credit valuation adjustments were not. Basel III introduced a CVA capital charge in addition to the default risk capital requirements for counterparty credit risk.

Also called a credit default note, it is a fixed or floating rate note where the coupon and principal payments are referenced to a reference credit, which can be a single name or multiple names. It pays interest and repays principal that depend on a credit event. At maturity, the investors receive par unless the referenced credit defaults or declares bankruptcy, in which case they receive an amount equal to the recovery rate

Used in the valuation of cross currency basis swaps, this is the liquidity premium of one currency over the other that is added to the floating rate of one of the legs of the swap

An embedded Bermudan option in a cross currency swap. It is a contract in which the holder of a cross currency swap is long or short an option to put the swap at certain cash flow payment dates. For example, suppose a fixed leg cross-currency swap payer is long a Bermudan swaption. Then he makes periodic payments based on a fixed rate in a certain currency and receives floating rate payments based on the interest rate of another currency. At certain payment dates he can cancel the swap, or equivalently, he can switch to pay the floating rate and receive the fixed rate. Most cross currency swaptions are fixed-for-floating swaptions. Typical swaptions have fixed notionals for both receive and pay legs, and a single fixed coupon rate for the fixed leg and a single spread for the floating leg

An interest rate swap that consists of each leg dominated in a different currency and two notional principal amounts also in different currencies. The two parties agree to exchange principal and interest payments in one currency for the principal and interest payments in the other currency. The principal amounts must be paid out at maturity

The practice of margining across products, asset classes or clearing houses, resulting in netting benefits due to overall lower margin requirements.

An agreement to exchange a specified amount of one currency for another at a future date at a certain rate. The exchange of currencies is priced on an arbitrage-free basis according to the interest rates in the two jurisdictions

Options on foreign assets where the payoff is exchanged into the domestic currency. For example, a US investor may be interested in buying an option on a British equity which is priced in sterling. Two types of risk must be considered when pricing the option: exchange rate changes and price changes

A financial institution that holds customer securities for safekeeping so as to minimise the risk of their theft or loss.

Dates that are generated backwards from the terminating date, based on the user-defined frequency.

The simultaneous purchase of a currency put option and sale of a currency call option at different strike prices. Both options are out of the money. This strategy enables purchasers to hedge their downside risk at a reduced cost. This is at the expense of forgoing upside beyond a certain level since the purchase of the put is financed by the selling of the call (or vice versa). See also Range Forward

The date from which accrued interest is calculated on debt instruments (bonds) when the purchase date is between interest payment (coupon) dates.

Used for the calculation of an accrual factor, this is the number of days that a financial instrument accrues interest for a partial time period based on the defined interest accruing days that make up a full period. Also known as accrual method.

Measures the possibility of one company to default on its obligations and its affect on another company to default on its obligations as well. This is positive default correlation. It is also possible that the opposite (negative) can occur.

A pool of funds established by a central counterparty (CCP), contributed by clearing members to absorb the costs of clearing member non-performance when the failed clearing member’s margin contributions and the CCP’s first-loss contribution are exhausted. It is also known as a guarantee fund.

Measures the likelihood of a counterparty to fail in its obligation over the life of or for a period of time in the agreement.

A pre-determined sequence of actions taken by a clearing house and/or clearing members in the event of a default of one or more members of the clearing house in order to prevent systematic risk.

A swap in which the payments are deferred for a specified period. Unlike a forward swap, where the entire swap is delayed, in a deferred swap only the payments are deferred. For example, a company wanting to enter a swap, but not wanting cash flows until a future period, may want to defer payment.

EMIR permits counterparties to delegates its transaction reporting obligation to the other counterparty to the trade or to a third party service provider.

In a credit derivative credit event, if the physical settlement option is selected, an obligation must be delivered. A deliverable obligation other than the Reference Obligation must be payable in any amount equal to its outstanding principal balance.

The fair quoted bond futures price divided by the conversion factor for the deliverable bond. The bond with the lowest delivery adjusted fair quoted futures price is also the cheapest to deliver bond.

The date that a seller must fulfill the obligations (delivery of a good or transfer of a financial instrument) of a forward or futures contract for settlement.

Commodity market terminology for the physical delivery location relating to a transaction. An example for US Natural Gas is Henry Hub.

The ratio which compares the change in the price of the underlying asset to the corresponding change in the price of a derivative. Sometimes referred to as the “hedge ratio.”?

Rebalancing a portfolio dynamically by taking a short or long position on delta units of the underlying per one unit of the option in which one is long or short, respectively.

The rate of change in the fair value of the option per 1% change in the instant correlation between two assets. This is the derivative of the option price with respect to the correlation value, divided by 100

A holding company consisting of 5 clearing corporations and 1 depository, making it the world?s largest financial services infrastructure corporation dealing with post trade transactions. DTCC is a utility that provides clearance, settlement and information services and it is owned by major investment banks.

A financial contract whose value derives from underlying securities prices, interest rates, foreign exchange rates, commodity prices, or market or other indices. Examples of derivatives include stock options, currency and interest rate swaps, and credit default swaps.

An institution?s derivative receivables is the sum of the positive replacement values of all of its over-the-counter derivatives contracts, and the derivative payables is the sum of the negative values.

A clearing house, clearing association, clearing corporation, or similar entity that enables each party to an agreement, contract, or transaction to substitute, through novation or otherwise, the credit of the DCO for the credit of the parties. A DCO provides clearing services by multilateral settlement or netting of obligations and by mutualising and transferring the credit risk from the transactions to the members of the clearing organisation.

Boards of trade (or exchanges) that operate under the regulatory oversight of the CFTC, pursuant to Section 5 of the Commodity Exchange Act (CEA), 7 USC 7. DCMs are like traditional futures exchanges in that they may allow access to their facilities by all types of traders, including retail customers.

A contract that moves with reference to the slope of a yield curve. The DIRF is meant for those who wish to profit from a steepening or flattening of one yield curve. The DIRF is customised with defined settlement dates, a defined value per basis point, and two defined points on the yield curve.

An interest rate swap in which a counterparty swaps floating payments referenced to an interest rate of one currency into floating payments referenced to an interest rate of another currency. The principal for both payments, however, is in one currency. The differential swap is therefore a strip of forward rate agreements and the pricing characteristics are similar to a fixed-fixed cross-currency swap, and a premium will be payable either up front or as a spread on the floating rate. Also known as cross index basis swap.

A modification of the standard credit default swap (CDS) used for recovery rate trading. If there is a credit event the protection seller pays the protection buyer par minus a fixed recovery rate. In a vanilla CDS the recovery rate is effectively determined after the credit event. See also recovery lock.

An option that provides the buyer with a fixed payout profile. This means that the buyer receives the same payout irrespective of how far in the money the option closes.

A swap structure where the swap can be extended or canceled after a given number of years. Equivalent to a swap plus a European swaption expiring at the date when the extension choice is made.

The price of a fixed-interest security which includes the accrued interest since the last coupon date.

The sensitivity to a change in the rate used to discount future cash flows.

The percentage rate that calculates the present value of one dollar to be received from a security at a specified future date. The discount factor is equal to 1/(1 + i)t where i is the interest rate and t is the number of time units from the date of purchase until the specified future date.

The interest rate used in discounted cash flow analysis to determine the net present value of future cash flows. The discount rate takes into account the time value of money (the idea that money available now is worth more than the same amount of money available in the future because it could be earning interest). See also Net Present Value.

An off-market interest rate swap in which the fixed payments are below the market rate. At the end of the swap the shortfall is made up by one large payment. Companies may use this type of structure to reduce interest rate payments during completion of a project. The more these payments are discounted, the more credit risk is taken by the counterparty. At the extreme, fixed payments can be set to zero resulting in a larger balloon payment on the maturity date. This is known as a zero coupon swap.

A graphical representation of interest rates used for calculating the present value of a transaction’s cash flows.

Processes for identifying, clarifying, monitoring and documenting disputes between counterparties. Dispute processes normally arise from differences in margining, transaction assessment or in case of adjustment of transaction data.

A distribution of a portion of a company?s earnings to a class of its shareholders decided by the board of directors.

A financial regulation, primarily affecting financial institutions and their customers based in US that the Obama administration passed in 2010 in response to the commitments agreed at the G20 2009 Pittsburgh Summit.

An ISDA Protocol aimed at assisting the over-the-counter derivatives industry in implementing regulatory requirements under Title VII of the US Dodd-Frank Act. It allows market participants to: (i) supplement the terms of existing ISDA Master Agreements under which the parties to the agreements may execute individual swaps and derivatives transactions; and (ii) enter into an agreement to apply selected Dodd-Frank compliance provisions to their swaps and derivatives trading relationship.

Part of ISDA?s Dodd-Frank documentation initiative. The protocol is intended to aid compliance with the CFTC?s internal business conduct rules for swap dealers and major swap participants. It addresses: (i) swap transaction confirmation (ii) swap portfolio reconciliation (iii) swap portfolio compression (iv) swap trading relationship documentations (v) the commercial end-user exception from mandatory swap clearing requirements (vi) swap clearing determinations under s.2(h) of the US Commodities Exchange Act.

It is the Delta multiplied by the notional principal.

It is the Vega multiplied by the notional principal.

Options that combine the features of an average strike option and an average price option. Used predominately in the currency markets by multinationals, these options are designed to match currency risks more closely as the option creates an average strike and average price based on pre-defined sampling periods.

A double average option where the strike price is not set at inception; it becomes the average price of the predefined sampling points. Combine this with an average rate feature, the value of a Daro can be described as the difference between the expected average strike price and the expected average rate.

A type of Double Barrier Option whereby in the knock-out case, if during the life of the option neither barrier is touched, the payout at expiry is as for a binary option. For the knock-in option, on the other hand, the payout at expiry is as for a binary option only if one of the barriers has been breached.

A type of Double Barrier Option whereby in the knock-out case, if during the life of the option neither barrier is touched, the payout at the expiry is as for a call or put option. For the knock-in option, on the other hand, the payout at expiry is as for a call or put option only if one of the barriers has been breached.

Options that depend not only on the final asset value but also on whether either one of two barrier levels, a lower barrier which is below the value of the underlying, and a upper barrier which is above the value of the underlying, were touched at some time during the life of the option (making the payoff path dependent). There are two types of double barrier options, a knock in or a knock out.

A type of single barrier option that when the option is set, the underlying asset is above the barrier level. If the barrier is touched, the holder now owns a standard option. If over the life of the option the barrier is never touched, the option dies worthless though the holder may be entitled to a rebate.

A type of single barrier option that when the option is set, the underlying asset is above the barrier level. As long as the barrier is never touched, the holder owns a standard option. If the barrier is ever touched, the option dies worthless though the holder may be entitled to a rebate.

This phase of a triReduce cycle provides participants with a test proposal giving them an indication of the risk movements they can expect to see in Live Execution.

The Trade Information Warehouse (TIW) is a centralised global trade repository for trade reporting and post-trade processing of OTC credit derivative transactions and virtually for all credit default swaps (CDS) contracts outstanding in the global marketplace. It is a service offered by the Depository Trust & Clearing Corporation and DerivSERV (a subsidiary of DTCC established in 2003). It offers services of repository, regulatory reporting and lifecycle event processing, particularly, the central settlement operated in collaboration with CLS (Continuous Linked Settlement) Bank.

A swap used to hedge dual currency bonds in which the issuer has the option to repay principal and coupon in either the base currency or an alternative currency, at a preset exchange rate. Dual currency swaps are currency swaps that incorporate the foreign exchange options necessary to hedge the interest payments back into the principal currency.

A dual strike option is a European style option whose payoff involves receiving the best payoff of two standard European style call or put options. These options involve two underlying assets and two strike prices.

A commonly used term for a measure of risk and stands for the Dollar Value of a one unit change in the underlying. It is used across a number of different asset classes.

Credit spread sensitivity. The change in fair value per X basis points up shift in the par CDS spread curve of each entity in the reference pool or in the case of a single entity, only the default curve of the specified reference entity is shifted X basis points.

A credit default swap with the notional linked to the mark-to-market of a reference swap or portfolio of swaps. For example, the notional amount applied to computing the contingent payment could be equal to the mark-to-market value, if positive, of the reference swap at the time of the credit event. The protection buyer pays a fixed fee, either up front or periodically, which once set does not vary with the size of the protection provided. The protection buyer will only incur default losses if the swap counterparty and the protection seller fail. This dual credit effect means that the credit quality of the Protection Buyer?s position is compounded to a level better than the quality of either of its individual counterparties. It is also called a credit intermediation swap.

The date when a contract enters into force.

Technology through which investors and traders can open, close and manage market positions.

The end of the trading day in financial markets, when markets have closed.

Dates are adjusted to land on last day of the month.

An exchange of payments relating to an energy commodity.

The name of an organization (such as a business or governmental unit) that has an identity separate from those of its members and so exists as a particular and discrete unit.

A measure of the profit from option positions of equivalent risk where risk is adjusted using its delta. Equalizing ratio is calculated by dividing the difference between an option’s theoretical (fair) value and market price by the absolute value of its delta.

The European Commission is the executive body of the European Union responsible for proposing legislation, implementing decisions, upholding the Union?€™s treaties and day-to-day running of the EU.

A European Union financial regulatory institution that replaced the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS). It is established under EU Regulation 1094/2010.

The European Union regulation on derivatives, central counterparties and trade repositories. EMIR introduces new requirements to improve transparency and reduce the risks associated with the derivatives market. EMIR also establishes common organisational, conduct of business and prudential standards for CCPs and trade repositories. EMIR is Europe’s response to the commitments agreed at the G20 2009 Pittsburgh Summit.

The European Securities and Markets Authority (ESMA) is an independent EU Authority that contributes to safeguarding the stability of the European Union’s financial system by ensuring the integrity, transparency, efficiency and orderly functioning of securities markets, as well as enhancing investor protection. The main general purpose of ESMA is to ensure the correct functioning across the financial markets in Europe by providing a consistent investor protection and international supervisory co-operation.

Call and put options that can only be exercised at the specified maturity or expiration date. See also American style option.

This body oversees the regulation of financial services across Europe and consists of the separate agencies: European Securities and Markets Agency (ESMA), European Banking Agency (EBA) and European Insurance and Occupational Pensions Authority (EIOPA).

An option on a forward start interest rate swap that gives the purchaser the right to either pay or receive a fixed rate. A buyer of a swaption who has the right to pay fixed and receive floating is said to have purchased a payer swaption. Alternatively, the right to exercise into a swap through which the buyer receives fixed and pays floating is known as receiver swaption. The options holder is only permitted to exercise on the expiry date.

For Credit Derivatives, it relates to the date on which the Credit Event Notice is ‘served’.

A marketplace in which securities, commodities, derivatives and other financial instruments are traded. The core function of an exchange is to ensure fair and orderly trading, as well as efficient dissemination of price information for any securities trading on that exchange. Products traded on an exchange are standardised compared to over-the-counter products, which are customised.

Financial products that are traded on exchanges and other organized trading platforms.

Individual trading in a personal, non-commercial capacity is exempt from the requirements of EMIR.

To execute the rights of an option, by buying (call options) or selling (put options) the underlying asset.

See Strike Price.

An exit option is an option to get out of a structure. For example, an exit option on a swap allows you enter into an offsetting position at a certain date, so it represents a swaption on the offsetting swap.

An option that has more complex features than a simple call or put option (plain vanilla). It usually trades over the counter. Examples include barrier options (path dependent), compound options (options on options), chooser options (options to buy options at a later date) etc.

Projected amounts of money paid periodically derived from a notional principal amount.

The date on which an agreement is no longer in effect.

These interest rate swaps differ from regular extendible swaps in that fixed (and floating) coupon payments are not made periodically during the swap. Instead, the coupons accrue interest and the fixed (and floating) leg(s) provide a single payment at the termination of the swap.

An option on an interest rate swap (swaption) where one or both parties has the right to extend the life of the swap beyond the original maturity date.

The enforcement of a rule/law/regulation outside the borders of a local jurisdiction e.g. non-EEA entities falling in the scope of EMIR for portfolio reconciliation when trading with EEA counterparties.

A credit event in which the reference entity fails to make, when and where due, any payments under one or more obligations. Grace periods for payment are taken into account.

Basis is the difference between the spot price and the price of a futures or forward contract on the same underlying asset. A ‘fair basis’ is one where no arbitrage opportunities exist between the two.

The fixed price for a commodity or index swap that renders the present value of the fixed leg equal to that of the floating leg.

The fair total futures price less futures accrued interest from the previous coupon payment to the futures expiration date.

The market price of the bond discounted at the repo rate for the term of the futures contract less the future value at the futures expiration date of the coupons received by holding the bond.

The price of a financial instrument that a buyer would be willing to pay and a seller would be willing to accept on the open market. The estimate of fair value should take into account prices for similar assets and valuation results such as the present value of all expected future cash flows of a security.

An independent agency created by the US Congress to maintain stability and public confidence in the nation?s financial system by insuring deposits, examining and supervising financial institutions, and managing receiverships.

The FCA is a non-governmental institution which regulates the financial services industry in the UK. The aim of the FCA is to protect consumers and to ensure that the financial services industry remains stable.

Under EMIR definitions, FC includes investment firms, credit institutions, insurance undertakings, assurance undertakings, reinsurance undertakings, undertakings for collective investment in transformable securities UCITS and their management companies, institutions for occupational retirement provision, and alternative investment funds managed by alternative investment fund managers. In each case these firms are authorised or registered in accordance with applicable EU legislation.

An establishment that focuses on dealing with financial transactions, such as investments, loans and deposits. Financial institutions are composed of organisations such as banks, trust companies, insurance companies and investment dealers.

Processes and systems which are used for clearance and settlement of transactions in the financial markets as well as the movement of money and securities around the world. FMIs include payment systems, central securities depositories, central counterparties and TRs.

The Act came into force from the 1st April 2012 and implemented the UK Government?s commitment to strengthen the financial regulatory structure in the UK. The regulation delivered a reform of the regulatory system by dividing responsibilities for financial stability between the Treasury, the Bank of England and FSA. The FSA ceased to exist from the 1st April 2013. The Act transferred responsibility to a new regulator, the PRA, which was established as a subsidiary of the Bank of England. In addition, the act created a new conduct of business regulator – the FCA. The FCA supervises all firms to ensure that business across financial services and markets is conducted in a way that advances the interest of all users and participants.

The regulatory body for all providers of financial services in the United Kingdom. The FSA is an independent, non-governmental entity that receives its statutory powers through the Financial Services and Markets Act of 2000. On 1st April 2013 the FSA was split into two new agencies: the Prudential Regulation Authority and the Financial Conduct Authority.

An international board set up to coordinate the work of national financial authorities and international standard setting bodies. Its role is to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies in the interest of global financial stability.

A basket credit default swap on which a credit event occurs the first time any of the reference entities in the basket defaults. At that point the buyer stops paying the swap’s premium and receives from the seller the difference of the principal amount of the defaulted entity and the recovered value. If the swap’s counterparty defaults, premium payments will stop and both the buyer and the seller walk away from the contract.

A foreign exchange currency swap where both counterparties pay a fixed interest rate by using domestic funds to buy foreign funds where interest rates may be cheaper in order to finance a foreign project.

An arrangement between counterparties in which one party, the fixed rate payer, making fixed payments and the other party, the floating rate payer, making payments which depend on the level of future interest rates.

A series of payments calculated by applying a constant rate of interest to a notional principal amount

Interest rate payments that are constant over the life of the loan or asset.

The day count fraction used in interest rate swaps. It is one divided by the number of interest payments per year. The coupon payments are thus always the same (with any small difference in the number of days ignored).

A Range Floater with a resetable range. At reset dates the investor can adjust the range to more closely reflect their view. The only condition is that the new range must be the same width as the original range. The Flexi Range Floater is also known as a Flexi Band Floater.

An interest rate cap where the buyer is only entitled to utilise the cap for a limited and pre-defined number of reset periods. The cap is automatically used if the underlying index, say LIBOR, is above the strike level. Once the number of “uses” equals the limit, the cap can no longer be used by the buyer.

An interest rate floor where the buyer is only entitled to utilise the floor for a limited and pre-defined number of reset periods. The floor is automatically used if the underlying index, say LIBOR, is below the strike level. Once the number of “uses” equals the limit, the floor can no longer be used by the buyer.

See Range Forward.

A series of payments calculated by applying a variable rate of interest to a notional principal amount

An interest rate which, under the terms of a transaction, is periodically reset (can increase or decrease over the life of the asset) according to the then current level of a pre-defined reference rate ? often LIBOR.

A Par Forward where one of the legs is dependent upon the floating interest rate of the currency rather than the fixed rate. Any Floating Rate Par Forward can easily be converted back to the standard Par Forward once interest rate views have changed.

See Basis Swap.

An agreement between two parties providing the purchaser (who pays a premium) a guarantee that if interest rates fall below an agreed level, the seller (floor writer) makes compensatory payments to the floor buyer. Floors are used in times of decreasing short term interest rates by money managers trying to preserve certain returns on floating rate investments. Floors are similar to caps, but from the opposite perspective. Floors consist of the sum of individual floorlets.

One of the interim dates of floors each with an expiry date generally on the date which the forward rate is set in a multiple period floor agreement. A floor is not a continuous guarantee which means claims can only be made on specified dates selected by the purchaser.

The right but not the obligation to buy or sell an interest rate floor at some defined point in the future for a defined premium.

Where the date is adjusted to the first following day that is a Business Day

A US act that requires persons from the United States, including individuals who live outside the US, to report their financial accounts held outside of the US, and requires foreign financial institutions to report to the Internal Revenue Service (IRS) about their American clients. FATCA was implemented in order to combat offshore tax evasion and to recoup federal tax revenues.

Derivative contracts that allow, but do not require, the holder to buy (sell) an amount of foreign currency for a specified amount of domestic currency an agreed strike price.

A transaction in which counterparties agree to exchange a specified amount of different currencies at some future date, with the exchange rate being set at the time the contract is entered into. These are used to minimize foreign exchange risk.

An agreement in which one currency is purchased at the spot rate and sold at the forward rate against another currency purchased at the forward rate and sold at the spot rate at one or more future dates.

An option that comes alive, i.e. Knocks In, when a certain barrier is reached. If the barrier is never reached, the option will automatically expire worthless, as without reaching the barrier, it never exists. If the barrier is reached, the option knocks in and its final value will depend on where the spot rate settles in relation to the strike.

A global decentralised market for the trading of currencies.

A swap that involves the exchange of two currencies (principal amount only) on a specific date at a rate agreed at the time of the conclusion of the contract, and a reverse exchange of the same two currencies at a date further in the future at a rate (generally different from the rate applied to the short leg) agreed at the time of the contract.

Derivative contracts to buy or sell underlying assets at pre-set prices on pre-set future dates. When they are standardized and trade on exchanges they are called futures contracts. Also, futures contracts are cash settled daily based on mark-to-market valuations.

A graphical representation of forward rates having the same maturity but with different forward periods. This curve changes constantly due to many factors such as supply and demand, regulatory requirements, prices etc.

A synthetic agreement for forward exchange. It is settled by reference to the spot rate as well as the forward premium or discount.

A contract by which counterparties agree to exchange two currencies at a rate agreed on the date of the contract for value or delivery (cash settlement) at some time in the future (more than two business days later). This category also includes forward FX agreements, non-deliverable forwards and other forward contracts for differences.

The intrinsic value (see Intrinsic Value) of an option plus the fair value of the underlying forward.

The agreed price of the forward contract upon delivery in the future.

An interest rate calculated today that will be paid on money to be borrowed at a specific future date based on current (spot) rates and will be repaid at an even later date in the future.

An interest rate forward contract in which the rate to be paid or received on a specific obligation for a set period, beginning in the future, is set at contract initiation. FRAs are settled by net cash payments; that is, the difference between the rate agreed upon and the prevailing market rate at the time of settlement. The FRA buyer receives payment from the seller if the prevailing rate exceeds the rate agreed upon, and vice versa.

A graph which plots the forward rates of securities with the same maturity but different forward periods.

The counterparties of a forward spread agreement contract into a spread between two forward rate agreement rates applied to a nominal amount of one currency. The settlement amount will be the spread between the reference rate minus the contracted spread.

An interest rate swap in which the fixed coupon is set before the start date. If a company expects rates to rise soon but only needs funds later, it may enter into a forward swap. Also known as a forward start swap.

An option which is paid for now, but will start at some prespecified date in the future. This date is called the issue date. At the issue date, a call or put option is issued with the strike price being determined by the spot price of the underlying on this date. Generally such options are issued at the money.

An agreement where the counterparties agree to enter into a swap at a specified future date at a prearranged price.

Frontloading refers to the period between the point at which a clearing house ? also known as a central counterparty (CCP) ? is authorised and the date on which the clearing obligation for a particular derivatives contract takes effect.

A trade that is struck off from a portfolio as part of a triReduce unwind proposal.

A term used for collateral agreement, where both parties post initial margin and variation margin.

The interest the bond will accrue from the previous coupon payment date until the futures expiration date.

Standardized contracts traded on organized exchanges or trading platforms by which parties agree to buy or sell underlying assets at pre-set prices on pre-set future dates. They are cash settled daily based on mark-to-market valuations. When they are less standardized and/or do not trade on exchanges they are called forward contracts.

The agreed-upon price for delivery on a futures contract at the settlement date.

The Group of 10 or G10 refers to the 11 countries that work together to drive global financial and economic stability. The original 10 countries were Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, the UK and the US. Switzerland was added in 1964 to make 11 countries but the group kept the original G10 title.

The group of finance ministers and central bank governors from 19 countries plus the European Union.

Commitments made by the G20 group of countries. For example, at the G20 2009 Pittsburgh Summit, the participating countries committed to improve the over-the-counter derivatives market through: 1. Reporting over-the-counter derivatives to Trade Repositories 2. Increased use of central counterparties 3. Execution of over-the-counter derivatives on electronic trading platforms 4. Increase use of collateral and risk mitigation techniques.

The rate of change in the value of delta per 100% change in the current value of the underlying asset.

A currency option pricing calculation for evaluating European style options on the spot foreign exchange by subtracting the present value of the continuous cash flows from the price of the underlying instrument.

GAAP refer to the standard framework of guidelines for financial accounting used in any given jurisdiction; generally known as accounting standards or standard accounting practice. These include the standards, conventions, and rules that accountants follow in the preparation of financial statements. GAAP may vary depending on the jurisdiction they are used in.

A DTCC owned central repository which maintains the records of derivative trades. The GTR provides full coverage of all cleared and uncleared over-the-counter derivatives products within each major asset class globally.

Greeks are various risk statistics (delta, gamma, theta, rho and vega) that measure sensitivities of an option?s value to certain variables and are mostly used for hedging purposes.

Clients can be classified under US legislation as Guaranteed Affiliates, where they are: (i) affiliated with a US person, and (ii) their trading activity is supported by a guarantee from any US person. *A Guarantee in this sense: – is not a traditional guarantee of payment or performance of the related swaps – is the substance, rather than the form, of the arrangement that determines whether the arrangement should be considered a guarantee; and – includes other formal arrangements that support the non-US person?s ability to pay or perform its swap obligations with respect to its swaps.

The long guts is a neutral strategy in options trading which involves the simultaneous buying of an in-the-money call option and an in-the-money put option on the same underlying and having the same expiry date.

A haircut is a percentage that is subtracted from the market value of an asset that is being used as collateral. The size of the haircut reflects the perceived risk associated with holding the asset.

The extent to which a hedge transaction results in the offsetting changes in fair value or cash flow that the transaction was and is intended to provide as identified by the hedging entity. For example, a hedge is considered to be highly effective if the changes in fair value or cash flow of the hedged item and the hedging derivative offset each other to a significant extent. Under FAS 133 only the portion of a transaction that is considered effective may qualify for hedge accounting treatment.

The ratio of the change of value of a hedging instrument (derivative) to the change of the price of the position being hedged (underlying).

Hedge trades are used to mitigate the risk and exposure that exists with positions. Under EMIR, trades used for hedging purposes directly linked to commercial or treasury financing activity are exempt from a number of the EMIR rules.

The standard deviation of the change in the average price of the underlying instrument over recent history.

A feature of the triReduce Credit service allowing participants to group multiple books together, thereby achieving greater termination efficiency.

High Yielding Performance Enhancing Reversible options are like American options but ones which you can exercise over and over again. On each exercise the option flips from call to put or vice versa.

In terms of credit derivatives, IMM dates are the four quarterly maturity dates: 20th March, 20th June, 20th September and 20th December. In terms of futures and options and swaps, IMM dates are four quarterly maturity dates: the third Wednesday in March, June, September and December.

An estimate of an underlying asset’s market price volatility using the current prices of the derivative, not the historical price changes of the asset. This measure can be determined by using the Black 76 pricing model for the derivative, that is there are no financing costs related to the derivative contract

Projected future rates that are determined by the differences in the current rates on the same instrument that have different maturities.

The difference between current (spot) interest rates and the future (forward) rates.

An estimate of an underlying asset’s market price volatility using the current prices of the derivative, not the historical price changes of the asset. This measure can be determined by using a pricing model for the derivative such as Black-Scholes. Implied volatility can be thought of as the current market consensus of volatility for the underlying instrument assuming that everyone is using the same theoretical option pricing model.

Either a call option where the price of the underlying asset is greater that the strike price or a put option where the price of the underlying asset is less that the strike price; therefore the option has intrinsic value.

The amount of collateral required over and above the mark to market of a portfolio. It is designed to cater for changes in the market value of a portfolio between margin calls.

A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is an imaginary portfolio of securities representing a particular market or a portion of it. Each index has its own calculation methodology and is usually expressed in terms of a change from a base value.

An interest rate swap agreement where the notional principal amount declines over the life of the swap according to a level of short-term money rats such as LIBOR or mortgage interest rates.

An option contract on a stock index (basket of stocks) such as Standard and Poors 500. Settlement is made via cash payment as delivery of the underlying is not possible.

Multi-name credit default swap (CDS) contracts with constituent reference credits and a fixed coupon that are determined by an administrator such as Markit (which administers the CDX and iTraxx indices). Index products include tranches of CDS indices.

A type of cash and collateral segregation where the CCP has to keep separate records and accounts enabling the clearing member to distinguish between the assets and positions held for the account of one client from those held for the account of another client.

A swap where one party pays the other party the inflation rate on each cashflow date and the other party pays the first party a fixed rate. This rate is calculated as a percentage return of the CPI index over the applicable time period.

Deposits made by holders of contracts in proportion to their open positions that act as buffers against potential losses imposed on their counterparties.

The square root of the expected variance of a stock price per unit time, as the time interval approaches zero.

An Inter-Dealer Broker is an institution that brings together a buyer and a seller of a financial instrument.

An agreement between two parties providing the purchaser an interest rate ceiling or ‘cap’. This financial instrument is primarily used by borrowers of floating rate debt in situations where short term interest rates are expected to increase. Rate caps can be viewed as insurance ensuring that the maximum borrowing rate never exceeds the specified cap level.

A combination of a purchase of an interest rate cap and a sale of an interest rate floor to create a range for interest rate fluctuations between the cap and floor strike prices to minimize the risk of a significant rise in the floating rate.

Sensitivity of the value of a trade to a related interest rate. It may be expressed as a profit or loss measured by a single unit uptick in the interest rate from a valuation curve. A popular measure of interest rate risk, commonly known as price value of a basis point (PV01) or dollar value of a basis point (DV01).

A derivative contract that is linked to one or more reference interest rates.

A contract that guarantees a minimum level of LIBOR. A floor can be a guarantee for one particular date, known as a floorlet. A series of floorlets, or floor can extend for up to 10 years in most markets. In return for making this guarantee, the buyer pays a premium. Floors generally guarantee a minimum level of either 3 or 6 month LIBOR or whatever the prevailing floating rate index is in the particular market. The clients maximum loss on a floor transaction is the premium. After purchasing the Floor, the buyer can make “claims” under the guarantee should LIBOR be below the level agreed on the floor on the settlement dates. A floor is not a continuous guarantee, it is only date specific. This means claims can only be made on specified dates. These dates are selected by the purchaser. Should the buyer never be required to make a claim under the floor, the option will expire worthless.

An option on a forward rate agreement. The agreement specifies that one party agrees to compensate another party if the reference interest rate is higher than the forward rate over a specified future period. A cap is a form of an interest rate guarantee.

A principle based on the notion that there should be no arbitrage opportunity between the FX spot market, FX forward market, and the term structure of interest rates in the two countries.

A method to generate a set of possible future interest rate projections that is arbitrage free.

The potential that a loss in a value of a security, especially a bond, will occur caused by unanticipated fluctuations in the value of the asset because of changes in interest rates. For example, as interest rates rise, bond prices fall and vice versa.

A derivative contract whereby two parties agree to exchange interest rate cash flows, based on a specified notional amount from a fixed rate to a floating rate (or vice versa) or from one floating rate to another, with a certain frequency (reset dates).

The acknowledged international body that brings together the world?s securities regulators and is recognised as the global standard setter for the securities sector.

Unique 12-character alpha-numerical code that is used to identify a security such as options, shares, equities or derivatives.

The world?s largest developer of voluntary International Standards which give specifications for products, services and good practice, helping to make industry more efficient and effective. Developed through global consensus, they help to break down barriers to international trade, by driving consistent standards.

A mathematical process in the pricing of options used to plot the volatility surface (varying strike prices and expiry dates that assume that the volatility of the underlying fluctuates) from a set of implied volatilities. These methods include: bi-linear: two dimensional (horizontal and vertical), bi-cubic: two dimensional (weighted average of the nearest sixteen pixels in a rectangular grid), and thin plate: produces a smooth continuous surface.

Transaction occurring between two counterparties which are within the same financial group. Under EMIR all intra-group transactions need to be reported.

The amount of any favorable difference between the strike price of an option and the current price of the underlying. For call options, this is the underlying stock’s price minus the strike price. For put options, it is the strike price minus the underlying stock’s price. In the case of both puts and calls, if the difference between the underlying stock’s price and the strike price is negative, the value is zero.

An options strategy comprised of a long straddle and a short strangle: a short put, a long call and a long put having the same strike price that is higher than the short put, as well as a short call having the highest strike price.

An options strategy comprised of a long strangle and a short strangle: a short put, a long put having a higher strike price that the short put, a long call having a higher strike price than the long put as well as a short call having the highest strike price.

The global trade association of the over-the-counter derivatives market participants, including corporations, investment managers, government and supranational entities, insurance companies, energy and commodities firms, and international and regional banks, exchanges, clearing houses and repositories, as well as law firms, accounting firms and other service providers.

A standard agreement which helps participants to carry out the EMIR requirements for portfolio reconciliation and dispute resolution. It also includes a disclosure waiver to help ensure parties can meet the various reporting and record keeping requirements under EMIR without breaching confidentiality restrictions. Signing up to this agreement eliminates the need to create bilateral agreements between counterparties. If a counterparty signs the protocol, then that counterparty has signed up to all the other counterparties who have also signed the protocol.

The ISDA DF Protocol Extension permits parties that have adhered to DFP2 to agree bilaterally to use their existing DFP2 arrangements as a substitute for formal adherence to the ISDA 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol. The Protocol Extension either modifies or restates provisions in DFP2 to bring that protocol document into compliance with certain requirements under EMIR.

An ISDA Master Agreement provides standardised terms to a contract when trading in the over-the-counter market. The first Master Agreement was first designed by ISDA (International Swap and Derivatives Association) in 1992 with the intent of standardising the documentation in the OTC derivatives market in order to increase efficiency and liquidity in the markets. The standard agreement identifies the two parties entering the transaction; describes the terms of the arrangement, such as payment, events of default and termination; and lays out all other legalities of the deal.

European and Asian credit default swap (CDS) indices owned by Markit. The Markit iTraxx represents the most liquid part of the CDS market for Asia and Europe.

The power or the right of a legal or political agency to exercise its authority over a person, subject matter, or territory.

A cap or floor that only comes alive, or knocks in when some defined barrier (the knock in level) is reached on a rollover date. The cap or floor can either come alive for the entire remaining life of the option or only for the period to which that fixing applies. Interest rate caps and floors can be Knocked-In with reference to a wide range of underlyings, including LIBOR, FX, commodity and equity levels.

A European or American call or put option with two barriers whereby the option is deemed worthless unless a barrier is breached during the life of the option, although a rebate may be paid at the expiration date of the option.

A swaption with a “knock-In” feature. The swaption only comes alive, or knocks in when some defined barrier (the knock in level) is reached during or at the end of the option period. Both Receiver and Payer Swaptions can be Knocked-In with reference to a wide range of underlyings, including LIBOR, FX, commodity and equity levels.

A cap or floor with a “knock-out” feature added to it. Should some defined underlying, say LIBOR, ever reach the prescribed knock-out level on a rollover date, the cap/floor is terminated or “knocked-out”. This termination can be either for the entire remaining life of the option or only for the period to which that fixing applies. Interest rate caps and floors can be knocked-out with reference to a wide range of underlyings, including LIBOR, FX, commodity and equity levels.

A European or American call or put option with two barriers whereby if either of the two barriers is breached during the life of the option, the option is ?knocked out” and dies, although a rebate may be paid when a barrier is knocked out.

A swaption with a “knock-out” feature added to it. Should some defined underlying, say LIBOR, ever reach the prescribed knock-out level on a rollover date, the swaption is terminated or “knocked-out”. Both receiver and payer swaptions can be knocked-out with reference to a wide range of underlyings, including LIBOR, FX, commodity and equity levels.

An Option in which the strike is periodically reset when the underlying trades through specified trigger levels, at the same time locking in the profit between the old and the new strike. The trigger strikes appear as rungs on a ladder. Ladder options can be structured to reset the strike in either one or both directions. The Ladder option is also known as a Ratchet option and Lock-In option.

A large notional swap is an off-facility swap that has a notional or principal amount at or above the appropriate minimum block size applicable to such publicly reportable swap transaction and is not a block trade as defined in Section 43.2 of the Commission’s regulations. Similar to block trade, however it is not available for trading or execution on a swap execution facility (SEF) or designated contract market (DCM). A large notional swap must be consistent with the appropriate minimum size requirements in the proposed rules. Additionally, a large notional swap must be reported in accordance with the appropriate time delay in the proposed rules.

The currency used to define the cash flows of swap leg.

The type of cash flow payments that each party must swap (fixed, floating, etc).

An individual or company that can legally enter into a contract and as a result can be held to account for the contract.

A code that identifies a counterparty uniquely. LEI was initially recommended by the Office of Financial Research (OFR) in the US. It is similar to the CFTC Unique Counterparty Identifier Code (UCI) and has been endorsed by the FSB as the unique code to describe legal entities globally.

An interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market. The LIBOR is fixed on a daily basis by the ICE Benchmark Administration. The LIBOR is derived from a filtered average of the world?s most creditworthy banks? interbank deposit rates for larger loans with maturities between overnight and one year.

An interest rate model based on evolving LIBOR market forward rates. The objects modeled using LMM are market-observable quantities (LIBOR forward rates). The LIBOR Market Model can be used to price any instrument whose pay-off can be decomposed into a set of forward rates. It assumes that the evolution of each forward rate is lognormal. Each forward rate has a time dependent volatility and time dependent correlations with the other forward rates being evolved. After specifying these volatilities and correlations, an instrument can be priced using Monte Carlo simulation to evolve the forward rates.

A calibrated model is a model whose parameters have values that are consistent with market observations. Calibration involves finding values of the parameters such that the model is able to reproduce (as close as possible) the prices of ?calibration instruments” observed in the market. Values of the LIBOR Market Model parameters (forward rate volatilities and correlations) are found by calibrating the model to market-quoted Black volatilities of caps and European-style swaptions. The resulting values of the parameters (forward rate volatilities and correlations) are used when evolving the state variables (forward rates) for the purpose of pricing interest rate derivatives that may or may not have prices available in the market.

An interest rate swap in which one party receives LIBOR and pays a blended rate representing a fraction fixed and a fraction floating. The “blended rate” will be capped at a maximum.

In a LIBOR-in-Arrears swap/note, the current floating payment is based on the LIBOR rate for the next period and applied retroactively to the entire period.

A permit issued by government agencies that authorises individuals or companies to conduct business within the Government?s geographical jurisdiction.

An interest rate swap where the fixed interest rate leg is linked to the performance of a defined FX rate. Any change in the FX rate results in a linear change in the fixed rate paid or received under the swap agreement.

The first phase of a triReduce portfolio compression cycle, where participants submit trades that are eligible for termination. TriOptima forms a legal connection between trade sides that form a deal previously incepted between two institutions.

Liquidity is a market?s ability to facilitate an asset being traded quickly without having a material impact on the asset’s price.

A credit default swap contract where the underlying instrument is a syndicated loan, senior secured in the capital structure.

A market infrastructure that provides LEI codes to legal entities that require them. Due to the decentralised nature of regulation around LEIs, a number of LOUs exist across Europe but follow consistent standards to generate LEIs.

Given the prices of call or put options across all strikes and maturities, we may deduce the volatility which produces those prices via the full Black-Scholes equation. Unlike the naive volatility produced by applying the Black-Scholes formulae to market prices, the local volatility is the volatility implied by the market prices and the one factor Black-Scholes.

A historical volatility calculation method that assumes that stock prices are lognormally distributed (the rate of change in a price series is continuous). This is one of the assumptions used in the Black-Scholes option pricing model. The historical volatility of the Black-Scholes model is the standard deviation of the natural logarithms of the prices on consecutive trading dates and is called the log volatility.

A pattern of frequency of occurrence where the logarithm of a variable follows a normal distribution pattern in order to describe returns over one or more years.

An industry standard model which describes movements of stock prices are independent of one another and the size and direction are random except for the fact that stock prices tend to increase over time. The lognormal distribution becomes a normal distribution when the values of the variable are switched to the natural logarithms of the values of the variable.

A global CCP providing central counterparty and clearing services for securities and derivative transactions (e.g., LCH.Clearnet).

The London Interbank Offered Rate (LIBOR) or bbalibor is the interest rate that London based banks lend to each other intra-day. It is used in the settlement of interest rate contracts on many of the world’s major futures and options exchanges. It is also used in loan and mortgage agreements globally, and in standardised derivative documents such as the ISDA terms.

Options that allow the option holder the right to purchase the underlying asset at the lowest price (call option), or sell the underlying asset at the highest price (put option) over a specified period. At expiration, the investor looks back and chooses the largest in-the-money amount that occurred over the life of the option. Lookback options are never out-of-the-money.

Under Dodd Frank Act, MSP is a person that satisfies any of the following: 1. It maintains a ?substantial position? in any of the major swap categories, excluding positions held for hedging or mitigating commercial risk; 2. A person whose outstanding swaps create ?substantial counterparty exposure that could have serious adverse effects on the financial stability of the United States banking system or financial markets.?. It is ?highly leveraged relative to the amount of capital such entity holds and that is not subject to capital requirements.”

The amount that the holder of a financial instrument has to deposit (with their broker or exchange) to cover some or all of the risk associated with that instrument. Variation margin covers day-to-day changes in instrument mark-to-market market values, and initial margin covers potential losses in excess of posted variation margin in the event of counterparty default.

The total balance of a margin account. If the balance is negative, a margin call can be issued at any time.

The amount of money or collateral requested when the underlying value of an asset falls below a pre-specified amount. In a repo transaction where the collateral is continuously revalued, if its value falls, extra collateral is requested by the cash lender (a process called margin maintenance).

The pricing of a specific investment position or portfolio based on financial modelling. Mark to Model is used where Mark to Market is unavailable.

An interest rate hedge structure that puts an upper limit on the marked-to-market (MTM) loss of a swap portfolio. It gives the option to enter into a portfolio of offsetting swaps at any reset date over a chosen period, at strikes that will ensure that the MTM loss will not exceed a pre-determined amount.

The Mark to Market methodology is used to compute a value closest to the fair value of an asset or security, by marking it at its market value. Mark to market should be reported daily and the increase and the decrease in the MTM should be reported daily in the P&L. When positions are cleared through a Clearing House, the central counterparty is in charge of re-evaluating positions at their current market price at the end of each day. The re-evaluation of the portfolio will then be used to make calls for new margin (margin calls).

One of the main measures in the EU Financial Services Action Plan which is designed to help complete a single market in financial services for the EU and a framework for establishing a proper flow of information to the market.

The potential loss of an investment which is related to the moves in the market portfolio and, therefore, cannot be lessened by diversification.

The current value of a financial instrument based upon the price at which the financial instrument can be bought or sold in the financial market immediately. For equities, multiply the number of shares times the market price and for bonds, multiply the par or current face value times the market price.

A directive that aims to integrate the European Union?€™s financial markets and to increase the amount of cross border investment orders. The MiFID plans to implement new measures, such as pre- and post-trade transparency requirements and capital requirements that firms must hold. The directive officially took effect on November 1st, 2007.

MiFID II is the re-write of MiFID but will be replaced by the MiFIR regulation as, unlike MiFID, the new legislation will be a regulation and not a directive.

Regulation provides for net position limits and reporting of positions in derivatives and securities products. Unlike MiFID, which was a directive translated into law by European member states, MiFIR is the re-write of MiFID II but as a regulation rather than directive.

A confirmation platform supporting affirmation and matching of over-the-counter derivative transactions across all major asset classes. MarkitSERV was launched in September 2009 as a joint venture between MarkitWire and DTCC DerivSERV. MarkitWire was the affirmation platform for rates and equity derivatives, where as DTCC DerivSERV was the matching platform for credit and equity derivatives. However, in 2013 Markit acquired DTCC ownership of MarkitSERV, which is now a product of the company.

An electronic trade capture and confirmation platform.

An option strategy whereby an investor, having purchased a stock, purchases a put on the same stock to protect (hedge) against a depreciation in the stock?s price.

A form of stochastic (random) process with zero drift (break even).

The date that a contract term is ended or expires. For bonds, this is the date that the bond issuer repays investors the principal of the bond.

A model that explains the tendency of a stochastic process such as interest rates or stock returns to remain at or return over a long period of time to an average value. This average value can be based on the historical average of a return or another relevant average such as growth in the economy.

A minimum size threshold below which calls for collateral will not be made.

Dates are adjusted to the next good business day unless that day falls in the next calendar month in which case the date is adjusted to the previous good business day.

An interest rate cap in which the cap level is dependent on the last rate set for LIBOR. If LIBOR rises above a predetermined trigger in the rate set period, the cap strike for the remaining option is increased by a predetermined amount (up to a maximum level). Also known as ratchet cap and adjustable strike cap.

An interest rate cap (or floor) with a payout that is determined by the maximum “average” interest rate over the cap (floor) period. The calculation of the average is dependent upon a defined “window” period which is determined by the cap (floor) buyer.

An option whose payoff is based on two (or more) assets.

Any number of average price options (Asian) and / or any number of average strike options. The options involve any number of underlyings with any strike price and may be calls or puts.

A mathematical model using two or more factors that predicts future interest rates by predicting the future evolution of the short rate. The short rate is the (annualized) interest rate at which an entity can borrow money for a very short period of time.

A credit default swap (CDS) contract where the reference entity is more than one name, as in portfolio or basket CDS or CDS indices.

An arrangement among multiple parties that transactions be summed rather than settled individually. Multilateral netting not only streamlines the settlement process, it also reduces risk by specifying that, in the event of a default or some other termination event, all outstanding contracts are likewise terminated. CLS, TriOptima, exchanges and clearing houses perform netting. Firms can multilaterally net positions and/or cash flows. EMIR encourages greater multilateral netting through mandatory use of CCPs.

A trade tear-up exercise (or compression process) involving more than two parties. TriOptima offers a multilateral-termination service, triReduce.

A trading system that facilitates execution of financial instruments between multiple parties. MTF provides pre-trade transparency by disclosing the buy and sell price of contracts and disclosing the trading volumes between executing counterparties.

A credit default swap (CDS) contract where the underlying is a municipality, and the reference obligation is either a Revenue Liability, a General Obligation Liability, a Moral Obligation Liability or a Full Faith and Credit Liability.

A modification of the Knock-Out Cap. In a Knock-Out Cap, once the trigger rate is reached (i.e. the Knock-Out level), the protection of the cap disappears for that period. With an N-Cap, once the trigger is reached the original cap level is replaced with a second cap level for that period. It is therefore more risk averse than the Knock-Out Cap. The N-Cap is also known as a Dual-Strike or Double Strike Cap.

A basket default swap on which a credit event occurs when nth default occurs in the m-entity reference basket. At that point the buyer stops paying the premium and receives the difference of the principal amount and the recovered value for each of the first defaults.

An unhedged option strategy where the buyer or seller has no offsetting or risk-reducing position in another option or the underlying security. Very risky and is the opposite of a covered option.

Financial instruments, with the underlying usually a single index, that give their traders the opportunity to play with the volatility of a market. The main factors of the payoff of a Napoleon option is a fixed coupon and the worst return of an index over specified time periods.

An organisation that has the authority to monitor the financial activities of counterparties within a particular regulatory jurisdiction.

A human being, as opposed to an organisation or business entity.

The act of replacing one participating member of a contract with another. For example, in clearing the bilateral trade is novated into two separate trades where the counterparty is facing the CCP.

The Net Present Value rule is a method used to understand whether a project is worth undertaking, by expressing future cash flows in terms of cash today. It can be used to compare to project (the one with the higher cash flow will win) or to make a decision whether to accept or reject a project (accept those ones with a positive NPV). The Net Present Value of a project is the difference between the present value of the benefits and the present value of its costs, or simpler, the present value of all its future cash flows. NPV = PV (Inflows) – PV (Outflows) = PV (All cash flows – with respective sign)

Dates are adjusted for weekends and holidays to the next good business day.

Cycle dates are not adjusted for weekends or holidays and are forced to land within a cycle month.

A nominee account is a type of account in which a stockbroker holds shares belonging to clients, making buying and selling those shares easier. In such an arrangement shares are said to be held in street name.

A company formed by a bank or other fiduciary organisation to hold and administer securities or other assets as a custodian on behalf of beneficial owners under a custodial agreement.

Under EMIR client classification, non-financial counterparties are separated into two categories: 1) NFC+ is an NFC that has outstanding derivative transactions with a gross notional value which exceeds EUR 1 billion for credit and equity derivatives or EUR 3 billion for rates, FX and commodity transactions. An NFC+ will be subject to the same EMIR obligations as a financial counterparty (FC). 2) NFC- is an NFC that has not breached the above thresholds. An NFC- will be exempt from clearing and margining EMIR obligations, but will still be required to comply with transaction reporting, timely confirmations and portfolio compression and reconciliation.

The relationship between the futures price of an asset being less than the expected spot price of the asset on the delivery date of the contract.

The relationship between the futures price of an asset being greater than the expected spot price of the asset on the delivery date of the contract.

The denomination of the notional which could be in any of the standard ISO currencies.

The value that the counterparties agree to in order to determine the size of future cash flow and interest payments for a derivative. The amount is notional because there is no exchange of actual principal.

The act of replacing one participating member of a contract with another. For example, in clearing the original bilateral trade is novated to two separate trades where each counterparty now faces the central counterparty (CCP) as opposed to facing each other, as was the case in the original trade.

A basket default swap on which a credit event occurs when nth default occurs in the reference basket. At that point the buyer stops paying the premium and receives the difference of the principal amount of the latest (nth) defaulted entity and the recovered value. Note that the premium does not stop until the n-th default as long as the counterparty does not default, even if there are already defaults in the basket.

A credit event triggered when one or more reference obligations become immediately due and payable as a result of a default or covenant breach on the reference entity?s other debt instruments, subject to a materiality threshold.

Also known as stub periods, these are periods which are not of the length as specified in the contract. Usually these are dates which may fall after the start date of a cycling period or before the end of a complete cycling period or both. They can be either longer than a standard period or shorter.

A swap that is not traded on the rules of a SEF or DCM.

The official gazette of record for the European Union (EU). It is published every working day in all of the official languages of the member states.

A strategy used to reduce potential losses in a trade. Usually this involves hedging which involves the purchase or sale of an underlying asset together with the sale or purchase of a related derivative.

The currency risk that arises when the buyer or seller of an option has to account for the transaction in a different currency.

A type of collateral segregation where the CCP keeps separate records and accounts enabling the clearing member to distinguish the assets and positions of the clearing member from the assets and positions held for the account of its clients (all clients? collateral is kept together).

An option that provides the Buyer with a Fixed payout profile. The Buyer receives the same payout irrespective of how far in the money the option closes. Unlike ordinary Digitals, One Touch Digital Options payout if the underlying reaches the strike at any time from start to maturity. They can therefore be considered as an American style Digital Option and the straight Digital as European style (i.e. exercise only at maturity).

Type of collateral agreement which states that only one party will be posting some form of collateral (whether it?s variation, initial or both).

A client can elect a MiFID classification which offers more protection than the classification assigned by the financial institution. It is at the discretion of the institution to accept or decline the opting-down of classification.

A client can elect a MiFID classification which offers less protection than the classification assigned by the financial institution. It is at the discretion of the institution to accept or decline the opting-up of classification.

The mathematical designs used to calculate the value of options. Common examples include the Black-Scholes model, the Cox-Rubinstein binomial model, the Black 76 model and the Garman Kohlhagen model.

The possibility that a change in interest rates will cause an option holder to exercise the option earlier or later than expected.

Any combination of option types and trade positions used to generate additional income from investments and/or minimize losses (hedging).

The seller of either a call or put option who receives a payment (premium) from the buyer obligating the seller to fulfill the contract if and when the buyer (holder) exercises the option.

A financial derivative that represents a contract sold by one party (option writer) to another party (option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date). See also http://en.wikipedia.org/wiki/Option_style.

Comprised of international financial regulators including central banks, banking supervisors, market regulators, and other governmental authorities. The forum monitors the over- the-counter derivatives market infrastructure providers and the major over-the-counter derivatives market participants.

Either a call option where the asset price is less than the strike price or a put option where the asset price is greater than the strike price, therefore, having no intrinsic value and would be worthless if it expires at this point in time.

A financial instrument traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase ???over- the-counter?€ù can be used to refer to financial instruments that trade via a dealer network as opposed to an exchange.

An interest rate swap whereby the compounded overnight rate in the specified currency is exchanged for some fixed interest rate over a specified term.

The coupon for a single asset CDS that leads to a value of par.

An agreement to exchange a series of cashflows over time in one currency for a series of cashflows in another currency with all exchanges occurring at the same exchange rate. The Par Forward is therefore a series of foreign exchange forward contracts at one agreed rate. It is not necessary for the cashflows to be of the same notional amount. Also known as a flat rate forward. More complex versions of the par forward include the floating rate par forward and the rolling par forward.

The value of the fixed rate which gives the swap a zero present value or the fixed rate that will make the value of the fixed leg equal to the value of the floating leg. To determine this rate, discount the forward rates of the floating rate to the present date to determine the value of the floating leg then discount the rates for the fixed leg and adjust the fixed rate until the swap has a net present value of zero.

An entity that owns another or has enough voting rights to control a subsidiary’s operation.

A barrier option for which the barrier feature (knock in or knock out) is only triggered after the underlying asset has spent a certain prescribed time beyond the barrier. The effect of this more rigorous triggering criterion is to smooth the option value (and delta and gamma) near the barrier to make hedging somewhat easier. It also makes manipulation of the triggering, by manipulation of the underlying asset, much harder. In the classical Parisian contract the ‘clock’ measuring the time outside the barrier is reset when the asset returns to within the barrier. In the Parasian contract the clock is not reset but continues ticking as long as the underlying is beyond the barrier.

Collateral agreement where both parties regularly post variation margin (but not initial margin).

An option strategy comprised of a combination of the purchase (sale) of a call option and the sale (purchase) of a put option of different amounts, but at the same strike price. This strategy is used for protection against unfavorable changes in foreign currency spot rates by locking in an exchange rate now while leaving a portion of the investment open to participation in favorable exchange rate movements.

A call option on the trading account of an individual trader, giving the holder the amount in his trading account at expiration if it is positive, or zero if it is negative. They are also called perfect trader options. The terms of the contract will specify what the underlying asset is that the trader is allowed to trade, his maximum long and short position, how frequently he can trade and for how long. To price these contracts requires knowledge of stochastic control theory. The governing partial differential equation is easily solved by finite differences.

An option where the payoff is at least partially affected by the way in which the price of the underlying asset fluctuates during the life of the option and not just the final value.

The party to a trade that is required be the fixed interest rate payer in a derivative transaction. Typically, the Buyer.

An option to pay the fixed rate on an interest rate swap

The value (amount received by the investor) of an option when it is exercised.

An historical volatility calculation method that assumes the rate of change in a price series is discrete.

Options on fixed for floating rates. ?Percentage-of-LIBOR” swaps, which differ from regular fixed/floating swaps in that the payment on the floating leg is a specified fraction of the LIBOR index.

The most basic form of a financial derivative contract.

The most common interest swap involving one party, the fixed rate payer, making fixed payments, and the other party, the floating rate payer making payments which depend on the level of future interest rates. Interest rate payments are made on a notional amount and there is no exchange of principal.

Portfolio compression is a risk reduction technique in which two or more counter- parties terminate some or all of their derivative contracts and replace them with another derivative whose market risk is the same as the combined notional value of all of the terminated derivatives. Under EMIR, firms must use a portfolio compression technique to reduce the number of transactions in a portfolio that need to be managed in the trade life cycle. This reduces the overall operational risk of the portfolios by reducing the gross nationals outstanding.

Portfolio reconciliation is the practice of comparing one counterparty?s portfolio to another?s. It provides a means of ensuring that parties? books and records remain synchronised and that details are accurately captured.

A message from a market infrastructure provider acknowledging that all activities have been received and processed successfully.

A measure of the degree of curvature between bond prices and bond yields when the bond?s price increases at least as much as the duration when interest rate drop and decreases less than duration when interest rates rise. Duration changes in the opposite direction of interest rates if the convexity is positive.

A measure of the maximum credit exposure expected over a specific period of time.

An option on the product of powers of several assets.

Where the date is adjusted to the first preceding date that is a Business Day

Credit derivatives whose payoffs are triggered by the usual CDS credit events (e.g., bankruptcy, restructuring, failure to pay) and the deferral of preferred stock dividends (or interest, in the case of hybrids). Payments of preferred dividends in stock rather than cash also triggers a credit event.The reference obligation is defined as an obligation of the reference entity itself or a related preferred issuer (e.g Trust Preferreds). A preferred security is any security that represents a class of equity ownership which upon liquidation ranks prior to the claims of common stock holders. Reference obligations can be senior preferred or subordinated preferred.

The purchase price of an option contract. The positive difference between the price of a security and its face value or par amount.

A market that has been prescribed by the UK Treasury as a market that comes within the scope of the market abuse regime contained in Part VIII of the Financial Services and Markets Act 2000 (FSMA).

The current value of one or more future cash payments which is determined by multiplying the future value by discount factor.

The value of any financial asset determined by discounting the expected future cash flows by a discount factor to accurately reflect the uncertainty/risk associated with its cash flows.

Dates are adjusted for weekends and holidays to the previous good business day.

PAI is the overnight cost of funding collateral. It is debited from the receiver and transferred to the payer to cover the loss of interest on posted collateral.

A sum of the high level technical terms of a trade required by CFTC to be reported.

The primary location where the business of an organisation is conducted, as opposed to where the trade is processed.

Where an entity is incorporated outside of England and Wales, they are required to appoint a process agent within England and Wales which allows their counterparty (incorporated in England or Wales) to send any legal documents or notices to the agent.

A put option purchased on an asset by an investor who owns the asset(long position). This is a strategy designed to protect against a drop in the underlying asset?s price.

A UK financial services regulatory body set up as one of the successors to the Financial Services Authority (FSA) and owned by the Bank of England. It is responsible for the prudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms.

EMIR requirements, except the reporting obligation, do not apply to public sector entities within the meaning of point (18) of Art.4 of Directive 2006/48/EC where these entities are owned by central governments and have explicit guarantee arrangements provided by central governments.

An option strategy comprised of a short put, another short put having a higher strike price than the first short put as well as a long put having a strike price which is higher than the first short put.

A financial derivative that allows, but does not require, its owner to sell (?put?) an asset to the option seller at a certain price (the strike price) at a specific future date. The option is of value to its owner if the market price of the asset drops below the strike price.

A type of option strategy using two options of the same type and the same expiration date but with different (spread) strike prices. The spread involves a simultaneous purchase of a put option at a higher strike and the sale of a put at a lower strike price. Also called a bear spread.

An option strategy comprised of a short put, a long put having a higher strike price than the short put, and a short call usually having the highest, but not always, strike price.

A relationship between the market prices of a put and a call option on the same underlying asset with the same strike price and expiration date.

A swap where one side has the right to early termination.

A cap that provides insurance against the total interest cost over a period. The borrower pays a premium and in return receives a guaranteed maximum cash interest cost for the period. Over this period the loan remains floating. The borrower pays the interest charge up to the guarantee level. Payments above this are reimbursed by the option seller. Q caps are also known as quantity caps, cumulative caps and payment caps.

A floor that provides insurance against the total interest income over a period and is an ideal alternative for investors with floating rate assets. The investor pays a premium and in return receives a guaranteed maximum cash interest income for the period. Over this period the underlying asset remains floating. The investor is guaranteed to earn a minimum cash income from the asset and any shortfall is reimbursed by the option seller. Q floors are also known as quantity floors, cumulative floors and payment floors

A cash settled derivative that has an underlying asset denominated in one currency, but its payoff is in another currency which is often multiplied by a constant and is considered as a fixed exchange rate.

A type of forward contract involving two currencies.

A swap leg where the currency of the notional amount upon which the payments are based differs from the currency of the reference index. An example would be a floating leg in which the notional amount is denominated in Canadian dollars (CAD) while the reference index used is USD LIBOR.

An option on an underlying asset in one (foreign) currency, but which is settled in a second (domestic) currency. These options are used when an investor believes that the value of the foreign security will increase but the currency may not, so the investor buys an option in the foreign asset which is paid out in the domestic currency.

An interest rate swap where payments are based on the movement of two countries? interest rates. Though two different currencies are involved, payments are settled in the same currency. Quanto swaps may be broken down into two general sub-categories. One category called fixed for quanto swaps, involves swaps where one party pays a fixed rate while the other party pays the variable quanto rate. The other category called floating for quanto swaps, is one where one party pays a regular floating rate (e.g. LIBOR) while the other pays the variable quanto rate.

A contract that allows an investor, currently in a quanto swap with a counterparty, an option to either cancel the current swap at some pre-specified time (or times) in the future. These may also specify that some sort of compensation or exercise fee must be paid if the option is exercised.

The secondary currency in an FX transaction and is usually the foreign currency.

German market master agreement for over-the-counter derivatives transactions. Similar to the French AFB agreement which covers the French based agreements, or ISDA Master Agreement which covers global agreements.

A European style spread option which is written on the best or worse of two or more underlying assets which have several of the same type of risk factors.

A deposit or Note that accrues interest daily when the underlying reference point is within a predefined range and accrues zero when outside that range. In general, Range Floaters are principal guaranteed so the investor is assured of at least receiving the principal back. By their nature, Range Floaters are ideal where the market is expected to move sideways, i.e. stay range bound. Range Floaters can be designed with any underlying reference including interest rates and FX rates. Range Floaters are also known as Fairway Bonds or Fairway Floaters and Daily Range Accruals.

An FX collar using forward contracts that replicates the payoff profile of purchasing an in the money call and selling an in the money put. For example if the forward price for sterling is $1.50, a range forward can be produced by buying a forward contract to purchase sterling at $1.50, entering a forward contract where the buyer has the right to break the contract at a price of $1.43, and the seller of the forward contract has the right to break the contract at a price of $1.56.

Also called a credit-sensitive note, is a fixed or floating rate note with a coupon rate adjusted in the event of a change in the issuer?s credit rating.

A type of put spread option strategy comprised of any amount of long puts and another amount of short puts having the strike price higher than the long puts.

The minimum number of fields on a trade that must be reported as soon as the trade has been executed between two parties and reported to the CFTC.

The party to a trade that receives the fixed rate of interest in a derivative transaction. Typically, the Seller.

An agreement that gives the holder the right but not the obligation to enter into an interest rate swap where the holder has the right to receive fixed interest payments in exchange for floating. Because this is a type of option, the holder must pay a premium.

A modification of the standard credit default swap (CDS) used for recovery rate trading. If there is a credit event the Lock seller delivers a Deliverable Obligation to the Lock buyer. The Lock buyer pays the seller a fixed recovery amount specified in the contract, or the Reference Price. This different from the vanilla CDS contract, where par is paid for the bond. See also digital credit default swap.

The percentage of the investment that is recouped through bankruptcy or settlement agreement in the event of default.

The legal entity that is the subject of a credit derivative contract. The reference entity can be the issuer or the guarantor of the debt.

The specific debt obligation(s) referenced in a credit derivative contract.

A cap where the premium is paid periodically, and each instalment is dependent upon a trigger rate being reached. The total premium will be low if the reference rate stays below the trigger, but will be higher if the rate is above that trigger.

The location at which a company is officially listed with the appropriate bodies.

A medium for the exchange of goods or services over which a government body exerts a level of control. This control may require market participants to comply with environmental standards, product-safety specifications, information disclosure requirements and so on.

A set of criteria, processes and practices aimed at outlining the regulatory framework around the implementation of EMIR.

The practice by market participants to use collateral posted in one jurisdiction to cover exposures in another jurisdiction. Under EMIR and DFA there are rules around what can and cannot be rehypothecated.

A rental cap or floor is similar to a normal interest rate cap or interest rate floor, but where the premium is paid over time in instalments. The buyer can terminate the option by ceasing to make further premium instalment payments. This allows the buyer to “change their mind” and not continue the option to maturity. The rental option is also known as an instalment option.

A trade, delivered as part of a triReduce Credit unwind proposal. The sole purpose of this trade type is to rebalance risk that would be shifted by solely booking terminations.

As a result of ongoing global regulatory reform, financial markets regulators increasingly require reporting of transaction data to increase market transparency and enable regulators to monitor systemic risk. In order to report data as required, counterparties have to obtain each other?s consent. Consent can be required from a counterparty which does not fall directly in scope for a certain regulation (i.e. a non-US person entity transacting with a US person entity).

In case the reporting counterparty has delegated the submission of the report to a third party or to the other counterparty, this entity has to be identified in this field by a unique code. Otherwise this field shall be left blank. In case of an individual, a client code shall be used as assigned by the legal entity used by the individual counterparty to execute the trade.

Time and date reported to the transaction repository.

A credit event triggered when the reference entity repudiates or imposes a moratorium on the reference obligation(s) and failure to pay or restructuring occurs.

A form of short-term borrowing for dealers in government securities. The dealer sells the government securities to investors, usually on an overnight basis, and buys them back the following day.

Number of days that the reset rate is in effect.

The difference (fixed spread) between the index on which the interest rate is based and the actual interest rate of the investment.

An interest rate for floating or forward transaction payments which are adjusted from time to time at an agreed upon frequency or date. These rates are based on the value of an index such as LIBOR and are reset to reflect changes in this benchmark on a specified date.

The point in time when the coupon rate for a variable rate or floating rate financial instrument is re-adjusted to reflect changes in a benchmark index. Usually, interest is paid at the end of a specific quarter based on the value of 3-month LIBOR two business days before the start of that quarter. The coupon rate is calculated as the reference rate (3-month LIBOR) plus a fixed spread. Reset dates are usually monthly, quarterly, semi-annual or annual.

The time stage of the reset rate. ?Implied? status means that the future reset rates are derived from a curve. ?Active? status means that a reset rate has already occurred and should be used for proper valuation.

A credit event triggered by a coupon reduction or maturity extension on the reference obligation(s) undertaken in lieu of default.

Under MiFID classifications, this category offers the most protection and imposes the most requirements in terms of communication, disclosure and transparency. Retail clients are clients that do not belong in professional or ECP client categories.

An interest rate swap in which the floating payments are inversely proportional to interest rates.

An interest rate swap in which one side has an option to alter the payment basis (fixed/floating) after a certain period. This is usually achieved by the use of a swaption, allowing the purchaser the opportunity to enter a swap with payment on the opposite basis. The swaption would be for twice the principal amount, one half of which nullifies the original swap.

The rate of change of the option fair value with respect to a small change in the risk free interest rate.

The rate of change in the fair value of the option per 1% change in the holding cost rate of an asset. This is the derivative of the option price with respect to the holding cost rate of the asset divided by 100.

The rate of change in the fair value of the option per 1% change in the risk-free rate. This is the derivative of the option price with respect to the risk-free rate, divided by 100.

The change in the fair value of a credit derivative per 1% change in the recovery rate.

Financial and non-financial counterparties entering into an over-the-counter derivative contract that is not cleared by a CCP must ensure that appropriate procedures and arrangements are in place to measure, monitor and mitigate operational risk and counterparty credit risk. EMIR prescribes a number of techniques: portfolio reconciliation, portfolio compression, dispute resolution, etc.

An option strategy comprised of a long put and a short call having a higher strike price and the same expiry date.

Pertaining to a derivative trade, the date on which one coupon is paid and the next coupon period begins. For CDS Indices, it can also refer to the launch date of a new series.

An interest rate swap where the principal amount on which its cashflows are based increases and decreases during its life according to a pre-agreed schedule.

A modification of an interest rate cap. With a standard interest rate cap, the notional amount remains the same at each reset date. If any caplet should expire out-of-the-money, its value is lost forever and the buyer does not have the opportunity to utilise it at some point in the future. The rolling cap seeks to remedy this shortcoming by rolling any un-exercised caplet notional amount onto the next period. Where the cap remains un-utilised, the notional amount will continue to increase, providing increased protection to the buyer. A rolling cap where the buyer has the choice of what amount to roll forward is known as a super flexible cap.

A modification of an Interest rate floor. With a standard interest rate floor, the notional amount remains the same at each reset date. If any floorlet should expire out-of-the-money, its value is lost forever and the buyer does not have the opportunity to utilise it at some point in the future. The rolling floor seeks to remedy this shortcoming by rolling any un-exercised floorlet notional amount onto the next period. Where the floor remains un-utilised, the notional amount will continue to increase, providing increased protection to the buyer. A rolling floor where the buyer has the choice of what amount to roll forward is known as a super flexible floor.

A modification of the par forward. The standard par forward has a defined maturity. When entering into a rolling par forward, one party has the right to extend the maturity of the transaction. Any extension is transacted at the then market rate and so no optionality exists. At the time of extension, the contracted par forward rate is adjusted to reflect the extended maturity. A rolling par forward where the maturity automatically extends each period in perpetuity is known as a perpetual par forward.

Assets that provide identical real payoffs under all possible circumstances; that is, the value of the asset is protected from credit, market, inflation, liquidity, currency, and idiosyncratic risks.

A percentage usually applied (similar to a spread but multiplied) to a parameter such as volatility, forward rates etc. and is particularly useful when cash flow payments are based on a percentage of a parameter (such as Percentage of LIBOR swaptions where a scale factor is applied to the floating leg).

An FX option strategy using three options structured by the purchase of a call spread which is financed with the sale of an out-of-the-money put in equal amounts and normally priced at zero cost premium. This strategy is designed to hedge against increases in currency.

An interest rate swap in which the principal alternates between zero and some notional principal amount. The principal amount of the swap is designed to hedge the seasonal borrowing needs of a company. For example retail companies might use such swaps to fix rates on loans required only on a seasonal basis for building up inventory.

Managing data between organisations or infrastructures in a secure and controlled manner.

The US Securities and Exchange Commission (SEC) is an agency of the United States federal government, established in the years following the Great Depression of the 1929 to regulate the stock market by the Commission with the Security Act of the 1933 and the Security Exchange Act (1934). The main purpose of the SEC is to “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”

In credit terms, this refers to the ?seller? of protection (or the ?receiver? of interest payments).

A measure of a financial instrument’s degree of response to changes in a particular common factor; for example changes in interest rates in relation to changes in bond prices.

The date upon which flows of cash and/or securities are exchanged following a financial transaction.

The daily valuation of a security which is calculated by the exchange at both the open and close of each trading day to determine a gain or a loss on the contract.

An interest rate model that defines a yield curve by describing the future evolution of short (usually overnight market) rates. The short rate, usually written rt is the compounded interest rate at which an entity can borrow money for an infinitesimally (very small) short period of time from time.

An option that allows the buyer to lock in the profit to date while retaining the right to benefit from any further upside. When the option buyer thinks the market has reached a high (call) or low (put), they “shout” and lock in that minimum level. If the market finishes higher (call) or lower (put) than the shout level, the holder benefits further. The option can be structured with any number of “shout” opportunities.

Options that depend not only on the final asset value but also on whether a certain barrier level was touched at some time during the life of the option. There are four types of single barrier options (each may be either a call or a put and have either European or American exercise features): an up-and-in Barrier option, a down-and-in Barrier option, an up-and-out- Barrier option and a down-and-out Barrier option

A service offered by clearing members where collateral is posted in the base currency as opposed to the multiple currencies of the underlying transactions. This reduces the FX and settlement exposure between counterparties.

A parameter describing an asymmetrical probability distribution curve. If the curve skews to the right, it is a positive distribution, but if the curve skews to the left, it is negative.

A legal entity created by a firm with a specific purpose. SPVs usually have a special legal status that makes their obligations secure even if the parent company goes bankrupt.

Also called a zero-coupon curve, it is a graphical representation of spot interest rates for a variety of maturities.

The quoted price of an asset for immediate delivery.

The rate that can be achieved in the cash market (otherwise known as the spot market) under regular settlement conditions.

The price quoted for immediate settlement on a commodity, a security or a currency. It is based on the value of an asset at the moment of the quote. This value is in turn based on how much buyers are willing to pay and how much sellers are willing to accept, which depends on factors such as current market value and expected future market value. The spot rate is the rate used in the market in two days time. TOM rate is the rate used tomorrow.

The difference between two associated values of a price or rate variable. For example, when structuring a swap, the pay-variable leg could be based on a floating rate, plus a spread (LIBOR + 20 basis points for example).

An indicator that shows the difference between the bid and ask price of a security, currency or asset. The spread indicator is typically used in a chart to graphically rep resent the spread at a glance, and is a popular tool among forex traders. The indicator, displayed as a curve, shows the direction of the spread as it relates to the bid and ask price. Usually, highly liquid currency pairs have lower spreads.

An option whose value is derived from the difference between the values of two or more underlying assets.

An interest rate swap in which one payment stream is referenced at a fixed spread over a benchmark rate such as US treasuries.

A rate cap is an agreement between two parties providing the purchaser, who pays a premium, an interest rate ceiling or ‘cap’. This financial instrument is primarily used by borrowers of floating rate debt in situations where short term interest rates are expected to increase. Rate caps can be viewed as insurance, ensuring that the maximum borrowing rate never exceeds the specified cap level. An interest rate floor on the other hand, guarantees the purchaser, who pays a premium, a lower bound for the rate of interest received on an investment. This may be used in conjunction with a floating rate note (FRN) to ensure a minimum return on investment. Floors are used in times of decreasing short term interest rates by money managers trying to obtain higher cash returns on floating rate investments.

A set of results based on uncertain relationships between parameters that provides a range of probable outcomes. Monte Carlo models of interest rate risk are examples of stochastic measures.

How much the price of a security randomly fluctuates from the mean level. Stochastic volatility models such as the Hull-White model have been developed to explain how volatility appears to vary over time, demonstrated by the volatility smile, in a random not constant fashion.

An option strategy comprised of a long call and a long put, having the same strike price (usually at-the-money) and the same expiry date. This strategy is used when a stock’s price is expected to fluctuate considerably in either direction.

An option strategy comprised of a long call and a long put having the same strike price as well as a short call usually, but not always having a higher strike price.

An option strategy comprised of a long call and a long put having the same strike price as well as a short put usually, but not always having a lower strike price.

A term used to explain how a trade or a piece of activity moves through the process (series of steps) without manual involvement.

An option strategy comprised of a long put and a long call with the same expiry date and underlying asset where the call strike price is greater than the put strike price

The price at which an asset will be bought (call) or sold (put) under an option contract. The exercise price is determined at the time the option contract is formed.

A pre-packaged investment strategy based on derivatives, such as a single security, a basket of securities, options, indices, commodities, debt issuance and/or foreign currencies, and to a lesser extent, swaps.

An interest rate swap in which the fixed rate is below the market rate. However, if rates rise above a certain trigger level, the fixed payer will pay floating rate set below the then prevailing rate. The result is a below market fixed Interest Rate Swap that reverts to a below market floating rate when a certain trigger rate is reached. The Subsidised Swap is created by combining a pay fixed Interest Rate Swap with a sold Interest Rate Cap. The cap premium is used to reduce the fixed rate paid under the swap.

A modification of the chooser flexible cap and interest rate cap. With a standard interest rate cap, the notional amount is the same at each reset date. The super flexible cap defines the total cap notional amount that may be exercised over the life of the cap, but the buyer has the right to choose what notional amount will be exercised if any, at each LIBOR reset date. Therefore, where the buyer chooses not to utilise the cap at a particular reset date even though LIBOR is above the strike, they have more notional amount available to utilise at a later date. At each reset date, the buyer can determine the size of the cap they wish to exercise as long as the cumulative amounts of the caps exercised to date do not exceed the notional amount. Of course, as time goes by, there is added pressure to use the cap otherwise it may expire with little or none of the notional amount utilised. A super flexible cap where the notional amount is automatically rolled forward when not utilised is known as a rolling cap.

An agreement between two parties to exchange sequences of cash flows for a set period of time. Usually, at the time the contract is initiated, at least one of these series of cash flows is determined unknown variable, such as an interest rate, foreign exchange rate, equity price or commodity price.

A graphical representation of the relationship between swap rates with varying maturities from 1 week to 30 years.

SDR is the US regulatory abbreviation for a transaction repository aimed at providing transparency around over-the-counter derivatives in response to the commitments agreed at the G20 2009 Pittsburgh Summit.

An individual who acts as the counterparty in a swap agreement for a fee called a spread. In the US, swap dealers are the market makers for the swap market. The equivalent terminology used in Europe is a Financial Counterparty.

(also known as FX swaps, cash management swaps or investment swaps) Investments are purchased in a foreign currency at the current spot rate, invested for a specified period and converted or ‘swapped’ back into domestic funds at a designated forward price.

An interest rate derivative contract moves with reference to the difference between the same point on two different yield curves. The SDA allows the investor to profit from the widening or narrowing between two yield curves. The SDA is customised with defined settlement dates, a defined value per basis point move, and one defined point on two yield curves. All payments are in one currency so there is no currency exposure.

A trading system or platform that enables many participants to execute or trade swaps. A swap execution facility generates the Unique Trade Identifier (UTI) for both parties to a swap and reports the executed transaction to the regulated transaction repository. SEF is the US regulated abbreviation for electronic trading platform.

The rate of interest for the fixed leg of an interest rate swap that causes the swap to have zero net present value. See also Par Swap Rate.

The difference between the interest rate swap rate for a specific maturity and the yield on a Treasury with the same maturity

An interest rate swap having only one payment.

An option contract that allows, but does not require, its owner to enter into an underlying interest rate swap. A payer (receiver) swaption gives the holder the option of paying (receiving) the fixed leg and receiving (paying) the floating leg.

An artificially created financial instrument that imitates characteristics of another instrument by using combined features of a collection of other instruments and/or assets

An option strategy comprised of a long call and a short put both having the same strike price.

An option created by trading the underlying asset. For example, a synthetic (long) call option is created by buying a stock then buying a put option on it at the same time. This the same as buying a call option on the stock so it is ?synthetic” as the two instruments put together act as a different investment.

The Trans-European Automated Real-Time Gross Settlement Express Transfer System.

The duration of a contract.

A set of assumptions referring to the relationship between bonds of different maturities and their yields.

The value of an investment at the end of a holding period including accrued interest.

The day on which a swap contract ends. Trades can be terminated before maturity if both counterparties agree. In this case, this would be the termination date.

The rate of change in the fair value of the option per one day decrease of the option time.

An entity that would be subject to the relevant EMIR obligation as if they were established in the EEA even though they are not.

A party who is indirectly involved and not a principal party to an arrangement contract, deal, lawsuit, or transaction.

The smallest possible upward or downward movement in the price of a security.

The difference between option value and intrinsic value (see Intrinsic Value), i.e.: Time Value = Option Value – (price of underlying – strike price of option), or: Time Value = Option Value – Intrinsic Value. The time value of an option is meant to describe the possibility that the option will increase in value relatively to the volatility of the underlying asset. Time value is always positive and declines exponentially over time until the expiration date when time value reaches zero.

Similar to a total return swap on a bond, it is a 2-sided financial contract in that one counterparty pays out the total return of the equity, including its dividends and capital appreciation or depreciation, and in return, receives a regular fixed or floating cash flow. For convenience the asset’s total return is called a TR-leg and the fixed or floating cash flow a non-TR leg. A total return swap can be settled at the terminating date only or periodically, e.g., quarterly. The equity used in a total return swap contract can be a single publicly traded stock or a private stock, a portfolio of stocks, a stock index, or even any market index. The buyer of a total return equity swap can gain the economic exposure to certain equity or index market without physically owning such assets while the seller of a total return equity swap can reduce or eliminate the market risk of his/her stock portfolio without selling the assets and gain stable returns.

A credit derivative that transfers the returns and risks on an underlying reference asset from one party to another. The ?total return buyer? pays a periodic fee to a ?total return seller? and receives the total economic performance of the underlying reference asset in return. Total return includes all interest payments on the reference asset plus an amount based on the change in the asset?s market value.

An infrastructure that allows one party to provide the details of a trade to another party and to allow that other party to affirm they agree with the trade details.

The date that a transaction is agreed upon.

The date on which a trade is initiated. Consequent days will follow the form of T+1, T+2, etc.

The trade events from initiation of a trade to maturity including settlement, amendment, modification, rate reset, increase, partial novation, termination, exercise, corporate action, etc.

The requirement in many jurisdictions to provide detailed trade data to regulators. Initially driven by the Dodd Frank Act (DFA) in the US and EMIR in Europe.

An electronic data storage center, where records of trades are kept. It captures various contractual details, such as counterparty identifiers, payment dates, and calculation protocols.

The risk range of two adjacent risk levels or classes in a Collateralized Debt Obligation (CDO). The lower bound of the risk level of a tranche is often referred to as an attachment point and the upper bound a detachment point. Tranche is derived from the French word for “slice”. Each tranche is a separate security with its own interest rate, maturity date and cash flows.

In a CDO tranche, a correlation that gives the tranche a par spread equal to the given spread. In general, the tranche correlation is only available for the equity tranche.

Sub-divisions of the more traditional Collateralized Debt Obligation (CDO) tranches

A unit at FCA which is responsible for the surveillance of UK Markets. The TMU reviews the collation of transaction reports and compliance with transaction reporting rules for the reporting firms.

The identifier associated with the transaction.

A consolidated point of reference created by the FCA to assist firms in understanding and complying with their transaction reporting obligations.

Three scenarios: increase, decrease, and stay the same for each valuation date.

Service Provider for reconciliation and portfolio compression cycles.

A multilateral portfolio compression and early termination service operated by TriOptima AB.

A proactive portfolio reconciliation service and exposure management service from TriOptima.

A trade where no initial margin and no variation margin is posted by either party.

An asset or financial instrument upon which a derivative depends. The price of the underlying determines the price of the derivative that is linked to it. As the underlying?s price fluctuates so will the value of the derivative.

A set of European Union Directives that aim to allow collective investment schemes to operate freely throughout the EU on the basis of a single authorisation from one member state.

An identifier for all legal entities dealing in over-the-counter derivatives falling under CFTC jurisdiction, where they do not have an existing CICI or LEI.

A unique code to describe a financial product for the purpose of regulatory reporting.

A unique trade ID allowing both participants to recognise specific trade. The USI is used for reporting under Dodd Frank.

A unique trade ID allowing both matched participants to recognise the specific trade. UTIs are used for reporting under EMIR.

Where both parties to a trade mutually agree to settle or terminate prior to the normal maturity of the trade, normally involving a cash settlement.

A type of single barrier option that when the option is set, the underlying asset is below the barrier level. If the barrier is touched, the holder now owns a standard option. If over the life of the option the barrier is never touched, the option dies worthless though the holder may be entitled to a rebate.

A type of single barrier option that when the option is set, the underlying asset is below the barrier level. As long as the barrier is never touched, the holder owns a standard option. If the barrier is ever touched, the option dies worthless though the holder may be entitled to a rebate.

A fee paid typically on a credit derivative transaction, where the amount relates to a differential between the fair coupon and the fixed coupon on the trade. This results from product standardization in the credit derivative markets.

A price increase of a transaction from the last transaction in the same security.

The CFTC defines a person to be a US person under the Dodd Frank regulation if: 1) they are a natural, legal resident of the United States of America; 2) they are an enterprise which is either incorporated or has its place of business in the US (with the exception of funds, and collective investment vehicles) as of 1 April 2013; 3) pension funds for US employees of the above entities; 4) they are a collective investment vehicles ? including hedge funds? that are majority-owned by US persons, or a trust of a US citizen or administered under US jurisdiction; 5) there exists an account in which the beneficiary is any of the above entities.

The point in time for which the fair value (the price for payment and delivery on the market) of a derivative is calculated.

The Value at Risk (VaR) is a risk measure to compute the maximum amount of losses that can be expected with certain confidence level p over a certain horizon (K trading days). This means that we are (1- p)*100% confident that losses will not exceed the VaR, over K days horizon. In statistical terms, that is: Probability (Loss > VaR) = p.

A derivative that has no special or outstanding features and are usually fairly common.

A forward contract on future realized price variance, where variance is the square of volatility.

Collateral, required in addition to the initial margin that must be collected as a result of price movements.

The rate of change in the fair value of the option per 1% change in the volatility of the asset.

The rate of change in the fair value of the option per 1% change in the volatility.

The mathematical process used to obtain an unknown number from a three-dimensional graph representing changes in vega both by strike price and expiry dates of an option.

A report that proposes fundamental change in how UK banks are organised. The main proposal is that UK banks should separate retail banking ???utility?€ù from investment banking and corporate finance. It also propose that banks retain higher capital/ loss absorbing reserves than under the Basel Rules. Many of the recommendations of Vickers were given effect by provisions in the Financial Services (Banking Reform) Act 2013.

A measurement of how much the price of a stock various over time or is expected to move in the near future and to what degree are these variances; however, the measurement does not take into account price direction only the quantity of the change. This number is important for analyzing many different types of instruments to determine the probability of a pre-determined price being reached on a certain date in the future.

A bootstrapping method used to value caps and floors by bootstrapping out the spot volatility for each caplet or floorlet. The volatility used in valuing each caplet using the Black model is called the ?spot volatility”, and is the volatility of the forward rate. See also Bootstrap.

A volatility smile (implied volatilities varying by strike price) when it is not symmetrical.

A symmetrical curve which graphically shows implied volatilities varying by strike prices on the same underlying asset with the same expiration date.

A three dimensional graph which shows volatilities varying both by strike price and expiry dates (shows the volatility smile and term structure at the same time).

A forward contract on future realized price volatility.

A graph that shows implied volatility by varying expiration dates for a specific strike price.

The US equivalent of the Vickers Report. The Volcker Rule separates investment banking, private equity and proprietary trading (hedge fund) sections of financial institutions from their consumer lending arms. Banks are not allowed to simultaneously enter into an advisory and creditor role with clients, such as with private equity firms. The Volcker Rule aims to minimise conflicts of interest between banks and their clients through separating the various types of business practices financial institutions engage in.

Confirmation from market infrastructures that activities or messages have been successfully received and processed, but there is still a potential outstanding issue on the activity or message.

Options issued by a company on its own stock. The fundamental difference between a standard option and a warrant is what happens at exercise. In the case of a standard call option, upon exercise, existing stock is delivered to the option holder. In the case of a warrant, upon exercise, the company issues new stock that is then delivered to the warrant holder. This new stock issue leads to a dilution of the existing equity and lowers the value of each individual stock.

Payment allocation of principal and interest cash flows to debt holders in order of priority in a multi-tranche security such as a CDO.

A derivative where the underlying is weather related(rain, snow, temperature) and the payoff is dependent on the weather. These instruments are used by companies to reduce risk associated with adverse (not disastrous) weather conditions resulting in losses.

The risk that the default risk associated with a financial contract is positively correlated with the risk of counterparty default. See also Counterparty risk.

The return earned on a financial asset, normally expressed in terms of an annual percentage rate of interest.

Change in yield assuming the bond price (100 par) changes by 0.01

A graphical representation at a selected point in time that plots interest rate returns of similar securities of equal credit risk with different maturity dates.

An interest rate swap in which the two interest streams reflect different points on the yield curve. For example, one side could pay the five year constant maturity treasury rate versus the two year constant maturity rate. The swap can be on either a fixed or a floating basis. This has been used by many investors who have a point of view on the shape of the yield curve or debt managers that want to hedge a structured note issue.

The single annual percentage rate of a long-term security, for example a bond, which is a single discount rate applied to all future interest and principal payments to obtain a net present value equal to the purchase price of the security.

Any strategy that involves financing an option purchase by the simultaneous sale of another of equal value. See also Collar, Cylinder, and Participating Forward.

An off-market interest rate swap in which either or both of the counterparties make one payment at maturity. Usually it is only the fixed-rate payments that are deferred. The party not receiving payment until maturity obviously incurs a greater credit risk than it would with a vanilla swap.

A European call option with a strike price of zero or close to zero, usually traded in countries where there may be obstacles pertaining to the transfer of securities especially stock. The purchaser of the option will definitely exercise it, so it is the same as owning the underlying asset and the seller has full offsetting participation in the stock price.

An interest rate cap with no up front premium. It is applicable only where the yield curve is positively sloped. It exploits the higher implied forward LIBORs to “pay” for the cap. The zero premium cap does not cap LIBOR as in a “normal” interest rate cap, but LIBOR is set in arrears

The French Caisse de Liquidation clearing house was closed down in 1974 as a result of unmet margin calls by one large trading firm after a sharp drop in sugar prices on the futures exchange. One of the primary causes of the failure was that the clearing house did not increase margin requirements in response to greater market volatility.[2] Also, although it lacked the authority to order exposure reductions, the clearing house should have informed the exchange (which had the authority) of the large size of the exposure of Nataf Trading House. The problem was further aggravated when the clearing used questionable prices and nontransparent methods to allocated losses among clearing members.

Financial derivatives are financial instruments that are linked to specific financial instruments, indices, indicators or commodities, and through which specific financial risks can be traded in financial markets in their own right. Financial derivatives contracts are usually settled by net payments of cash, that often occurs before maturity.

Trade reporting has been one of the success stories of the FSB OTC derivative regulatory reform agenda, with all jurisdictions expected to have adopted reporting requirements or at least related requirements by end-2014. In the United States, reporting requirements under Commodity Futures Trading Commission (CFTC) rules were phased in during 2013, and European Union (EU) trade reporting requirements came into force in February 2014.[1] The majority of FSB member jurisdictions have at least one TR available to receive transactions.