Vocabulary

Glossary

The following are terms that I use on this site. The definitions are my own. Note that definitions of financial terms are not standardized. That is one of the reasons why financial legal documentation is so dense -- each term has to be redefined in the document! Useful financial glossaries are sprouting up all over the Web (See for example the Nasdaq's Glossary, Business Glossary Index of the Washington Post and The Glossary of Frequently Used Terms by Finance Canada).

The Hong Kong Monetary Authority has a Guide to Hong Kong Money and Banking Terms with the Chinese language translations of terms while the Hong Kong Justice Department has a legal Chinese English legal glossary.

A Glossary of Securitization terms is found on ABSNet' Site

Please let me know about any problems you find with my definitions.

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Term	Definition
A
ABS	See asset backed securities
Acceptance	Acceptance is the legal recognition by a drawee that it has an obligation to make payment on a draft according to its terms
Acceptance Company	A finance company that purchases at a discount extended payment purchase contracts or receivables from sales companies
Account Party	The FI's customer. In a letter of credit, the FI guarantees payment to the beneficiary on behalf of the account party. The account party also undertakes a contingent obligation to the FI in the event that the letter of credit is negotiated.
ACSS	The Automated Clearing Settlement System operated by the CPA to aggregate all payments information to determine FIs' daily net settlement to the Bank of Canada.
Actuarial Liabilities	Actuarial liabilities are the expected present values of insurance policy payouts recorded as liabilities on balance sheets of FIs. They are also known as policy reserves or actuarial reserves .
Actuarial model	An actuarial model is an insurance model. An actuarial model consists of a stationary population is assumed that neither grows nor shrinks in any of its age groups, but stays the same forever as entrants to the age group exactly equal deaths plus those who grow out of the category. Actuarial models of stationary populations are the basis for calculating pricing of insurance contracts.
Actuarial Reserves	see actuarial liabilities
Actuarial Risk	Actuarial risk is the risk borne by an insurer that the critical assumptions of the expected net present value model used to price the insurance contract are substantially incorrect. Actuarial risk is a form of model risk.
Actuarially Fair Premium	The premium in an insurance policy that when discounted to present value equals the expected present value of the cash outflows of a policy (claims and expenses).
Add-On Factor	Concerning capital adequacy, the amount determined by the BIS to approximate the future potential credit risk of the counterparty in a derivative contract.
Adjustment	in P&C insurance, the process of arriving at a claim settlement amount. In determining the amount of the loss, external consultant expenses -- adjustment expenses on the balance sheet -- are regularly incurred.
Adverse Selection	The tendency of those most at risk in a group to take out insurance so that the insuring FI that priced the contract with respect to the average in the group is faced with losses.
Agency Fee	In a syndicated loan, the fee payable to an FI that serves as the agent for the syndicate banks in dealing with the borrower during the course of a syndicated loan
Agency Costs	Costs relating to the risk (and the monitoring of that risk) that an agent will pursue his personal interests rather than the principal's interests. Agency costs can arise whenever the agent's actions or the outcomes of those actions can not be accurately fully known to the principal.
Agent bank	An agent bank in a syndicated loan is the agent for the lending banks. It reviews conditions precedent to drawdown, receives drawdown instructions from the borrower and passes them to the lenders, receives lenders remittances and transfers them to the borrower and receives borrower payments and allocates them to the lenders. It also serves as the nexus for flows of information between lenders and the borrower.
All Risk Policy	A P&C insurance policy that covers against the loss caused by all perils except those specifically excluded from the terms of the policy (also called an all risk loading policy)
Allowance for loan losses	A contra account on the balance sheet of a credit granting FI that should be an estimate of the amount by which, because of credit risk, realized cashflows on outstanding loans will be less than contracted cash flows. Allowances may be general or specific. Loan loss allowances are often referred to as loan loss reserves. Note that the word "provision" is used by some finance professionals to mean what we define here as an "allowance."
Angel Capital	Informal start-up capital provided to entrepreneurs who are starting companies by investors other than family members or close friends.
Annuitant	The holder of an annuity. In life insurance, a person during whose life a life annuity is payable. Usually the annuitant receives the annuity payments.
Appropriated Surplus	In insurance accounting, amounts associated with certain policies in excess of the difference between expected net present values of future claims and premiums.
Arbitrage	The making of riskless profits by the simultaneous purchase and sale of securities (including synthetic securities) with identical payoffs. In finance, the "no arbitrage condition" states that two securities (or two groups of securities) that have the same payoffs must have the same price. In other words, in efficient markets, opportunities to generate riskless profits can not be sustained.
Asset Backed Security	A public security whose value derives from a structured pool of legally bankruptcy-remote assets, administered by an independent asset manager, rather than claims over the cash flows and assets of a corporation that manages the assets.
Asset Based Finance	Provision of credit for and secured by specific machinery and equipment, inventories and/or receivables.
Assignment	In a loan sale transaction, the buyer fully replaces the seller, because all rights and obligations under the loan are assigned from the original lender (seller) to the new lender (buyer). For assignment to occur, the borrower must agree (or have set up the original loan contemplating and pre-authorizing assignment.
Assumable Mortgage	A mortgage contract that is transferable from the seller to the buyer of a house
At the Money	Concerning the price of a put or call option, the condition when the option's strike price equals the current market price of the underlying instrument.
Authorized Credits	In credit risk management, concerning a credit granting FI's exposure to a borrower, the sum of outstanding credits plus amounts that are undrawn but committed to the client (off-balance sheet commitments).
Average Life	The weighted-average times of payments on a loan, security or portfolio with the proportions of each payment in the aggregate payment being the weights.
B
Back to Back LC	A trade letter of credit (LC) issued on behalf of an account party who is the beneficiary under a separate LC (assigned to the FI) whose terms of payment are substantially identical.
Backtesting	The comparison of actual trading results with VAR model-generated risk measures.
Balance Sheet Identity	Equity = Assets - Liabilities. See (Debits and Credits: A Few Principles of Accounting)
Bank for International Settlements	The BIS is the central bank for central banks, facilitating inter-central bank payments and serving as a forum for bank regulatory harmonization.
Bank Rate	In Canada, the bank rate is the rate of interest that the central bank charges clearing banks on overnight overdraft loans.
Bankers Acceptance	a commercial draft drawn on a bank client that has been accepted for payment by the bank. BAs are highly liquid money market securities.
Bankruptcy	The status of a legal person (either an individual or a company) who is unable to service its debts and petitions (or is petitioned by its creditors) to become a bankrupt. During the bankruptcy process, creditors may entertain plans for reorganization of the bankrupt to preserve value in operation. During this time the bankrupt's assets are held by a bankruptcy trustee. If no plan is approved by the creditors, the assets are sold; the proceeds are distributed among the unsecured creditors, and in the case of a personal bankruptcy, the person's remaining unpaid portions of those debts are forgiven. See receivership and Chapter 11.
Bankruptcy-Remote	The characteristic of a holder of assets that makes its value from the point of view of its claimants independent of the bankruptcy of a related third party. In a securitization the SPV that purchases the assets with the new securities' proceeds is bankruptcy-remote from the asset seller, such that, in the event of the seller's bankruptcy, the claimants of the seller would have no recourse to the assets sold to the SPV.
Basis Risk	The risk that the price movement of a hedge will differ from the price movement of the hedged position. For example, in a deposit-taking, credit-granting FI, the variable spread between a lending rate and a borrowing rate. In derivatives hedging, a residual risk that arises because the movement in a spot (cash) asset's price is not perfectly correlated with the movement in the price of the asset delivered under a forward, futures or option contract.
Basis Point	In quotes of interest rates, one basis point is one percent of one percent. If interest rates rise from 4.50% to 4.55% they have risen by 5 basis points. In quotes of foreign exchange and commodity price rates, a basis point is often used to mean the smallest change in the price of foreign exchange quoted.
Basis Point Swap	The simplest currency swap, being a floating versus floating swap in which interest in each leg (i.e., each currency) is calculated using the appropriate interbank offer rate. Note that US usage of the term "basis point swap" may differ from the above. Some professionals use the term to describe swaps that are used to hedge basis risk in interest rates within a single currency (eg a prime-LIBOR swap).
BAX	Three month Canadian Bankers' Acceptance futures contracts traded on the Montreal Exchange
Bearer Securities	Public securities, the simple possession of which constitutes proof of ownership. Electronic depositories and securities issues where no individual securities are actually printed has eroded the importance of bearer securities. See book entry securities and registered securities.
Benchmark bond	A bond that is frequently quoted as a reference bond in analyzing yield curves. Specific benchmark bonds are often used as the underlying security in interest rate futures.
Best efforts basis	Concerning the primary issue of securities, an FI's commitment to place the securities in the market, but not to underwrite the issue, such that, if market demand for the securities was less than anticipated, the FI would be under no obligation to purchase the unplaced securities.
Bid-Ask Spread	The difference between the price at which the market maker is willing to sell the security (the ask price) and the lower price at which the market maker is bidding to buy the security (the bid price). If the market's demand for the security at the ask equals supply of the security at the bid over an appropriately small period of time (eg one day) then the market maker on each trade can expect to make half the bid-ask spread. See the traders' rule.
Bill of Exchange	see draft
BIS	See Bank for International Settlements
BIS Capital Accord	The set of agreements starting in 1988 between the G-10 central banks, plus Luxembourg and Switzerland, and now adhered to by most countries of the world, setting minimum levels of regulatory capital between for banks. The Accord includes provisions of capital for credit and market risk and is subject to ongoing updating. The original 1988 Accord is also known as the Basle Capital Accord.
Book Entry Securities	Public securities where ownership is evidenced only by recording the owner's name in a central registry, usually held in computerized account form. With book entry securities, no individual securities are ever printed for distribution to securities holders.
Booking	An action by an FI of purchasing an asset (or taking an off-balance sheet position), thereby showing it as an asset on the books of the FI (or as a risk position in the notes of the FI).
Bought Deal	In Canadian investment banking parlance, an underwriting using the prompt offer prospectus (POP) system. The rapidity with which a bought deal can be brought to market has made it the preferred route for listed firms. Reduced risk for the underwriter allows it to quote firm prices at reduced fees, achieving the same effect as a shelf registration in the US capital markets.
Brady Bond	A bond that was originally issued in exchange for outstanding principal under loans to a country experiencing difficulty in servicing its international sovereign debt. The program was initiated by Nicholas Brady, secretary of the Treasury of the U.S. government in 1989.
Bridge Financing	Short term financing arranged to bridge a temporary cash shortage between the need for a expenditure (eg. to finance the purchase of a company, a share repurchase or the maturity of a debt financing) and the receipt of proceeds (eg. from permanent financing or asset sales).
Bucket	An aggregation of risks and/or cash flows into a single risk point (often called a risk vertex) for analytical purposes (for example in an interest rate gapping model or a VAR model).
Bulldog Bonds	See foreign bonds
Buyer Credit	A medium or long term export credit loan to the importer granted at the request of the exporter to finance the purchase of capital equipment or services.
C
Call Option	A derivative security that gives the purchaser the right, but not the obligation, to buy the underlying security from the writer of the option at a specified exercise price.
Canada Bond	A bond issued by the Government of Canada.
CAPM	The capital asset pricing model is an economic model that shows that, in equilibrium, risk averse investors in an otherwise perfect economy will price only the systematic risk of a security, (i.e., the covariance of a security with the market portfolio) or Where R_i is the return on the ith security, ß_i is the covariance of the ith security's returns with the market returns over the variance of the market returns and R_mis the market return and R_f is the risk free rate. The higher is the beta, the greater the cost of equity. Implementation of CAPM difficulties include estimates of the risk premium (R_m - R_f), with ranges of 3% to 8% commonly used and difficulties in estimating beta using historical data.
Capital Accord	See BIS capital accord
Capital At Risk	see risk capital
Capital Forbearance	A policy by a deposit insurer or FI regulator, allowing an FI to continue operating even when its equity capital funds are fully depleted.
Capital Structure	The proportions values of the various liabilities and shareholders equity accounts that make up the funding sources of the FI (or other corporation). At it's simplest, the capital structure is the equity to assets ratio or the FI's leverage
Capital Taxes	Capital Taxes are taxes charged by the Canadian federal and some provincial governments on a company's "capital" which includes equity and long term debt financing.
Capricious Run	A run on an FI not justified by the financial condition of the FI. In the absence of the run, the FI would have no problems with its solvency. If however, the solvent FI is subject to a capricious run and has insufficient liquidity to make immediate payment, it may be forced to liquidate assets at below their fair market price which could then impair solvency.
Central Bank	The central bank of a currency area is the FI on whose books final clearing and settlement of payments is made. Deposits of FIs with it are the most liquid assets in the economy. By creating more deposits (eg in payment for purchase of government obligations) it can increase the money supply. As the ultimate provider of liquidity it can immediately and directly affect interest rates. It is the government vehicle for conducting monetary policy. Central banks may also be the governments fiscal agent, the issuer of notes and coins and/or a major FI supervisor.
Certificate of Deposit (CD)	A money-market security, issued by a bank or other deposit taking FI, evidencing a deposit. If the CD may be legally sold to a third party in the secondary markets, it is known as a negotiable CD.
Chapter 11 Bankruptcy	The U.S. law that protects borrowers unable to pay their debts from liquidation by their creditors while proposals for solutions allowing the bankrupt to remain in business are being considered.
Chattel Mortgage	A mortgage over movable property, for example over a vehicle.
Chinese Wall	An internally imposed barrier within an FI that limits the flow of confidential information
Clearing	Exchange of drafts and payment instructions between negotiating and payer FIs.
Clearing Account	A demand deposit account maintained by an FI with the clearing and settlement authority -- typically the central bank. The clearing account allows the FI to make final payment in the currency of the central bank in which the clearing account is held.
Clearing Bank	A bank with a clearing account. Clearing banks are direct clearers.
Closed Pools	MBS pools where the mortgages in the pools are not allowed to be prepaid.
Closed Ended Mutual Fund	A closed ended mutual fund is a publicly listed investment fund that issues a fixed number of shares to outside investors in the same manner as a regular publicly listed corporation. See Open End Fund.
Co-financing	A large financing (bank and/or capital market) where both private sector and government owned FIs combine forces to meet the financing needs of a borrower.
Coincident to when issued t-bill	The seasoned T-bill whose maturity coincides with the maturity of the T-bill to be issued and currently traded in the when issued market. For example, the when issued one month T-bill will have coincident to when issued T-bills whose original maturities were three months and six months.
Co-Insurance	An insurance contract design where the insurer only covers a set proportion of the losses, with the insured bearing the remainder.
Collateral	Assets pledged by a borrower to a secured lender in support of a credit facility which give the secured lender priority in repayment over unsecured lenders up to the value of the collateral. Collateral is used to reduce the credit risk of a facility.
Collar	For the holder of an underlying security, the hedging strategy of issuing a call and purchasing a put of identical maturities where, typically, the cost of the put is substantially offset by the fee income from the issued call.
Combined Ratio	In P&C insurance, a measure of the underwriting profitability of the P&C insurer. The sum of the loss ratio and the expense ratio.
Commercial Paper	Short term unsecured money market obligations issued directly by a non-FI.
Commitment Fee	A periodic fee payable to the credit-granting FI on the undrawn balance of the credit facility.
CompCorp	CompCorp is the Canadian Life and Health Insurance Compensation Corporation, the industry-owned, mandatory liability guarantor for Canadian life and health insurance.
Compensating Balances	Compensating balances refer to a partial cash collateral requirement in a credit relationship whereby a proportion of a loan that a borrower draws is required to be held on deposit at the lending FI (typically in a zero or low interest account). The effect is to lower the total amount at risk to the FI while raising the effective interest rate.
Concentration Limit	A prudential guideline that an FI implements specifying the maximum amount of a certain type of exposure that the FI can book, often expressed as a proportion of assets or capital
Conditions Precedent	Those conditions, specified in the credit agreement or terms sheet for a credit, that must be fulfilled prior to drawings being permitted under the agreement. Typical conditions precedent include legally proving the authority to borrow, registration of collateral, government approvals and favorable opinions of legal council.
Confidence Interval	A statistical range that a random variable will lie within a known percentage of the time, under specified assumptions about the distribution of a random variable. Confidence intervals are the basis of VAR analysis.
Confirming a Letter of Credit	The guaranteeing of a letter of credit (LC) by a bank other than the LC opening bank, typically at the request of the beneficiary who may not be comfortable bearing the risk of the LC opening bank.
Conflict of Interest	A conflict of interest between an FI and its client occurs when the FI's actions to further its own objectives conflict with the best interests of the client, and where the FI has been employed to further that client's best interests. Conflicts of interest are of particular concern in FI activities where the FI has a fiduciary responsibility to the client.
Consol Bond	A perpetual bond with a fixed rate of interest.
Contingent Claim	An security that makes payment under specified circumstances and no others. Contingent claims include lines of credit, guarantees, insurance contracts, derivatives, etc.
Contra Account	An account that reduces the balance of an asset account, for example, on and FI's balance sheet the allowance for loan losses.
Contributory Pension Plan	A pension plan under which employees (and not just employers) are required to contribute during their years of employment to the fund the amortization of which will be their pension.
Core Deposits	Deposits (excluding those purchased on wholesale markets or from retail deposit brokers) that on average remain in a deposit-taking FI for relatively long periods and so constitute a statistically reliable source of funding.
Core Funds	With respect to the liquidity risk faced by an FI and a specific horizon over which the liquidity risk is being assessed, the sum of the FI's core deposits, term wholesale financing with maturities longer than the horizon and equity capital.
Correlation of defaults	One of the three key factors in quantifying the credit risk of a portfolio. If the correlation of defaults is low, then the percent value at risk of a portfolio of loans can be made small by increasing the number of uncorrelated loans. On the other hand, if the correlation is very high, then the portfolio acts much like a single loan, with correspondingly higher value at risk.
Correspondent Banking	The provision of banking services from one FI to another. Services may include deposits, loans, LC advising and confirming and foreign currency clearing and settlement. Profitable correspondent banking is carried out often between FIs based in separate countries.
Cost of Equity	The cost of equity is the expected rate of return that equity holders require. It is not directly observable but is implied by the price of the shares of the FI and expectations of risks and returns to those shares. See dividend discount model and CAPM
Coupon Rate	The periodic payment on a bond (typically semi-annual or annual) expressed as a percent per annum of the principal of the bond. It's called the coupon rate because, in a bearer bond, the payment is evidenced by a separate coupon that has to be cut from the bond to be negotiated .
Counterparty	The party with whom one contracts, used especially in over-the-counter derivatives transactions.
Covenant	Legal clauses in a legal agreement (eg a loan agreement or the trust indenture of a bond) that require the signatory take or avoid certain actions. For example, a common covenant in a loan agreement is to maintain a minimum debt to equity ratio.
Covered Interest Rate Parity	See interest rate parity
CPA	The CPA is the Canadian Payments Association, the organization responsible for inter-FI clearings and settlements of final payment in Canadian dollars.
Credit Equivalent Amount	A term used in the calculation of regulatory capital for credit risk according to the BIS Capital Accord. Off-balance sheet items involving credit exposures are converted into credit equivalent amounts by multiplying them by specific weighting factors. The credit equivalent amounts are then weighted again to convert them into risk assets.
Credit Facility	A service (which may a loan, a line of credit, a guarantee, pre-approval of LCs and/or derivatives, or any combination of these) packaged, priced, approved and possibly sold as a single service extended by a credit-granting FI or syndicate of FIs or placed in financial markets.
Credit Rationing	A restriction in the supply of a loan so that excess demand for credit exists at the market price. In perfect market economics, supply and demand schedules intersect at a price that clears the market. If rationing prevails, the price in such perfect economics must be below that which equilibrates supply and demand. In the credit markets, agency conflicts lead to credit rationing so that price adjustment does not clear the markets.
Credit Risk	Credit risk is the risk that an obligor (eg., a borrower, derivative counterparty, or supplier of a credit substitute) will not make timely payment when contractually obliged to do so. "Credit" comes from the latin credo and means to believe in.
Credit scoring model	A model that uses quantitative information about large numbers of borrowers in homogeneous portfolios in order to make pricing and lending acceptance decisions. Such models reduce the cost and improve the accuracy of credit risk management.
Credit Substitute	A credit substitute is an off-balance sheet instrument where the FI is at risk for the entire notional value. Examples of credit substitutes include undrawn but committed lines of credit, guarantees, letters of credit, standby letters of credit and underwriting of securities. See direct credit substitutes.
Cs of credit analysis	Variously referred to as "the four Cs", "the Five Cs" and "the six Cs", these refer to several aspects of analysis of credit risk that the FI credit officer should consider in her analysis. The list may include Character (i.e. reputation and honesty), Capital (i.e. leverage), Cash Flow (you lend cash, cash has to repay the loan), Collateral, Capacity (i.e., the ability of the borrower to do that which is in the business plan to be financed), Conditions (i.e., market specific conditions such as the business cycle and interest rates or the conditions that should be written into the credit agreement) and Common Sense (don't make dumb loans). I know, that makes seven, but I've never heard the "Seven Cs" applied to credit analysis.
Currency Swap	A swap where the two counterparties agree to make payments to each other in different currencies. Unlike an interest rate swap a currency swap involves exchanging the gross principal amounts in the two currencies at both the beginning and the end of the swap and gross interest payments on each interest payment date. A currency swap is like a complex foreign exchange swap.
D
Daily Earnings at Risk	DEaR is JP Morgan's original name for value at risk.
Data Envelope Analysis (DEA)	A linear programming-based technique for calculating the production frontier for a population of producers (such as bank branches) in order to draw conclusions concerning relative efficiency of the producers.
Daylight overdraft	A condition in a daily settlement system whereby a payments system user maintains a overdraft during the day that is expected to be resolved by the end of the day. For example, in the U.S., where the Federal Reserve guarantees direct clearers' payments during the day, banks' reserve accounts at the U.S. Federal Reserve Bank often becomes negative within the banking day.
DEA	see Data Envelope Analysis
Debentures	A debenture is a bond that is not secured with any collateral. In general, FI regulators prohibit FIs from issuing secured bonds because they would give priority of payment over the depositors, policy holders and liability guarantors.
Debt Service Ratio	The ratio of a borrower's interest and principal amortization payments to the funds available for making payment. In sovereign risk assessment, a ratio of a country's interest and debt amortization obligations to the value of its exports.
Deductible Policy	An insurance contract design whereby the insurer covers the full amount of insured losses above a minimum amount, which must be born by the insured.
Deep Discount Bond	A bond with a low coupon rate relative to the current yield.
Defined Contribution Pension Plan	A pension plan where each employee has a separate account into which the employer and/or employee contributes a defined amount (usually a function of salary, but possibly also a function of profits); the funds in the account are invested by the asset manager and the pension is calculated on the value in the account upon employee retirement. See defined benefit plan.
Defined Benefit Pension Plan	A pension plan which defines the benefits to be paid to the employee by a formula stipulated in the pension plan agreement. Unlike the defined contribution plan, employer and employee contributions are not pre-determined but are functions of actuarial calculations based on costs, investment returns, mortality, etc.
Delegated Monitor	An economic agent appointed to act on behalf of other agents in collecting information and/or investing funds on their behalf. The term was coined by Doug Diamond to describe deposit taking FIs in his 1984 Review of Financial Studies paper.
Delta of an Option	The change in value of an option resulting from a change in price of the underlying instrument.
Demand Deposits	Low or no-interest bearing, chequing deposits held by a deposit taking FI that can be withdrawn at any time by the depositor.
Deposit and other liability insurers	In most developed countries, government or industry sponsored insurers explicitly guarantee that retail deposits will be honored, retail insurance policies will be honored, and the ownership of securities held in trust will be maintained even in the event of the deposit taker, insurance writer or securities custodian's bankruptcy. (see implicit deposit insurance).
Deposit Drain	In liquidity risk management of deposit-taking FIs, the amount by which cash withdrawals from deposit accounts exceed cash inflows to deposit accounts.
Deposit Run	The rapid withdrawal of a substantial portion of an FI's deposit base. If the FI has insufficient liquidity to make immediate payment to meet the withdrawals, it may be forced to liquidate assets at fire-sale prices, with a consequential deterioration in FI solvency. Deposit runs can be either informed or capricious or informed
Derivatives	A derivative or derivative security is a security whose prices are based on one or more underlying securities. Examples of derivatives contracts include a stock index futures contract, a foreign exchange forward contract, an interest rate swap and a commodity call option. These are based on an index of share prices, delivery of foreign exchange, exchange of net interest payments calculated on different bases on single notional principal of debt, and a the right but not the obligation to purchase the commodity respectively. Derivatives are not shown at their notional value on the accounts of the FI and so are called off-balance sheet accounts.
Designated Jobber	In Canada, the core group of market makers in the secondary market for treasury bills and Canada bonds are designated by the Bank of Canada as jobbers.
Direct Clearer	An FI with an account at the central bank through which final clearings may be made. Also called a clearing bank
Direct Credit Substitute	A term used in computing regulatory capital under the BIS Capital Accord, a *direct* credit substitute is a credit substitute that is effectively the same as a loan from a credit risk standpoint. Direct credit subsguarantees include guarantees of financial obligations, SBLCs that serve as financial guarantees (eg backing CP), risk participations in BAs, and securities lending where the FI faces the credit risk of the borrower.
Direct Quote	In foreign exchange markets, the price of foreign exchange quoted as a number of units of domestic currency.
Discount Broker	A stockbroker that conducts trades for customers but does not offer investment advice or asset management services on those trades .
Discount window	A borrowing arrangement for the benefit of direct clearers made by the central bank whereby the eligible bank will purchase eligible securities at a discount with an agreement to sell them back to the direct clearer at par at a specified future time. The central bank makes and accepts payment using its clearing balances. The central bank can act through the discount window as a lender of last resort.
Diseconomies of Scale	A cost structure whereby, at a specified level of output, as the output increases, average costs of production also increase.
Diseconomies of Scope	A cost structure whereby, at a specified level of output, the costs of jointly producing two services (goods) are higher than if they were produced separately. independently.
Disintermediation	Disintermediation means removing the middleman. With reference to financial services, it is the removal of the FI. Securities are placed directly with ultimate suppliers of the capital and risk absorption, rather than with FIs. Note, however, that FIs find roles in servicing the disintermediated market.
Dividend Discount Model	The simply dividend discount model for estimating the cost of equity capital of an FI uses notes that, if a dividend paying company's expected rate of dividend growth g can be considered to be constant from a dividend per share base of d_t+1 one period from the present time t and if the t price is P_t , then the cost of equity, k_equity must be: Actual calculations are very sensitive to g which is typically calculated based on past dividend historical growth.
Documentary Credit	See letter of credit.
Draft	A draft (also called a bill of exchange) is an unconditional order in writing, signed by the maker, to pay a specific amount to a specific person (or the bearer) at sight or on a specific future date. A cheque is one example of a draft. The party who makes the draft is called a drawer (if you write a cheque, you are the drawer). The party to the draft orders to make payment is the drawee (the bank in the case of the cheque). The recipient of the payment is the beneficiary or payee. A commercial draft is a business-to-business order to make payment (such as an invoice).
Duration	A measure of interest rate elasticity of the price of an interest bearing instrument. Duration is calculated as Where: CF_t = Cash flow received on the security at end of period t T = The last period in which the cash flow is received DF_t = The discount factor = 1/(1 + R)^t R = Yield (current level of interest rates in the market) PV_t = Present value of cash flow at period t = CF_t X DF_t
Duration Gap	A balance sheet measure of the interest rate risk faced by the equity of an FI calculated as Where D_A= duration of assets D_L= duration of liabilities and k= L/A
Drawee	The party on whom a draft is drawn -- i.e., the party that makes payment to the beneficiary.
E
Early Intervention	Early intervention, with regard to the action of a liability insurer or an FI regulator is the taking over a financially distressed FI before its equity capital has been fully depleted.
Earning Assets	Earning assets of an FI are those assets that generate fixed income (i.e., interest or bond coupons)
Economies of Scale	A cost structure whereby, at a specified level of output, as the output increases, average cost of production decreases.
Economies of Scope	A cost structure whereby, at a specified level of output, the costs of jointly producing two services (goods) are lower than if they were produced separately. independently.
Efficiency Ratio	The efficiency ratio, the ratio of non-interest expenses to total revenue, is used by deposit taking FIs as a general measure of efficiency.
Equity as a call option	A view of shareholders equity that that sees in equity an imbedded call option. Equity holders can purchase the assets of the firm from the debtholders by buying back the debt of the debtholders. If the firm goes bankrupt, because of the limited liability of equity, the equityholders will lose no more than the value of contributed equity. From the debtholders perspective, this equivalence of equity to a call option causes debtholders to strive to reduce the value of the option by reducing the time between monitoring, reducing the volatility of the asset value and increasing the capital cushion (decrease the strike price relative to the value of the assets).
Equity in the Property	In real estate lending, the difference between the market value of the real estate and the value of the claims of senior creditors
Escrow Account	In lending, a trust account, established by a borrower for the benefit of a lender, where the account receives funds (e.g. from sales proceeds) for a specified use (e.g., debt service) and the excess funds ultimately reverts to the borrower.
Expected Value	The value of each possible outcome of the event multiplied by the probability of that outcome occurring. All possibilities must be considered, since the sum of probabilities must be 1. Note that this definition applies to discrete not continuous distributions.
Expense Ratio	In P&C insurance, the ratio of expenses accrued (excluding those allocated to particular claims) to premiums earned in a specified period.
Export Credit	A loan to finance exports granted by or guaranteed by an export credit agency, a government FI devoted to stimulating its country's exports. Two major types of export credits are buyer credits and supplier credits.
Euro	The single currency of the Euroland.
Eurobond	see international bond
Euroland	The countries of the European Union that participate in the European Monetary Union using the euro as the currency: Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, Netherlands, Austria, Portugal and Finland.
Euromarkets	See offshore markets.
F
Factoring	The process by which an FI purchases accounts receivable from corporations at a discount, usually with no recourse to the corporation should the receivable go bad.
Fallen Angel Bond	see Speculative Grade Bond
Fed Funds	The interest rate for onshore, unsecured US dollars in the interbank market, so named because value is given by the lending bank crediting the account of the borrowing bank with the US federal reserve.
FI	An FI is a financial institution, including commercial banks, savings banks, credit unions, savings and loans companies, mortgage lenders and brokers, investment banks, investment brokers, dealers, merchant bankers, venture capitalists, hedge funds, life insurance companies, property and casualty insurance companies, general insurance companies, monoline insurers, asset managers, pension fund managers, mutual fund managers, mutual funds, special purpose vehicles, investment advisors, stock and derivatives exchanges, trading systems providers of financial information, bond rating agencies
FI Regulators	FI regulators are government bodies that empower FIs to provide services, set the specific rules for FI activity within the legal framework and monitor FIs' adherence to those rules. Separate FI regulators may be at both the national and the provincial/state level and the regulatory function may be split between different bank, credit union, insurance, pension, securities, etc. regulators.
Fidelity Insurance	Insurance guaranteeing the performance of the agent to a principal -- typically taken out by corporations to protect themselves from employee fraud.
Fiduciary	A person whom another person (the beneficiary) legally entrusts to perform a task (f`rom Latin fiducia:`trust) for the benefit of the beneficiary. The fiduciary has rights and powers which would normally belong to the beneficiary and must not allow any conflict of interest to affect their duties towards beneficiary. Fiduciaries must use a high standard of care to protect and promote the interests of beneficiary.
Financing Gap	A measuring tool in FI liquidity risk management, being the difference between an FI=s non-reserve assets to be funded and core funds.
Fire Wall	Firewalls in FI corporate structure refer to legal limitations on intercorporate dealings intended to prevent the financial distress of one FI from spreading to another FI within the same group.
Fire Sale Price	A slang term to describe a realization of liquidity risk wherein the price received for an asset that has to be liquidated (sold) immediately is less than its fair market value.
Fiscal Agent	(1) In a bond issue or securitization, the agent that administers the cash flows. (2) In a government, the agency that acts as the treasury. Often a monetary authority or central bank often acts as the fiscal agent for a government.
Fisher Effect	In macroeconomics, the observation, named after Irving Fisher, that the nominal rate of interest is made up of two components: the real rate of interest and the expected rate of inflation.
Fixed Charge	With respect to collateral on a credit facility, a lien that relates to specific assets that are individually identified.
Fixed Charge Coverage Ratio	A ratio frequently used in assessing the credit risk of a borrower. It is like the debt service ratio, but here the numerator is the funds available for debt service and the denominator is the debt service requirements.
Fixed Income Securities	Assets which accrue a set of future cash flows which, in the absence of credit risk are known, regardless of what happens in the future. Fixed income securities include loans, bonds, accounts receivable, lease payments, rental income, etc. and exclude equity claims and contingent claims.
Float	A float is non-interest bearing funds obtained by the FI because of the favorable timing of payment versus receipt of funds that are nominally simultaneous. If funds are paid with delay to the FI but the FI delays in crediting the payee's account, the FI will enjoy a positive float.
Floating Charge	A lien over a class of assets where the individual assets may change over time (such as receivables or inventories).
Floating Rate Note (FRN)	A bond with a floating rate of interest. FRNs are common in the offshore bond market where their interest rate is typically periodically set at a spread over LIBOR.
Floor	A put option issued on interest rates, often with multiple exercise dates that effectively sets the minimum interest rate the issuer would pay on underlying debt.
Foreclosure	Taking possession by the mortgagee (i.e., the lender from whom the mortgaged property is collateral) of the mortgaged property in satisfaction of indebtedness of a defaulting borrower.
Foreign Bond	A bond, issued in a domestic capital market, by a corporation whose place of residence is in a different country from the market. A foreign bond is one type of international bond. Foreign bonds include Yankee bonds (issued by non-US companies in the US), Bulldogs (issued by non-UK companies in the UK) and Samarais (issued by non-Japanese companies in Japan.
Foreign Exchange Swap	A foreign exchange swap is a forward purchase and spot sale (or vice versa) of foreign exchange with no interest payments between its two payment dates. Foreign exchange swaps, are not usually categorized as "swaps" by anybody but foreign exchange traders, because they are far simpler than, for example, currency swaps.
Forward/Forward Deposits	An agreement to place a deposit with an FI at a specified future time on specified conditions. Unlike the case in and FRA, where net settlement based on market interest rates occurs, in a forward forward, the deposit is actually placed.
Forward Purchase (Sale) Agreement	A forward purchase or sale agreement (usually just called a "forward") is an over the counter agreement between two parties, a buyer and a seller, to effect the sale of a specific amount of a specific item at a specific date in the future for a specific price, determined at the time of concluding the forward agreement. The item may be bonds, stocks, foreign exchange, commodities, or any other good or service. In financial markets very liquid forward markets are in foreign exchange and (to a lesser extent) commodities.
Forward Rate Agreement (FRA)	An FRA is a forward agreement in deposits used to hedge against or speculate in interest rate risk where delivery does not take place but where cash flow settlement occurs on the notional deposit placement day.
Frequency of Loss	The probability of occurrence of a loss. In calculating the expected value of an insurance policy (or credit risk), actuarial value of an insurance policy, one needs joint estimates of the severities of losses and the frequency of each such loss. (See also in credit risk probability of default)
Futures Contract	A pure bet made through a standardized (with respect to quality, quantity, timing of delivery, etc.) contract(s) at an exchange between two members (who may be acting for their clients) one who longs and one who shorts the contract(s). The contractors face only the credit risk of the exchange, which intermediates the bet and must maintain margin accounts into and out of which is a daily marking to market of the contract. A futures may be considered to be like forward contract, intermediated by an exchange where there is recontracting daily.
Futures Option	A put or call option contract that, when exercised, results in the delivery of a futures contract on the underlying asset .
G
G-10 Countries	G-10 refers to the Group of Ten countries: Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Sweden, UK and USA.
Gap	In FI management, applied in three different situations: 1. To measure interest rate risk in the interest rate gap for a given bucket. 2. To measure interest rate risk for the whole portfolio in the duration gap and 3. To measure liquidity risk in the financing gap.
Gearing	See leverage
General Allowance for Loan Losses	An allowance for loan losses not assigned to any specific borrower but to an entire portfolio of like loans. Based on past experience of losses of the portfolio, the general allowance represents the amount of losses that the FI believes it is likely experience.
General Risk Charge	In the BIS Method for assessing market risk for regulatory capital, in order to set capital , a charge to account for the interest rate risk of a trading portfolio fixed income security.
Ginnie Mae	The US government-owned mortgage corporation and the first body to sponsor US government risk mortgage backed securities.
Goodwill	An accounting asset which may be booked when a company acquires another company for a value greater than the book value of equity. The difference acquired value and book value is recorded as goodwill.
Greenfield Project	A term used in project finance to denote a totally new project, starting from a "green field" (i.e., an empty construction site).
Gross Debt Service Ratio	In consumer lending, the ratio of a prospective borrower's total accommodation expenses (mortgage, lease, condominium management fees, real estate taxes etc) divided by gross income before taxes.
H
Hedge Ratio	The ratio of the notional principal of the hedge to the amount of the exposure to hedge, often calculated as the beta coefficient of the return of the hedge instrument regressed on the return of the exposure to hedge. The hedge ratio of a naive hedge is one.
High Power Money	Bank notes issued (or guaranteed) by the Central Bank, coins issued by the mint and deposits of clearing bank deposits held with the central bank. The money supply (including bank deposits) is a multiple of high power money. See outside money.
Hitting a Bid	The act of a market participant selling a security to a market maker who has quoted a bid to buy the security. A market maker whose bid is hit increases his inventory in the security. See lifting an ask.
Homogenous market expectations	The condition, unlikely to be achieved in practice, whereby all market participants share the same beliefs about the fair value of an asset.
Horizontal Disallowance	A disallowance of offsets to required capital used the BIS Method for assessing market risk for regulatory capital. In order to calculate the capital required for interest rate risk of a trading portfolio, the BIS Method allows offsets of long and short positions. Yet interest rate risk of instruments at different horizontal points of the yield curve are not perfectly correlated. Hence, the BIS Method requires that a portion of these offsets be disallowed.
I
IBRD	International Bank for Reconstruction and Development, the main FI in the World Bank Group
IDA	International Development Association, the soft loans window of the World Bank Group
IFC	International Finance Corporation the FI in the World Bank Group dedicated to stimulating private sector investment by, among other means, co-financing.
Imbedded Option	A subset of rights within a complex security that give the holder of the security the same rights as an option. For example, a loans with a fixed rates of interest and the right to prepay the principal prior to final maturity contains an imbedded interest rate option. Such an option will affect the interest rate risk of the portfolio, making simple gapping and duration analysis inadequate measures of interest rate risk. Another example, from credit risk management sees equity as an option over a firm's assets
IMF	International Monetary Fund the international FI, owned by member countries (with voting rights roughly proportion to GDP) dedicated to promoting monetary cooperation by consultation and collaboration. The IMF seeks to facilitate the growth of international trade, employment and income, to promote exchange stability, to reduce foreign exchange restrictions and to help members over balance of payments maladjustments
IMF Conditionality	The requirement that various economic reforms be implemented prior to drawdown of an IMF loan.
Immunize	In hedging of risk, the action which results in the portfolio being fully protected against the risk hedged. For example, an FI setting the duration gap to zero would immunize its portfolio from interest rate risk as long as interest rate changes involved only parallel shifts in the yield curve.
Implicit Deposit Insurance	Because of the systemic risk posed by deposit-taking FIs, governments face political pressure to prevent them from failing. This is often tantamount to guaranteeing the retail (and possibly wholesale) deposits of FIs even in the absence of formal deposit insurance.
Implicit Interest	A payment for use of funds in a form other than explicit interest. For example, the uncharged costs of check clearing services is implicit interest "paid" to the deposit holder. Front end fees are implicit interest for a loan.
In the Money	In the money, with respect to a specific derivative refers the FI being owed more net cashflows (appropriately present-valued) than it owes the counterparty. An in the money position (if marketable) can be sold for a positive net present value.
Indirect Quote	In foreign exchange pricing, the reciprocal of the direct quote (i.e. the price of domestic currency, expressed as the number of units of foreign currency that must be given up to acquire one unit of domestic currency).
Informed Run	A deposit run where the depositors believe that the FI's solvency is in doubt, and where their beliefs are true. The threat of a run serves as a disciplining device to pressure banks to maintain adequate amounts of capital. See capricious run.
Initial public offering or IPO	The first issue of the debt or equity securities of a corporation for public distribution.
Institutional Investors	Large, non-bank, investing FIs such as life insurance companies, pension, trust, mutual and other and investment funds.
Insurable Interest	With respect to life insurance, an insurable interest in a person is a continuing benefit from the life that person. With respect to property insurance, the insurable interest is ownership. One must have an insurable interest in order to purchase insurance.
Insurance Agent	A sales representative for an insurance company.
Insurance Broker	An independent person or company who acts on behalf of the insured to place an insurance contract with an underwriter. The broker also may represent the interests of insured or beneficiary to the underwriter in the event of a claim.
Insurance Underwriter	The FI that assumes the obligations under the insurance contract by insuring a particular risk.
Interbank Market	The wholesale, over-the-counter market where FIs borrow and place unsecured deposits with each other.
Interbank offer and bid rates	The interest rate charged by one bank to another in wholesale markets for deposits (e.g., LIBOR and LIBID).
Interbank Ratio	A measurement tool used in liquidity management defined as the ratio of interbank deposits placed over interbank deposits purchased.
Interest Rate Gap	A measurement tool used in interest rate risk management, being, for a specific re-pricing bucket, the total principal of rate sensitive assets minus rate sensitive liabilities.
Interest Rate Parity	More accurately known as covered interest rate parity, this is the relationship between foreign exchange markets and the money markets of the two currencies in the foreign exchange transaction forced by arbitrage whereby the discounted spread between domestic and foreign interest rates equals the percentage spread between forward and spot exchange rates. See also uncovered interest rate parity.
Interest Rate Risk	The risk that the net market value of a security or a portfolio will decrease and/or, with respect to an FI, the risk that its net income will be adversely affected due to changes in interest rates
Interest Rate Swap	A swap where (typically) one counterparty is the payer of fixed rate interest and the other is the payer of floating rate interest, with both payments being in the same currency. If, in a given period, the fixed rate of interest is greater (less) than the floating rate of interest, at the end of that period, the payer of fixed (floating) pays the payer of floating (fixed) the amount by which the gross interest calculated on the fixed basis exceeded (was less than) the gross interest calculated on the floating basis. Interbank rates are frequently used as standards for calculating the floating rates of interest in swaps.
International Bond	An international bond is a bond that is issued in a location outside of the country of the main place of business of the issuer (called a foreign bond) or in a currency other than that of the location of issue (called an offshore bond) or both. Offshore bonds, prior to the advent of the euro, were called Eurobonds.
Investment Banking	The servicing securities markets, including underwriting, selling, trading, valuing, administering, and managing securities and advising clients about these activities. See merchant banking.
Investment Ratio	In P&C insurance, the gross yield on premiums invested from the time of receipt to the time of payout.
J
Jobber	A primary distributor of a publicly listed securities. I have only heard the term used for government bonds. See designated jobber.
Junk Bond	See Speculative Grade Bond
K
Kiting	Writing a cheque against a bank account with insufficient funds to cover the cheque in the hopes that the money will become available before the cheque is cashed. Especially if the beneficiary of the cheque will, based on the funds drawn under the cheque, make funds available to the drawer and if the drawer repeatedly uses this technique to obtain financing.
L
Large Value Transfer System	The LVTS is the real time settlement system implemented by the CPA in Canada. Although the LVTS gives finality of payment in real time, it is not a true real time gross settlement system (RTGS) because settlement is net at the end of the day.
Law of one Price	In international economics, the strongest form of purchasing power parity whereby prices of identical products in different countries are equated by their exchange rates. This "law" is only in force by arbitrage under conditions of free trade and zero transportation costs.
Lender of last resort	A source of liquidity for an entity which otherwise would fail in its payment obligations. For a direct clearer, the lender of last resort is typically the central bank, operating through a discount window. Although some lenders of last resort claim only to provide liquidity to solvent banks against liquid collateral, others may subsidize insolvent banks viewed as too big to fail and by providing ultimate liquidity may inflate the high power money supply.
Letter of Credit	A letter of credit is a unilateral undertaking of an FI to make payment to a beneficiary upon presentation to the FI of a set of documents specified in the letter of credit. Letters of credit facilitate, among other activities, international trade, where the beneficiary is the exporter and the documents include a bill of lading (or other shipping documents evidencing delivery of the goods. Letters of Credit are often called LCs, L/Cs or documentary letters of credit. Guide to L/Cs are found at several banks' websites, for example Scotiabank's web site.
Letter of Credit Advising	The informing of the beneficiary of a letter of credit (LC) about the exact conditions of the LC that has been opened in its favor by an FI (typically the beneficiary's bank) who may also serve as the negotiating bank.
Leverage	Leverage, or gearing, is the extent to which an economic entity funds itself with borrowed money rather than with the equity. Leverage is measured as debt/assets or debt/equity. Since payments to debt are contractually fixed, the higher the leverage, the greater the volatility of (residual) cash flows to equity holders.
LIBID	The London Interbank Bid Rate is the rate quoted by banks active in the offshore interbank market for deposits in London in US dollar deposits at which they will take deposits with from banks. The bid-ask spread between LIBOR and LIBID is fluctuates around 10 basis points but can increase at times of crisis.
LIBOR	The London Interbank Offer Rate, being the rate quoted by banks active in the offshore interbank market for deposits in London in US dollar deposits at which they will place deposits with other banks.
Life Annuity	An agreement by an FI to make specified annual payments to the annuitant as long as she lives.
Lifting an Ask	The act of a market participant buying a security from a market maker who has quoted an ask price to sell the security. A market maker whose ask is lifted decreases his inventory in the security. See hitting a bid.
Lien	A charge (i.e. a legal claim) over property as security for a debt (for example a mortgage)
Limited liability	The shareholders of a company can lose no more than their contributed capital. Limited liability plus stochastic value of assets through time gives allows equity to be viewed as a call option on the firm assets.
Line of Credit	A line of credit is an undertaking of an FI to provide a loan up to a maximum principal amount to a borrower, where the loan can be drawn down subject to very short notice by the borrower and repaid at the discretion of the borrower. Lines of credit can be either committed (in which case the FI is obliged to make the funds available on demand) or uncommitted.
Liquidity Reserves	Assets maintained by an entity facing liquidity risk that either are cash (notes and coins and demand deposits) or can be converted to cash at a their fair market value, where that fair market value is subject to minimal market risk. For a clearing bank or other direct clearer. Liquidty reserves can be divided by their liquidity into primary, secondary and tertiary reserves.
Liquidity Risk	Liquidity is the ease of converting an asset into cash. Liquidity risk of an asset is the risk that it can not be so converted without substantial loss of value relative to the its fair market value. Liquidity risk of an FI is the risk that it will not be able to meet its payment commitments as they come due without substantial loss due to asset illiquidity relative to liability and off-balance sheet liability liquidity.
Loan Loss Provision	A charge to the income of a credit granting FI to recognize likelihood of loan losses. The loan loss provision is used to increase the balance sheet's asset contra-account allowance for loan losses.
Loan Loss Reserves	see allowance for loan losses.
Long	Having a net asset position in a security, so that if its price increases, the value of the position also increases.
Loss given default	The amount, typically expressed as a percent of all principal and accrued interest, that a lender will lose in the event that the borrower defaults. It is a function of the value and liquidity of the assets of the borrower, the priority and ease of exercise of the claim that the lender has over the collateral and the costs of obtaining possession of and liquidating those assets. It is one of the three important factors in determining the VAR of a credit portfolio, the other two being probability of default and correlation of default. Loss given default is analogous to the insurance concept of severity of loss.
Loss Ratio	In P&C insurance, the ratio of losses incurred to premiums earned for a specified period expressed as a percent. Losses include claims, independent adjusters fees and legal fees allocated to particular claims.
M
Management fee	A flat fee payable to the arranger(s) of a syndicated loan or other credit facility usually on or shortly after loan signing.
Margin Loan	A loan by a broker to its client to finance the purchase of securities. Collateral for the loan is provided by the client's securities portfolio, the value of which must be maintained at a specified multiple (eg 125%) of the loan. If the market value of the securities portfolio drops below that multiple and the client fails to answer a margin call (i.e., the broker's request that the client contribute more cash to his portfolio), the broker will sell stocks to repay the loan until the specified multiple is reached.
Market-to-Book Ratio	The ratio of the market capitalization of a firm (equal to the number of shares of common equity times the current share price) to the book value of that equity (being the paid in capital plus retained earnings attributable to common equity shareholders) as recorded on the balance sheet. This ratio reflects the market premium or discount that investors are willing to pay to own the firm's equity.
Mark to market	In a portfolio (of assets, liabilities, derivatives, or other off-balance sheet claims) adjusting the recorded values to reflect current market prices. In a futures position, daily marking to market involves, for the holder of a long position, making payment from (receiving payment to) the margin account to (from) the exchange in the event of a futures price fall (rise). The margin account of the holder of the short position will make or receive the opposite cash flows.
Market Risk	Market Risk is the risk that the market price of a security or component of a security held long (short) declines (increases). Market risk can include various other risks. For example, take a highly liquid benchmark Canada bond with no credit risk. Its market risk is identical to its interest rate risk).
Merchant Banking	In North American usage, merchant banking refers to investment banking where the FI also books a significant amount of continuing risk (in the form of bridge financing, mezzanine debt and/or equity) to a company for which it arranges security issues or gives financial advice. In U.K. traditional usage, merchant banking refers generally to investment banking.
Mezzanine Financing	Unsecured debt that is subordinate to bank debt and is frequently convertible into common shares.
Micro-hedging	Using derivatives contracts to hedge specific assets or liabilities, one transaction at a time, rather than hedging the entire portfolio taking into consideration asset and liability covariance.
Model Risk	Model risk is the risk that the theoretical model used to price a given security is substantially in error due to assumptions and/or structure. Actuarial risk is a form of model risk.
Money Market	The money market is the market for short term (i.e. less than 365 days) liquid securities, primarily BAs CDs, commercial paper, finance company paper and government T-bills.
Money Supply	Theoretically, the total value of assets in the society that are considered to money. There are many different practical definitions starting from the narrowest money (notes, coin and demand deposits of banks) and increasingly broad definitions that can include notice deposits of banks, deposits of non-bank FIs, foreign currency deposits, mutual funds, etc.
Monoline Insurers	Financial risk insurance companies who specialize in insuring bond and ABS issues. A "monoline wrap" is a guarantee issued by such insurers covering fully the repayment of principal and interest of the bonds or ABS.
Monte Carlo Analysis	A simulation technique (eg for valuation or cash flow analysis) where the simulation output is a non-linear function of input random variables. The technique involves performing repeated random draws from a hypothesized known distribution in order to obtain the value of the input variables that are then used to calculate the value of a function. In FI risk analysis, Monte Carlo Analysis is often used as an alternative technique for calculating a VAR.
Moral Hazard	An agency risk that a party to an economic contract will alter her behavior after contracting in order to benefit from the contract in a way not anticipated by the contract counterparty. For example, the insured/beneficiary in an insurance contract may undertake more risky activities following entering a contract, the price of which was based on a lower level of risk.
Morbidity Risk	The risk of ill health
Mortality table	An actuarial model of the mortality experience of a population (also called a "life table") used to calculate life insurance premia.
Mortgage Backed Securities (MBS)	An undivided interest in a pool of mortgage loans. Many MBS are guaranteed by agencies such as Canada Mortgage and Housing Association in Canada and Fannie Mae, Freddie Mac and Ginnie Mae in the US, while others are guaranteed by monoline insurers or unguaranteed.
Mortgagee	The lender in a mortgage loan who holds the mortgaged title to the property.
Multilateral Banks	A multilateral bank is a supra-national FI, devoted to promoting development in a particular region. Multilateral banks are more like finance companies than banks because they do not take deposits or make payments but do finance themselves in capital markets. Among the multilaterals are the IBRD, the Asian Development Bank, the Inter American Development Bank, the African Development Bank, etc.
Mutual Fund	See open ended mutual fund.
Mutual Ownership	In FI corporate structure, the ownership of the FI by the users of the FI service. Examples of mutual ownership are mutual insurance companies, where participating policy holders own shares in the company and credit unions where each depositor is a shareholder.
N
Naive Hedge	A derivative micro hedge of a risk exposure where the notional principal of the hedge is of the same amount as the asset, liability or expected cash flow to be hedged. In the presence of basis risk, a naive hedge may be suboptimal to using a hedge ratio different from one.
Naked Exposure	An unhedged exposure. For example, the writer of a call option on stock who did not own of the stock (or security closely correlated with the stock) would be said to have written naked calls.
Name at Lloyds	A "Name at Lloyds" is a member of Lloyd's of London, a P&C insurance market specializing in marine insurance, specialty insurance, and large disaster and liability insurance and reinsurance. Names are the final risk bearers insurance contracts underwritten in the market organized by Lloyd's
Named Perils Policy	A property insurance policy that insures the property only for the risks named (excluding, for example, earthquake insurance)
Negative Externality	An action by an economic agent in a transaction that imposes costs on economic agents not directly involved in that transaction.
Negotiation	Negotiation, with respect to a security (for example a letter of credit or a draft) is the presentation of the security (and supplementary documents, if required) for validation and payment.
Negotiable Instrument	A security whose ownership can be transferred in the secondary market, for example a negotiable CD.
Net Amount at Risk	In a life insurance policy, the difference between the potential maximum claim and policy reserves.
Net Asset Value (NAV) per share	With respect to an open-ended mutual fund, The price at which mutual funds shares are sold (or can be redeemed). It equals the total market value of the assets of the fund divided by the number of shares in the fund outstanding.
Net Interest revenue	Net interest revenue = interest income - interest expense. It shows the portion of income attributable to lending after deduction of funding costs. Since both interest income and interest expense fluctuate with the changing interest rate environment, net interest revenue is a far more stable measure of revenue than (gross) interest income. Net interest revenue may also be called net interest income.
Net Premium	In insurance contract pricing, the gross premium on a policy reduced by allowances for expenses, commissions and taxes -- i.e., the amount that can be applied to the expected present value of claims plus adjustment expenses.
No Arbitrage Condition	See arbitrage.
No Load Fund	A mutual fund, the purchase of which requires the buyer to pay no fees (loading) to the fund company or agent selling the fund.
Non Interest Bearing Liabilities	Non-interest bearing liabilities of an FI include non-equity claims that do not accrue interest. These may include interest accrued on its liabilities but not yet paid out, securities sold short, actuarial liabilities, minority interests, taxes payable etc.
Non-Accrual Loan	A loan on which interest income is not being accrued. For example, in Canada, regulators require that a loan with a payment 180 days late must be classified as non-accrual. and a loan, other than credit card and well secured loans are classified as non-accrual where payment is 90 days past.
Non-Cumulative Preferred Shares	Preferred shares whose dividends, if not paid, are not accumulated for later payment but are lost to the preferred shareholder forever. Non-cumulative preferred shares therefore participate fully in losses of the FI and are classified as Tier I capital.
Non-Performing Assets	FI assets on which, in the opinion of management, losses may be suffered.
Northbound Funds	In Canadian FI parlance, U.S. dollar purchased funds that are converted into Canadian dollars with a foreign exchange swap to achieve hedged Canadian dollar wholesale funding.
Note Issuance Facility (NIF)	A credit facility that allows a borrower to, over several years, issue short term notes into the money market confident that, in the event that there is insufficient demand for the notes, the underwriting FI (or syndicate) will purchase the notes.
Notice Deposits	Interest bearing deposits that in law may be withdrawn by the depositor only after formal prior notice of intention to withdraw. In practice, notice deposits can usually be can be withdrawn on demand, but do not have check writing privileges.
Notional Value	The notional value of an off-balance sheet is the face amount of the position. For a derivative this is the amount of an underlying security with respect to which the derivative security is priced. For a credit substitute, this is the maximum amount available for drawdown or payout.
Novation	A procedure, written into an original contract that contemplates a future contract which will, when entered into, cause the original contract to be renewed and amalgamated with the new contract. Novation is a legal device useful in facilitating loan assignment from a loan seller to loan purchaser, without having to go back to the borrower for approval.
O
OECD	See Organization for Economic Cooperation and Development
Onshore markets	Currency and security markets located in the same jurisdiction as the denomination of the traded instrument.
Off Balance Sheet Accounts	Off Balance Sheet Accounts are those accounts recording contingent claims, such that, when a contingent event occurs, this item moves into the accounts. Off balance sheet accounts of FIs are broadly classified into credit substitutes and derivatives
Off-Market Swaps	Swaps that have nonstandard terms. FIs frequently write an off-market swaps for client (tailoring them to clients risk needs) but client must compensate the FI with a higher than market price for the off-market swap.
Offsets	A reduction (eg of a risk). Particularly, in the BIS standardized method of calculating regulatory capital needed to cushion market risk, long and short positions in fixed income instruments that individually face interest rate risk initially reduce each other. These offsets, however are subject to vertical and horizontal disallowances.
Offshore Bond	A bond issued in a currency other than that of the currency of the location of issue. The center of the offshore bond market is in London, and the preferred currency is the US dollar. Offshore bonds, prior to the advent of the euro, were called Eurobonds.
Offshore Markets	International markets for deposits and securities denominated in currencies other than the currency of the country where the transaction occurs. The major offshore market center is London and the major offshore currency is US dollars. Prior to the advent of the euro the offshore markets were known as the euromarkets.
On Balance Sheet Accounts	see off balance sheet accounts
Open Ended Mutual Fund	An open ended mutual fund or unit trust is a publicly listed investment fund that issues and repurchases on a daily basis the shares of the fund at the discretion of the shareholders at a price equal to the net asset value per share at the close of business on the transaction date. See closed end fund.
Open Interest	In derivatives exchange terminology, the outstanding number of a specific contract (eg how many March 2001 Yen futures contracts are outstanding).
Operating Income	Operating income is the sum of net interest income and other operating income.
Operating Ratio	In P&C insurance, a measure of the overall profitability the insurer. The operating ratio is the combined ratio minus the investment ratio.
OTC	See over the counter
Other Operating Income	Other operating income of FIs is composed of fees for underwriting, trading, market making, advising, and asset management, LC fees and in come cases up-front fees on loans (Loans front end fees are sometimes amortized over loan life and considered part of interest income).
Operating Risk	Operating risk is the risk that the management systems (personnel, informational, legal, electronic, etc.) will fail.
Optimal Capital Structure	The debt equity mixture which, given the expected cash flows to the assets of the FI, maximizes the value of the FI to shareholders.
Option to buy (sell)	The right, but not the obligation to buy (sell) a security during some future period of time. See call option (put option)
The Organization for Economic Cooperation and Development (OECD)	The OECD is forum for social and economic research and policy formulation whose members are 29 rich and middle income countries of Europe, the Americas and Asia-Pacific.
Out of Sample Performance	An Ability, particularly of an econometric model, to predict accurately an outcome from new data, rather than the data used in model estimation.
Over the Counter (OTC) Market	A market trading in securities not listed by an organized securities exchange (e.g., interbank deposits, OTC call and put options, foreign exchange, forwards, swaps, FRAs).
P
P & C Insurance	Property and Casualty Insurance, also called "general insurance" to distinguish it from life and health insurance.
Parsimonious Model	In economic theory, a model that distils a complex phenomenon into relatively few critical components.
Participation	(1) With reference to a loan sale, a participation is the purchase of a share in a loan from the original lender, where the original lender maintains its relationship with the borrower and the rights and obligations of the original lender are passed through to the purchaser, leaving the purchaser with credit exporsure to the seller. (2) with reference to a syndicated loan the pro-rata sharing of the rights and obligations of all lending banks by a bank joining the syndicate. Each participant in a syndicated loan individually contracts with the borrower and retains contractual rights, without any credit risk to the arranging or agent bank.
Pass-through	A securitization mechanism whereby the cash flows of the underlying assets are passed through, essentially unchanged (after deduction of administrative expenses) to the security holder. Traditional Ginnie Mae MBS are passthroughs.
Payee	The party receiving payment e.g. in a draft.
Payout and Closure	In deposit insurance administration, the action of a deposit insurer paying out the claims of a failed deposit-taking FI's insured deposits and the closure (dissolution) of the FI (i.e., by either assuming its assets or selling them to third parties)
Performance Bond	A guarantee (often in the form of a standby LC) typically extended by an FI in relation to an engineering contract, where the FI guarantees the performance of a contractor in completing (some portion of) a large project. The beneficiary would be the project company and the account party would be the contractor. In the event that the project company determines that the contractor has not fulfilled its obligation, the project company requires the FI to make payment under the bond and the FI seeks reimbursement from the account party.
Policy	In insurance, the contract that specifies the insured event, the premiums, and the terms under which payment will be made by the insurer.
Policy Loan	In life insurance, a loan made by an insurance company to a policy holder using his/her policy as collateral. The terms of policy loans are frequently written into the life insurance contract.
Policy Reserves	see actuarial liabilities.
Premium	The periodic (typically annual) fee paid to the insurer to obtain insurance.
Primary Issue of Securities	The issue of securities by the obligor (eg, the issue of treasury shares by the company or of bonds by the borrower) to be distinguished from secondary trading of issued securities.
Primary Reserves	In FI liquidity risk management, the most liquid reserves, being bank notes plus coin plus deposits with the central bank. In RTGS systems, primary reserves also include securities that can be repoed or pledged to the central bank to obtain clearing balances.
Prime Rate	A variable per annum rate of interest, publicly announced by a lending FI, that can be changed at any time without notice, at the discretion of the lending FI, charged to a FI's most credit worthy borrowers
Private placement	A non-public placement of securities. Private placements are typically medium to long term loans made by a non-traditional lender such as an insurance companies or pension funds to a corporate borrower usually arranged by a bank or investment bank.
Probability of default	The chance, expressed as a number between 0 and 1 that a borrower will not make payment when legally obliged to do so. This is one of the key factors in quantifying credit risk and is a function of the willingness and the ability of the borrower to make payment. See also loss given default and correlation of defaults. Probability of default is analogous to the insurance concept of frequency of loss.
Prompt Offer Prospectus	A Canadian system of obtaining regulatory approval for offering of securities for a qualified issuer (that makes regular filings with the securities commission) that allows the issuer to file a short form prospectus, substantially reducing the time it takes to issue public securities from weeks to days.
Project Finance	A branch of structured finance wherein projects are financed with limited recourse to project sponsors.
Prospective Method of Reserve Calculation	In insurance, the usual method for calculating reserves, which sets reserves equal to the difference between the expected present values of future premiums and future claims and expenses of life insurance policies
Prospectus	A sales document stating the terms and conditions of a newly issued publicly offered security and truthfully, fully, and plainly describing the issuing company.
Prudent person rule	A legal standard of fiduciary responsibility that requires the agent to exercise the same care in managing the portfolio as would a prudent person managing his or her own portfolio.
Pull to Maturity	The tendency of the variance of a bond's price to decrease as maturity approaches.
Purchase and Assumption	In deposit insurance, the action by a deposit insurer or FI regulator to merge a failed FI with a healthy FI
Purchasing Power Parity	The international macroeconomic condition whereby changes in the exchange rate tend to offset differential inflation across countries.
Put Option	A derivative security that gives the purchaser the right, but not the obligation, to sell the underlying security from the writer of the option at a specified exercise price.
Q
Quality Swap	A fixed- floating interest rate swap between two parties of different credit ratings.
R
RAROC	see risk adjusted return on capital.
Real Interest Rate	The difference between a nominal interest rate (i.e., the quoted rate) and the expected rate of inflation.
Real Time Gross Settlement System	An RTGS system is a clearing and settlements system by which final settlement is made through gross payments across the books of the central settlement authority (usually a central bank) in real time.
Receivership	The status of a borrower in which the lender receives the collateral over which it has a lien when the borrower defaults on the loan. Many failing companies never go into formal bankruptcy because all assets are pledged and the unsecured creditors are left with nothing.
Recourse	The ability of an asset purchaser to sell an asset or loan back to the original seller should the credit quality of that asset deteriorate.
Recovery rate of a loan in default	1 minus the percent loss given default
Refinancing Risk	The interest rate risk faced by an FI that the cost of borrowed funds to be re-priced or re-borrowed will rise above the returns being earned on asset investments because of market changes in interest rates.
Registered retirement income fund (RRIF)	A Canadian tax shelter set up by the government to serve as a post retirement trust fund from which the retiree must withdraw specific amounts of taxable income each year. Each individual's RRIF principal comes from the accumulated investments of her RRSP.
Registered retirement savings plan (RRSP)	A Canadian a tax shelter set up by the government, to encourage individuals to save (up to certain limits) for retirement. Initial contributions to and interest on the RRSP are tax deductible.
Registered Securities	Securities for which registration by the issuer is necessary to establish ownership (see bearer securities and book entry securities).
Regulatory Burden	With reference to an FI, the difference between the private costs of meeting regulations (eg filing costs, costs of holding excessive capital and/or liquidity, costs of being excluded from certain markets and sales practices) and the private benefits of the regulatory regime (eg protection from competition). Also called "net regulatory burden."
Regulatory Capital	The amount of equity capital and certain subordinated debt required by FI regulators to be held as a cushion against insolvency. See Tier I and Tier II capital.
Reinvestment Risk	The interest rate risk faced by an FI that the returns on invested funds to be re-priced will fall below the cost of funds because of market interest rates falling.
Representation and Warranty	A representation or warranty is a guaranty of a statement of fact that a contractor makes in a contract. In a loan agreement, borrowers frequently represent or warrant that they have the legal authority to borrow, that they have gained all appropriate approvals, that the information that they have given to the lender is true, etc. This helps protect lenders from being cheated by borrowers misrepresenting facts by establishing what those facts are and making the signatories legally liable for them.
Re-pricing	The re-setting of the interest rate on that loan or deposit (e.g., a 5 year term loan whose interest rate is re-set every 90 days is re-priced every 90 days).
Repricing Gap	See interest rate gap.
Repudiation of debts	The unilateral denial by the borrower of the validity of its obligations to the lender. Debt repudiation is sometimes encountered as a sovereign risk where a government denies the validity of debts incurred by previous governments.
Repurchase Agreement	A repurchase agreement (more accurately called a "sale and repurchase agreement" and commonly called a "repo") is a very short term collateralized loan where title to the securities used as collateral passes to the lender at drawdown and is returned to the borrower at repayment.
Rescheduling of a loan	Changing the contractual terms of the loan such as its maturity and interest payments, typically to accommodate the projected cash flows of a borrower in distress where the lender considers the chance of repayment to be high, notwithstanding the distress.
Retail Banking	Consumer and SME banking involving principal amounts too low to quality as wholesale banking amounts.
Retail Deposit Broker	A broker that breaks up a large deposit of a wholesale depositor into smaller units to place each at a different deposit-taking FIs to ensuring full deposit insurance coverage.
Return on Assets
Return on Equity
Revolving Line of Credit	See line of credit. The word "revolving" is added simply to emphasize the fact that the line can be dawn down, repaid and drawn down again repeatedly during its period of effectiveness.
Riding the Yield Curve	A strategy that can be followed by an FIs that takes interest rate exposure as a matter of course to earn profits by borrowing at short term rates and lending long term rates of interest. Riding the yield curve has taken advantage in the past of the typically upward sloping yield curve that prevailed through most of the 20th century.
Risk Adjusted Return on Capital	The risk adjusted return on capital (RAROC) of a position or portfolio is the ratio of the expected return (or, retrospectively, the realized return) on a portfolio divided by the risk capital of that portfolio.
Risk Assets	In the calculation of regulatory capital, the amount of credit risk exposure an FI is deemed to face. The amount is calculated by weighting the value of each asset by its regulatory risk weighting. Off-balance sheet exposures are weighted to calculate a credit equivalent amount and then risk weighted.
Risk Capital	The capital put at risk by a position or capital available to support maximum expected losses from a risk position, where the maximum expected loss is the value at risk (VAR). Often the term capital at risk is used as a synonym for VAR.
Risk Participation	An agreement related to a loan or guarantee extended by an FI that subsequently wishes to reduce its risk (the risk off-laying FI). A risk assuming FI agrees, for a fee, to reimburse the risk off-laying FI if there is a default by the borrower (or if the guaranteed is called).
Risk Vertex	An aggregation of risks and/or cash flows into a single risk point (often called a bucket) for analytical purposes (for example in an interest rate gapping model or a VAR model).
Roll Over Date	The date on which a term deposit (or loan) that is expected to be renewed matures. The depositor (borrower) does not withdraw (repay) the interest and principal but "rolls" the total into a new deposit (loan).
run	The rapid withdrawal of a substantial portion of an FI's deposit base. See deposit run
Runoffs	Periodic cash flows of interest and principal on a fixed income portfolio.
S
Samarai Bonds	See foreign bonds
Schedule I Bank	In the Canadian Bank regulatory system, a bank that is widely-held and, chartered by act of Parliament or letters patent of the Ministry of Finance, to conduct banking as defined in the Bank Act. All of the large domestic banks in Canada are Schedule I banks.
Schedule II Bank	In the Canadian Bank regulatory system, a bank that is closely-held FI, authorized by letters patent of the Ministry of Finance, to conduct banking as defined in the Bank Act. Most Schedule II banks are subsidiaries of non-Canadian FIs.
Seasoned	The characteristic of a publicly traded security of having been traded on the open market for more than a specified length of time (e.g., 90 days ).
SEC	Securities and Exchange Commission of the US federal government is the agency responsible for public securities trading and filing of required disclosure documents.
Secondary Reserves	Assets maintained for liquidity risk management purposes being less liquid than primary reserves, typically made up of liquid deposits with other FIs.
Secondary Trading of Securities	The purchase and sale of securities from investors, market makers and traders in the secondary market, i.e., not from the primary obligor on a primary issue of new securities.
Securities Exchange	A self-regulating venue (either physical or virtual) where securities are traded according to specific set of rules agreed to by the members who are allowed to trade therein.
Securities Sold Short	Securities sold short are securities that an FI borrowers from another party (for example from securities the FI holds in trust for clients of its asset management operations) and then sells. Since the borrowed security has to be returned eventually to its owner, it is recorded as a liability on the balance sheet.
Securitization	The creation of a new marketable security from a pool of fixed income assets. The original holder of the assets sells them to a bankruptcy-remote, special purpose vehicle that finances the purchase through the issuing of the new marketable securities.
Select Life Tables	Insurance company mortality tables for policy holders who have passed a medical examination.
Self Regulatory Organization	A Self-Regulatory Organization (SRO) is an industry association that has been granted powers by the government to regulate its members.
Settlement	Making of final payment through transfer of funds from the account of the payer FI to the account of the payee FI with the central bank.
Settlement Price	The price at which a trade is concluded. In futures transactions, it is the average prices at which futures trade immediately before the end of the day's trading activity and is used by the exchange in marking all outstanding contracts to market
Specific Allowance for Loan Losses	An allowance for loan losses assigned to a specific borrower based on the deterioration of the borrower's credit worthiness or loan delinquency representing the amount that the FI believes will be lost on the loan.
Severity of Loss	The dollar amount of loss in a given circumstance. In calculating the expected value of an insurance policy (or credit risk), actuarial value of an insurance policy, one needs joint estimates of the severities of losses and the frequency of each such loss. Severity of loss is analogous to the credit risk concept of loss given default.
Shelf Registration	A method of registration with the SEC of securities to be issued in the US under Rule 415 of the Securities Act of 1933 whereby securities are not necessarily to be sold in a single discrete offering immediately upon effectiveness, but rather are proposed to be sold in a number of tranches over a period of time or on a continuous basis. Shelf registration effectively give the shelf registrant flexibility to raise money as needed, timing entries into the capital market allowing issues to be made in days, rather than weeks.
Short	Having a net liability position in a security, so that if its price increases, the value of the position decreases. Shorts in futures are simply accomplished by taking the opposite side of the long. Shorts in other securities must be constructed by actually borrowing the security from a party who already owns it and making delivery of it to the purchaser to whom you have sold the security short. Since illiquid securities may be expensive, difficult or impossible to borrow, constructing a short position in a given security may not be feasible.
Soft Dollars	A practice typically found in in retail investment banking, involving an unethical (and possibly illegal) action by which a service seller uses gains from an overpriced service to give to the service buyer's investment bank a free or underpriced service.
Soft Loan	A loan with a below-market rate of interest.
Solvency	The condition of an economic entity having having the fair value of its assets greater than the accounting value of its liabilities or, equivalently, having positive net worth. .
Sovereign Loan	A loan made to a sovereign (i.e., independent) government. Loans to municipal, regional, provincial and state governments are not usually considered sovereign.
Sovereign Risk	A form of credit risk relating to a loan to a borrower in a different country from the lender where the government of the borrower (who may be the government itself or a citizen of the government's country) causes the borrower to default on the loan. Sovereign risk events typically occur with respect to sovereign loans and/or where the currency of the loan is not the domestic currency of the borrower and foreign currency controls are imposed by the government preventing timely debt service.
Special Drawing Right (SDR)	A unit of the reserve currency of the International Monetary Fund defined by various amounts of each of several major currencies of member countries.
Special Purpose Vehicle	A corporate entity or trust account created for a specific financial purpose, typically to hold assets and claims separate from sponsors of the transaction. SPVs are used widely in project finance and securitization.
Specific Risk Charge	In the BIS Method for market risk assessment, an addition to required regulatory capital to account for the credit and liquidity risk of a trading portfolio of fixed income securities.
Speculative Grade Bond	A high yield bond that is rated Ba or lower by Moody's, BB or lower by Standard and Poors, or is unrated by rating agencies. If the bond is speculative grade at the time of issue, it is called a "junk bond". Otherwise it is known as a "fallen angel"
Spot Market	In the foreign exchange market, the collection of over the counter purchases and sales of currencies for "immediate" delivery. "Immediate delivery" for standard spot contracts in most currencies is in two days and for US dollar-Mexican Peso and US dollar - Canadian dollar transactions is in one day. Same day delivery is also available, time zones permitting but constitute less liquid markets than spot.
Spread of a Loan	The difference between the marginal cost of funds for the FI financing the loan and the all-in rate of interest charged the borrower for the loan.
Standby Letter of Credit	A standby letter of credit (SBLC) is a letter of credit that functions as a financial guarantee. If the beneficiary determines that the account party has not fulfilled its obligations under the guaranteed contract, that beneficiary presents a statement to that effect together with the SBLC and the demand for payment.
Stationary Population	A theoretical population used in mortality tables which experienced exactly the same birth and mortality characteristics for a very long time until the population of each age group stabilized. See actuarial model.
Street Name	A method of attributing ownership of assets under administration whereby the asset administer holds title from the point of view of the registration of securities with the securities depository (and the securities issuer), but legally holds the assets in trust for its clients. For example, a broker will hold equity shares of retail clients. Corporate registries and depositories will show the owner under a "street name", that of the broker.
Stress Testing	An analytical technique used in valuation (eg, in a VAR model) based on assumptions of future conditions that are highly adverse to the portfolio owner so as to give a "worst case" estimation of predicted value.
Strike Price	The price in a call (put) option at which the underlying security can be purchased (sold).
Subordinated debt	Debt whose payment claims are not exercisable until all other debtors claims have been satisfied. From the point of view of the superior debt claimants, subordinated debt functions as cushion similar to equity.
Supplier Credit	An export credit loan to the exporter to finance the working capital needed to produce and sell the export.
Surety Insurance	Insurance that guarantees the performance of one party to another, required under a the terms of a commercial contract between them.
Surrender Value	The amount to be received by an insurance policyholder should she cashing in the policy prior to maturity.
Swap	An over the counter agreement between two counterparties to periodically exchange cash flows a predetermined dates where the among of the cash flows exchanged on each date depends on some predetermined notional principal outstanding and a pricing mechanism with relation to that notional principal. See interest rate swap and currency swap.
Swap Buyer	In an interest rate swap the party who pays the fixed rate of interest and receives the floating rate of interest.
SWIFT	The Society for Worldwide Interbank Financial Telecommunications
Syndicated Loan	A single loan too large to be comfortably lent by a single FI, extended to the borrower by a group of FIs and administered by an agent bank/FI for an agency fee.
Systematic Risk	The risk, in a portfolio, that cannot be diversified away because it reflects the degree to which the value of the assets in the economy move in together. Systematic risk in an equity portfolio was described rigorously by William Sharp in his Nobel Prize winning CAPM model.
Systemic Risk	The risk to the entire economy posed by the financial service sector. Systemic risk events include contagious bank runs, collapses of market liquidity, failures of payments systems, etc.
T
Take-or-pay Contract	In project finance, a contract whereby the off-take purchaser agrees to pay for a specified amount of off-take over a specified period whether or not the purchaser actually takes delivery, provided that the product is available for delivery
Tenor	The final maturity of a credit facility.
Term Structure of Credit Risk	The term structure of credit risk is the term structure of interest rates (i.e., a zero coupon yield curve) where the lowest schedule in yield - maturity space is riskless (typically sovereign obligations of the currency of the curve -- eg., US treasuries in a US$ curve), and successive schedules above that correspond to successively poorer credits (eg., Aaa, Aa, A, Baa, Ba, B etc). The term structure of credit risk is critical in calculating VAR of a credit portfolio using the Creditmetrics approach.
Term Structure of Interest Rates	The yield curve.
Tier I Capital	The BIS definition of core equity capital available to meet regulatory capital requirements being the sum of common shareholders' equity common shares, contributed surplus, retained earnings, non-cumulative preferred shares plus minority interests in subsidiaries from Tier 1 capital minus goodwill.
Tier II Capital	The BIS definition of supplementary capital which must be unsecured subordinated to deposits fully paid up not redeemable at the option of the holder within 5 years and available to participate in losses This includes cumulative preferred shares subordinate debt property revaluation reserves and general allowances for loan losses
Time to close	Time to close, with reference to market risk VAR of an FI, is the time that it would take to close out a position (i.e., buy back the securities of a short position or sell the securities of a long position) without shifting the market adversely against the FI due to low market liquidity relative to the amount of the FI's position.
Time to repricing	The time to repricing of the asset or liability is the time until the asset or liability's interest rate is reset. It is important to distinguish time to repricing from maturity, since many of the FI's assets and liabilities are repriced on a floating basis. For example, a prime based loan's time to repricing is one day, even though it may be of several years' maturity. Time to repricing is used in both interest rate gap analysis and duration analysis of interest rate risk.
Too Big to Fail	The condition, ascribed to an FI by creditors and/or the general public, of being too big for the government to allow the FI to be liquidated in a normal bankruptcy. Creditors and/or the general public typically believe such an FI is too big to fail because, if it were to fail, the failure would impose an unacceptable systemic risk on the economy.
Total Debt Service Ratio	A ratio used by FIs in analyzing the credit risk of a borrower, typically a mortgage borrower. The ratio of the TDS is the prospective borrower's total accommodation expenses plus all other debt service payments. The denominator is the prospective borrower's gross income before taxes.
The Traders' Rule	A rule of thumb for remembering how the bid-ask pricing works: "When I enter the markets for my own account, I'm always on the wrong side of the bid-ask spread."
Tranche	A part of a financing, from the French word meaning "slice." A single credit facility are often divided into different tranches with different maturity, drawdown, interest payment, repayment, credit support, etc. conditions.
Trust Account	A legal arrangement under which money or other property is held by one person or company (the trustee), often a trust company, for the benefit of another person or persons. These assets are administered according to the terms of the trust agreement. Each province has a trustee act, which regulates the kinds of investments that can be made by the trustees of a trust fund.
Trust Company	An FI that can act as a trustee.
Trust Indenture	An agreement signed between the bond issuer and the trustee for the bond holders that defines the obligations of the bond issuer.
Trustee	A trustee is a legal representative, acting on behalf of another person or group of people in any of a variety of transactions. The trustee can manage the affairs of a beneficiary (possibly managing a trust account), invest, manage or distribute property, be an executor of a will, receive property in a bankruptcy, be the agent for bondholders in a bond issue, etc.
Turnkey Basis	A method of contracting the construction of a manufacturing, power generating, transportation or other large engineering facility frequently used in project finance whereby the contractor undertakes to provide the facilities (including all installation and training) in a completed, fully-tested, working form so that the principal just as to "turn the key" to produce the desired product or service.
U
Unappropriated Surplus	The retained earnings of a mutually owned insurance company or mutually owned credit union.
Uncovered Interest Rate Parity	The condition in international economics whereby the discounted spread between the domestic and foreign interest rates equals the percentage spread between expected future spot and spot exchange rates. Uncovered interest rate parity is a stronger economic condition than covered interest rate parity and, because of risk aversion in the market, holds only approximately at best.
Underwriting of Securities	A fixed commitment of an FI to arrange a primary placement of securities at a fixed price or, failing than, to purchase the unplaced securities at the fixed price. An underwriting is to be contrasted with the placing of securities on a best efforts basis.
Uninformed run	See capricious run.
Unit Trust	See open ended mutual fund.
Universal Bank	An FI that engages in a broad range of financial service activities, typically including retail banking, commercial lending, insurance, investment banking etc.
Unsecured Loan	A loan that is backed by no lien over specific collateral but relies only on a general claim to the assets of the borrower if default occurs.
Unwinding a Position	A term used by traders to describe reversing the booking of a risk. For example, if the original risk was booked by buying an asset, the trader could unwind the position by selling the asset, by taking the opposite position in a derivative or by selling short a highly correlated asset so that the original position's risk is cancelled. Unwinding a position may involve the booking of basis risk.
Usance LC	A commercial letter of credit on which time (not sight) drafts are drawn. For example, a usance LC may specify that payment is to be made 90 days after presenting of documents.
Usury	The sin of charging too high rates of interest. Various countries have differing definitions of "too high" written as usury ceilings written into their criminal codes ranging upwards from the Islamic total proscription of any interest.
V
Value-at-Risk (VAR) model	A statistical model that assigns a probability per unit of time to a calculated amount of losses occurring in an FI's portfolio. While VAR models were originally developed for trading portfolios, the concepts are also being applied to credit and other risk portfolios.
Value in operations (versus value in liquidation)	A company's total value of assets including the appropriately present valued expected returns to all factors of production used to produce goods or services assuming that those assets and factors continue to be used in their current configuration. A company's value in operations is typically greater than its value in liquidation (i.e., if they are sold quickly and separately in a liquidation) if employees have accumulated knowledge that allows them to use assets efficiently in cooperation with other employees or if the assets are illiquid, being unable to command their fair value in the short time span of a liquidation. Liquidation itself is expensive because of legal, administrative, and accounting costs. Chapter 11 is a US device for preserving value in operations..
Venture Capital	Funds that venture capital companies or individuals provide to young, private firms with superior growth potential. Most venture capitalists require some control over the ventures in which they invest, have medium term investment horizons, high risk tolerance, and high expected rates of return, and structure their contributions as mezzanine financing.
Vertical Disallowance	In the BIS Method for determining regulatory capital necessary to cushion market risk, a reversal of the offsets of a general risk charge of a long position by a short position in two or more securities in the same time band in the yield curve where the securities have differing credit risks.
Vesting	The conferring of full ownership rights. In pension plans, vesting refers to conferring on the employee the legal right receive at retirement age the deferred pension benefits regardless of employment termination or plan dissolution.
W
Warranty	See Representation and Warranty
Wholesale banking	Wholesale banking involved transacting amounts greater than those of retail customers. The dividing line between wholesale and retail is not clear. One definition is the minimum balance that is typically transacted in interbank over-the-counter markets, typically greater than US$1 million. Another definition is deposits greater than those covered by deposit insurance contacts. For the FDIC in the US, that amount is US$100,000. For the CDIC it is C$60,000. Wholesale deposits are are important sources of funds for FIs with inadequate retail funding and repositories for FIs excess liquidity. They are highly sensitive to the creditworthiness of the FI.
Working Capital	A non-FI corporate finance concept, being current assets minus current liabilities. Working capital is often calculated by subtracting cash and short term investments from current assets and subtracting short term bank debt and money market financing from current liabilities. The largest components in non-cash working capital to be financed are inventories and accounts receivable. The largest financing within working capital so calculated comes from trade payables.
Waiver	In legal agreements (e.g. a credit facility agreement) the intentional relinquishment of a known right.
Watch Listed Credit	In FI credit risk management, the identification by the lending FI of a credit as having a high risk of future debt service problems and therefore deserving of special monitoring.
When Issued Trading	Trading in securities prior to their actual issue, so delivery will take place at the contracted price only after issuance occurs.
X
X- efficiencies	A term used in the scale and scope econometric literature (that seeks to measure optimal size of the FI) meaning the inefficiencies in FI service production that separate the costs of production of best-practice FI from others producing essentially the same services. X-efficiencies have found to greatly exceed economies of scale in large FIs.
Y
Yankee Bonds	See foreign bonds
Yield Curve	A graph that shows, for borrowers with the same credit risk, the yield of bonds of different maturities. See also
Z
Zero-coupon bonds	A bond that does not pay any coupon interest over the life of the bond. Instead it makes a single payment of principal face value on maturity.

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