Directory Glossary

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• ACCRUED INTEREST
  Coupon interest earned on a bond since the last coupon date.
• AGENT
  A party to a loan or borrow transaction that acts on behalf of a third-party client . The agent does not usually take any risk in the transaction.
• ALL-IN PRICE
  The market price of a bond plus the accrued interest. Also known as the dirty or full price. All-in price also refers to an equity lending trade where the value of the dividend relating to the stock is priced into the overall lending transaction.

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• BASEL ACCORD ON CAPITAL ADEQUACY
  A set of standards agreed by the Basel Committee on Banking Supervision. The original accord was agreed in 1989 by the world’s major central banks under the aegis of the Bank for International Settlements (BIS), whose headquarters are in Basel, Switzerland. The new framework, known as “Basel II”, was to be completed in late 2001. The accords are designed to mitigate credit and systemic risk as they require banks to set aside minimum amounts of capital as a proportion of exposures and of the risks attached to them.
• BASIS POINT
  One hundred basis points equal one percent. One basis point is 0.01%.
• BEARER SECURITIES
  Securities that are not registered to any specific party on the books of the issuing company and hence are payable to the party that is in possession of them, i.e. the bearer.
• BUY-IN
  If a lender recalls loaned securities from a borrower but the borrower is not able to return them in line with either the lender’s instructions or the normal market practice, the lender may be forced to buy the securities in the open market. All the costs of the buy-in will be borne by the borrower.
• BUY/SELL BACK
  Transactions that in economic terms are similar to reverse repos and repos, respectively. These transactions consist of a spot purchase (or sale) of a bond versus cash with a forward commitment to sell back (or buy back) the securities. Used as an alternative to repos/reverses. A buy/sell back differs from a reverse repo or a securities loan in that it is an outright sale, usually of bonds. At the time of the sale, a forward buy-back is simultaneously contracted for future settlement. The lending fee is implied in the repurchase price and cannot be adjusted during the course of a transaction. The lender does not retain beneficial ownership of the bonds and so does not receive any substitute payments. Buy/sell backs are essentially two trades, with the second contracted for a future date. As of November 1995, buy/sell backs can be executed under the standard PSA/ISMA agreement.
• CAPITAL ADEQUACY DIRECTIVE (CAD)
  The European Union Capital Adequacy Directive governs the amount of risk a bank or securities firm may take in relation to its financial base. It encourages banks to shift from unsecured to secured lending.
• CARRY
  The difference between the interest return on the securities held and the financing costs. Any gain derived from holding or carrying a security is known as a positive carry, while any loss is known as a negative carry.
• CASH-AND-CARRY TRADE
  A type of trading that is similar to a reverse repo trade. A trader buys a bond that is deliverable into a futures contract and then sells futures against that position. When the futures contract expires, the trader delivers the bond to cover the short. The effect of this is the same as a reverse repo trade: at the beginning the trader pays cash to acquire a bond and at the end of the contract returns the bond to receive cash. The difference between the initial cash amount and the cash received at the end allows the calculation of the implied repo rate. The cash-and-carry trader can, if he wishes, finance the bond he acquires by a repo contract that lasts until the date of the futures delivery.
• CENTRAL COUNTERPARTY (CCP)
  An organisation acting as the single counterparty in a market, i.e. buying from every seller and vice versa. CCPs are a typical fixture of organised derivative exchanges, They collect collateral to guarantee good delivery. They mitigate credit risk as they guarantee trades and are typically backed by large financial institutions. The multilateral netting they provide reduces the amount of collateral required from participants.
• CENTRAL GILTS OFFICE (CGO)
  The electronic book-entry transfer settlement system for gilts run by the Bank of England. To receive gross interest on gilts, investors need to hold their gilts in special accounts known as Star accounts.
• CLASSIC REPO
  Classic repo is used to describe US-style repo, as distinct from sell/buy backs. One party sells securities to another party and simultaneously both agree to repurchase the securities at a fixed price on an agreed future date or on demand. See repo.
• CLOSE OUT
  If a repo counterpart defaults, its counterparts may close out all transactions undertaken with that counterpart using the PSA/ISMA agreement. The agreement allows counterparts to net their exposure, which is important for capital adequacy purposes.
• COLLATERAL
  Securities, financial instruments or deposits of currency that are delivered by the borrower to the lender to support a loan transaction. In repos and buy/sell backs, the collateral is considered to be the securities side of the transaction. In securities lending, the collateral will be the cash or securities supplied in exchange for the specific borrowed securities.
• CONDUIT BORROWER
  A party that borrows a security in order to on-lend it to a thirdparty, rather than borrowing it for its own in-house needs. Also referred to as an intermediary or broker.
• CONTINUOUS LINKED SETTLEMENT (CLS)
  An international system providing netting and settlement services for transactions in (initially) the seven major currencies in the world. The system is backed by 20 of the world’s largest banks, which will begin operating it in the autumn of 2001. These so-called “settlement banks” will require collateral from users to bridge any payment gaps. The main benefit of CLS is immediate finality of transactions, which eliminates cross-currency settlement risk.
• CONVENTION CADRE RELATIVE AUX OPÉRATIONS DE PENSION LIVRÉE
  The French repo master agreement. Approved by the governor of the Bank of France in December 1994, the Convention Cadre Relative aux Opérations de Pension Livrée is used for repos of French or foreign bonds and other debt instruments.
• CROSS-CURRENCY REPO
  A repo in which the securities are denominated in a different currency to the collateral.

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• DELIVER-OUT REPO
  A repo which involves either the physical delivery of collateral to the cash provider or a book-entry transfer. Physical transfer of collateral provides good security for the cash investor, but it can be slow and expensive and makes substitution difficult. See hold-in-custody repo and tri-party repo.
• DELIVERY BY VALUE (DBV)
  The delivery, through UK settlement system Crest, of securities as collateral by value rather than by individual security. Similar to general collateral.
• DELIVERY VERSUS DELIVERY (DVD)
  A settlement method whereby a contractual delivery of securities is effected only if and when the corresponding delivery of collateral (under the form of different securities) is also made. DVD typically occurs when securities on “special” are being delivered against general collateral, e.g. in connection with futures markets.
• DELIVERY VERSUS PAYMENT (DVP)
  The simultaneous delivery of securities against the payment of funds. DVP eliminates the risk that a counterpart will fail to honour its obligations.
• DIRECT LENDER
  A lender that lends directly to a borrower rather than using an agent or intermediary and that has autonomy regarding all lending decisions. The lender may handle loan administration in-house or may also use a third-party.
• DIRTY PRICE
  See all-in price.
• DISTRIBUTIONS
  Entitlements arising on securities, such as dividends, interest and non-cash distributions such as bonus shares.
• DOUBLE-DIPPING
  The illegal practice of simultaneously pledging or allocating the same collateral to more than one counterpart.

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• EQUITY REPO
  Any repurchase agreement in which equities rather than bonds are given as collateral against cash.
• EQUITY SWAP
  An equity swap is the exchange of an equity return for an interest-rate return. For equity financing, the cash lender actually buys the equity from the cash borrower and then transacts the swap. During the term of the swap, the cash lender receives interest and pays the equity return to the borrower. At the end of the swap, which is typically transacted under a 1992 International Swaps and Derivatives Association master agreement, the cash lender sells the equity.
• EQUIVALENT SECURITIES
  When the securities returned must be of identical issue and nominal value to those repoed, but not necessarily the identically numbered securities.
• ERISA
  The 1974 Employee Retirement Income Security Act. A law governing US pension plan activity which was amended in 1981 to allow US pension funds to lend securities in accordance with specific guidelines. FAIL A failure by a counterpart to deliver cash or collateral for settlement.

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• FILL OR KILL
  See holding stock.
• FIRM FINANCING
  The financing of long securities positions within a firm by repoing the securities out.
• FIXED-TERM TRANSACTIONS
  Transactions where the expiry date has been agreed. Neither party to the transaction can break the terms until the expiry date.
• FLEX REPO
  A classic repo with a definite maturity and a fixed repo rate, but which allows the supplier of cash to draw down the cash outstanding under the repo on an agreed schedule. See structured repo.
• FREE OF PAYMENT (FOP)
  A settlement method whereby securities are delivered without any corresponding payment of funds.

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• GENERAL COLLATERAL (GC)
  General collateral is any security that is not special in the repo market and which is used to collateralise cash borrowings when specific collateral has not been requested. The lender of cash against general collateral is usually indifferent to the specific security received as collateral.
• GENERAL COLLATERAL RATE
  The interest rate charged for money lent on repo against general collateral.
• GENSAKI
  Japanese repo. Bonds are sold for a fixed period with an agreement to repurchase the bond at the end at an agreed price. But Gensaki is subject to transfer tax and it is a general collateral market: the borrower cannot specify an individual bond. So Gensaki can be used to finance long positions but not to cover shorts.
• GILT-EDGED SECURITIES LENDING AGREEMENT (GESLA)
  The standard legal agreement for lending UK government bonds (gilts). The agreement uses English law, is approved by the UK’s Inland Revenue and was introduced in April 1996.
• GLOBAL MASTER REPURCHASE AGREEMENT (GMRA)
  The PSA/ISMA Global Master Repurchase Agreement is the standard repo agreement used by non-US Treasury repo practitioners. It is based on the PSA’s Master Repo Agreement, but under English law, and was first introduced in November 1992. A new version was introduced in November 1995. Annexes are available for repos of UK gilt-edged securities, Belgian securities and buy/sell back and agency transactions. The GMRA is endorsed by the PSA and ISMA and is often known as the PSA/ISMA agreement.
• GROSS-PAYING SECURITY
  Securities on which interest or other distributions are paid without any taxes being withheld at source.

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• HAIRCUT
  A percentage subtracted from the market value of a security being posted as collateral. While the size of the initial margin (q.v.) is proportional to the potential future changes in the value of an exposure, the size of a haircut is best determined from the potential change in the value of the collateral. Therefore the haircut protects a lender of funds or securities from losses resulting from a decline in collateral value, rather than in the value of the exposure.
• HEDGE FUND
  An investment fund that engages in trading, investing and/or hedging strategies which generally involve derivatives, leverage and/or short selling.
• HOLD-IN-CUSTODY REPO
  The cash borrower holds the repo collateral in a segregated account, which reduces the transaction costs because the collateral does not have to be moved. As opposed to deliverout repo the party borrowing cash does not deliver collateral security to the counterpart but rather segregates it in a separate internal account for the benefit of the cash lender. Also known as safekeeping repo, letter repo or due bill repo.
• HOLDING STOCK
  Holding stock, also known as icing, is the practice of lenders reserving securities at a borrower’s request in anticipation of the borrower taking delivery of the stock. The securities are still available for loan to another borrower, but only after first refusal to the holder of the stock, known as “filling or killing”. Holds generally apply for 24 hours.
• HOT/HARD STOCK
  A security for which demand to borrow is high relative to its availability in the market and which hence becomes expensive to borrow.

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• ICING
  See holding stock.
• IMPLIED REPO RATE
  The rate of return for the supplier of cash in a buy/sell back. The rate is not quoted separately but is incorporated into the buy/back price. The implied repo rate is also the rate of return of a trader in a cash and carry trade.
• INDEXED REPO RATE
  A classic repo where the repo rate is periodically reset according to a money market index rate such as Libor or Fed funds.
• INITIAL MARGIN
  Initial margin is the excess of cash over securities or securities over cash in a repo or securities lending transaction. One party may require an initial margin because of the perceived credit risk of the counterpart. No initial margin is typically expected in fixed income transactions, but where it does occur it normally ranges from 1% to 5%. Initial margin is normally posted in securities lending transactions; US domestic loans are typically collateralized at 102% of their market value, while international loans are typically collateralized at 105% or greater, depending on the market standard. The purpose of initial margin is usually to protect the supplier of cash with protection against a fall in the market value of the collateral during the course of the trade. The size of the margin often varies according to the volatility of the collateral and the credit standing of the counterparts.
• INTERNATIONAL SECURITIES LENDERS ASSOCIATION (ISLA)
  The UK-based securities lending trade association. Changed its name from International Stock Lenders Association in May 1996.
• INTERNATIONAL SECURITIES MARKET ASSOCIATION (ISMA)
  The International Securities Market Association is an organization of international bond dealers which sets standards of business conduct in the fixed-income securities market.
• MANUFACTURED DIVIDENDS
  When securities that have been lent pay a dividend, the borrower of the securities is required to pass the dividend on to the lender of the securities. This payment is known as a manufactured dividend (as opposed to the normal dividend paid by the issuer of the securities) and will be of an amount equal to the gross coupon. Manufactured dividends cause tax problems in some markets.

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• MARGIN CALL
  A request by one counterpart for the initial margin to be reinstated or to restore the original cash/securities ratio to parity. See variation margin.
• MARK TO MARKET
  The act of revaluing the securities borrowed/loaned and collateral posted in a repo or securities lending transaction to current market values. This is either done daily or at a suitable interval agreed upon by the parties to the transaction.
• MARKET VALUE
  The value of an asset at its current market price, usually determined using the latest available sale price on the principal exchange where the instrument is traded, or if not so traded using the most recent bid and offered prices.
• MASTER REPURCHASE AGREEMENT
  The standard legal agreement for repos in the US, under New York law.
• MATCHED/MISMATCHED BOOK
  Refers to the interest rate arbitrage book that a repo trader may run. By matching/mismatching maturities, rates, currencies or margins, the repo trader creates a profit (or loss).

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• SECURITIES LENDING
  A contract which commits two counterparts to exchange agreed securities against collateral and to subsequently reverse the exchange at an agreed future date or on demand. The counterpart borrowing the securities pays a fee to the other counterpart.
• SELL/BUY BACK
  A buy/sell back from the point of view of the counterpart which takes cash and supplies collateral. See buy/sell back.
• SET OFF
  The legal right to net opposite obligations (to deliver securities or pay cash) between two counterparts in the event of default by one of them.
• SPECIALS
  Securities that are highly sought after in the market by borrowers. Because the borrower wants a specific security, the lender of cash (the security borrower) will usually accept a lower rate of interest on the money lent against a special. The interest rate charged for money lent against specials is often quoted as a spread below the general collateral rate. Issues become special in the repo market for a variety of reasons associated with supply and demand. A typical reason for a bond to go special is that it is the cheapest issue to deliver into a futures contract. Please also refer to hot/hard stock.
• SPOT
  Standard settlement, two business days forward.
• SPREAD TRADE
  Using lower yield securities as collateral in a repo and then reinvesting the cash received to buy higher yield securities, which achieves a higher yield while minimizing the extra risk.
• STRAIGHT-THROUGH PROCESSING (STP)
  A generic term for the handling of trade instructions from the notice of trade execution on the trading floor all the way to the final confirmation preceding settlement. With STP, instructions are keyed in once and for all and then go through a seamless process. STP mitigates operational risk, especially for crossborder settlement of financial transactions.
• STRUCTURED REPO
  A transaction which enables a cash lender to give its counterpart cash to a pre-arranged schedule. It allows the lender to lock in a term rate while retaining liquidity.
• SUBSTITUTION
  The ability of a lender of securities to recall them from a borrower and replace them with other securities of the same type and value.

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• TAISHAKU
  Japan’s bond borrowing market. The borrower of securities does not buy them, but rather pays a fee. The loan can be secured against cash collateral. Taishaku avoids transfer tax.
• TERM REPO
  A repo with a maturity of more than one day after its value date.
• TERM TRANSACTION
  Trades with a fixed end or maturity date.
• THIRD-PARTY LENDING
  The practice of lending by an institution directly to the borrower with retention of autonomy of the lending decision, where all loan administration, such as settlement and collateral monitoring, is handled by a third-party, such as a global custodian bank.
• THIRD-PARTY AGENCY LENDING
  Where the agent lends securities on behalf of a beneficial owner, and the agent has autonomy over the transaction. The agent also takes responsibility for the marking to market of collateral (cash or non-cash), margin calls and investing of cash collateral. Revenues are then shared between client and agent.
• TRIPARTY REPO
  In a triparty repo, cash and securities are delivered by the counterparts to an independent custodian bank or clearing house, the triparty custodian. The triparty custodian is responsible for ensuring the maintenance of adequate collateral value at the outset of a trade and over its term. The triparty custodian marks the collateral to market daily and makes margin calls on either counterpart as required. Triparty repo reduces the operations/systemic barriers to participating in the repo market. Proponents of triparty repo argue that it is easy to operate, simplifies the problems of reporting and settlement, allows the consolidation of assets in one place and simplifies collateral substitutions. But triparty custodians charge for the services, which can affect the economics of a deal.

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• VARIATION MARGIN
  Once a repo or securities lending transaction has settled, the variation margin refers to the band within which the value of the securities borrowed / loaned (relative to the value of the collateral posted) may fluctuate before triggering a margin call for an increase or reduction in collateral. Variation margin may be expressed in either percentage or absolute currency terms. The PSA/ISMA Global Master Repurchase Agreement states that all legitimate requests for variation margin must be honoured.

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• ZERO-COST OPTIONS
  A way of financing equity that is economically similar to an equity repo. The cash lender transacts a synthetic short by selling a call to and buying a put from the cash borrower (which thereby transacts a synthetic long). The cash lender then buys securities from the borrower to hedge and the cash borrower pays interest. Zero-cost options are usually transacted under a 1992 International Swaps and Derivatives Association master agreement.