AAR
See Actual applicable rate.
Accretion
The amount that the principal of an asset increases over time.
Accretion swap
A swap in which the amount of principal increases over time.
Accrual
The accumulation of cash or other value from the same origin over time. Interest owed on a debt instrument accrues day by day until it is paid or the debt matures.
Accrual swap
A swap in which interest accrues to one party when a certain event occurs.
Accrued interest
The interest owed on a debt instrument covering a period of time.
Activity date
The day that the action or event is recorded or formally “booked.”
Actual applicable rate
Refers to the rate realized on a swap at end of tenor.
Actual value
The quantity or sum that is used in interest and other computations, as apart from notional value. A stock option trading at the notional value of $6 has an actual value of $600 because the option is on a trading unit of 100 shares.
Agent
A broker-dealer or other party who acts as a conduit assisting customers in buying and selling financial instruments. An agent does not have any financial interest in the transaction. Usually charges a fee known as a commission.
American form of option
A put or call option that can be exercised at any time during its life.
1. The process whereby the principal amount of the debt decreases over time. 2. How the cost or payment of a product is apportioned over its life.
Amortization swap
A swap that pays down its initial value during its tenor.
AP
See Associated person.
Arbitrage
See Risk arbitrage, Risk-free arbitrage.
Asian option
By some preestablished methodology, an average strike price is determined between the underlying’s market price the day the contact position was acquired and the price at expiration.
Asset-backed security
A group of similar loans, mortgages, and other debt that are pooled into a single collateralized security. See Collateralized debt obligation.
Asset swaps
A transaction where the referenced asset is being swapped for another (e.g., a fixed-income bond being swapped for a floating-rate note).
Assignment
When used in listed options, the process used by Options Clearing Corporation to elect an option writer (or seller) who must perform the terms of the contract due an exercise by an option owner.
Associated person
Registered employee who is permitted to conduct business with the public. Term is used in the futures market.
Audit
Verification of the account balances and positions in the “books and records” of a company by a third party or its internal staff.
Authorized participant
An entity empowered to “create or redeem” ETF shares.
Backwardation
Term used in the futures market when the price of a futures contract is below that of the spot (cash or current) deliverable.
Bankruptcy
Legal process that occurs when a creditor does not meet its financial obligations and the remaining assets are placed in the care of a trustee.
Barrier option
A knock-in or knock-out option. A price is set (the barrier) by the negotiating parties and when the price is reached the option will come alive (knock in) or the option is terminated (knock out).
Basis point
One one-hundredth of a percent. Therefore, 50 basis points equals ½ of a percent. Used as a pricing guide in the evaluation of certain debt products. Example: debt product X trades at 50 basis points over debt product Y.
Basis swap
A floating-for-floating swap where the swap legs are tied to different referenced indexes or money rates. Example: one leg is tied to the three-month LIBOR rate, the other leg is tied to the three-month U.S. Treasury bill rate.
Basket default swap
Basket containing several entities from which the credit default swap (CDS) negotiation will determine which credit event will be the trigger enacting the terms of the CDS contract.
Bear option spread
Long and short put or call options on the same underlying product but different series constructed so that the spread owner profits if the underlying product loses value.
Bellwether
A bond or other instrument from which other products’ values are set.
Benchmark
The referenced object that sets prices or values of other products.
Beneficial owner
The principal or actual owner of an instrument, regardless of how it is registered.
Bermuda option
Option that can only be exercised on certain predetermined dates.
Beta
Relationship of two products to each other. One of the two is generally an index. The closer the beta is to the number one (1), the more closely the issue replicates the referenced issue’s movements.
Binary default swap
This swap contract states that should a certain credit event occur, the credit default swap (CDS) seller pays a predetermined amount. Example: a scheduled payment is missed.
An option with a predetermined underlying asset price, which if and when reached will pay a preset amount. If the target price is not reached, the option expires worthless.
Borrowers
The users of other parties’ funds on a temporary basis.
BOT
Industry abbreviation meaning “bought.”
Brady bonds
Treasury zero-coupon bonds issued as backing for sovereign debt of troubled Latin American countries of the 1980s.
Broker
Individual or entity that acts on behalf of others transacting futures, securities, or other types of contracts for a fee or commission. The broker does not have any financial interest in the transaction.
Brokerage firm
An entity registered with the Securities and Exchange Commission that offers financial products and services including the trading of securities in the marketplace.
Broker-dealer
1. A license obtained from the Securities and Exchange Commission that permits a firm to carry on security business with the public. 2. A firm that acts as an agent (broker) and/or principal (dealer) in transactions with the public.
Bull option spread
Long and short put or call options on the same underlying product but having different series, designed to profit from a rise in the underlying value.
Buy/write
The simultaneous purchase of stock and the writing of a call, on the same security, against it.
C-a-R
Capital at risk. The amount of an investment’s current value being exposed to possible loss.
Callable bond
A bond that can be retired in part or whole, by the issuer, in accordance with the terms of the bond’s indenture, before the bond’s maturity date.
Call option
Product that permits its owner to buy the underlying product at a predetermined price during a predetermined time period.
Cancellable swap
A swap that includes a stipulation that if a particular event was to occur, the swap would be terminated. Example: the issuance of additional debt by the referenced asset’s issuer thereby diluting the collateral or security backing the reference asset.
Capped option
An “out of the money” option that is automatically exercised if the strike price of the option is reached or passed by the underlying issue’s price, which places the option in the “in the money” state.
Capped swap
A floating-rate swap that sets a limit to which the floating rate can increase.
Cash settlement
The use of currency to settle a transaction in lieu of a physical delivery settlement. Example: Several derivative products are based on the value of indexes. The indexes themselves are undeliverable, so cash is used instead for settlement purposes.
Cash trade
A trade that settles on its trade date.
CBO
See Collateralized bond obligation.
CCP
See Central clearing party.
CDO
See Collateralized debt obligation.
CDX index
A family of credit default swap indexes covering different sectors.
CEA
See Commodity Exchange Act.
Central clearing party
The process by which a clearing corporation inserts itself and becomes the contra party to both sides of each compared trade.
CFTC
See Commodity Futures Trading Commission.
Circus swap
Two swaps where each has one identical but offsetting leg with the same party that can be netted out against each other, leaving the remaining leg in each swap active.
Class
1. A type of option (i.e., put or call). 2. A product comprising components that have distinct characteristics (e.g., Class A common stock has voting rights, Class B does not). 3. A grouping of products having the same or similar characteristics (e.g., asset class).
Clean price
A debt’s price that is free from any interest calculations which may have accrued, and from commission or other fees. The present value of all of the debt instrument’s cash flows.
Clearing broker-dealer
See Clearing member.
Clearing corporation
An industry organization that acts as a third party to a transaction while expediting the settlement process.
Clearing firm
See Clearing member.
Clearing member
A member of a clearing corporation, which uses the corporation’s facilities to expedite and settle transactions with and/or against other clearing members.
CLO
See Collateralized loan obligation.
Closed-end fund
A type of mutual fund where buyers and sellers of the fund shares trade with each other in a marketplace and not against the mutual fund itself as they do with open-end funds.
Closed-end investment company
See Closed-end fund.
CMO
See Collateralized mortgage obligation.
Collateral
1. An asset that is pooled with similar assets to form a new product. Example: as used in support of a collateralized debt obligation (CDO). 2. An asset whose value is used to support or back another issue’s risk. 3. An asset that is pledged against a loan.
Collateralized bond obligation (CBO)
An instrument comprising a pool of corporate bonds; most, if not all, are rated “junk” but due to the wide range of issuers and issues, they are considered investment grade. The instruments are issued in tranche format.
Collateralized debt obligation
Umbrella term covering collateralized bond obligations (CBOs), collateralized loan obligations (CLOs), collateralized mortgage obligations (CMOs).
Collateralized loan obligation (CLO)
Pools of different types of bank-issued commercial loans that are securitized. Among the loans included are car loans and credit card loans. They are issued in tranche format.
Collateralized mortgage obligation (CMO)
An instrument set in a tranche format where each tranche has its own credit risk profile. It comprises mortgages from different issuers. The mortgages of the Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal National Mortgage Association (FNMA, Fannie Mae) are classified as mortgage-backed securities (MBS). Mortgages issued by conventional issuers, such as banks and savings and loan institutions, are referred to as asset-backed securities (ABS).
Combined interest rate and currency swap
See Circus swap.
Committee for Uniform Security Identification Procedures (CUSIP)
A nine-digit number assigned to identify a particular security. Only one issue can have that particular number.
Commodity Exchange Act
Passed in 1936; ultimately led to creation of the Commodity Futures Trading Commission (CFTC).
Commodity Futures Trading Commission
Established in 1974 as an independent federal regulator of the commodity and futures markets.
Commodity pool operator
Funds are gathered and pooled by the operator for the purpose of trading in the futures market.
Commodity Research Bureau (CRB)
One of the oldest commodity data gathering companies in the world. Publishes many commodity data books that include prices, production, and analysis.
An individual or entity that offers trading strategies for a fee.
Common stock
Voting (usually) shares representing ownership of a corporation.
Compared transaction
Official (written) agreement between contra firms to the terms of a trade.
Confirmation
Document detailing the components of a transaction that is given by one party involved in a transaction to another. It may be in electronic or paper form and is usually delivered by a brokerage firm to its client.
Constant maturity swap
Two floating rates, one pegged to the swap rate, the other pegged to LIBOR. Spread can constantly be adjusted as the rates change.
Consumer Price Index
Measures changes in the cost of a select list of goods that consumers purchase.
Contingent swap
A swap that becomes enforceable when some other event occurs.
Contra party
See Counterparty.
Conversion
An option strategy involving the buying of stock, the buying of puts, and the selling of calls, all with the same expiration date on the same security. No matter which way the security price moves, the position will be closed out upon the exercise of the option.
Convertible security
Security that contains a feature permitting its owner to exchange it for another security of the same issuer. A one-time event.
Convexity
The sensitivity of a bond price to a change in interest rate.
Cost of carry
The charges associated with storage or holding on to an asset pending settlement.
Counterparty
The other party to a transaction as it goes through processes leading up to final transaction settlement.
Coupon rate
Percentage of a debt instrument’s face value that interest payments are based on.
Covenant
A clause in a contract that mandates an obligation on either or both parties to do or refrain from doing certain actions or deeds.
Covered bonds
Pooled mortgages that are securitized and sold, but remain on the issuer’s books and give investors access to the assets in case of issuer’s default.
CPI
See Consumer Price Index.
CPO
See Commodity pool operator.
CRB
See Commodity Research Bureau.
Creation units
The assembling of ETP shares by an authorized participant.
Credit balance
The sum in a client’s account that is owed to the client.
Credit default swap
A contract between two parties that obligates one of the parties to step up should a third party fail to perform its obligations.
Credit Default Swap Index
See CDX index.
Credit derivative
A generic term for a group of products designed to transfer credit risk from the issuer to another entity.
Credit event
Occurrence that triggers the CDS seller (risk buyer) to act as required by contract.
Credit-linked notes
A note with a credit default swap embedded in it.
Credit market
The trading of debt instruments among practitioners.
Credit risk
Exposure to a counterparty’s defaulting risk.
Credit spread option
An option on the spread between two debt instruments.
Provides credit protection between parties by establishing mutual rules concerning the posting of collateral.
CTA
See Commodity trading advisor.
Currency
Umbrella name for cash or nomenclature of a type of cash.
Currency swap
The contract that oversees the exchanging of one currency for another at predetermined rates and conditions.
Current yield
Annual compensation divided by price. Annual interest rate times principal divided by market price.
CUSIP
See Committee for Uniform Security Identification Procedures.
Customer side
That part of a transaction or entry affecting customer accounts.
Day order
An order entered into a marketplace that is canceled at the end of the day if not executed.
Dealer
A firm that trades for its own account and risk. Makes a market (quote) for others to trade against.
Debit balance
The sum in a client’s account owed to the financial institution.
Debt market
General term where all loan or borrow types of securities can be traded.
Default swap
An agreement that states that if Party A doesn’t honor its obligation to Party C, Party B will.
Delivery risk
The exposure to a failure of delivery occurring.
Delivery versus payment (DVP)
Where assets are exchanged simultaneously. For example: a seller is paid at the same time that it delivers the sold item.
Delta
The amount of change in an option’s or other derivative’s price relative to the price change in the underlying or referenced product.
Depository Trust & Clearing Corporation
See DTCC.
Depository Trust Company
Industry custodian for the immobilization of securities.
DerivSERV
A product of DTCC used as a repository for OTC derivative transactions.
Dirty price
The instrument’s price including the present value of all cash flows plus accrued interest less commission and other fees.
Discount instrument
A debt instrument, issued below par, whose interest accrues in its price and at maturity pays par or its face value. The value at maturity is composed of the initial principal amount plus interest that has accrued over the life of the instrument.
Dividend
A per-share payment or earnings which is sometimes made to the equity share owners of an entity.
Dodd-Frank Act
Set in motion regulations codifying financial requirements, trading restrictions, and development of clearing and settlement facilities (see SEF) for certain derivatives.
Dow DIAMONDS
An ETF that tracks the Dow Jones Industrial Average and is managed by State Street Global Advisors.
DTCC
The domestic clearing corporation and depository for stocks, bonds, and unit investment trusts, expediting transactions; a major participant as a repository in global derivative transactions.
Duration
1. The time remaining in an event. 2. The conversion of the present value of a debt’s cash flow into years. 3. Measures the change in a bond’s price due to a change in interest rates.
DVP
See Delivery versus payment.
Equity
1. Ownership portion of a corporation’s balance sheet. 2. The balance in a margin or cash account minus any money or value owed the institution carrying said account. 3. The value of any asset minus any encumbrance.
Equity-linked note
A note in which the return is based on the performance of a specified security, basket of securities, or index.
Equity tranche
Lowest-level tranche in a collateralized debt obligation issue.
ETF
See Exchange-traded fund.
ETN
See Exchange-traded note.
ETP
See Exchange-traded products.
Euribor
Interest rate charged between European banks.
European form of option
A put or call option that can only be exercised at the end of its life.
Event
An occurrence that triggers a derivative product to respond.
Exchange
A federally regulated organized marketplace that has membership standards and product listing requirements on which trading and price dissemination are carried out.
Exchange-traded fund (ETF)
An equity index that trades its shares on exchanges as if they were shares of stock.
Exchange-traded note (ETN)
Senior debt offered by a bank or provider backed by the creditworthiness of the issuer.
Exchange-traded product (ETP)
A basket of similar products that have been put into a fund or trust and qualified for listing to trade on an exchange. It’s an umbrella name which includes ETFs and ETNs.
Executing broker or party
The initial broker-dealer or other financial intermediary involved in the contracted execution of an order or contract.
Exercise price
The contracted price, as stated in an option description, to be paid upon exercise of the option. Also known as strike price.
Expiration date
The last day of a derivative’s life. After this date the contract that existed between parties is no longer enforceable.
External audit
A verification of a firm’s books and record by an independent “outside” auditing firm.
Facilitation trade
A trade executed by a dealer to clear the way for other transactions to occur. These are sometimes executed for $1 for the entire lot as a way of recording an execution for audit trail purposes.
Fact sheet
See Term sheet.
FCM
See Futures commission merchant.
Federal funds rate
Rate charged on overnight loans between U.S. banks.
Federal Home Loan Mortgage Corporation (FHLMC)
A government-sponsored entity (GSE) that issues mortgage-backed CMO-type securities. Also known as Freddie Mac.
Federal National Mortgage Association (FNMA)
A government-sponsored entity (GSE) that issues mortgage-backed CMO-type securities. Also known as Fannie Mae.
Financial Industry Regulatory Association
See FINRA.
FINRA
A self-policing and rule-enforcing organization of the securities industry. Enforces SEC rules as well as promulgates its own rules. It can fine, suspend, or take other action against offenders.
Fitch
One of three major rating services. The other two are Moody’s and Standard & Poor’s.
Fixed-for-fixed swap
An agreement between two or more counterparties in which fixed rates of cash flows are exchanged. This usually involves debt instruments with different payment cycles. For example: One party’s cash flow occurs every January 15 and July 15; the other party’s cash flow occurs every April 15 and October 15.
Fixed-for-floating swap
An agreement between two or more counterparties during which one party exchanges a fixed-rate cash flow for another party’s floating rate which is pegged to some standard, such as LIBOR or the federal funds rate.
Fixed rate
A debt instrument whose interest rate is set for the entire duration of the instrument.
Fixed-return option
Amex’s name for a binary option.
Flex option
A listed option, with a duration of up to three years, that has negotiable terms as opposed to the standard option whose terms are set by the Options Clearing Corporation’s listing regimen.
Floater
Industry jargon for a debt instrument whose interest rate is changed periodically in accordance with present interest rate conditions.
Floating for floating
An agreement between two or more counterparties to exchange floating-rate cash flows that are pegged to agreed-to indexes. One leg of the swap may be tied to the three-month Treasury bill rate, the other leg of the swap tied to the three-month LIBOR rate.
Floating-rate instrument
Debt instrument whose interest rate is adjusted periodically based on a referenced rate.
Floor broker
A member of an exchange who operates from the trading floor provided by a contract market and executes orders for others. The location on the trading floor may be a booth, post, or ring from which the broker operates.
Floor trader
A member who operates from a trading floor, making markets, adding liquidity, and executing orders against other members.
FNMA
See Federal National Mortgage Association.
An abnormal condition that prevents the carrying out of required assignments.
Foreign exchange
The exchanging of one currency for another.
Foreign exchange rates
The rates used in exchanging one currency for another.
Forward
An over-the-counter future product used mainly for postponing currency or interest rate transactions until a later time. The rate is negotiated today that will be used at a later time.
Freddie Mac
See Federal Home Loan Mortgage Corporation.
FRO
See Fixed-return option.
Fund manager
Manages a pool of money in an attempt to accomplish certain goals.
Future
An exchange-traded product that sets the price today at which a contract will be settled at, on a later date.
Futures commission merchant
An entity registered with the CFTC and NFA to transact business with the public, usually acting as a broker.
Futures exchange
A marketplace where futures contracts trade between members. Each exchange “lists” the products it chooses to offer (e.g., agriculture, metals, currency, interest rates, etc.).
FX
See Foreign exchange.
Gamma
Measures the degree of change of the option’s delta to the price of its underlying security as it relates to a portfolio or strategy.
Gearing
The relationship of debt to equity. The higher the ratio, the more debt there is to equity.
Give up
Changing the name from the executing broker-dealer or original broker-dealer to the broker-dealer or other entity that will be the contra party responsible for settling the transaction.
Global economy
1. The global financial and economic status. 2. The effect of one nation’s economy on the world.
Global Trade Repository (GTR)
DTCC repository for interest rate, credit, equity, and FX derivatives. The details of the participants’ transactions are “booked” and retained at GTR, which acts as a third independent party to the transaction.
Globex
CME’s virtual around-the-clock electronic trading platform.
GNMA
See Government National Mortgage Association.
Good till canceled (GTC) order
An order that remains in force until it is executed in the marketplace or canceled by the originator.
Good till “X”
An order to buy or sell an issue that is canceled after a specific time, “X.”
Government National Mortgage Association (GNMA)
A federal agency, a division of the Department of Housing and Urban Development, issuer of pass-through securities. Also known as Ginnie Mae.
GSE
A government-sponsored entity created by an act of Congress. Federal National Mortgage Association (FNMA) is an example.
GTR
See Global Trade Repository.
Guaranteed bond
A bond that is guaranteed by a party other than the issuer. If the guarantor defaults, the investor may lose all of the investment. The exception is U.S. government debt, which is guaranteed by the U.S. government.
Hedge
A strategy that is structured to minimize or eliminate risk. Recent applications of the term, such as hedge funds, do not follow this definition.
Hedge risk
Possibility of a hedged position coming apart.
Those who use futures or other derivative products to offset or minimize risk.
Holder
Another name for the owner of an option.
Indenture
Details the terms under which the bond or other debt instrument was issued.
Index
The application of a mathematical computation involving the value of a set of products divided by a predetermined base amount to arrive at one representative figure. As the value of the products changes, the representative figure will increase or decrease.
Indexed portfolio
A portfolio of securities that is engineered to replicate the performance of an index, such as the Dow Jones Industrial Average.
Inflation swap
A swap composed so that the notional value can be adjusted at the end of the swap for the effects of inflation.
Initial margin
The amount required to be in a customer’s account to satisfy a new position.
Institutional account
1. A customer’s account that settles transactions through delivery vs. payment (DVP). 2. An account whose principal is created by law. Example: a corporation’s pension fund.
Interest
The cost or charge assessed to the borrower for the use of the lender’s money or other funds.
Interest only
Debt instruments are composed of two parts, principal and interest payments. This is the interest payment part of a stripped debt instrument.
Interest payments
Payments made according to a prearranged schedule for the use of borrowed funds.
Interest rate
Percentage of a loan’s principal charged for the use of the funds.
Interest rate swap
Conversion of one rate to another (e.g., fixed rate for floating rate).
Internal audit
A review of the accounts in the books and records by employees of the entity.
International Security Identification Number (ISIN)
Twelve-digit global security identification number. A unique number that is assigned to each issue.
International Swaps and Derivatives Association (ISDA)
Group whose members aim to foster safe, efficient derivative markets and to develop documentation such as the Master Agreements.
In the money
In the case of call options: the amount by which the market value of the underlying asset exceeds the strike price. In the case of put options: the amount by which the strike price of the option exceeds the market value of the underlying asset.
Intrinsic value
A value that must be present in the pricing of a product. In option products, for example, it equates to the “in the money” sum that an option may have.
Introducing broker
A firm that is registered with the appropriate authority (e.g., FINRA, NFA) to conduct business with the public but uses the services of a clearing firm to settle the public’s transactions.
Inverse floater structured product
One that is designed to move contrary to the market. For example: An interest payment on a bond is divided into two parts: the floater and the inverse floater. As market interest rates change, the rates paid by these two parts change accordingly.
I/O
See Interest only.
ISDA
See International Swaps and Derivatives Association.
iShares
ETFs that are sponsored and administered by Barclays Global Investors.
ISIN
See International Security Identification Number.
iTraxx
A credit default swap index primarily used in Europe.
An option strategy whereby options with a set strike price and expiration month are rolled into a later expiration option with the same strike price.
Joint venture
A pooling of funds in an attempt to achieve a one-time goal.
Knock-in option
See Barrier option.
Knock-out option
See Barrier option.
Laspeyres index
One of two standard methods for calculating indexes. The formula uses a continuous base.
LEAPS
See Long-term Equity AnticiPation Securities.
Leveraged contract
Contract based on the use of loans and/or derivatives products to control the acquisition or sale of an asset of much larger size. Example: borrowing against the value of an owned asset to acquire another much larger asset.
Leverage exchange-traded fund
An ETF on which derivatives are used to augment the return.
Leverage swaps
Swap in which one of the legs is expressed as a multiple of the notional value.
Leverage transaction merchant (LTM)
A party who is actively engaged in the facilitation of leveraged contracts.
LIBOR
See London Interbank Offered Rate.
Limit order
An order entered into a market that sets the maximum price to be paid (buy) or the minimum price to be received (sell).
Liquidation
The closing of a derivative position.
Lombard rate
A rate set by the Deutsche Bundesbank for short-term lending rates collateralized by securities.
London Interbank Offered Rate (LIBOR)
An average of the interest rates London banks charge one another for borrowing funds.
Long
An owner’s position in a security, derivative, commodity, or currency.
Long-term Equity AnticiPation Securities (LEAPS)
Listed equity options that have an expiration date as far out as three years. In the option’s final year it reverts to the standard option format.
LTM
See Leverage transaction merchant.
Maintenance margin
The minimum amount of equity required to maintain positions in a margin account. In an account containing common stock, FINRA regulations state that the equity cannot be less than 25 percent of the market value. Broker-dealers set higher requirements.
Margin
Minimum amount of equity required in an account to acquire or sell short products.
Margin call
The calling for additional collateral in an account to cover a deficiency.
Market-linked investments
See Structured products.
Market makers
Traders that trade for their own account and risk, thereby adding to market liquidity. Many markets mandate that their market makers make two-sided quotes (bid and offer). In some cases, market makers are referred to as dealers.
Mark to market
Process by which the monetary values in an account are adjusted to their current market value.
Market risk
Risk of adverse market conditions, such as the changing of interest rates or the liquidity of the particular issue drying up.
Master Agreement
1. Developed by the ISDA, forms the core of an agreement between a derivative’s participants. 2. One of five parts to the umbrella master agreement, sets the standard the participants will operate under.
Moody’s
One of three major rating services. The other two are Standard & Poor’s and Fitch. Moody’s is most noted for its bond-rating capabilities.
National Futures Association (NFA)
Industry group promulgating rules to protect the integrity of the market and whose membership includes all parties operating on future exchanges.
National Securities Clearing Corporation (NSCC)
Division of DTCC. Clearing corporation for equities, exchange-traded funds, corporate and municipal debt, as well as closed-end investment funds and unit investment trusts.
Negotiated swap rate (NSR)
Swap rate that is set at the beginning of a swaption. It becomes the effective rate if the swaption is elected.
Net asset value (NAV)
Share price of open-end mutual funds and other related securities. It is computed by adding the value of the portfolio to money awaiting investments less operating expenses divided by the number of shares outstanding.
NFA
See National Futures Association.
Nominal value
See Notional value.
Nominee name
Owner in registered name only, but not the name of the actual principal or beneficial owner. It is a registration name used by custodians and other financial institutions which is accepted by industry participants and used to expedite trade settlement and other related actions.
Notional value
A value that exists in name only. A $1,000 bond trading in the market for $900 has a dollar value of $900 but a notional value of $1,000.
NSR
See Negotiated swap rate.
OID
See Original issue discount.
Open interest
The number of contracts of a derivative product that are outstanding (live) at a specific time.
Open repo
See Open repurchase agreement.
Open repurchase agreement
A repurchase agreement where the termination or closeout date is unknown at the time the repurchase agreement is set. Two transactions occur at the same time. One is selling an issue on inception date (trade date) for settlement (settlement date) on the inception date. The other transaction is buying the issue back using the inception date today (trade date) for settlement at a date that will be determined at the later time (settlement date). Either party to the repo can close out the contract with twenty-four hours’ notice.
Option
A derivative product that grants its owner the privilege but not the obligation to take market action for a predefined period of time at a predetermined price.
Option combination
The purchase or sale of puts and calls on the same underlying issue with different option series designation.
Option spread
See Spread.
Option straddle
See Straddle.
Original issue discount (OID)
1. A bond issued at a discount that pays interest only at maturity. The difference between the price paid and par, paid at maturity, is the interest earned. 2. A bond issued below its face value (par). The portion or all of the discount will be taxed as interest income.
Over-the-counter
Trading in a nonregimented exchange market.
Over-the-counter option
An option not traded on an exchange where all parts are negotiated.
Paasche index
One of two standard methods used for calculating indexes. The base used for calculations is updated periodically.
Paper profit
A make-believe profit that would have been real if the position had been closed out.
Par
The face amount of a debt instrument. A $1,000 bond trading at $1,000 is trading at par.
When two or more securities are exchangeable for one another at equal value. For example: A $1,000 bond is convertible into 20 shares of common stock. The bonds and the common shares would be at parity if the bonds were trading at $800 and the shares were trading at $40 ($40 × 20 shares = $800).
Par value
1. A figure assigned to common and preferred stocks. 2. Concept used to convert shares to dollars on the company’s balance sheet. 3. A value assigned to “percent” preferred stocks and used to compute preferred shares’ dividends.
Pass-through security
An asset- or mortgage-backed security that passes through debt payments and interest to the security’s owner. For example: each month the owner of a GNMA mortgage-backed pass-through security receives the mortgage interest payments and the amount of mortgage principal that has been paid down by the homeowners.
Physical settlement
The use of the referenced asset in transaction settlements, either by actual movement or by book entry. One party delivers the asset and the other party pays cash or its equivalent for it. In the case of a cash settlement one party pays the other the amount due according to the contract.
Preferred stock
Nonvoting ownership shares of a corporation that has prior claim to dividends and assets over the common stock. Preferred shares are supposed to pay a stipulated rate of dividend.
Premium
1. In a debt instrument, the amount paid over par. 2. In an option, another name for the price. 3. In insurance, the periodic cost for the policy. 4. In trading, the amount paid over fair value.
Price-weighted index
Index whose value is computed on the prices of a set amount of shares of the component securities.
Principal
The actual amount invested as apart from interest.
Principal only
A debt instrument that does not make interest payments, but is issued as a discounted instrument that pays out its full principal amount at maturity. Some government bonds are stripped into two parts and sold as interest only and principal only instruments.
Put
A product that gives its owner the privilege of selling the underlying product at a predetermined price during a specific time.
Put bond
1. A bond that contains a feature that allows the bondholder to sell the bond back to the issuer under preset terms. 2. A feature in some bonds that allows the issuer to mandate that the bondholder sell the bond back to it under fixed terms. (Resembles a call feature.)
Put or call swap
In either type of a fixed-for-floating rate swap that contains this feature, the floating leg of the swap can use the option to terminate the swap.
Recovery rate
The amount or percentage rate that is expected to remain after bankruptcy.
Redemption
The retirement of an instrument, usually for a payment of cash.
Referenced security or referenced asset
The underlying issue or entity that the swap or derivative is based on.
Refunding
The issuance of a new debt to pay off an old debt. The U.S. Treasury refunds its maturing Treasury bills by issuing new Treasury bills.
Registered employee
A person who has satisfied the requirements of a regulatory authority to carry out the responsibilities of his or her occupation.
Regulation T
U.S. Federal Reserve regulation governing the lending of money by broker-dealers to clients.
Regulation U
U.S. Federal Reserve regulation governing the extension of credit by banks to clients for security transactions.
Repo
See Repurchase agreement.
Repurchase agreement (Repo)
Two transactions are set up at the same time. One is selling an issue on the inception date (trade date) for settlement on the same day (settlement date). The other transaction is buying the issue back using the inception date as the trade date (trade date) for settlement on another known date (settlement date). Both legs of the repo values and applicable rates are known at inception.
Reverse conversion
An option strategy involving the selling short of a stock, the buying of a call, and the selling of a put on the same stock with both options having the same expiration date. No matter which way the stock’s price moves, the exercise of the option will cover (close) the position.
Rho
Measures the change in time value of an option, or other derivative, as interest rate changes.
RIC
Reuters Instrument Code.
Risk arbitrage
Taking security or other financial positions based on an event that may or may not occur. Company A is rumored to be interested in acquiring the shares of Company B. If it happens, what effect will it have on the securities? Or if it doesn’t, what will the effect be?
Risk-free arbitrage
Trading on an aberration in prices between the same products (e.g., the converted value of an American depositary receipt [ADR] and its foreign shares).
Roller-coaster swap
A swap in which the periodic payments increase or decrease according to an agreed-to schedule.
S&P
See Standard & Poor’s.
Scalpers
Futures traders who trade on the spread between bids and offers.
Schedule
1. Part of the ISDA Master Agreement setting forth the responsibilities of the transaction. 2. Any listing of responsibilities executable by a particular party.
Securities Industry and Financial Markets Association
See SIFMA.
Securitization
The process by which financial assets are pooled together in a single new product and sold piecemeal, thereby spreading risk of default over many owners.
SEF
See Swap exchange facility.
Separate trading of registered interest and principal securities
See Stripped bond.
Series
1. In options, the strike price and expiration date. 2. In municipal bonds, subissues of the same bond.
Settlement date
The day there is supposed to be an exchanging of assets to satisfy the terms of a transaction.
SFR
See Swap fixed rate.
Shark note
A short-term note referenced to an index, with a knock-out option.
Short position
1. A short position requiring a covering action at a later time (e.g., selling stock short that must be bought back eventually); a nonderivative product. 2. A short derivative position requiring action only if and when acted upon by a long position (e.g., a seller of an option only has to act if the option is exercised by the option owner). 3. A position requiring the eventual delivery of a product (a future product short position). 4. A bookkeeping balance.
Short sale
Selling something that is not owned or intended to be delivered with the intention to buy it back at a lower price at a later date.
SIFMA
Securities Industry and Financial Markets Association. An organization made up of industry broker-dealers and other related interests.
Single-name swap
Swap between two parties and a single currency.
Sinker
A short name for a sinking fund—see Sinking fund.
Sinking fund
A fund that is set up by the issuer that permits the issuer to reacquire its own bonds from its earnings. The bonds are then retired.
Sovereign
That which belongs to a country.
Sovereign debt
Loans made directly by a country’s government.
Sovereign risk
Concern that a foreign government: 1. may default; 2. may intervene during the life of a swap or other derivative; 3. may take market action that could negatively affect an ongoing contract.
SPAN margin
See Standard portfolio analysis.
SPC
Special purpose corporation—see Special Purpose Vehicle.
SPDR
Spiders or Spyders. ETFs on the S&P 500 index, managed by State Street Global Advisors.
SPE
Special purpose entity—see Special Purpose Vehicle.
Special Purpose Corporation
See Special Purpose Vehicle.
Special Purpose Entity
See Special Purpose Vehicle.
Special Purpose Vehicle
An entity that manufactures credit derivative securities.
Speculator
A trader who risks capital trying to outguess the market or effect of events and maintains positions for short periods of time.
Sponsor
The originator who presents an ETF product plan to the regulatory authorities.
Spread
1. The difference between two related prices. 2. In options, the buying and selling of equal numbers of puts or calls having the same underlying but different series. 3. Buying and selling equal numbers of different related future contracts to take advantage of an aberration in their prices. 4. The difference between the bid and offer of a quote.
SPV
See Special Purpose Vehicle.
See Swap rate.
Standard & Poor’s
One of three major rating services. The other two are Moody’s and Fitch.
Standard & Poor’s 500
A free-float capitalization-weighted stock index.
Standard margin
See Initial margin.
Standard portfolio analysis
System used by futures exchanges to analyze complex accounts to determine maximum risk.
STANS
See System for Theoretical Analysis and Numerical Simulations.
Straddle
The purchase or sale of puts and calls on the same underlying issue with the same option series designation—see Option combination.
Street side
That part of a transaction or entry affecting the operation processing accounts of the firm.
Strike price
A predetermined price at which an option, or other similar type of derivative, would transact an exchange of assets (trade).
Stripped bond
A bond where the interest and principal are divided into two different payment streams, interest only and principal only. Strip stands for Separate Trading of Registered Interest and Principal Securities.
Structured product
A product comprising a discounted bond and a derivative, such as an option.
Swap
A product in which assets, liabilities, or cash flows are exchanged.
Swap agreement
An ISDA contract that details the terms of the swap.
A firm that acts as a conduit between parties but does not take a position or risk.
Swap dealer
A firm that takes positions and trades against counterparties.
Swap exchange facility (SEF)
Third-party clearing facility mandated by the Dodd-Frank Act.
Swap fixed rate
The current rate applicable to swaps.
Swap interdealer broker
A broker whose clients are dealers that work between dealers dispensing information and generating liquidity.
Swap payer
Party to an interest rate swap that pays the fixed rate of interest.
Swap rate
The rate applicable to an ongoing swap or a swap rate negotiated in advance.
Swap receiver
Party to an interest swap that received the fixed rate of interest.
Swaption
An option to enter into a swap agreement at a later time.
Synthetic option
Using two of the three—puts, calls, and the underlying issue—to replicate the third. Example: long a call and short a put on the same underlying issue replicates the market price movement on the underlying.
System for Theoretical Analysis and Numerical Simulations (STANS)
System used by Options Clearing Corporation to analyze complex accounts to determine maximum risk.
Taker
Another name for the owner of an option. Term used in such countries as the United Kingdom.
Tau
Measures an option’s premium change as the underlying security’s volatility changes.
Term sheet
Contains full description of the derivative, issuer, underlying product, and features.
Theta
Reflects the daily decay of the time value of an option premium.
Tick
Minimum trading price movement assigned to a product.
Time value
That portion of an option’s premium that is over and above its intrinsic value. The value dissipates as time passes.
TomNext
Settlement date for the trade is trade date plus two days.
Tomorrow next
See TomNext.
Total return index
Index whose received value feeds from three sources: the components of the index, revenue generated from collateral, and adjustments to the value of the index.
Total return swap or total rate of return swap
A derivative in which one party transfers both market and credit risk to another party in return for an income flow plus protection of original value.
Trade date
The actual day a trade occurs.
Trade date + 3
Trade settles three days after trade date.
Traders
Term is usually applied to market makers who trade for their own account and risk.
Trading lot
The regular trading size of a product (e.g., U.S. common stock = 100 shares).
Tranche
One section of several that compose an asset-backed security.
TROR
See Total rate of return swap.
TRS
See Total return swap.
Trustee
Individual or entity responsible for the safety and security of assets and the adherence to rules and regulations governing that responsibility.
UIT
See Unit investment trust.
Underlying issue
The asset that is behind the derivative.
Unit investment trust (UIT)
Established by assembling a nonmanaged fixed portfolio with a fixed maturity date and selling shares in it.
U.S. Treasury bills
Short-term instrument of the federal government.
U.S. Treasury bonds
Long-term instrument of the federal government.
U.S. Treasury notes
Intermediate-term (from one to ten years from issuance) instrument of the federal government.
U.S. Treasury rate
Benchmark interest rate used for other loans.
Valuation date
The day that the required money computations of a transaction are determined.
Value at risk
A guesstimate of potential loss that could occur over a set period of time, based on historical events.
Value-weighted average price
Method used to establish the basis for daily and final settlement prices for U.S. Treasury futures.
VAR
See Value at risk.
Variation margin
The mark to market on positions that are maintained in a futures account.
Venture capital
Investment in start-up companies or “one shot” opportunities.
VIX
CBOE’s Volatility Index, which measures near-term market expectation as reflected by the S&P 500.
Volatility
The price movement range of a product or market over a predetermined period of time.
Volatility Index
See VIX.
Volcker Rule
Named after Paul Volcker, former Federal Reserve chairman; part of the Dodd-Frank Act that separates a bank’s proprietary business from its customer business, thereby reducing the potential for conflicts of interest.
VWAP
See Value-weighted average price.
WAC
See Weighted average coupon.
WAM
See Weighted average maturity.
Weighted average coupon
Used in pricing a basket of different couponed debt securities.
Weighted average maturity
A weighting formula used to amortize the maturity of a pool of loans or a basket of debt instruments.
Writer
A party that sells the right, but not the obligation, to buy (a call) or sell (a put) an underlying product for a specific period of time.
Yield
The periodic return on an investment over and above the principal. See Current yield, Yield to maturity, Yield to call.
Yield curve swap
Swap based on the spread between two points on the yield curve.
Yield to call
Debt instruments that have a call feature usually have a call price. Yield to call uses the call price instead of par.
Yield to maturity
The return on an investment that includes the amortization or depletion of the difference between current market value and par or face value.
Zero-coupon bond
A discounted bond that pays its interest at maturity; an OID offering.
Zero-coupon swap
A fixed or floating rate against a zero-coupon bond.