Securities Finance glossary

Coupon interest that is earned on a bond from the last coupon date to the present date.

A party to a loan transaction that acts on behalf of a client. The agent typically does not take in risk in a transaction.

An agent bank is a bank that performs services in some capacity on behalf of an entity. An agent bank, also known as agency bank, can offer a wide variety of services for businesses looking to expand internationally. Agent banks can offer securities lending as part of their suite of services to clients.

Agent Lending Disclosure provides an industry standard for agent lenders and broker-dealers to exchange underlying principal level detail information related to transactions executed under securities lending agreements. The initiative established a standard process and infrastructure among industry participants.

The sum of the manufactured dividend plus the fee to be paid by the borrower to the lender, expressed as a percentage of the dividend of the stock on loan.

Market price of a bond, plus accrued interest. Generally rounded to the nearest 0.01. Also known as “dirty price”.

Negotiable certificate issued by a US bank representing a specified number of shares (or one share) in a foreign stock that is traded on a US exchange.

When a central bank creates new money electronically to make large purchases of assets.

To calculate your AANA is to sum the total outstanding notional amount of non-cleared derivative positions during a prescribed period on a gross notional basis.

An EU directive designed to create a framework for authorities to manage bank failures effectively.

Basel III is a global, voluntary regulatory framework on bank capital adequacy, stress testing, and market liquidity risk.

One one-hundredth of a percent, or 0.01 percent.

Securities that are not registered to any particular party and hence are payable to the party that is in possession of them.

A party that is entitled to the right of ownership of property. In the context of securities, the term is usually used to distinguish this party from the registered holder (a nominee, for example) that holds the securities for the beneficial owner.

Any entitlement due to a stock or shareholder as a result of purchasing or holding securities, including the right to any dividend, rights issue, scrip issue, etc. made by the issuer. In the case of loaned securities or collateral, benefits are passed back to the lender or borrower (as appropriate), usually by way of a manufactured dividend or the return of equivalent securities or collateral.

A bond is a contract between two parties. Companies or governments issue bonds because they need to borrow large amounts of money. They also have to pay the investors a little bit more than they paid for the bond. Bonds are usually traded through brokers and are part of a financial instrument group called ‘fixed income’.

A broker-dealer is a person or firm in the business of buying and selling securities for its own account or on behalf of its customers.

BTF is a fixed-rate short-term discount treasury bill issued by the French debt agency.

BTP are bonds offered by the government of Italy.

A bund is a debt security issued by the German government to generate revenue with which to finance expenditures.

The act of repurchasing shares, where a counterparty did not deliver securities in a timely fashion, or did not deliver them at all. The difference in price is transferred to the failing party.

Types of bond transactions that, in economic substance, replicate reverse repos, and repos respectively. These transactions consist of a purchase (or sale) of a security versus cash with a forward commitment to sell back (or buy back) the securities. Used as an alternative to repos/reverses.

An EU initiative which aims to deepen and further integrate the capital markets of EU member states.

Transaction motivated by the need of one party to invest cash and the need of the other to borrow. See also ‘Securities-orientated repo’.

A non-financing purchase or sale of securities.

A central counterparty clearing house (CCP) is an organisation that exists in various European countries to help facilitate trading done in European derivatives and equities markets.

CSDR entered into force on 17 September 2014 and aims to harmonize the authorisation and supervision of central security depositories (CSDs), across the EU and to improve settlement discipline in the securities settlement systems (SSSs) that CSDs operate.

A financial organisation that specialises in holding securities so that ownership can be easily transferred electronically without the need for physical certificates.

The clean price is the price of a coupon bond not including any accrued interest. That is, it doesn’t include the accrued interest between coupon payments.

To complete a trade, i.e. when the seller delivers securities and the buyer delivers funds on correct form. A trade fails when proper delivery requirements are not satisfied.

An arrangement to settle all existing obligations to and claims on a counterpart falling under that arrangement by one single net payment, immediately upon the occurrence of a defined event of default.

Securities or cash delivered by a borrower to a lender to support a loan of securities or cash.

Collateral management is the method of granting, verifying, and giving advice on collateral transactions in order to reduce credit risk in unsecured financial transactions.

Commonly used type of unsecured, short-term debt instrument issued by corporations, typically used for the financing of payroll, accounts payable and inventories, and meeting other short-term liabilities.

A CDM is a single, market-wide domain model: it is a common data representation of transaction events, used by the market as a whole. That common data representation is the foundation for the development of solutions that are scalable, efficient and that future-proof our market.

common reporting standard (CRS) An information standard for the Automatic Exchange Of Information (AEOI) on a global level, between tax authorities.

An OTC derivative transaction that enables one party to gain economic exposure to the price movement of a security (bull or bear). Writers of CFDs hedge by taking positions in the underlying securities, making efficient securities financing or borrowing key.

A corporate action is an event initiated by a public company that brings or could bring an actual change to the securities — equity or debt — issued by the company. Corporate actions are typically agreed upon by a company’s board of directors and authorised by the shareholders.

A coupon payment on a bond is the annual interest payment that the bondholder receives from the bond’s issue date until it matures.

A financial contract whereby a buyer of corporate or sovereign debt in the form of bonds attempts to eliminate possible loss arising from default by the issuer of the bonds. This is achieved by the issuer of the bonds insuring the buyer’s potential losses as part of the agreement.

A company that assesses the financial strength of firms and government entities, especially their ability to meet principal and interest payments on their debts.

A transaction concerning either more than one member state, or a member state and a third country.

An entity that holds securities of any type for investors, effecting receipt and deliveries, and supplying appropriate reporting.

“Standard” two-party repo, where the party receiving cash delivers bonds to the cash provider.

A mechanism in some settlement systems whereby a member may borrow or lend cash overnight against collateral. The system automatically selects and delivers collateral securities, meeting predetermined criteria to the value of the cash (plus a margin) from the account of the cash borrower to the account of the cash lender and reverses the transaction the following morning.

The simultaneous delivery of securities against the payment of funds within a securities settlement systems.

Delta One products are financial derivatives that have no optionality and as such have a delta of (or very close to) one – meaning that for a given instantaneous move in the price of the underlying asset there is expected to be an identical move in the price of the derivative.

A financial security with a value that is reliant upon or derived from, an underlying asset or group of assets.

A directive is a legal act of the European Union but each member state is free to decide how to transpose directives into national laws.

The mandatory automatic exchange of information in the field of taxation, in relation to reportable cross-border arrangements. DAC6 forms part of the EU’s mandatory disclosure rules.

Entitlements arising on the securities that are loaned out, e.g. dividends, interest, and non-cash distributions.

A dividend is the distribution of a portion of a company’s earnings, decided and managed by the company’s board of directors.

Environmental, social, and governance (ESG) refers to the three central factors in measuring the sustainability and societal impact of an investment in a company or business. These criteria help to better determine the future financial performance of companies (return and risk).

An equity swap is a financial derivative contract (a swap) where a set of future cash flows are agreed to be exchanged between two counterparties at set dates in the future.

An equity swap is a financial derivative contract (a swap) where a set of future cash flows are agreed to be exchanged between two counterparties at set dates in the future.

ERISA is a federal US tax and labor law that establishes minimum standards for pension plans in private industry. It contains rules on the federal income tax effects of transactions associated with employee benefit plans.

The use of a third party, which holds an asset or funds before they are transferred from one party to another.

Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements.

EMIR is a body of European legislation for the regulation of over-the-counter derivatives.

An evergreen trade automatically renews after the expiry date. The parties involved in the trade agree that it rolls over automatically until one gives the notice to terminate it.

A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange, thus experiencing price changes throughout the day as it is bought and sold.

The failure to deliver cash or collateral in time for the settlement of a transaction.

Proposed by the European Commission to impose a FTT within some of the member states of the EU. The tax would be levied on all transactions on financial instruments between financial institutions when at least one party to the transaction is located in the EU.

Delivery of securities with no corresponding payment of funds.

Futures are derivative financial contracts that obligate the parties to transact an asset at a predetermined future date and price.

A set of security issues which trade in the repo market at the same or a very similar repo rate.

Government bonds in the UK, India, and several other commonwealth countries are known as gilts. Gilts are the equivalent of US treasury securities in their respective countries. The term gilt is often used informally to describe any bond that has a very low risk of default and a correspondingly low rate of return.

The GMSLA is an industry standard master agreement that is promoted and maintained by the International Securities Lending Association. It is used predominantly for the conclusion of cross-border securities lending transactions.

GMRA is an industry standard master agreement for repos

Securities on which interest or other distributions are paid without any taxes being withheld.

Initial margin on a repo transaction. Generally expressed as a percentage of the market price.

A characteristic or feature of a cross-border arrangement that presents an indication of a potential risk of tax avoidance.

A leveraged investment fund that engages in trading and hedging strategies, frequently using leverage.

Level one assets include Federal Reserve bank balances, foreign resources that can be withdrawn quickly, securities issued or guaranteed by specific sovereign entities, and US government-issued or guaranteed securities.

An arrangement under which securities are not physically delivered to the borrower (lender), but are simply segregated by the lender in an internal customer account.

A particular security that is in high demand in relation to its availability in the market and is thus relatively expensive or difficult to borrow.

The practice whereby a lender holds securities at a borrower’s request in anticipation of that borrower taking delivery.

A form of guarantee or insurance, frequently offered by agents. Terms vary significantly and the value of the indemnity does also.

A share index is a number that indicates the state of a stock market. It is based on the combined share prices of a set of companies.

Initial margin is collateral collected by a counterparty and posted on a two-way basis (each party posts and receives at the same time) to minimise current and potential risk exposure.

The first sale of stock by a private company to the public.

An institutional investor is a company or organisation that invests money on behalf of other people. Mutual funds, pensions, and insurance companies are examples. Institutional investors often buy and sell substantial blocks of stocks, bonds, or other securities.

The date that is entered into the securities settlement system as the settlement date, and on which the parties to a securities transaction agree that settlement is to take place.

An IDB is a specialist financial intermediary that facilitates transactions between broker-dealers, dealer banks and other financial institutions rather than private individuals.

An IRS is a financial derivative that companies use to exchange interest rate payments with each other. Swaps are useful when one company wants to receive a payment with a variable interest rate, while the other wants to limit future risk by receiving a fixed-rate payment instead.

An institution that facilitates a financial transaction between two parties.

The authority given by law on legal matters within a particular geographic area.

The legal entity identifier is a unique global identifier of legal entities participating in financial transactions. These can be individuals, companies or government entities that participate in financial transaction.

The term given to those portfolio assets that are placed into lending programmes, and made available to borrow in return for a fee.

When securities that have been lent out pay a cash dividend, the borrower of the securities is in general contractually required to pass the distribution back to the lender of the securities. This payment ‘pass-through’ is known as a manufactured dividend.

This refers to the excess of cash over securities or securities over cash in a repo/reverse repo, sell/buy-buy/sell, or securities lending transaction.

To mark-to-market is to calculate the value of a financial instrument (or portfolio of such instruments) at current market rates or prices of the underlying. Marking-to-market on a daily (or more frequent) basis is often recommended in risk management guidelines.

Markets in Financial Instruments Directive (MiFID) is a regulation that increases the transparency across the European Union’s financial markets and standardises the regulatory disclosures required for particular markets. This was updated in 2017 with MiFID II.

Markets in Financial Instruments Regulation MiFIR), is a European law which demands its member states to comply with its regulations. As a result of the last financial crisis, the need for a EU-wide regulation called for the emergence of MiFIR. This regulation was formed with the intent to not only protect the markets, but also the investors.

The value of loan securities or collateral determined using the last (or latest available) sale price on the principal exchange where the instrument was traded or, if not so traded, using the most recent bid offered prices.

This was developed as a market standard agreement under English law for securities lending prior to the creation of the Global Master Securities Lending Agreement. It has a legal opinion from Queen’s Counsel and has been mainly, but not exclusively, used for lending UK securities excluding gilts.

The agreement was developed as a market standard exclusively for lending UK gilt-edged securities. It was drafted with a view to complying with English law and has a legal opinion from Queen’s Counsel.

Refers to the interest rate arbitrage book that a repo trader may run. By matching or mismatching maturities, rates, currencies, or margins, the repo trader takes market risk in search of returns.

An MMF is an open-ended mutual fund that invests in short-term debt securities such as US treasury bills and commercial paper. MMFs are managed with the goal of maintaining a highly-stable asset value through liquid investments, while paying income to investors in the form of dividends.

NCAs are organisations that have the legally delegated or invested authority, or power to perform a designated function, normally monitoring compliance with the national statutes and regulations.

Securities on which interest or other distributions are paid net of withholding taxes.

OATs (Obligations assimilables du Trésor) are government bonds issued by Agence France Trésor (French Treasury), generally by auction according to an annual calendar published in advance.

The Official Journal of the European Union is a directory of official record. Legal acts published in the Official Journal are binding.

A trade with no fixed maturity date.

Over-the-counter or off-exchange trading is done directly between two parties, without the supervision of an exchange. It is contrasted with exchange trading, which occurs via exchanges.

With overcollateralisation, excess collateral is used to enhance credit in order to get a better debt rating from a credit rating agency. An issuer backs a loan with assets or collateral which has value in excess of the loan, thereby, limiting credit risk for the creditor and enhancing the credit rating assigned to the loan.

The agreement was developed as a market standard for stock lending prior to the creation of the Global Master Securities Lending Agreement. It was drafted with a view to complying with English law and has a legal opinion from Queen’s Counsel. Intended for use by UK-based parties lending overseas securities (i.e. excluding UK securities and gilts), it has since become the most widely used global master agreement.

Market practice or a specific agreement between counterparts that allows a part-delivery against an obligation to deliver securities.

The practice of paying a fee to the lender to hold securities for a particular borrower until the borrower is able to take delivery.

A payment date, also known as the pay date or payable date, is the date on which a declared stock dividend is scheduled to be paid to eligible investors. This date can be up to a month after the ex-dividend date. However, the stock price may fall on the payment date to reflect the dividend payment.

Peer-to-peer securities lending is the practice of lending cash or securities to borrowers without bank intermediation.

A service offered to clients (typically hedge funds) by investment banks to support their trading, investment, and hedging activities. The service consists of clearing, custody, securities lending, and financing arrangements.

A party to a loan transaction that acts on its own behalf or substitutes its own risk for that of its client when trading.

Trading activity conducted by an investment bank for its own account rather than for its clients.

When a central bank creates new money electronically to make large purchases of assets.

The interest paid on the cash side of securities lending transactions. A rebate rate of interest implies a fee for the loan of securities and is therefore regarded as a discounted rate of interest.

A request by a lender for the return of securities from a borrower.

A dividend record date is the date on which the company finalizes the list of investors who qualify as ‘shareholders of record’.

A regulation is a legal act of a government or other authority that becomes immediately enforceable as law.

A repo or reverse repo that matures on the maturity date of the security being traded.

The interest rate paid on the cash side of a repo/reverse transactions.

Occurs when the market value of a security in a repo or securities lending transaction changes and the parties to the transaction agree to adjust the amount of securities or cash in a transaction to the correct margin level.

Transaction whereby one party sells securities to another party and agree to repurchase the securities at a future date at a fixed price.

Occurs when the borrower of securities returns them to the lender.

Transaction whereby one party purchases securities from another party and agrees to resell the securities at a future date at a fixed price.

An RWA is used to determine the minimum amount of regulatory capital that must be held by banks to maintain their solvency. This minimum is based on a risk assessment for each type of bank risk exposure; credit, market, operational, counterparty and credit valuation adjustment risks.

To renew a trade at its maturity.

Securities lending and borrowing

Transaction motivated by the desire of one counterpart to borrow securities and of the other to lend them.

Securities financing transactions (SFTs) allow investors and firms to use assets, such as the shares or bonds they own, to secure funding for their activities. A securities financing transaction can be:
• A repurchase transaction – selling a security and agreeing to repurchase it in the future for the original sum of money plus a return for the use of that money
• Lending a security for a fee in return for a guarantee in the form of financial instruments or cash given by the borrower
• A buy-sell back transaction or sell-buy back transaction
• A margin lending transaction

The completion of a securities transaction where it is concluded with the aim of discharging the obligations of the parties to that transaction through the transfer of cash or securities, or both.

The time period between the trade date and the intended settlement date.

TA practice whereby delivery of a large amount of a security may be made in several smaller blocks so as to reduce the potential consequences of a fail. May be especially useful where partialling is not acceptable. Securities lending return to lendable (SLRTL): The revenue from securities lending, scaled by the lendable assets, in basis points.

Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement. Updated to SRD II as of 3 September 2020.

Sets out regulatory requirements for insurance firms and groups, covering financial resources, governance and accountability, risk assessment and management, supervision, reporting and public disclosure.

Short selling is the sale of a security that is not owned by the seller or that the seller has borrowed. Short selling is motivated by the belief that a security’s price will decline, enabling it to be bought back at a lower price to make a profit.

SSIs are the agreements between two financial institutions which fix the receiving agents of each counterparty in ordinary trades of some type. These agreements allow traders to make faster trades since the time used to settle the receiving agents is conserved.

A swap is a derivative contract through which two parties exchange the cash flows or liabilities from two different financial instruments. Most swaps involve cash flows based on a notional principal amount such as a loan or bond, although the instrument can be almost anything.

T2S is a platform for securities settlement in the EU where an exchange of delivery of securities vs payment can occur simultaneously.

The market-standard document used for repo trading. The GMRA, whose original November 1992 version was based on the PSA Master Repurchase Agreement, was revised in November 1995 and again in October 2000.

Trades with a fixed maturity date.

This term is used to describe an agreement under which collateral is provided by one party (the collateral provider) to the other (the collateral receiver) on a ‘title transfer basis’. This means that the collateral receiver receives full title (e.g. legal ownership) to that collateral from the collateral provider.

Triparty arrangements involve two counterparties to a transaction and the entity that acts as an independent, third-party collateral agent to manage the collateral securing the transaction. Triparty structures have long been used for repo and securities lending in global markets.

Repo used for funding/investment purposes in which the trading counterparts deliver bonds and cash to an independent custodian bank or central securities depository (the triparty custodian). The triparty custodian is responsible for ensuring the maintenance of adequate collateral value, both at the outset of a trade and over its term. It also marks the collateral to market daily and makes margin calls on either counterpart, if required. Triparty repo reduces the operational and systems barriers to participating in the repo markets.

A regulation requiring the implementation of margin requirements for non-centrally cleared derivatives.

UCITS came about from a 1985 EU directive that aimed to standardise the rules and regulations across Europe regarding open-ended funds and transferable securities. The plan was to make funds approved in one country easy to market and sell to investors throughout the EU. The first two versions of UCITS were not adopted, but UCITS III was approved in 2001, and remains in force today.

The amount of stock which has been borrowed, as a percentage of the amount which is available to borrow from the majority of the world's major custodians and beneficial owners. Utilisation numbers need to be used in conjunction with the percentage of market cap on loan and new loan volumes in order to get a full picture of activity in stock lending.

Variation margin reflects the daily change in market value of a contract due to market movements.