Glossary of Terms
Accounting selection parameters table
A data table that contains the rules for selecting which general ledger account to use for a particular posting
Accrual
A method of accounting in which each item is entered as it is earned or incurred regardless of when actual payments are received or made
Accrued interest
The interest that has accumulated on a transaction since the last interest payment date or start date, up to but not including the current date
ACK/NACK protocol
This protocol is used by SWIFT to confirm that messages sent by its members have passed network validation and are therefore good messages (ACK), or have failed validation (NACK)
Affirm
The process of affirmation
Affirmation
The process where a buy-side firm sends a communication to a sell-side firm indicating their agreement to the details of a confirmation received from the sell-side firm
Agency trade
A securities trade where the sell-side firm acts as the agent of its customer, and is remunerated by the payment of commission
Agile manifesto
A statement of the principles that underpin agile software development
Agile model
A methodology to manage the designing and building of software applications. The aim of this model is to minimise risk by developing software in short amounts of time
Algorithmic trading
The placing a buy or sell order of a defined quantity into a quantitative model that automatically generates the timing of orders and the size of orders based on goals specified by the parameters and constraints of the algorithm
Allocation
The process where a buy-side firm sends a communication to a sell-side firm advising the sell-side firm of the details of the investors who are parties to a block trade
American style options
An option that may be exercised at any time before the expiry date
Application programming interface
A source code interface that one computer system provides to support requests for services to be made of it by computer programs running in other systems. It specifies details of how the two independent computer programs can interact
Arbitrage
The practice of taking advantage of a price differential between two or more markets
Assets
Everything a corporation owns or that is due to it: cash, investments, money due it, materials and inventories, which are called current assets; buildings and machinery, which are known as fixed assets; and patents and goodwill, called intangible assets
Average price
The average price per unit of a position. If the position is long (i.e. positive), then further purchases modify the average price, and sales create P&L but do not modify the average price. If the position is short (i.e. negative) then further sales modify the average price, and purchases create P&L but do not modify the average price
Back testing
The practice of comparing the actual daily trading results to the predicted VaR figure
Bank for International Settlements (BIS)
An international organisation of central banks which exists to “foster cooperation among central banks and other agencies in pursuit of monetary and financial stability”. It carries out its work through subcommittees, the secretariats it hosts, and through its annual general meeting of all members. The BIS also provides banking services, but only to central banks, or to international organisations like itself. Based in Basel, Switzerland, the BIS was established by the Hague agreement of 1930
Bargain
See “Trade”
Basel Accord
The set of minimum capital requirements developed by the Basel Committee, originally in 1988
Basel Committee
A committee of central bankers which publishes a set of minimal capital requirements for banks and is known as the Basel Accord
Basel II
The second version of the standards of the Basel Accord, to be implemented by participating countries in 2008
Baseline
A declared summary description of the point in a project, indicating original content and stage reached, as a basis for measuring project performance and estimates to complete
Baseline control
A system of procedures that allows monitoring and control of the emerging project scope against the scope baseline. Also known as “Configuration control”
Basis point
A basis point (often denoted as %00) is a unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly used for calculating changes in interest rates, equity indexes and the yield of a fixed income security. The relationship between percentage changes and basis points can be summarised as follows: 1% change = 100 basis points, and 0.01% = 1 basis point. So, a bond whose yield increases from 5% to 5.5% is said to increase by 50 basis points; or interest rates that have risen 1% are said to have increased by 100 basis points
Basis risk
A form of market risk. The risk that one position has been hedged with another position that behaves in a similar, but not identical, fashion
Bearer securities
Securities for which there is no register or registrar. When the security is first issued on the primary market, the issuer prints certificates representing the entire amount of shares or bonds issued, and these are posted to the investors who have purchased the shares in the primary market
Benchmark interest rate
A reference rate is a rate that determines pay-offs in a financial contract and that is outside the control of the parties to the contract. It is often some form of LIBOR rate, but it can take many forms, such as a consumer price index, a house price index or an unemployment rate. Parties to the contract choose a reference rate that neither party has power to manipulate
Beneficial ownership
A legal term where specific property rights (“use and title”) in equity belong to a person even though legal title of the property belongs to another person, the nominal owner.
Best execution
An obligation placed on sell-side firms to get the lowest available price for its customer when the customer is buying, and the highest available price when the customer is selling, taking into account other factors such as speed and accuracy of execution
Best-shoring
The “best-shoring” strategy involves tailoring specific customer care needs to locations that are best suited for these functions. It allows the customer to save on the cost of domestically sourcing the work, while at the same time removing the inflexibility of using only one offshore location
Bid price
The highest price that a prospective buyer is willing to pay for a specific security. The offer, also called the “asking price”, is the lowest price acceptable to a prospective seller of the same security. The highest bid and lowest offer are quoted on most major exchanges, and the difference between the two prices is called the “spread”
Bill
A debt instrument issued for a period of less than one year with the purpose of raising capital by borrowing. The Federal government, states, cities, corporations and many other types of institutions sell bonds. Generally, a bond is a promise to repay the principal along with interest (coupons) on a specified date (maturity)
Block trade
The purchase or sale of large quantities of stock. On the New York Stock Exchange trades involving 10 000 or more shares and $200 000 in value are considered block trades. Block trades are often placed by fund managers on behalf of a number of investors, and may need to be allocated to those investors. See “Allocation”
Bond
A debt instrument issued for a period of more than one year with the purpose of raising capital by borrowing. The Federal government, states, cities, corporations and many other types of institutions sell bonds. Generally, a bond is a promise to repay the principal along with interest (coupons) on a specified date (maturity)
Book or trading book
A portfolio of financial instruments held by a brokerage or bank. The financial instruments in the trading book are purchased or sold to facilitate trading for their customers, to profit from spreads between the bid/ask spread, or to hedge against various types of risk. Sometimes this term is used interchangeably with “position”
Business case
The reason, in non-technical terms, why a particular project is to be undertaken
Business continuity management
Review of business continuity, risk analysis and risk management, defining assets, threats, vulnerabilities and countermeasures (protection and recovery), development, testing and maintenance of the IT service continuity plan, IT recovery options and management roles
Business continuity plan
A plan developed to mitigate different disaster or worst case scenarios. The BCP will contain agreed workarounds and task lists for those supporting the application during a disaster. The goal of BCP processes is to ensure that IT services can be recovered within required, agreed and business sensitive timescales
Buy-in notice
Investors and securities firms who fail to deliver securities for an extended period of time may be issued with a buy-in notice. Failure to answer the buy-in notice means the trading party that issued the notice may buy the securities from a third party and cancel the transaction with the original party. If the price has risen, then the selling party has to compensate the buying party any losses
Buy-sellback
A form of a repo where the two legs of the transaction are treated as separate transactions, and the purchaser does not directly pass any coupon payments back to the seller. Instead, the price of the second leg is adjusted by the value of the coupon that the seller did not receive
Buy-side firms
Fund managers that take investment decisions on behalf of investors
CAD
The European Capital Adequacy Directive
Call and notice loans and deposits
Money market loans and deposits with no maturity date agreed on trade date
Call option
See “Option”
Cap
The maximum coupon rate of a floating rate note
Capability maturity model
A description of the common stages that software organisations evolve through as they define, implement, measure, control and improve their software processes
Cash instrument
See “Underlying instrument”
Central counterparty
A central counterparty is a financial institution that acts as an intermediary between security market participants. This reduces the amount of counterparty risk that market participants are exposed to
Central Securities Depository or CSD
An entity holding securities either in certificated or uncertificated (dematerialised) form, to enable book entry transfer of securities. In some cases these organisations also carry out centralised comparison, and transaction processing such as clearing and settlement of securities. The physical securities may be immobilised by the depository, or securities may be dematerialised (so that they exist only as electronic records). International Central Securities Depository (ICSD) is a central securities depository that settles trades in international securities and in various domestic securities, usually through direct or indirect (through local agents) links to local CSDs. ClearStream International (earlier Cedel), Euroclear and SegaInterSettle are considered ICSDs
CFD
An agreement between two parties to exchange the difference between the opening value and the closing value of a particular share. These are generally short-term contracts drawn up by both involved parties. The sell-side firm’s exposure to default by its client is controlled by margin requirements and collateral deposits
Change control procedures
A process developed to prevent an item of software or hardware from being amended without auditability and review of the impact by all interested parties
Chart of accounts
The list of accounts used by a general ledger system
Child trade
After a buy-side firm sends its allocation instructions, a single bulk trade executed by a sell-side firm (the parent trade) may need to be broken down into a series of smaller trades – child trades – one for each investor concerned
Chinese walls
Information barriers implemented within firms to separate and isolate persons who make investment decisions from persons who are privy to undisclosed material information which may influence those decisions
Classic offshoring
Offshoring that is neither “near-shoring” nor “best-shoring”. In practice this usually implies offshoring to India or the Philippines
Clean price
The price of a bond trade (excluding accrued interest) expressed as a percentage of face value
Clearing house
A financial institution that operates clearing, central counterparty or settlement services
Clearing member
A member of a clearing house that clears only its own trades
Client money
Money belonging to clients which an investment business is holding. It could either be free money or settlement money and in either case it must be kept in a bank account separate from the firm’s own money
Cold standby
A standby server that is configured similarly to the primary server and ideally should be running the same version of the operating system and database, and with all the same service packs applied. If the primary server suffers a failure then the SQL database is restored to the secondary server from the primary’s backup files
Collar
The range between the cap and the floor of a floating rate note coupon
Collateral
A security or guarantee (usually an asset) pledged for the repayment of a loan
Collateral substitution
The act of returning securities supplied as collateral by a stock borrower to a lender, and replacing them with other securities of a similar value and quality
Commission
The amount charged by a sell-side firm to its customer when executing an agency order
Confirmation
The process where one party to a trade sends the other party a communication that confirms that the order has been executed, and provides details of the resulting trade
Consideration
The total amount paid by an investor when purchasing an investment, or received by an investor when selling. Consideration is the sum of principal amount + accrued interest + commission + fees
Contract for difference
See “CFD”
Convertible bond
A bond that offers the investor the opportunity to surrender the bond in exchange for equity securities at a fixed price per share. The equity securities are usually issued by the same company that issued the bond
Corporate action
Events initiated by a public company that affects the securities (equity or debt) issued by the company; examples include takeovers, stock splits, rights issues and consolidations
Counterparty risk
A form of credit risk. The risk that a trading party cannot meet its obligations to settle trades or make other transaction-related payments (such as swap cash flows) in the future
Coupon
The interest payable on a debt instrument
Coupon date
The interest payment date of a bond
Coupon period
The period of time between the previous coupon date and the next coupon date of a bond issue
Coupon rate
The interest rate of a bond
Credit crunch
An economic condition where investment capital is difficult to obtain. Banks and investors become wary of lending funds to potential borrowers, thereby driving up the price of debt products for borrowers. Credit crunches are usually considered to be an extension of recessions. A credit crunch makes it nearly impossible for organisations and individuals to borrow because lenders are scared of bankruptcies or defaults, which results in higher interest rates. The consequence is a prolonged recession (or slower recovery), which occurs as a result of the shrinking credit supply
Credit default swap
A contract under which two trade parties agree to isolate and separately trade the credit risk of one or more securities or other obligations issued by a third party
Credit limit
The maximum amount of credit that a bank or other lender will extend to a debtor. In the securities industry “debtors” may include clients, counterparties, countries or business sectors. In addition, securities firms usually have limits that they apply to individual traders or trading books
Credit rating
An independent measure of creditworthiness made by a credit rating agency, which affects the interest rate applied to loans
Credit rating agency
A company that assigns credit ratings for issuers of certain types of debt obligations
Credit risk
The risk associated with one party not fulfilling its contractual obligations at a specific future date
CREST
The former name of the Central Securities Depositary for the UK and Ireland. In 2007, CREST changed its name to Euroclear UK and Ireland
Critical path
The series of interdependent project activities, connected end to end, which determines the longest path through the project network and hence the shortest total duration of the project. The critical path may change from time to time as tasks are completed behind or ahead of schedule
Cum-warrant bond
A bond with warrants attached
Currency risk
A form of market risk. The risk to an investment portfolio caused by movements in exchange rates
Custodian bank
A bank, agent, or other organisation responsible for safeguarding a firm’s or individual’s financial assets. The role of a custodian is to hold in safekeeping assets such as equities and bonds, arrange settlement of any purchases and sales of such securities, collect information on and income from such assets (dividends in the case of equities and interest in the case of bonds), provide information on the underlying companies and their annual general meetings, manage cash transactions, perform foreign exchange transactions where required and provide regular reporting on all their activities to their clients
Customer order priority
An obligation on the firm executing a client order while at the same time executing orders for its own account to execute these orders fairly and in due turn
Customer side trade
One half of an agency trade, the side of the trade that settles with the investor
Data controller
The name of the individual within the firm that is responsible for compliance with the Data Protection Act 1998
Data Protection Act 1998
This act details how personal data should be dealt with to protect its integrity and to protect the rights of the persons concerned
Database replication
The process of creating and managing duplicate versions of a database. Replication not only copies a database but also synchronises a set of replicas so that changes made to one replica are reflected in all the others
Deal
See “Trade”
Debt instrument
Collective name for both bonds and bills
Deliverable
The physical outcome of a task resulting from applying defined processes to a set of inputs. A deliverable is a measurable, tangible, verifiable item produced as part of a project
Delivery by Value (DbV)
A service operated by CSDs for their member firms where the CSD selects the securities to be used in a multi-instrument repo transaction
Delivery date
The date that an investor who held a position in a future at its expiry date has to deliver the underlying instrument, or settle the obligation in cash
Delivery risk
The risk that payment is made for a trade by one party, but the other party fails to fulfil its obligations to deliver securities or make payment in another currency
Delivery versus payment (DvP)
The simultaneous delivery of securities by a seller and payment of sale proceeds by a purchaser of securities on settlement date
Dematerialised securities
Registered securities for which no share certificates are issued. The share register itself is the evidence of ownership
Depot
The account with a settlement agent which is used to record transactions and balances in security quantities
Depot position
Settlement date position + stock borrowed – stock lent
Derivative instrument
A financial contract whose value depends upon the value of an underlying instrument or asset (typically a commodity, bond, equity or currency, or a combination of these). Three classes of financial products fall under the heading of derivatives: derivative securities; exchange-traded derivatives; and over-the-counter (OTC) derivatives
Deutsche Borse Group
Owner and operator of the Frankfurt Stock Exchange as well as the EUREX futures exchange
Digital certificate
An electronic “credit card” that establishes your credentials when doing business or other transactions on the web. It is issued by a certification authority (CA). It contains your name, a serial number, expiration dates, a copy of the certificate holder’s public key (used for encrypting messages and digital signatures), the digital signature of the certificate issuing authority so that a recipient can verify that the certificate is real
Direct market access (DMA)
The automated process of routing a securities order directly to an execution venue, therefore avoiding intervention by a third party
Dirty price
The price of a bond trade (including accrued interest) expressed as a percentage of face value
Disaster recovery
The process of regaining access to the data, hardware and software necessary to resume critical business operations after a natural or human-induced disaster. A disaster recovery plan (DRP) should also include plans for coping with the unexpected or sudden loss of key personnel. DRP is part of a larger process known as business continuity planning (BCP)
Discounted margin
The average return on an FRN for its life compared to the reference interest rate, calculated at a constantly compounding rate
Diversification
Investing in a wide range of assets spread across different countries, industries, etc. so as to mitigate market risk
Dividend
A taxable payment declared by a company’s board of directors and given to its shareholders out of the company’s current or retained earnings. Dividends are usually given as cash (cash dividend), but they can also take the form of stock (stock dividend) or other property. Dividends provide an incentive to own stock in stable companies even if they are not experiencing much growth. Companies are not required to pay dividends. The companies that offer dividends are most often companies that have progressed beyond the growth phase, and no longer benefit sufficiently by reinvesting their profits, so they usually choose to pay them out to their shareholders
Dividend date
The date on which a dividend is paid
Double-entry bookkeeping
The basis of the standard system used by businesses and other organisations to record financial transactions, where each transaction is recorded in at least two accounts
DvP or DVP
See “Delivery versus payment”
Economic and Monetary Union (EMU)
On 1 January 1999 the euro became the official currency for 11 participating countries in the European Union (EU). In 2001, Greece also adopted the euro as its official currency. From that date forward, the respective foreign exchange operations, new public debt and all stocks and bonds on all stock exchanges in the participating member areas were quoted or issued in euro. Euro banknotes were first made available three years later
Effective date (of an interest accrual)
The date that interest is to be accrued to. Depending on why interest is being accrued this may be the value date of a transaction, today, or the date of a statistical month end
End user development
A set of activities or techniques that allows individuals who are non-professional developers to create or modify a software artifact
Equity
Ownership interest in a corporation in the form of common or preferred stocks or shares
Equity risk
The general market risk of rises or falls of individual share prices or stock market levels in general
Equity swap
A swap where one of the payment streams is based on the return from holding an equity or equity index instead of being based on an interest rate
EURIBOR
EURIBOR (Euro Interbank Offered Rate) is the benchmark rate at which Euro Interbank term deposits within the Eurozone are offered by one prime bank to another prime bank. It is one of the two benchmarks for the money and capital markets in the Eurozone (the other one being Eonia). EURIBOR is sponsored by the European Banking Federation (FBE), which represents the interests of 3000 banks in the 25 member states of the European Union and in Iceland, Norway and Switzerland and by the Financial Markets Association (ACI). The first EURIBOR was published on 30 December 1998
Euroclear
The central securities depositary for France, The Netherlands and Belgium, and owner of CREST CSD in London. Euroclear also provides settlement services for the international bond markets
Euronext
Owner and operator of the Amsterdam, Brussels, Lisbon and Paris Stock Exchanges as well as the LIFFE futures exchange in London
European Economic Area
The 27 countries of the European Union plus Iceland, Norway and Liechtenstein
European style options
An option that may be exercised only at the expiry date of the option, i.e. at a single predefined point in time
European Union
A political and economic community with supranational and intergovernmental dimensions. It is composed of 27 member states: Austria, Belgium, Bulgaria, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom
Ex-dividend date
A date, usually two working days before record date for a dividend. After the stock exchange closes on the day before the ex-dividend date and before the market opens on the ex-dividend date, the price of all open good-until-cancelled, limit, stop and stop limit orders are automatically reduced by the amount of the dividend, except for orders that the customer indicated “Do Not Reduce”. This is because these trades cannot settle until after record date, and the new owners will not receive the dividend concerned
Ex-warrant bond
A cum-warrant bond from which the warrants have been detached
Exercise date
The date on which an option is exercised
Expiry date
For a traded option, the date on which the option expires. For a future, the date when the final price of the future is determined
Face value
The quantity of a bond trade or bond issue. Also known as principal amount
Failed trade
A trade that has not settled by the agreed value date
Fees
Any charges other than commission and accrued interest that are applied to a securities trade
Financial control department
The department of the securities firm that is responsible for managing the financial resources of the business
Financial Services and Markets Act 2000
The Financial Services and Markets Act 2000 (FSMA 2000) introduced a new structure for the regulation of the financial services industry in the United Kingdom, which came into effect from midnight on 30 November 2001. It established a new regulatory regime, empowering the Financial Services Authority (FSA) with broad responsibility for both the prudential and business conduct regulation of firms within the financial services industry
Financial Services Authority (FSA)
The UK regulator for the financial services industry
FIX Protocol
The Financial Interface eXchange (FIX) protocol was initiated in 1992 by a group of institutions and brokers interested in streamlining their trading processes. It is an open message standard controlled by no single entity, which can be structured to match the business requirements of each firm
Fixed income security
See “Debt instrument”
Fixing date
The date on which the benchmark interest rate (such as LIBOR or EURIBOR) for the next coupon period of a bond or swap is published
Floating rate note
A bond whose interest rate is linked to a benchmark interest rate such as LIBOR
Floor
The minimum coupon rate of a floating rate note
Follow the sun model
A method of running a helpdesk where an incident that is reported during one time zone will continue to be worked on and handed over to others around the clock until it is resolved ready for the requestor to sign off and close on their return to the office.
Foreign exchange
The simultaneous buying of one currency and selling of another, either for spot (i.e. immediate) settlement, or for forward settlement (i.e. settlement at a later date)
Forward transaction
A foreign exchange transaction with value date of more than two working days after trade date
Fountain model
A model for software development that is based on the waterfall model
Free of payment (FOP)
A term used in a settlement instruction where the movement of cash and the movement of securities are not
inextricably linked to one another. In other words, FoP is the opposite of delivery versus payment (DVP)
Functional testing
Tests at any level (class, module, interface, or system) for proper functionality as defined in the specification
Future or futures contract
A legally binding agreement to buy or sell a commodity or financial instrument in a designated future month at a price agreed upon today by the buyer and seller. Futures contracts are standardised according to the quality, quantity and delivery time and location for each commodity. A futures contract differs from an option because an option is the right to buy or sell, while a futures contract is the promise to make a transaction
General clearing member
A futures and options exchange member that is also a member of a clearing house, and which clears trades done by other exchange members, who are known as non-clearing members
General Ledger
The general ledger, sometimes known as the nominal ledger, is the main accounting record of a business which uses the double-entry bookkeeping convention. It will usually include accounts for such items as current assets, fixed assets, liabilities, revenue and expense items, gains and losses
Gharar
Islamic finance term for uncertainty in a contract
Global custodian
A custodian bank that holds securities in multiple jurisdictions around the world, using their own local branches or other local custodian banks in each market
Gross redemption yield
Also known as yield to maturity. The return on the investment on a debt security, taking compound interest into account
Haircut
The difference between the market value of securities lent and the collateral amount required by the lender. For example, if the market value of the securities is £100 000, and the collateral required is £105 000, then the haircut is £5000
Haraam
An Arabic term meaning “forbidden”. In Islam it is used to refer to anything that is prohibited by the faith. Its antonym is halaal. In the context of Islamic finance it refers to investment in any asset class that is forbidden by Islam
Hedge fund
A pooled investment vehicle that is privately organised and administered by investment management professionals and not widely available to the public. Many hedge funds share a number of characteristics: they hold long and short positions, use derivatives and leverage to enhance returns, pay a performance or incentive fee to their hedge fund managers, have high minimum investment requirements and target absolute (rather than relative) returns
Hedging
The purchase or sale of a commodity, security or other financial instrument for the purpose of offsetting the profit or loss of another security or investment. Thus, any loss on the original investment will be hedged, or offset, by a corresponding profit from the hedging instrument
Helpdesk
A section of the IT department that takes requests from users to deal with system problems and/or out of the ordinary requests, logs them, prioritises them and hands them to the appropriate individuals for action
Hot standby
An approach to maintaining system availability whereby all transactions are routinely written to the production server and the standby server simultaneously. The standby server is therefore ready to take over the processing load instantaneously, should there be any failure in the production system
Hybrid market systems
A stock exchange trading system that uses both an order queue and market makers
IBAN code
A European standard for storing bank account numbers
ICMA
International Capital Markets Association – a Swiss-based organisation with the status of a designated investment exchange in the UK. The ICMA promotes bye-laws, statutes, rules and recommendations for market practices in the bond markets
Illiquid
A financial instrument that is rarely traded is said to be illiquid
Index linked bond
A bond whose interest rate and/or redemption proceeds are linked to an index, such as the Retail Price Index in the United Kingdom
Information commissioner
The UK government agency that is responsible for the operation of the Data Protection Act 1998
Infrastructure catalogue
An inventory of all the applications and hardware used by a business. The infrastructure catalogue is a prerequisite for both helpdesk management and business continuity planning
Initial margin
A margin amount that a member of a clearing house must pay in order to open a position
Initial public offering (IPO)
The first sale of stock by a private company to the public
Innovation outsourcing
Outsourcing the research and development of products, in particular the development of new business applications
Insider dealing
Illegal share dealings by employees of a company where they have used confidential price-sensitive information for their own gain or the gain of their associates.
Insourcing
Insourcing (internal outsourcing) occurs where a company sets up an operation to carry out work that would otherwise have been contracted out. It usually implies the centralisation of a service that would have previously been decentralised; and may also imply that the insourced service is now provided offshore
Instrument associations
Static data that informs about other instruments into which a complex instrument such as a convertible bond or warrant may be converted into or exercised
Integration testing
Testing designed to expose defects in the interfaces and interaction between integrated components (modules)
Intellectual property rights
Rights to intangible property that is the product of the human intellect. Intellectual property may be protected by copyright, trademark or patent
Interest rate cap
An OTC derivative contract where the buyer receives money at the end of each period in which an interest rate exceeds the agreed strike price
Interest rate collar
A combination of an interest rate cap and an interest rate floor
Interest rate floor
An OTC derivative contract where the buyer of the floor receives money at the end of each period in which an interest rate is lower than the agreed strike price
Interest rate risk
A form of market risk. The risk to a portfolio caused by fluctuating interest rates
International Capital Markets Association (ICMA)
A self-regulatory organisation and trade association representing the financial institutions active in the international capital markets worldwide. ICMA provides the TRAX2 central matching engine
International Central Securities Depository or ICSD
See “Central Securities Depository or CSD”
International Securities Lending Association or ISLA
A trade association established in 1989 to represent the common interests of participants in the securities lending industry
International Standards Organisation or ISO
A United Nations sponsored organisation that sets international standards that can be used in any type of business and are accepted around the world as proof that a business can provide assured quality
Internet protocol suite (IP)
The set of communications protocols that implement the protocol stack on which the Internet and most commercial networks run
Investment bank
Strictly speaking, an investment bank is a financial institution that assists companies and governments and their agencies to raise money by issuing and selling securities in the primary market. Investment banks also act as intermediaries in trading for clients. However, only a few small firms provide only this service. Almost all investment banks are heavily involved in providing additional financial services for clients, such as the trading of derivatives, fixed income, foreign exchange, commodity and equity securities. In this book the term “investment bank” is used to describe an institution that offers some or all of these services
Investment exchange
A corporation or mutual organisation which provides facilities for stockbrokers and traders, to trade company stocks and other securities including bonds, derivatives and physical commodities such as precious metals and agricultural products
Investment mandate
A contract between an investor and a fund manager that sets out the terms on which the fund manager will act for the investor
Investment Services Directive
A European Commission Directive issued in 1993. It specifies that if a firm has been authorised by one member state to provide investment services, this single authorisation enables the firm to provide those same investment services in other member states without further authorisation. The originating state providing authorisation is commonly referred to as the “home” state, whereas other states where investment services are offered are known as “host” states. In 2007, the ISD was superseded by MiFID
IP protocol
The Internet protocol suite is the set of communications protocols that implement the protocol stack on which the Internet runs. It is sometimes called the TCP/IP protocol suite, after the two most important protocols in it: the Transmission Control Protocol (TCP) and the Internet protocol (IP), which were also the first two defined
ISDA
The International Swaps and Derivatives Association
ISDA Master Agreement
A standardised contract (drafted by the ISDA) to enter into derivatives transactions
ISIN code
(International Securities Identification Number): a 12 character, alphanumeric code allocated to each equity and bond that is widely used to identify individual securities in financial messages.
Islamic Financial Services Board (IFSB)
An international standard-setting organisation that promotes and enhances the soundness and stability of the Islamic financial services industry by issuing global prudential standards and guiding principles for the industry, broadly defined to include banking, capital markets and insurance sectors
Islamic window
A department of a conventional bank or other financial institution that only offers Sharia compliant products
ISO9126
The international standard for software testing
Issue
Requests to a helpdesk and defects found during software testing are both often known as “issues”.
Issue price
The price that a bond or equity was first issued in the primary offering
Issuer risk
A form of credit risk. The risk that a security issuer may not be able to pay coupon, dividend or maturity proceeds at some time in the future
IT Infrastructure Library™
A set of concepts and techniques developed and supported by the UK government for managing IT infrastructure, development and operations
Iterative/Incremental
A methodology to manage the designing and building of software applications
Joint requirement development sessions
A means of requirement gathering where stakeholders are gathered together in “requirement workshops”
LCH.Clearnet
A recognised clearing house that operates central counterparty services for a number of European markets including the LSE and Euronext.LIFFE
Letter of credit
In the context of stock loans and repos, a document issued by the borrower’s bank that essentially acts as an irrevocable guarantee of payment to the lender, should the borrower not be in a position to return the securities
Leverage
The degree to which an investor or business is utilising borrowed money
Liabilities
All the claims against a corporation. Liabilities include accounts, wages and salaries payable; dividends declared payable; accrued taxes payable; and fixed or long-term liabilities, such as mortgage bonds, debentures and bank loans
LIBOR
LIBOR is a benchmark interest rate published by the British Bankers Association (BBA) shortly after 11am each day, London time, and is a filtered average of interbank deposit rates offered by designated contributor banks, for maturities ranging from overnight to one year. The shorter rates, i.e. up to six months, are usually quite reliable and tend to precisely reflect market conditions at measurement time. The actual rate at which banks will lend to one another will, however, continue to vary throughout the day
Liquidity risk
The risk that a firm may be unable to refinance its borrowings as they mature and needs to be renegotiated. For securities firms, this may be because the market for the instruments that it uses for its borrowings becomes too thin to enable efficient and fair trading to take place
Log shipping
A process that allows you to automatically send transaction log backups from a primary database
on a primary server
instance to one or more secondary databases
on separate secondary server
instances
London Stock Exchange
The largest formal market for securities in the UK; the LSE facilitates deals in equities, bonds and some derivatives such as exchange traded funds and covered warrants
Long position
See “Position”
Lot
Futures and options contracts are denominated in lots. One lot is the minimum quality of the contract that may be traded, and the exchange that lists the contract will specify what precise quantity of the underlying instrument is represented by one lot
Maintenance margin
Margin based on the unrealised losses of a transaction or position
Managing stage boundaries
A key step in a project reflecting the decision point in the continuity of the project as planned, adjusted or stopped. The process involves preparing for the next stage and reviewing the current stage
Margin
The cash or collateral that a holder of a position in securities or in exchange traded derivatives is required to post to cover potential adverse movements in the value of the position
Mark to market
An accounting procedure by which assets are “marked,” or recorded at their current market value, which may be higher or lower than their purchase price or book value
Market abuse
An offence introduced by FSMA 2000; judged on what a “regular user” would view as a failure to observe the required standards. The offence includes abuse of information, misleading the market and distortion of the market
Market identifier code
ISO Standard 10383 specifies a universal method of identifying exchanges, trading platforms and regulated or non-regulated markets as sources of prices and related information in order to facilitate automated processing. The market code convention is four alphabetic characters. For example, the code for the London Stock Exchange is XLON
Market maker
A sell-side firm that has accepted the obligation to quote both a buy and a sell price in a financial instrument or commodity, hoping to make a profit on the turn or the bid/offer spread
Market risk
The risk that the value of the investments owned by the investor might decline
Market-side trade
One half of an agency trade, the side of the trade that settles with the market maker of the clearing house appointed by the exchange
Matching engine
A form of trade agreement where both parties input their trade details to the matching engine database, and the matching engine then compares the two trade reports and provides them to both parties in real time
Maturity date
The date when the borrower repays the investors of a bond issue with the face value of the issue
MiFID
The Markets in Financial Instruments Directive (MiFID) introduced a single market and regulatory regime for investment services across the 25 member states of the European Union in 2007
Milestone
A significant event in the project, usually completion of a major deliverable, at a given point in time
Model risk
The risk that models (such as VaR) are applied to tasks for which they are inappropriate or are otherwise implemented incorrectly
Money broker
Traditionally, a firm that acts as intermediary, arranging deals between principals in the FX, money market loan and deposits, debt securities and OTC derivative markets
Money laundering
The process of turning dirty money (money derived from criminal activities) into clean money (money that appears to be legitimate)
Multilateral trading facility
A system that brings together multiple parties that are interested in buying and selling financial instruments and enables them to do so
Near-shoring
A form of offshoring where the business process is relocated to lower cost foreign locations, but these locations are in close geographical proximity to the customer’s country of business
Nominal ledger
See “general ledger”
Nominal owner
A person or group that holds title to a security or piece of real estate but is not the true owner
Non-clearing member
A firm that is a member of a futures and options exchange but not its associated clearing house. The non-clearing member relies on general clearing members to clear its trades on the relevant exchanges
Non-disclosure agreement
A legal contract between the parties which outlines confidential materials or knowledge the parties wish to share with one another for certain purposes, but wish to restrict from generalised use. In other words, it is a contract through which the parties agree not to disclose information covered by the agreement. An NDA creates a confidential relationship between the parties to protect any type of trade secret
Normal market size
The quantity of stock that can be purchased without moving the market price. This will vary from security to security, the less liquid that a stock is on a particular market, the smaller the normal market size will be
Nostro
The account with a settlement agent which is used to record transactions and balances in cash amounts
Notional principal
The principal value of a swap or futures deal or position. Because these are off-balance sheet items, their value is said to be “notional”
Novation
The substitution of one party to a contract by another party, in particular novation occurs at the point when the central counterparty assumes the responsibility to settle a trade
Objective
A concise statement (or statements) of what the project is to achieve
OECD
The Organisation for Economic Cooperation and Development (OECD). An international organisation of 30 industrialised countries that accept the principles of representative democracy and a free market economy
Off-balance sheet item
An asset or debt or financing activity not on the company’s balance sheet. It could involve a lease or a separate subsidiary or a contingent liability such as a letter of credit. It also includes futures, forwards, swaps and other derivatives
Offer price
The lowest price acceptable to a prospective seller of the same security. The highest bid and lowest offer are quoted on most major exchanges, and the difference between the two prices is called the “spread”
Offshoring
Offshoring is defined as the movement of a business process done at a company in one country to the same or another company in another, different country. Almost always, work is moved due to a lower cost of operations in the new location
Operational risk
The risk of losing money due to mistakes, processing errors or deliberate wrongdoing
Option or options contract
A call option gives the buyer (or holder) the right (but not
the obligation) to purchase the underlying instrument at a specified price on or before a given date. A put option on the other hand gives the buyer (or holder) the right (but not
the obligation) to sell the underlying instrument at a specified price on or before a given date
Option premium
The amount paid in order to purchase an option
Order-driven markets
A stock exchange trading system that does not rely on market makers. A member firm who wishes to buy a given stock at a given price submits an order to the system; while at the same time other member firms who wish to sell the same stock submit sell orders to the system
Outsourcing
The delegation of non-core operations from internal production to an external entity specialising in the management of that operation
Over-the-counter (OTC) market
A decentralised market of securities not listed on an exchange where market participants trade over the telephone, facsimile or electronic network. There is no central exchange providing a trading system
Parent trade
After a buy-side firm sends its allocation instructions, a single bulk trade executed by a sell-side firm (the parent trade) may need to be broken down into a series of smaller trades – Child trades – one for each investor concerned
PMBOK Guide
A Guide to the Project Management Body of Knowledge, published by the Project Management Institute
PMI
The Project Management Institute, which had developed a methodology to manage projects of any kind, including those related to software development and implementation
Portfolio
In the context of software development, a portfolio is a suite of projects being undertaken by a function. In the context of investment management, a portfolio is a collection of investments held by an institution or a private individual. The term is sometimes also used as an alternative to “book” or “trading book”
Position
The net total of all the purchases of a security less all the sales of the same security. When the position is positive it is said to be a long position, when it is negative it is said to be a short position. Sometimes this term is used interchangeably with “book” or “trading book”
Post-trade publication
Also known as regulatory trade reporting. In the EEA, broker–dealers have an obligation to report, in real time, all trades executed by them to the National regulator. Similar requirements exist in other jurisdictions
Present value
The value on a given date of a future payment or series of future payments, discounted to reflect the time value of money and other factors such as investment risk
Price limit
The maximum price that a buyer of securities is prepared to pay for them, or the minimum price that a seller of securities is prepared to receive for them
Primary market
The market for new securities issues. In the primary market the security is purchased directly from the issuer
Prime brokerage
A bundled package of services offered by investment banks to hedge funds. The business advantage to a hedge fund of using a prime broker is that the prime broker provides a centralised securities clearing facility for the hedge fund, and the hedge fund’s collateral requirements are netted across all deals handled by the prime broker. The prime broker benefits by earning fees (“spreads”) on financing the client’s long and short cash and security positions, and by charging, in some cases, fees for clearing and/or other services
PRINCE2
A methodology to manage projects of any kind, including those related to software development and implementation
Principal amount
The quantity of a bond trade or bond issue. Also known as face value
Principal value
The result of a quantity * price calculation
Principal trade
A securities trade where the sell-side firm sells (or buys) stock to (from) its customer from its own trading book, and its remuneration consists of the spread between the bid and offer prices
Private client stockbroker
A stock exchange member firm that specialises in serving private individuals
Production outsourcing
The maintenance and support of IT applications that have already been developed
Programme
A group of projects that is managed together
Project
A set of inter-related and controlled activities with start and finish dates, undertaken to achieve a unique objective conforming to specific requirements, including the restraints of time, cost and resources
Project brief
A document produced in the early stages of a project that describes, in outline, what the project is attempting to achieve and the business justification for doing it
Project initiation document (PID)
A logical document whose purpose is to bring together the key information needed to start the project on a sound basis, and to convey that information to all concerned with the project
Project management
The discipline of organising and managing resources (e.g. people) in such a way that the project is completed within defined scope, quality, time and cost constraints
Project Management Institute
A professional body formed in 1969 whose objective is to serve the interest of the project management industry. The premise of PMI is that the tools and techniques of project management are common even among the widespread application of projects from the software industry to the construction industry
Project manager
The individual responsible for delivering the project
Project risk
The risk that a business change project is delivered late and/or over budget or has to be abandoned
Project sponsor
Normally, the senior executive that instigated a business change and who is responsible to the business for the success of the project
Prototyping
A form of iterative/incremental software development based in building a model (or prototype) in order to test various aspects of a design, illustrate ideas or features and gather early user feedback
PTM levy
A charge automatically imposed on investors, and collected by their brokers, when they sell or buy shares with an aggregate value in excess of £10 000. The charge is £1, and the money raised goes to the Panel of Takeovers and Mergers
Public offering
See “Initial public offering”
Put option
See “Option”
Quote-driven markets
A stock exchange trading system where some of the exchange’s member firms take on the obligation of always making a two-way price in each of the stocks in which they make markets. These firms are therefore known as market makers
Realised P&L
P&L that arises as a result of selling securities
Reconciliation
The process of proving that an organisation’s books and records are accurate
Record date
The date on which the share register is frozen for the calculation of the dividend payments to be paid on the next dividend date
Reference rate
See “Benchmark interest rate”
Register
The record of ownership of a company’s shares maintained by a registrar
Registrar
An agent employed by a corporation or mutual fund to maintain shareholder records, including purchases, sales and account balances. The registrar is also responsible for the payment of dividends to shareholders and for the management of corporate actions. Also known as transfer agent
Regression testing
After modifying software, either for a change in functionality or to fix defects, a regression test reruns previously successful tests on the modified software to ensure that the modifications haven’t unintentionally caused a regression
of previous functionality
Regulatory news service
A service that transmits regulatory and non-regulatory information published by companies and other securities issuers allowing them to comply with local market transparency legislation
Regulatory trade reporting
Also known as post-trade publication. In the EEA, broker/dealers have an obligation to report, in real time, all trades executed by them to the national regulator. Similar requirements exist in other jurisdictions
Repo
Repos – sale and repurchase agreements – are transactions where Party A lends money to Party B provided that Party B provides Party A with collateral in the form of government bonds
Repo rate
The interest rate of a repo transaction
Reputational risk
Damage to an organisation through loss of its reputation or standing
Request for proposal (RFP)
An invitation for suppliers, through a bidding process, to bid on a specific product or service. An RFP is usually part of a complex sales process, also known as enterprise sales
Retail service Provider (RSP)
In the context of the London Stock Exchange, an RSP is an automated quoting system similar to a computerised market maker – it is electronically connected to brokers who normally request quotes from several RSPs and trade on the best price
Reverse repo
The repo transaction seen from the point of view of the purchaser of stock/lender of cash
RFP
See “Request for proposal”
Riba
Islamic finance term for interest or usury
Rights issue
A form of corporate action where the company offers existing shareholders the rights to acquire new shares in the company at a discounted price
Safe custody service
The service provided by a custodian bank
Sale and repurchase agreement
See “Repo”
Secondary market
A market in which an investor purchases a security from another investor rather than the issuer, subsequent to the original issuance in the primary market. Also called aftermarket
Securities
Equities and bonds
SEDOL code
SEDOL stands for Stock Exchange Daily Official List, a list of security identifiers used in the United Kingdom and Ireland for clearing purposes. The codes are assigned by the London Stock Exchange, on request by the security issuer. SEDOLs serve as the ISIN for all securities issued in the United Kingdom and are therefore part of the security’s ISIN as well. Although SEDOL was to have been superseded by ISIN, problems with the ISIN system have since forced a reversal of this decision. In particular, a single ISIN is used to identify the shares of a company no matter what exchange it is being traded on, making it impossible to specify a trade on a particular exchange or currency. For instance, Chrysler trades on 22 different exchanges worldwide, and is priced in five different currencies. An expanded ISIN standard is currently being formulated to address this problem
Sell-side firms
Investment banks and stock exchange firms that execute orders on behalf of investors
Service level agreement
Service level agreement (SLA) is that part of a service contract in which a certain level of service is agreed upon. Level of service in this context refers to both the quality of the service and the time deadlines for performing the service. It may also specify penalties to be paid by either party if the level of service provided fails to reach the minimum standards in the agreement for an extended period of time
SETS
An order-driven trading system operated by the London Stock Exchange
Settle within tolerance
In determining whether instructions match, the settlement agent usually has the ability to “settle within tolerance”. That is to say, if the instructions match in every respect apart from a minor difference in the cash consideration, then the agent will settle the trade using the cash figure supplied by the seller
Settlement
The process where the buyer pays the proceeds of the trade and receives legal title to the item it has purchased, while the seller receives the proceeds of the trade and has to deliver the item it has sold to the buyer
Settlement agents
CSDs, ICSDs, clearing houses and custodian banks may be collectively referred to as “settlement agents”
Settlement date
The date that a deal actually does settle, as distinct from value date, which is the date that it should settle
Settlement dated position
The net quantity of an instrument or contract bought or sold that has settled on or before today
Share certificate
A document issued by a registrar that provides evidence of ownership of securities and is sent to the holder of those securities shortly after purchase
Shareholders’ equity
Assets less liabilities
Sharia Supervisory Board
A group of Sharia scholars with relevant knowledge of the financial services industry. It is this board that decides what products may be offered to customers by an Islamic bank or a conventional bank that provides an “Islamic window”. The board also regulates how those products are to be financed by the institution offering them, and what types of instruments (such as derivatives) may be used to hedge its positions
Short position
See “Position”
Short selling
Selling more securities than are owned, in other words the creation of a short position
Simple margin
The average return on an FRN for its life compared to the reference interest rate, amortised in a straight line over the remaining life of the bond
Simple yield
The return on the investment on a debt security, not taking compound interest into account
SLA
See “Service level agreement”
Software development lifecycle (SDLC)
A standardised process of developing information systems or applications through the completion of defined steps or phases. Synonyms include systems development lifecycle, systems implementation lifecycle and software implementation lifecycle (SILC)
Software development model
A structure imposed on the development of a software product. Synonyms include software life cycle and software process.
Software maintenance
Software maintenance is an ongoing process, and it includes the continuing support of end users, the correction of errors and updates of the software over time
Software testing
The process used to measure the quality of developed computer software. Software testing standards are covered by ISO 9126
Sovereign risk
The risk of default by a government. A form of issuer risk
SPAN
Standard Portfolio Analysis of Risk (SPAN) is a system for calculating margin requirements for futures and options on futures. It was developed by the Chicago Mercantile Exchange in 1988. SPAN is a portfolio margining method that uses grid simulation. It calculates the likely loss in a set of derivative positions (also called a portfolio) and sets this value as the initial margin payable by the firm holding the portfolio. In this manner, SPAN provides for offsets between correlated positions and enhances margining efficiency
Specialist lending intermediary or SLI
A specialist intermediary that provides liquidity to the stock lending and repo markets
Spiral model
An iterative methodology to manage the designing and building of software applications
Spot transaction
A foreign exchange transaction with value date of two working days after trade date
Spread
The difference between the bid and offer prices
SQL
Commonly expanded as Structured Query Language, SQL is a computer language designed for the retrieval and management of data in relational database management systems, database schema creation and modification, and database object access control management
Stamp duty
A UK tax payable by buyers (but not sellers) of most equity shares listed on the UK markets
Standard settlement instructions or SSIs
Static data that provides details of the settlement agents used by both the firm and its clients
Standby server
A spare server that is brought into use when the production server for one or more applications is lost. Also known as the DR server
Static data
Information about the firm, its trading parties and the instruments it trades. Alternatively defined as the store of information that is used to determine the appropriate actions necessary to ensure successful processing of a trade
Static data repository
A system that consolidates the firm’s view of static data and feeds it to all the other systems in the configuration
Stock exchange
See “investment exchange”
Stock loan
The process of the lending of securities by one party to another. The terms of the loan will be governed by a “securities lending agreement”, which requires that the borrower provide the lender with collateral, in the form of cash, other securities or a letter of credit of value equal to or greater than the loaned securities. As payment for the loan, the parties negotiate a fee, quoted as an annualised percentage of the value of the loaned securities. If the agreed form of collateral is cash, then the fee may be quoted as a “rebate”, meaning that the lender will earn all of the interest which accrues on the cash collateral, and will “rebate” an agreed rate of interest to the borrower
Stock record
A system of double-entry bookkeeping that accounts on one side for the ownership of securities and on the other side for the location of the stock
Stock split
A type of corporate action where the total number of shares in issue is increased, and the additional shares are given to existing shareholders in proportion to their existing shareholding free of cost
Stock transfer form
A form submitted to a registrar to change the details of the name on a register
Stop loss
A stop loss order is an order given to a sell-side firm to sell a security if its price falls to a particular level
Straight-through-processing or STP
Working practices and systems that enable transactions to move seamlessly through the processing cycle, without manual intervention or redundant handling
Stress testing
The practice of testing the VaR model against “extreme” market conditions
Strike price
The price at which an option will be exercised
Subprime
Subprime lending is the practice of making loans to borrowers who do not qualify for the best market interest rates because of their deficient credit history. It includes a variety of credit instruments, including subprime mortgages, subprime car loans, and subprime credit cards
Sukuk
(Arabic, “legal instrument, deed, check”) The Arabic name for a financial certificate but can be seen as an Islamic equivalent of bond. However, fixed income, interest bearing bonds are not permissible in Islam, hence Sukuks are securities that comply with the Islamic law and its investment principles, which prohibits the charging or paying of interest
Swap
Derivative products that are used to alter the exposure of investment portfolios, or any series of cash flows. The most common kind of swap is an interest rate swap
SWIFT
The Society for Worldwide Interbank Financial Transfers (SWIFT) is an industry-owned utility that operates a secure telecommunications network, and also designs message standards for communications between market players
SWIFT Gateway
A term used to describe software applications that are used to access the SWIFT network, and which have SWIFTNet Link embedded within them
SWIFTAlliance
A SWIFT Gateway product supplied by SWIFT
SWIFTNet Link
A suite of software products, developed by SWIFT that ensures technical interoperability between SWIFT users by providing the minimal functionality required to communicate over these services. It is supplied both to SWIFT member firms directly, and also to software vendors who are able to embed it in their own products.
SWIFTNet PKI
The security component of SWIFTNet Link that uses digital certificates to provide the highest levels of authentication of institutions, end users and servers
System integration testing
Verifying that a system is integrated to any external or third-party systems defined in the system requirements
System testing
Testing a completely integrated system to verify that it meets its requirements
Systematic internaliser
A firm which on a frequent and systematic basis deals on its own account by executing client orders which are outside the “multilateral trading facility” (MTF) or exchanges
Tax sheltered investments
Investments that are managed in such a way as to provide a tax benefit for the investor. For example, in the United Kingdom private individuals may hold some of their investments in an individual savings account (ISA) that frees them from the obligation to pay capital gains tax when those investments are sold; or they may hold some assets in a self invested personal pension plan (SIPP). All contributions to a SIPP are exempt from UK income tax. Similar facilities are offered in other countries; for example, in the United States a 401(k) plan allows a worker to save for retirement while deferring income taxes on the saved money and earnings until withdrawal
Test case
A set of conditions or variables under which a tester will determine if a requirement or use case upon an application is partially or fully satisfied
Test scenario
A number of similar or linked test cases
Test script
A description of the input data to be entered and the output results to be inspected for a particular test case
Time loans and deposits
Money market loans and deposits with maturity dates agreed on trade date
Timely execution
An obligation on the firm executing an order to select the most opportune time to execute that order
Trade agreement
The processes of trade confirmation, affirmation and allocation
Trade date
The date that a deal is carried out
Trade dated position
The net quantity of an instrument or contract bought or sold up to and including the most recent trade
Trading book
See “Book”
Trading party
Any kind of institution or individual that trades with one firm is a “trading party” of that firm. Trading parties include both counterparties and clients
Transaction risk
A form of currency risk – the risk that particular transactions are adversely affected by exchange rate movements
Transfer agent
See “registrar”
Translation risk
A form of currency risk – the risk that foreign currency assets held on the balance sheet decline due to exchange rate movements
Transmission control protocol
One of the core protocols of the Internet protocol suite. TCP provides reliable, in-order delivery of a stream of bytes, making it suitable for applications like file transfer and email. It is so important in the Internet protocol suite that sometimes the entire suite is referred to as “the TCP/IP protocol suite”
TRAX2
A central matching engine provided by the International Capital Markets Association
Tri-party repo
A repo where a settlement agent acts as the “third party” custodian for the securities held as collateral. Instead of delivering the securities to the buyer, the seller delivers them to the third party which acts as the buyer’s custodian
Underlying instrument
An underlying instrument is a security (such as a stock) or other type of financial product (such as a stock index or futures contract) whose value determines the value of a derivative investment or product. For example, if you own a stock option, the stock you have the right to buy or sell according to the terms of that option is the option’s underlying instrument. Underlying instruments may also be called underlying products, underlying interest, underlying investment or the cash instrument
Unit testing
Testing of the minimal software component or module
Unrealised P&L
P&L that arises as a result of the mark-to-market process
Use case
A means of documenting requirements. Each use case provides one or more scenarios
that convey how the system should interact with the end user or another system to achieve a specific business goal. Use cases typically avoid technical jargon, preferring instead the language of the end user
User acceptance testing
Testing conducted by the end user, customer, or client to validate whether or not to accept the product
Value at Risk
Value at Risk (VaR) is an estimate – not a precise measurement – of how the market value of an asset or of a portfolio of assets is likely to decrease over a certain time period (usually over one day or 10 days) under usual conditions. It is typically used by security houses or investment banks to measure the market risk of their asset portfolios (market value at risk), but is actually a very general concept that has broad application
Value date
The date that a deal is expected to settle – i.e. the date that the seller delivers securities and the buyer pays for them
Value dated position
The net quantity of an instrument or contract bought or sold where value date is equal to or earlier than today
VaR
See “Value at Risk”
Variation margin
See Maintenance margin
Version control systems
Software applications that manage multiple revisions of the same unit of information, such as a program or a unit of documentation
Volatility
The relative rate at which the price of a security moves up and down. Volatility is found by calculating the annualised standard deviation of daily change in price. If the price of a stock moves up and down rapidly over short time periods, it has high volatility. If the price almost never changes, it has low volatility
Volatility risk
A form of market risk. The risk in the value of options portfolios due to the unpredictable changes in the volatility of the underlying asset
Volume testing (or load testing)
Testing a software application for a certain data volume
Warm standby
A standby server that is kept synchronised with the production server by processes such as log shipping
Warrant
A security that entitles the holder to buy stock of the company that issued it at a specified price, which is much higher than the stock price at time of issue
Waterfall model
A methodology to manage the designing and building of software applications
Weighted average price
A method of calculating the price of a position, used in a mark-to-market calculation
Wiki
Computer software that allows users to easily create, edit and link web pages. Wikis are often used to create collaborative websites, power community websites, and are increasingly being installed by businesses to provide affordable and effective intranets or for use in knowledge management
Work package
A subset of a project that can be assigned to a specific party for execution
Workflow applications
Systems that manage tasks such as automatic routing, partially automated processing and integration between different functional software applications and hardware systems that contribute to the value-addition process underlying the workflow
XML
A flexible way to create common information formats and share both the format and the data on the World Wide Web, intranets, and elsewhere. XML is a formal recommendation from the World Wide Web Consortium (W3C) similar to the language of today’s web pages, the Hypertext Markup Language (HTML)
Yield curve
The relation between the interest rate (or cost of borrowing) and the time to original maturity of the debt for a given borrower in a given currency
Yield to Maturity
See “Gross redemption yield”
Zero coupon bond
A Bond that does not pay regular interest. Instead it is issued at a deep discount to it’s final redemption value