- Call Ladder
An option strategy comprised of a long call, a short call having a strike price higher than the long call as well as a short call having a higher strike price than the long call.
- Call option
A financial derivative that allows, but does not require, its owner to buy (?call?) an asset from the option seller at a certain price (the strike price) at a specific future date. The option is of value to its owner if the market price of the asset rises above the strike price.
- Call Premium
The amount that the purchaser of a call option pays to the seller (writer) to buy (purchase price) a call option. The difference between the call price of a bond and the par value of the bond.
- Call Spread
An option strategy designed to limit costs and losses (and lower returns) which involves purchasing a call option and selling another call option (at a higher strike price), with both options having the same expiry date.
- Call Spread vs. Put
An option strategy comprised of a long call, a short call having a higher strike price than the long call as well as a short put having a strike price usually, but not always the lowest.
- Callable Swap
An interest rate cap where the fixed rate payer has the right, but not the obligation to terminate the swap at one or more pre-determined times during the life of the swap. A Swap where the fixed rate receiver has the right to terminate is known as a putable swap. Both callable and putable swaps are also known as cancellable swaps. The foreign exchange version of the cancellable swap is known as a break forward or cancellable forward.
- Cancelable Forward
See Break Forward Contract.
- Cancelable Swap
A cancelable interest rate swap provides the right to cancel the swap at a given point in the future. An example would be a swap with a tenor of 5 years that can cancelled after year three. This can be broken into two components. The first is a vanilla five year swap paying floating and receiving fixed. The econd component is a payer swaption exercisable into a two year swap three years from today. The result is that when the original bond is called, the swaption is exercised and the cash flows for the original swap and that from the swaption offset one another. If the bond isn?t called, the swaption is left to expire.
One of the interim dates of caps each with an expiry date generally on the date which the forward rate is set in a multiple period cap agreement. A cap is not a continuous guarantee which means claims can only be made on specified dates selected by the purchaser.
- Capped Swap
An interest rate swap with a cap in which the floating payments of a swap are capped at a certain level. A floating-rate counterparty can thereby limit its exposure to rising interest rates above a certain level.
A Caption is simply the right but not the obligation to buy or sell an Interest Rate Cap at some defined point in the future for a defined premium.
- Cash Flow Hedge
A hedge that includes a derivative with a periodic settlement based upon cash flows such as interest rate changes on variable rate debt (FRNs) which are swapped for a fixed rate to offset the variability of the cash flow of a balance sheet item.
- Cash Tolerance
A tolerance defining the maximum amount of cash to be paid or received in a triReduce portfolio compression unwind proposal.
- CDS spread
Annualized amount that the buyer of a CDS (credit default swap, see below) must pay the seller over the length of the contract, expressed as a percentage of the notional amount.
- CDS-Bond Basis
Difference in the credit spread on a credit default swap (CDS) and the underlying reference bonds. See also Credit default swap and Basis.
Markit credit default swap (CDS) indices focused on North America. Investment Grade, High Yield, and Emerging Markets are the three major sub-indices.
- Central counterparty (CCP)
An entity that interposes itself between counterparties, becoming the buyer to sellers and the seller to buyers in what would otherwise be bilateral arrangements between sellers and buyers.
- Central Securities Depository (CSD)
An infrastructure service that allows the registration, safekeeping and settlement of securities in exchange for cash and efficient processing of securities transactions in financial markets.
- CFTC Interim Compliant Identifier (CICI)
An identifier for all legal entities dealing in over-the-counter derivatives falling under CFTC jurisdiction, where they do not have an existing Unique Counterparty Identifier (UCI) or unique Legal Entity Identifier (LEI).
- Cheapest to Deliver Bond
Given the list of deliverable securities into the futures contract, the cheapest to deliver bond has the lowest delivery-adjusted spot price (spot price divided by conversion factor).
- Chooser Flexible Cap
A modification of the flexible cap. While the number of cap "uses" is still limited, the buyer can choose when to use the cap rather than have it automatically exercised. A chooser flexible cap where the notional amount increases each time the cap is not exercised is known as a super flexible cap.
- Chooser Flexible Floor
A modification of the flexible floor. While the number of floor "uses" is still limited, the buyer can choose when to use the floor rather than have it automatically exercised. A chooser flexible floor where the notional amount increases each time the floor is not exercised is known as super flexible floor.
- Chooser Option
An option where the investor has the opportunity to choose whether the option is a put or call at a certain point in time during the life of the option. The underlying options are assumed to be European options on the same asset. At the expiry date of the chooser option, it is assumed that a rational holder of the chooser option will choose the more valuable of the put or call option. In doing so, the less valuable option, not chosen, will die.
- Classification of Financial Instruments (CFI)
A standard for identifying the type of instrument and their core high-level characteristics.
- Classification of Financial Instruments Code (CFIC)
A code used to define and describe in an internationally valid, standardised format, classification of financial instruments which could be used as a uniform set of codes by all market participants.
- Clean Price
The price of fixed-interest security not including any accrued interest.
The process of transmitting, reconciling and, in some cases, confirming payment orders or security transfer instructions prior to settlement, possibly including the netting of cash flows and the establishment of final positions for settlement. It can be bilateral or multilateral. Even more
- Clearing Brokers (CB)
Acts as a liaison between a counterparty and either a Clearing Member or a clearing corporation. A Clearing Broker can be a clearing member and face the exchange directly or it can face a clearing member who in turn faces the exchange.
- Clearing House (CCP)
A financial institution that provides clearing and settlement services for market participants to mitigate credit risk between individual market participants. Clearing houses are also known as Central Clearing Counterparty (CCP).
- Clearing member (CM)
A CM is a member of a clearing house. In a CCP context, a CM clears on its own behalf, for its customers, and on behalf of other market participants. Non-clearing members use CMs to access CCP services. All trades are settled through a CM.
- Clearing Member ID
The unique code that identifies an institution who provides clearing services for market participants. The clearing member will face the CCP on behalf of their counterparty.
- Clearing Obligation
An obligation under EMIR for all financial counterparties (FCs) and non-financial counterparties (NFC+) to clear their eligible trades via a clearing house.
- Clearing Threshold
The total exposure (in terms of total notional amount) a non-financial counterparty can reach before being obliged to clear its trades centrally. It is the dividing line between NFC- and NFC+. The threshold only covers speculative trades and varies per asset class.
- Client Classification
Clients can be classified under EMIR as either a financial counterparty, non-financial counterparty +, or non-financial counterparty - in order to determine the applicability of certain EMIR rules.
- Client Clearing
Firms who are not direct members of a clearing house must rely on having their trades cleared by an intermediary, who is a direct member of the Clearing House. Even more
- Client On-boarding
The processes and procedures that need to be performed before a client can trade or buy services from a financial institution. For example: KYC, legal agreements, provision of account information and Legal Entity Identifier.
- Client Reference Data
Static reference data associated with a client to allow the applications and functional processes to support client activity for example Legal Entity Identifier, BIC code, Location of Client Head Office.
- Cliquet Options
Options that provide a guaranteed minimum return in exchange for capping the maximum return over the life of the contract.
- Close Match
A close match is a mismatch on one or two fields of lesser importance in a triReduce portfolio compression operation.
- Close-out netting clause
A legal provision in master agreements, allowing for the nondefaulting party to offset receivables and payables when one party defaults. When default occurs, termination of the contract is triggered and a single net amount due between the counterparties becomes payable.
A type of spread option strategy where an investor purchases (or sells) a call option while at the same time sells (or purchases) a put option both of which are out of the money with the same expiry date. If the strikes are chosen so that the purchase price of the call option and the sale price of the put option exactly match, then this is called a costless collar.
- Collar Swap
A collar on a swap. The transaction is zero-cost ? the purchase of the cap is financed by the sale of the floor. The collar allows the floating-rate receiver to gain slightly if rates go down.
Property or other assets that a borrower offers a lender to secure a loan. If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup its losses. In trading, collateral is posted from one counterparty to another to offset the risk of losses associated with its position.
- Collateral Call
The issuing of a demand for margin / collateral is sent to a counterparty following the calculation of the collateral requirement.
- Collateral Dispute
The process by which a counterpart disputes a collateral call.
- Collateral in transit
Collateral that is due to be sent or returned but has not yet settled.
- Collateral Portfolio Management
Collateral is posted from one counterparty to another to offset the risk of losses associated with its position within the overall portfolio of positions.
- Collateral Support Document (CSD)
A legal agreement which sets forth the terms and conditions of collateralisation.
The pledge of collateral to act as a safeguard against default.
- Collateralized Debt Obligation (CDO)
A financial instrument that is linked to a diversified pool of credits or credit derivatives which are mostly backed by corporate bonds or other corporate debt. The credits can be assets, such as bonds or loans, or simply defaultable names, such as companies or countries. There are two categories of CDOs: Cash CDOs and Synthetic CDOs
- Committee of European Securities Regulators (CESR)
An independent committee of European Securities Regulators set up to improve the coordination among securities regulators through networking. The CESR provides advisory support to the European Commission in the field of securities to ensure more consistent implementation of community legislation.
- Committee on Payment and Settlement System (CPSS)
A committee made up of the central banks of G10 countries that monitors developments in payments, settlements and clearing systems.
- Commodity Forward
A forward contract which is very similar to a futures contract, except that the terms and conditions can be specified to meet the particular needs of the counterparty. These contracts are primarily on agricultural or precious metal commodities and can be used for hedging, arbitraging and speculating against the future price of the underlying asset.
- Commodity Forward Strip
A simultaneous purchase or sale of a series of commodity forwards. The fair value of a commodity strip is the sum of the fair values of each of the commodity forwards.
- Commodity Futures
A futures contract is an agreement between two counterparties that commits one party to sell a standardized quantity of a commodity at a given price on a specified future date. These contracts are primarily on agricultural or precious metal commodities and can be used for hedging, arbitraging and speculating against the future price of the underlying asset. These contracts are standardized and traded on an exchange, in contrast to a forward.
- Commodity Futures Trading Commission (CFTC)
The Commodity Futures Trading Commission (CFTC) is an independent US federal agency established by Congress in 1974, whose mandate is to regulate the commodity futures, options and derivatives markets in the US. The mandate of the agency has been most recently renewed by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Even more
- Commodity Option
A commodity call option gives the holder the right to buy a commodity at a specified price (the exercise or strike price) for a certain time. The seller of a call option assumes a corresponding obligation to sell the commodity if and when the call option holder decides to exercise his right to buy. A put option gives the holder the right to sell a commodity at a specified price for a certain time. The seller of a put option assumes a corresponding obligation to buy the commodity if the put option holder decides to exercise his right to sell.
- Commodity Option Strip
A simultaneous purchase or sale of a series of call or put options. The fair value of a commodity option strip is the sum of fair values of the individual options.
- Commodity Swap
An agreement whereby a floating price based on an underlying commodity is traded for a fixed price over a specified period. The floating leg is based on the price of underlying commodity, for example oil or sugar.
- Common Data
A set of 59 fields which is common to both parties to a trade including contract type and transaction details e.g. trade ID (UTI), notional amount, currency, maturity date, etc. To avoid inconsistencies, common data needs to be agreed between counterparties before submission to a trade repository for EMIR regulatory reporting purposes.
- Compensation Payment
The undiscounted interest differential for a Forward Rate Agreement (FRA).
- Compliance Risk
The risk of monetary or reputational loss due to failure to comply with key regulations governing the organisation?s operations and business dealings.
- Compound Option
An option on an underlying which is itself an option; therefore, there are two strike prices and two expiry dates (where the underlying option?s expiry date is equal to or greater than the compound option?s expiry date). The underlying option is assumed to be a European Style option on an asset which follows a lognormal random walk (such as a basic Black-Scholes call or put option).
- Compounding Frequency
The number of times per year that interest is credited to a deposit. Annual compounding is once per year, semi-annual is twice per year, quarterly is four times per year and monthly is 12 times per year.
- Compounding Swap
An interest rate swap which compounds interest over more than one fixing period.
TriOptima, through its triReduce service, offers market neutral compression of trades and gross notional. See also Multilateral Termination.
An options strategy comprised of a long call (or put) and another long call (or put) having different strike prices as well as two short calls (or puts) having their strike prices equally spaced between the two long options.
- Conduit Affiliate (CA)
Client can be classified under US legislation as Conduit Affiliates. This classification will determine the applicability of certain rules. Factors relevant to determine classification include: (i) the non-US person is a majority-affiliate of a US person; (ii) the non-US person is controlling, controlled by or under common control with the US person; (iii)the financial results of the non-US person are included in the consolidated financial statements of the US person (iv) the non-US person, in the regular course of business, engages in swaps with non-US third party(ies) for the purpose of hedging or mitigating risks faced by, or to take positions on behalf of its US affiliate(s), and enters into offsetting swaps or other arrangements with its US affiliate(s) in order to transfer the risks and benefits of such swaps with third-party(ies) to its US affiliates; (v) Conduit Affiliate does not include affiliates of Swap dealers.
A legal agreement to all terms of an individual over-the-counter transaction between two counterparties. A confirmation shall legally supersede any previous agreements. Confirmations can be produced electronically or manually in paper form.
- Confirmation Timestamp
The date and time of when the confirmation was fully legally executed.
- Constant Maturity Credit Default Swap
Credit default swap (CDS) contracts where the spread is reset periodically, for example every six months, based on changes in the market spread for a benchmark CDS tenor.
- Constant Maturity Derivatives
A derivative where the payoffs are based on interest rate swap rates or bond yields (multiple payments) but the payoffs are calculated as if the rates or yields were zero coupon rates. The term constant maturity swap (CMS) is used when the derivative is based on swap rates and the term constant maturity treasury (CMT) is used when the derivative is based on bond yields.
- Constant Maturity Swap
An interest rate swap where the interest rate on one leg is reset periodically but with reference to a market swap rate rather than LIBOR. The other leg of the swap is generally LIBOR but may be a fixed rate or potentially another constant maturity rate. Constant maturity swaps can either be single currency or cross currency swaps.
- Contingent Credit Swap
A hybrid credit derivative which, in addition to the occurrence of a credit event requires an additional trigger, typically the occurrence of a credit event with respect to another reference entity or a material movement in equity prices, commodity prices, or interest rates.
- Contingent Premium Cap
An interest rate cap where the buyer pays a small up front premium but may have to pay a further premium instalment if LIBOR fixes above a pre-determined "contingency level". The total premium is therefore contingent upon market events.
- Contingent Swap
Generic term for an interest rate swap that is activated when rates reach a certain level or a specific event occurs. Swaptions are often considered to be contingent swaps ? the specific event in this case being the exercise of the option. Other types of swaps, e.g., droplock or spreadlock swaps, are activated only if rates drop to a certain level or if a specified level over a benchmark is achieved.
- Continuation Data
Requirement under Dodd Frank to report life cycle event data (e.g., assignments, novations and full or partial terminations) to ensure that the trade repository record remains current and accurate.
- Continuous Linked Settlement (CLS)
CLS operates the largest multi-currency cash settlement system to mitigate settlement risk between members of the system. The system takes members gross cash flows and nets them with other members to reduce the size and number of cash flows between participants, thereby reducing settlement risk.
- Contract Rate
The percentage amount of the principal amount used to determine cashflow amounts.
The time of delivery at which the cash price and the futures price are finally equal because the cost of carry decreases over time.
- Convexity Adjustment
The amount that must be added to the forward rate yield to give the expected future rate (yield) in order to calculate the expected payoff.
From the Latin word, meaning ?to bond", a copula is a statistical measure that links many variables together and has been applied to option pricing and portfolio value-at-risk to help identify various risks to deal with skewed distributions in finance.
- Cost of Carry
The amount of money spent during the course of owning an investment such as interest expenses plus the amount of money that could have been made otherwise (opportunity costs) had the investment not been purchased.
The other party involved in the transaction or trade.
- Counterparty (CP)
Every transaction needs to have two parties to conclude a transaction. The two parties are known as counterparties to a trade.
- Counterparty Data
A set of 26 fields, specific to a counterparty including counterparty ID, name of counterparty, country of domicile, beneficiary information, clearing broker ID. Under EMIR, counterparty data must be reported to a trade repository independently by both counterparties.
- Counterparty risk
The risk faced by one party in a contract that the other, the counterparty, will fail to meet its obligations under the contract.
- Coupe Option
An option that settles periodically and resets the strike at the worst of (a) the then spot level, and (b) the original strike set in period one. It is a series of options, but where the total premium is determined in advance. The payout on each option can be paid at final maturity, or paid at the end of each reset period.
An amount due on a transaction as a result of an interest rate calculation.
- Coupon Payments
The periodic interest payments on a bond
- Coupon Rate
The percentage of the annual dollar amount of coupon payments to the bond?s par value
- Covered Call Option
An option strategy where the investor owns a stock and writes a call option on the same amount of the stock. If the holder exercises the option, the stock owner must deliver the stock. This strategy is used if the stock owner believes that the stock price may decline in which case the holder will not exercise and he or she keeps the premium. If the price of the stock goes up and the option is exercised, the risk is minimal as the writer already owns the stock.
- CP Unmatched
During linking in a triReduce portfolio compression cycle, this term is used for trades that are submitted by the counterparty, but not by the participant.
- Credit Default Index Swap Option
An option to buy or sell the underlying CDS index at a specified date.
- Credit Default Index Swap(CDIS)
A portfolio of single-entity credit default swaps where the premium notional is variable. The most popular CDISs are the so-called standardized CDISs. In these standardized contracts the reference entity pool is homogeneous, that is, all the reference entities have the same notional and the same recovery rate. Typical examples of standardized CDISs are the CDX index and the ITRAXX index
- Credit Default Swap Options
Also known as a credit default swaption, it is an option on a credit default swap (CDS). A CDS option gives its holder the right, but not the obligation, to buy (call) or sell (put) protection on a specified reference entity for a specified future time period for a certain spread. The option is knocked out if the reference entity defaults during the life of the option. This knock-out feature marks the fundamental difference between a CDS option and a vanilla option. Most commonly traded CDS options are European style options.
- Credit Default Swaps (CDS)
Credit derivatives whose payoffs are triggered by a credit event, such as bankruptcy, obligation acceleration, repudiation, restructuring and failure to pay. Even more
- Credit Derivative
A financial contract under which an agent buys or sells risk protection against the credit risk associated with a specific reference entity (or specified range of entities). For a periodic fee, the protection seller agrees to make a contingent payment to the buyer on the occurrence of a credit event (usually default in the case of a credit default swap). Even more
- Credit Event
An event linked to the deteriorating credit worthiness of a credit derivative underlying reference entity. The occurrence of a credit event usually triggers full or partial termination of the transaction and a payment from protector seller to protector buyer. Credit events include bankruptcy, failure to pay, restructuring, obligation acceleration, obligation default and repudiation/moratorium.
- Credit Event Notice
A credit derivative notice where the counterparty triggering the credit event (normally the protection buyer) informs the other counterparty that a credit event has occurred. The notice must contain a description in reasonable detail of the facts relevant to the determination that a credit event occurred.
- Credit Exposure
A credit exposure of a financial instrument to a counterparty is the amount lost when the counterparty defaults. There are two types of potential credit exposures, worst credit exposures and expected credit exposures. A worst credit exposure at a given time is the largest possible loss of the instrument at certain confidence level when the counterparty defaults. An expected exposure is the expected loss of the instrument at a given time.
- Credit Risk
The risk that one of the parties to a financial transaction will fail to fulfill its obligation to pay.
- Credit Spread Option
Options where the payoffs are dependent on changes to credit spreads, that is, an option whose payoff is based on the credit spread between the debt of a particular borrower and a Treasury security having similar maturity
- Credit Support Annex
The Credit Support Annex (CSA) is a standard form collateral agreement which enables parties to an ISDA Master Agreement to receive and provide collateral in order to reduce counterparty risk. In practical terms, the bilateral agreement establishes the day-to-day management of the risk, which involves computing the mark-to-market of the parties? exposure across all the ISDA Master Agreements OTC derivatives and allowing the in-the-money party to make calls for collateral from the out-of-the-money parties.
- Credit Support Annex (CSA)
A legal agreement between the two parties to an OTC derivative transaction which contains the agreed collateral terms under an ISDA Master Agreement.
- Credit value adjustment (CVA)
The risk of loss caused by changes in the credit spread of a counterparty due to changes in its credit quality (also referred to as the market value of counterparty credit risk). Under Basel II, the risk of counterparty default and credit migration risk were addressed but mark-to-market losses due to credit valuation adjustments were not. Basel III introduced a CVA capital charge in addition to the default risk capital requirements for counterparty credit risk.
- Credit-linked Note (CLN)
Also called a credit default note, it is a fixed or floating rate note where the coupon and principal payments are referenced to a reference credit, which can be a single name or multiple names. It pays interest and repays principal that depend on a credit event. At maturity, the investors receive par unless the referenced credit defaults or declares bankruptcy, in which case they receive an amount equal to the recovery rate
- Cross Currency Basis Spread
Used in the valuation of cross currency basis swaps, this is the liquidity premium of one currency over the other that is added to the floating rate of one of the legs of the swap
- Cross Currency Bermudan Swaption
An embedded Bermudan option in a cross currency swap. It is a contract in which the holder of a cross currency swap is long or short an option to put the swap at certain cash flow payment dates. For example, suppose a fixed leg cross-currency swap payer is long a Bermudan swaption. Then he makes periodic payments based on a fixed rate in a certain currency and receives floating rate payments based on the interest rate of another currency. At certain payment dates he can cancel the swap, or equivalently, he can switch to pay the floating rate and receive the fixed rate. Most cross currency swaptions are fixed-for-floating swaptions. Typical swaptions have fixed notionals for both receive and pay legs, and a single fixed coupon rate for the fixed leg and a single spread for the floating leg
- Cross Currency Swap
An interest rate swap that consists of each leg dominated in a different currency and two notional principal amounts also in different currencies. The two parties agree to exchange principal and interest payments in one currency for the principal and interest payments in the other currency. The principal amounts must be paid out at maturity
The practice of margining across products, asset classes or clearing houses, resulting in netting benefits due to overall lower margin requirements.
- Currency Forward
An agreement to exchange a specified amount of one currency for another at a future date at a certain rate. The exchange of currencies is priced on an arbitrage-free basis according to the interest rates in the two jurisdictions
- Currency Translated Options
Options on foreign assets where the payoff is exchanged into the domestic currency. For example, a US investor may be interested in buying an option on a British equity which is priced in sterling. Two types of risk must be considered when pricing the option: exchange rate changes and price changes
A financial institution that holds customer securities for safekeeping so as to minimise the risk of their theft or loss.
- Cycling Dates
Dates that are generated backwards from the terminating date, based on the user-defined frequency.
The simultaneous purchase of a currency put option and sale of a currency call option at different strike prices. Both options are out of the money. This strategy enables purchasers to hedge their downside risk at a reduced cost. This is at the expense of forgoing upside beyond a certain level since the purchase of the put is financed by the selling of the call (or vice versa). See also Range Forward