A
Abandonment
The process by which a counterparty will allow an option to expire or lapse unexercised.
Accreting swap
A swap with an increasing principal amount as set out in a predefined schedule.
Affirmation
The process by which two counterparties agree the primary economics of a trade. The affirmation process may be done by telephone, voice recording, e-mail or on an electronic checkout platform.
AffirmXpress™
An electronic messaging hub for front office trader verification and affirmation of inter-dealer brokered transactions.
All in cost
The cost of funds in a bond issue after fees and expenses.
Allocation
The process by which a block trade is executed by an asset manager or hedge fund and is then divided (allocated) to individual funds.
American option
An option which may be exercised into the underlying instrument on any day in the option period prior to the expiry date.
Amortising swap
A swap with a decreasing principal amount as set out in a predefined schedule.
Arbitrageur
A trader who takes advantage of profitable opportunities in different markets arising from price anomalies.
Asian option
See Average rate option.
Asset Backed Index (ABX)
An OTC credit derivative index based on 20 underlying ABS bonds. There are five separate tradable tranches in each series and the new series is issued every six months.
Asset Backed Security (ABS)
A type of bond or note issued by a Special Purpose Vehicle (SPV) where the bond or note is backed by an underlying pool of assets. The principal and interest generated by the underlying pool of assets services the principal and interest obligations of the bonds or notes.
Asset Swap
A swap similar in structure to a plain vanilla swap. The key difference between an asset swap and a vanilla swap is the complexity of the underlying of the swap contract. An example of an asset swap is a fixed investment such as a bond, with guaranteed coupon payments which are swapped for a floating investment such as an index.
Assignment
The process by which a client agrees to transfer its future obligations to a third party.
Attachment point
A defined point at which the level of losses in the underlying portfolio reduces the notional of a tranche. For example, the notional in a tranche with an attachment point of 3% will reduce after 3% of losses in the portfolio have occurred.
At the money
An option where the exercise price is equal, or very close to, the current market price of the underlying instrument. This option has no intrinsic value.
Average rate option
An option where the settlement is based on the difference between the strike and the average price of the underlying instrument over a predetermined period. An average rate option is also known as an Asian option.
B
Backload
The process of inputting trades into the DTCC trade information warehouse. The process includes agreeing the full economics and legal documents between two counterparties before the trade is placed in the warehouse to create the Golden record. Backloading only relates to trades which were executed before 16 November 2006.
Bad business day
A day on which it is not possible to make payments, or days on which banks are not open for business. Bad business days depend upon the currency of the particular transaction and the location of the counterparties to the transaction.
Backload Effective Date (BED)
The date agreed between two parties, at which point the counterparties “snapshot” a portfolio of trades and send them to the DTCC Trade Information Warehouse for revalidation in the backload environment.
Barrier option
An option which can be exercised providing the price of the underlying instrument has not reached or crossed a predetermined level.
Basis (Gross)
The difference between the relevant cash instrument price and the futures price. Often used in the context of hedging the cash instrument.
Basis (Value or Net)
The difference between the gross basis and the carry. Basis point One basis point is one hundredth of one percent i.e. 0.01%.
Basis risk
The risk of loss arising from the difference between the economic or legal terms of two derivatives that are hedging each other.
Basis swap
An interest rate swap where the interest payments that are exchanged between each party are different types of floating rates.
Basket option
An option on the weighted average of several underlying instruments.
Bermudan option
An option which may be exercised into the underlying instrument on a number of specific dates in the option period.
Bid price
The price at which a trader or market maker is willing to purchase a contract.
Block trade
A single trade transacted by an asset manager or hedge fund which is then allocated to a number of different portfolios.
Bond
A certificate of debt, generally long-term, under the terms of which an issuer contracts to pay the holder a fixed principal amount on a stated future date and, usually, a series of interest payments during its life.
Bond basis
An interest calculation using 30 days in each month and 360 days in each year. Many Eurobonds use this as the basis on which interest is calculated. A bond basis could also involve a day count which counts the actual number of days elapsed (actual/actual). This is the method used by the US Treasury for interest calculations involving US Treasury Notes and US Treasury Bonds.
Bronze records
The DTCC eligible trades which have been matched but cannot be legally confirmed in Deriv/SERV.
Business day convention
The convention to adjust for bad business days.
C
Call option
An option which gives the buyer (holder) the right but not the obligation to buy a specified asset on or before a specified date. The seller (writer) of the option has the obligation to deliver the underlying asset, at the strike price, if the buyer exercises the option.
Carry (Net financing cost)
The difference between the cost of financing the purchase of an asset and the cash yield of the asset. Positive carry means that the yield earned is greater than the financing cost; negative carry means that the financing cost exceeds the yield earned.
Carry trade
A trade or strategy where the aim is to generate ongoing positive cashflow.
Cash CDO
A structure which typically has funded physical portfolios of bonds or loans.
Cash market
The market where the physical (non derivative) asset trades. For example, bonds or equities. Cash settlement The payment or receipt of an obligation by the delivery of cash.
CDO^2
A CDO structure where the underlying portfolio includes one or more CDOs.
Central settlement (credit derivatives)
A process by which DTCC will settle coupons and fees on credit derivative trades using Continuous Linked Settlement (CLS Bank).
Cheapest to deliver
The security which is delivered between two counterparties on physical settlement of a derivative trade at the lowest cost to the deliverer.
Clean price
The price of a bond net of accrued interest.
Close out
A transaction that leaves a zero net position in the market.
Closing trade
A bought or sold trade which is used partly to offset an open position, to reduce it or fully offset it and close it.
Collateral
An acceptable asset posted to/by a counterparty used to cover a margin requirement.
Collateralised Debt Obligation (CDO)
A structure used to distribute risk through tranching a portfolio of credit, and issuing notes or swaps of different risk profiles to investors. The risk of the tranche is determined by an attachment point and a detachment point. Riskier tranches will earn a higher investor premium, to reflect the higher risk. The CDO portfolio can be static or managed, depending on the specific terms of the transaction. CDO notes will typically be issued to the investor by a SPV.
Collateralised Loan Obligation (CLO)
A special purpose vehicle (SPV) with securitisation payments in the form of different tranches. Financial institutions back the security with receivables from loans.
Commercial Mortgage Backed Index (CMBX)
An OTC credit derivative index based on 25 underlying CMBS bonds. There are five separate tradable tranches in each series and a new series is issued every six months. The index is based on the PAUG product.
Commercial Mortgage Backed Security (CMBS)
A type of bond or note issued by a Special Purpose Vehicle (SPV) where the bond or note is backed by an underlying pool of commercial mortgage backed securities. The principal and interest generated by the underlying pool of assets effectively services the principal and interest obligations of the bonds or notes.
Commodity futures
A bilateral contract to pay for a commodity at a set price at an agreed time in the future. The main categories are agriculturals, softs, metals and energies.
Confirmation
A legal agreement between two counterparties setting out the terms of an individual OTC transaction.
Constant maturity swap
A derivative contract that allows the purchaser of the contract to fix the duration of received flows on a swap. The floating leg fixes against a point on the swap curve on a periodic basis.
Continuous Linked Settlement (CLS)
A service offered by CLS Bank International that eliminates settlement risk through the world’s first simultaneous global multi-currency settlement system.
Contract For Difference (CFD)
A cash settled total return swap or forward where the parties agree to exchange on the maturity of the contract the difference between the opening price and closing price of the underlying.
Convergence
The movement of the cash asset price toward the futures price as the expiration date of the futures contract approaches.
Convexity
The curvature in the bond price and yield relationship.
Correlation
A statistical measure of the relationship between the prices of two financial instruments.
Coupon
The nominal annual rate of interest expressed as a percentage of the principal value. The interest is paid to the holder of a fixed income security by the borrower. The coupon is generally paid annually, semi-annually or, in some cases, quarterly depending on the type of derivative.
Coupon swap
An interest rate swap, often from a fixed rate to a floating rate, or from a floating rate to a fixed rate.
Covered option
A written option which is matched by an opposing cash or stock position in the underlying asset, or by an opposing option position of specific characteristics.
Credit Default Swap (CDS)
An OTC contract designed to transfer the credit exposure of fixed income products between parties. The buyer of a credit swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the product. In a CDS the risk of default is transferred from the holder of the fixed income security to the seller of the swap. Most credit derivatives take the form of credit default swaps.
Credit default swap on asset backed securities
A physically settled credit default swap on an ABS or a PAUG swap.
Credit Index (CDX)
A family of credit derivative indices, where the underlying reference entities are a defined basket of North American credits. See iTraxx indices.
Cross currency interest rate swap
An interest rate swap where the interest payments are in two different currencies and the exchange rate, for the final settlement, is agreed at the outset of the transaction.
Currency future
A contract calling for delivery of a specific amount of a foreign currency at a specified future date in return for a given amount of specified currency.
Currency swap
A foreign exchange agreement between two parties to exchange a given amount of one currency for another for a specified period of time.
D
Default
The failure of a counterparty to perform on a derivative contract.
Definitions
The governing terms by which a derivative transaction is referred to. ISDA® issue and service these definitions.
Delivery
The physical movement from seller to buyer of the underlying asset on which the derivative is based.
Delta
The ratio comparing the change in the price of the underlying asset to the corresponding change in the price of a derivative. This ratio is sometimes referred to as the hedge ratio. Delta is usually expressed as the change in the derivative value for one basis point move in the underlying instrument’s price.
Depository Trust and Clearing Corporation (DTCC)
A corporation providing clearing, settlement and information services for equities, corporate and municipal bonds, government and mortgage-backed securities, money market instruments and OTC derivatives.
Derivative
A financial instrument that derives its value from the price or rate of some other underlying physical asset such as bonds, loans, equities, indexes, published rates or combinations of these assets.
Deriv/SERV
An industry electronic matching service for OTC derivatives provided by DTCC. Deriv/SERV provides posttrade processing.
Detachment point
The detachment point defines the point after the attachment point where losses in the underlying portfolio no longer reduce the notional of a tranche. For example, the notional in a tranche with an attachment point of 3% and a detachment point of 6% will reduce after there has been 3% of losses in the portfolio. The reduction in notional no longer occurs after 6%.
Dirty price
The price of a bond inclusive of accrued interest.
Discount
The condition of the price of a bond that is lower than par. The discount equals the difference between the price paid for a security and the security’s par value. If a bond with a par value of $1,000 is currently selling for $990 dollars, it is selling at a discount.
DTCC Transaction Reference Indicator (TRI)
The unique, DTCC assigned reference number for a confirmed trade in the trade information warehouse. This is common to both counterparties.
Duration
A measure of the relative volatility of a bond. Duration is an approximation for the price change of a bond for a given change in the interest rate. Duration is measured in units of time. It includes the effects of time until maturity, cash flows and the yield to maturity.
E
Eligible trade (DTCC)
An OTC derivative trade which can be executed under a master confirmation agreement, the ISDA® matrix or Standard Terms Supplement.
Equity default swap
A swap similar to a credit derivative contract, the equity default swap provides protection against the collapse in the company’s share price rather than protecting against the risk of debt default.
Equity index swap
An obligation between two parties to exchange cash flows based on the percentage change in one or more stock indices for a specific period with previously agreed re-set dates. The swap is cash settled and based on notional principal amounts.
Equity/stock options
Contracts based on individual equities or shares. On exercise of the option the specified amount of shares are exchanged between the buyer and the seller.
Equity swap
A derivative contract where payments are linked to the change in value of an underlying equity, basket or index. The equity return payer pays to the seller any increase in the value of the underlying plus any dividends received. The equity return seller pays any decrease in the value of the underlying plus funding cost.
Equity/first loss tranche
The first loss and riskiest tranche in a CDO where there is no subordination. For example, a tranche with a 0% – 4% attachment/detachment point.
European option
An option which may only be exercised into the underlying instrument on the expiry date.
Execution only (give-up agreement)
A tri-partite agreement that is signed by the executing broker, the clearing broker and the client. This agreement sets out the terms by which the clearing broker will accept business on behalf of the client.
Exercise
The process by which the holder of an option may take up the right to buy or sell the underlying asset.
Exercise day
A day on which the buyer (holder) of an option may exercise the right to buy or sell the underlying asset.
Exercise price
The fixed price, per share or unit, at which an option holder has the right to buy (call) or sell (put) the underlying asset.
Exotic option
A nonstandard option.
Expiry date
The last date on which an option holder can exercise their right. After this date the option can no longer be exercised and the option is deemed to lapse or is abandoned.
F
Financial future
A futures contract based on a financial instrument such as a currency, interest rate, debt instrument or financial index.
First to default basket
A credit derivative transaction where the payoff is based on the first asset to default in a basket of underlying reference entities. Once a default occurs the transaction terminates.
Fixed income
The interest calculated as a constant specified percentage of the principal amount, paid at the end of specified periods on a security. The periods are usually annual or semi-annual.
Fixed rate
An interest rate which does not vary during the life of a transaction or a financial instrument.
Floating rate
An interest rate which is reset at predetermined intervals.
Floating Rate Note (FRN)
A bond which pays a floating rate of interest.
Forward
An OTC contract involving the sale by one party and the purchase by another party of a predefined amount of an underlying instrument at a predefined price at a predefined date in the future.
Forward Rate Agreement (FRA)
An agreement where the client can fix the rate of interest that will be applied to a notional loan or deposit, drawn or placed on an agreed date in the future, for a specified term.
Full termination
The process whereby the entire transaction is terminated as opposed to partial termination.
Futures
An exchange traded agreement to take or make delivery of an asset (buy or sell) at a specific time in the future for a specific price agreed today.
G
Gamma
A term in option theory measuring the rate of change of delta. Gamma is used as a measure of how quickly the outright position to the underlying can change. In correlation transactions, gamma can be classified as single name gamma or cross gamma: single name gamma is an exposure to a single name in the basket moving; cross gamma is an exposure to all names in the basket moving simultaneously.
Gearing
The characteristic of derivatives which enables a far greater reward for the same, or much smaller, initial outlay. It is the ratio of exposure to investment outlay; for example an investment of $1 gives an exposure equivalent to a $10 investment and hence a gearing of 10.
Global clearing
The channeling of the settlement of all futures and options trades through a single clearing counterparty or through a number of clearing counterparties geographically located.
Gold Record
The representation of an OTC derivative contract with full legal status between two parties within the DTCC Trade Information Warehouse.
Gross
A derivative or asset position expressed without netting bought and sold trades.
H
Hedging
A trading strategy which is designed to reduce or mitigate risk. A second transaction is made to offset the risk of the first.
I
Independent clearing organisation
An independent clearing organisation which is capitalised without recourse to the members of the exchange. The organisation will guarantee to each member the performance of the contracts by the contract registered in the organisation’s name, thus removing counterparty risk against the other clearing members.
Initial margin
The deposit which the clearing house calls as protection against the default of a counterparty. It is returnable to the clearing member once the position is closed. The deposit is subject to change in line with market volatility.
Interest rate cap
An option product where the holder (buyer) is guaranteed a maximum borrowing cost over a specified term.
Interest rate collar
An option product where the holder (buyer) is guaranteed a maximum and minimum borrowing cost over a specified term.
Interest rate floor
An option product where the holder (buyer) is guaranteed a minimum yield on a deposit over a specified term.
Interest rate futures
Futures contracts for securities and deposits whose prices are determined by interest rates.
Interest rate swap
An agreement to exchange interest related payments in the same currency from fixed rate into floating rate (or vice versa) or from one type of floating rate to another.
Interest shortfall
The payment from the seller to buyer compensating for any reduced coupon payment on the underlying bond on a PAUG swap. If the reduced coupon is subsequently made up in future coupon payments this will result in an interest shortfall reimbursement from buyer to seller.
In the money
A position which has intrinsic value, for example a portfolio acquired at a rate which is more advantageous than current market rates.
Intrinsic value
The amount that would be realised if the option were immediately exercised.
ISDA®
International Swaps and Derivatives Association, previously known as the International Swap Dealers Association.
Issue price
The percentage of principal value at which the price of a new issue of securities is fixed.
Issuer
The borrower in a bond issue. For example a government, government agency, a bank or a large corporate.
iTraxx indices
A family of credit derivative indices, where the underlying reference entities are a defined basket of European credits. The benchmark indices include iTraxx Europe, comprising the top 125 names in terms of CDS volume traded in the previous 6 months; iTraxx Europe HiVol, comprising the top 30 highest spread names from iTraxx Europe; iTraxx Europe Crossover, where the 45 reference entities are sub-investment grade. The indices are highly liquid and traded using ISDA® standard documentation, to standard maturities. They are used by both buy side and sell side institutions for creating credit exposure as well as hedging. The underlying reference entities are reassessed every 6 months, following dealer liquidity polls.
L
Ladder option
An option that locks into gains once the underlying asset reaches certain price levels.
Leverage
The magnification of gains and losses by only paying for part of the underlying value of the instrument or asset.
Leveraged Loan CDS
A credit default swap on a leveraged loan which uses the general CDS template for loan specific issues.
LIBOR
The London Inter-Bank Offered Rate is the rate used when one bank borrows from another bank. It is the benchmark used to price many capital market and derivative transactions.
Lock in
The process by which two counterparties meet to rectify outstanding confirmation issues.
Long
An open bought position in a security or derivative.
Lookback option
An option where the holder has the right to buy/sell the underlying instrument at its lowest/highest price over a specified preceding period.
M
Margin
The sum of money which must be deposited, and maintained, in order to provide protection to both parties of a trade.
Mark to market
The process of revaluing an OTC or exchange traded product each day. Mark to market gains or losses are the difference between the closing price on the previous day against the current market price. For exchange traded products this is referred to as variation margin.
Market counterparty
An entity dealing as an agent or principal with a broker and involved in the same nature of investment business as the broker.
Market maker
A dealer who is prepared to make a market by quoting simultaneous bid and offer prices.
Markit Trade Processing
A web-based suite of solutions for automating processing of OTC derivative transactions covering all asset classes for OTC derivatives. Clients affirm and confirm OTC derivatives trades in an electronic environment with all economic disputes uncovered and resolved on T+1.
Master agreement
An agreement for OTC transactions which is signed between the client and the dealer. The agreement covers the basic terms under which the client and dealer wish to transact business. Each individual trade has a separate individual agreement with specific terms known as a confirmation.
Master confirmation agreement
A legal and binding agreement between two or more counterparties where the terms and conditions of a specific fund or counterparty are held.
Maturity
The date on which the principal or nominal value of a derivative contract becomes due and payable in full to the holder.
Mezzanine tranche
A tranche in the capital structure that is subordinated to the super senior tranche, but is senior to the equity tranche. For example, a tranche with a 4%-8% attachment/detachment point.
N
Nostro/settlement break
A mismatch of cashflows between the paying and receiving banks, which occurs when the expected amount of cash settlement differs from the actual amount.
Note
A debt security with a maturity usually between one and ten years.
Notice day
The day on which a holder of an option must serve notice to exercise.
Notional amount
The amount used to calculate interest payments on a derivative contract.
Novation
The substitution of a new debt or obligation for an older one in order to extend the life of the contract.
O
Offer/ask price
The price at which a trader or market maker is willing to sell a contract.
Option
The right, but not the obligation, to buy (call) or sell (put) a financial instrument at an agreed upon price during a certain period of time (American) or on a specific date (European).
Out of the money
A position which has no intrinsic value, for example one acquired at a rate which is less advantageous than current market rates.
Over The Counter (OTC)
A one-to-one agreement between two counterparties where the specifications of the product are completely flexible.
P
Partial termination
A reduction in the notional amount of a derivative contract.
Pay As You Go Swap (PAUG)
A credit default swap transaction on an underlying ABS or RMBS transaction. The seller compensates the buyer over the life of the transaction for any cash flow deficiencies i.e. interest shortfalls, principal shortfalls or writedowns. PAUG is cash flow driven as opposed to being single event driven as in corporate CDS. This is because the nature of the underlying ABS where there is no concept of a single default but rather cash flow deficiency. Calculations and determinations are made based on the Servicer report.
PayRec
The DTCC provided payment matching and netting service, facilitating settlement of OTC derivatives payments.
Pool Factors
The current principal balance of a particular asset backed bond outstanding divided by the original issued balance of such bonds expressed as a percentage.
Post Trade Events (PTE)
Events which occur after a trade is confirmed in DTCC.
Pre-Backload
The ‘ETL’ (Extract, Transform and Load) process undertaken by firms to clean-up and reconcile a portfolio of OTC derivative trades and data prior to submission for backloading to the Trade Information Warehouse.
Premium
The sum of money paid by the buyer, for acquiring the right of the option. It is the sum of money received by the seller for incurring the obligation, having sold the rights, of the option. It is the sum of the intrinsic value and the time value.
Principal shortfall
A payment from the seller to the buyer compensating for any reduced principal payment on the underlying bond in a PAUG swap. If the reduced principal is subsequently made up in the future the principal payment will result in a principal shortfall reimbursement from buyer to seller.
Property derivatives
A derivative where the underlying is commercial property. For UK commercial property transactions the derivative is based on data from the Investment Property Databank (IPD). Property derivatives are mostly in the form of swaps where one party pays the return on the index if positive versus the other party paying LIBOR.
Protection buyer
The counterparty that wishes to reduce exposure to credit risk and pays another counterparty to do so using a credit derivative.
Protection seller
The counterparty that is willing to take on additional credit risk in return for appropriate compensation using a credit derivative.
Put option
An option that gives the buyer the right, but not the obligation, to sell a specified quantity of the underlying asset at a fixed price, on or before a specified date. The seller (writer) of a put option has the obligation (because they have sold the right) to take delivery of the underlying asset if the option is exercised by the buyer.
Q
Quanto swap/differential swap
An interest rate swap where one of the floating rates is a foreign interest rate, but it is applied to a notional amount in the domestic currency.
R
Recovery rate swap
A credit derivative where the payoff is based on the difference between a preset fixed recovery rate and the recovery rate which is observed at the time of the credit event.
Reference entity
The underlying company which issues the debt obligation or obligations in the context of a credit derivative.
Reference obligation
A bond, loan or other obligation, issued by the reference entity, which is eligible to trigger a payout in a credit derivative. The reference obligation serves as a marker of the type of obligation that trigger a credit event.
Repurchase agreement (Repo)
The purchase of securities with the commitment to repurchase the securities at the same price at an agreed future date and rate.
Residential Mortgage Backed Security (RMBS)
A type of security which has cashflows from a pool of residential debt such as mortgages, home equity loans and subprime mortgages.
S
Servicer report
A report provided by the trustee or administrator on a specific ABS to the holders of those ABS to provide details of interest shortfalls, principal shortfalls and writedowns.
Settlement
The process whereby securities are delivered, usually against payment, to fulfill contractual obligations such as those arising under securities trades.
Spot price/rate
The price of a commodity, security or currency that is quoted for immediate payment and delivery.
Spread
The difference between the bid and the offer rate. Also describes a trade in more than one delivery month or more than one product.
Stepping in
The process when a third party not in the original contract, replaces one of the original parties under the identical terms of the trade.
Stepping out
The process where one of the original parties leaves the trade, and instead of terminating, a third party steps in under the same terms of the trade for a smaller fee than an unwind fee.
Stock Index futures/options
A financial contract based on the value of an underlying stock index such as the FTSE 100 in the UK, the Dow Jones and the S & P 500 index in the USA and the Nikkei 225 and 300 in Japan. Delivery of the contract is fulfilled by the payment or receipt of cash against the exchange calculated delivery settlement price.
Strike price
The price at which a contract is executed.
Special Purpose Vehicle (SPV)
A limited company used, by banks, to securitise loans in order to help spread the credit and interest rate risk of their loan portfolios over a number of investors. SPVs also provide investors with recourse to a specific portfolio of assets.
Super senior tranche
The least risky tranche in a CDO capital structure. For example, a tranche with a 8 – 100% attachment/detachment point.
Swap
A derivative where two counterparties exchange streams of cashflows with each other. These streams are known as the legs of the swap and are calculated over a notional principal amount.
Swapswire
An electronic platform used for trade capture. Swapswire allows for trade date affirmations and reduces the need for paper confirmations.
Swaption
An option into a predetermined swap transaction. Options can be payers or receivers, American or European style.
Synthetic CDO
A structure which typically has a non-physical asset portfolio. This structure is often issued as single tranche deals. The risk profile of the tranche will be bespoke, in line with investor requirements.
T
Tear up
The process by which derivatives trades which have equal and opposite economics are destroyed.
Template
A standard reference source for a confirmation agreement for a financial contract between two counterparties.
Term sheet
The financial terms and conditions of a specific transaction which is indicative of the trade. The term sheet is not legally binding.
Theta
A term in option theory measuring the time decay of the option premium.
Tie out
The process where Bronze records are matched in the DTCC trade information warehouse. These matched trades are not legally binding and are known as Bronze records as opposed to Gold records which are legally binding.
Time value
The amount by which an option’s premium exceeds its intrinsic value. Where an option has no intrinsic value the premium consists entirely of time value.
Total rate of return swap
A swap where one party makes payments based on an increase in the value of the underlying and the other party makes a payment based on any decreases in the underlying. In addition the payer pays any dividends and coupons received on the underlying to the seller and the seller pays the buyer the funding cost. In effect the seller is synthetically long the underlying asset and the buyer short the underlying asset.
Trade Information Warehouse (TIW)
The centralised and secure global infrastructure for all OTC derivatives. The TIW is the comprehensive trade database containing the ‘legal record’ for all contracts eligible for electronic confirmation. It will also automate and standardise post trade processes such as payments, notional adjustments and credit event processing.
T-Zero
An electronic trade affirmation tool used to communicate and enrich credit default swap trade information between dealers and clients. T-Zero electronically transfers the actual trade record from the trade capture system of the dealer to the client who affirms or rejects the trade. Fund managers use T-Zero to allocate trades across multiple funds which enables accurate trade capture in the dealer’s system at the fund level. T-Zero supports novation processing in compliance with the ISDA® novation protocol and has functionality for real time trade submission to Deriv/SERV.
U
Underlying
An asset, basket of assets, index or another derivative on which the value and cash flows of a derivative depends.
V
Vanilla
A product which has a very basic structure.
Vega
The measure of volatility in option theory.
Volatility
The variability of movements in a security or underlying instrument’s price. It is a measure of the amount by which an asset’s price is expected to fluctuate over a given period of time. It is normally measured by the annual standard deviation of daily price changes.
W
Warrants
An option on an underlying asset which is in the form of transferable securities and can be listed on an exchange.
Writedown
A payment in a PAUG from seller to buyer which arises from a permanent diminution in the value of the underlying ABS, i.e. the underlying assets are insufficient to pay the liability to the ABS holder. The result of the payment is the principal amount outstanding of the ABS is written down to the value of the underlying assets. The PAUG documentation provides for implied writedown for those bonds that have no specific writedown clause.
Y
Yield to maturity
The amount of interest on an annual compound basis, which a bond would pay if held until redemption or the maturity date.