CFD See contract for difference.
CFMA Commodity Futures Modernization Act introduced
in the United States to change the regulatory
environment in derivatives markets.
CFTC The Commodities and Futures Trading Commis-
sion, a US regulatory organisation.
CGO The Central Gilts Office – formerly responsible
for the settlement of UK Government securities
prior to transactions being taken over by
CREST through which UK Bond futures settle
on delivery.
Cheapest to Deliver The cash security that provides the lowest cost
(largest profit) to the arbitrage trader; the Cheap-
est to Deliver instrument is used to price the
futures contract and is the most likely to be deliv-
ered against the future.
Clean Price The total price of a bond less accrued interest.
Clearing The centralised process whereby transacted busi-
ness is recorded and positions are maintained.
Clearing Agent An institution that settles transaction for a large
number of counterparties.
Clearing Broker Is the clearing agent for the trading broker in the
market where the trade will settle. It is usually
the party with which the sub-custodian will actu-
ally settle the trade.
Clearing Fee Fee charged by the Clearing House or Clearing
Broker usually per trade or contract/lot.
Clearing House Company that acts as central counterparty for the
settlement of on-exchange transactions (also some
OTC transactions, i.e. SwapClear). The clearing
organisation acts as the guarantor of the
performance and settlement of contracts.
Clearing Corporation Formerly the Board of Trade Clearing Corporation,
will clear the business of the new Eurex USA
exchange starting in 2004.
Clearing Organisation Another name for a clearing house.
Clearing System System established to clear transactions.
Clearnet The clearing house for Euronext now merged with
LCH.
Clearstream The CSD and clearing house based in Luxembourg
and Frankfurt and linked into Deutsche Borse.
172 Glossary of derivatives terms
Closing Trade A bought or sold trade which is used to
partly offset an open position, to reduce it
or to fully offset it and close the position
out.
CME Abbreviation for the Chicago Mercantile
Exchange. Term ‘Merc’ is also used.
Collateral An acceptable asset used to cover a margin
requirement.
Commission Charge levied by a firm for agency broking.
Commodities The raw materials traded on specialist mar-
kets (see also Soft and Hard Commodities).
Commodity Futures These comprise five main categories: agri-
culturals, for example wheat and potatoes;
softs, for example coffee and cocoa; precious
metals, for example gold and silver; non-
ferrous metals, for example copper and lead;
and energies, for example oil and gas.
Common Stock US term for securities that represent
ownership in a corporation. The two most
important common stockholder rights are
the voting right and the dividend right.
Common stockholder’s claims on corporate
assets are subordinate to those of bond-
holders, preferred stockholders and general
creditors.
Common Clearing Link The linking of the clearing of the CME
and CBOT transactions under one clearing
house.
Commodity Swap A swap involving either two commodities or
a commodity and a floating rate.
Compliance Officer Person appointed within an authorised firm
to be responsible for ensuring compliance
with the rules.
Conduct of Business Rules Rules introduced by the Financial Services
Authority to dictate how firms conduct their
business. They deal mainly with the relation-
ship between firm and client.
Conflicts of Interest Circumstances that arise where a firm has
an investment which could encourage it not
to treat its clients favourably. The more areas
in which a firm is involved the greater the
number of potential conflicts.
Glossary of derivatives terms 173
Confirm An agreement for each individual OTC transac-
tion which has specific terms.
Consideration The value of a transaction calculated as the
price per share multiplied by the quantity being
transferred.
Contract The standard unit of trading for futures and
options. It is also commonly referred to as a ‘lot’.
Contract for Difference Contract designed to make a profit or avoid a
loss by reference to movements in the price of
an item. The underlying item cannot change
hands.
Contract Note Legal documentation sent by brokers/banks to
clients providing details of a transaction com-
pleted on their behalf.
Contract Specification A derivative exchange designs its own products
and publishes a contract specification setting
out the details of the derivative contract. This
will include the size or unit of trading and the
underlying, maturity months, quotation and
minimum price movement and value (see also
tick) together with trading times, methods and
delivery conditions (see appendix, for example
contract specification).
Convergence The movement of the cash asset price towards
the futures price as the expiration date of the
futures contract approaches. On expiry they will
both have the same value, as time or volatility is
no longer affecting the derivatives price.
Corporate Action One of many possible capital restructuring
changes or similar actions taken by the com-
pany, which may have an impact on the market
price of its securities, and which may require
the shareholders to make certain decisions.
Correlation Refers to the degree to which fluctuations of one
variable are similar to those of another.
Cost of Carry The net running cost of holding a position
(which may be negative), for example, the cost
of borrowing cash to buy a bond less the
coupon earned on the bond while holding it.
Counterparty A trade can take place between two or more
counterparties. Usually one party to a trade
refers to its trading partners as counterparties.
174 Glossary of derivatives terms
Coupon Generally, the nominal annual rate of interest
is expressed as a percentage of the principal
value. The interest is paid to the holder of a
fixed income security by the borrower. The
coupon is generally paid annually, semi-
annually or, in some cases, quarterly, depend-
ing on the type of security.
Covered Option An option bought or sold offsetting an existing
underlying position.
Covered Writing The sale of call options but the seller owns the
underlying which, would be required to cover
the delivery, if the position is assigned.
Credit Default Swap A swap where one side is a default event that
results in the payment of the related loss and
the other is the payment of a premium to
secure the protection. If no event occurs then
the seller of the protection keeps the premium.
Credit Derivatives Credit derivatives have as the underlying asset
some kind of credit default. As with all deriva-
tives, the credit derivative is designed to enable
the risk related to a credit issue, such as non-
payment of an interest coupon on a corporate
or sovereign bond, or the non-repayment of a
loan, to be transferred.
Credit Risk The risk that a borrower, or counterparty to a
deal, or the issuer of a security, will default on
repayment or not deliver its side of the deal.
Also known as counterparty risk.
CREST/Euroclear Crest The organisation in the United Kingdom that
holds UK and Irish company shares in demateri-
alised form and clears and settles trades in UK
and Irish company shares. Now merged with
Euroclear.
Cross Currency Interest An IRS where the interest payments are in two
Rate Swap different currencies and the exchange rate, for
the final settlement, is agreed at the outset of
the transaction.
Cum-dividend A security that is traded with the current divi-
dend right.
Cum-rights A term applied to a stock trading in the
marketplace ‘with subscription rights attached’
which is reflected in the price of that security.
Glossary of derivatives terms 175
Cumulative Dividend Dividend that is due but not yet paid on
cumulative preferred shares. These must be
paid before any ordinary dividends are paid.
Currency Exposure Currency exposure exists if assets are held, or
income earned, in one currency while liabil-
ities are denominated in another currency.
The position is exposed to changes in the
relative values of the two currencies such that
the cost of the liabilities may be increased or
the value of the assets or earning decreased.
Currency Futures Contracts calling for delivery of a specific
amount of a foreign currency at a specified
future date in return for a given amount of
say US Dollars.
Custodian Institution holding securities in safekeeping
for a client. A custodian also offers different
services to its clients like settlement, portfolio
services, etc. and this can include services
related to derivatives where the custodian
settles margin calls, etc. on trades with the
client’s broker.
Customer-non-Private Customer who is assumed to understand
the workings of the investment world and,
therefore, receives little protection from the
Conduct of Business Rules.
Customer – Private Customer who is assumed to be financially
unsophisticated and, therefore, receives more
protection from the Conduct of Business Rules.
Dealer Individual or firm that acts as principal in all
transactions, buying for his own account.
Default Failure to perform on a derivatives contract or
trade either cash settlement or physical settle-
ment or to be in default of other exchange or
clearing house rules.
Deliverable Basket or The list of securities that meets the delivery
Deliverable List standards of futures contracts, for example
the list of deliverable bonds against a bond
future published by the exchange.
Delivery The physical movement of the underlying asset
on which the derivative is based from seller to
buyer.
Delivery versus Payment Settlement where transfer of the security and
payment for that security occur simultan-
eously. Also known as DVP.
176 Glossary of derivatives terms
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