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Securities finance glossary

Securities finance glossary

Agent: A party to a loan transaction that acts on behalf of a client. The Agent typically does not take in risk in a transaction. See Indemnity.

All-in dividend: The sum of the manufactured dividend plus the fee to be paid by the borrower to the lender, expressed as a percentage of the dividend on the stock on loan.

All-in Price: Market price of a bond, plus accrued interest. Generally rounded to the nearest 0.01. Also known as the “dirty price”.

Bearer securities: Securities that are not registered to any particular party and hence are payable to the party that is in possession of them.

Benefit: Any entitlement due to a stock or shareholder as a result of purchasing or holding securities, including the right to any dividend, rights issue, scrip issue etc. made by the issuer. In the case of loaned securities or collateral, benefits are passed back to the lender or borrower (as appropriate), usually by way of a manufactured dividend or the return of equivalent securities or collateral.

Buy-In: The practice whereby a lender of securities enters the open market to buy securities to replace those that have not been returned by a borrower. Strict market practices govern buy-ins. Buy-ins may be enforced by market authorities in some jurisdictions.

Buy/Sell-Sell/Buy: Types of bond transactions that, in economic substance, replicate reverse repos and repos, respectively. These transactions consist of a purchase (or sale) of a security versus cash with a forward commitment to sell back (or buy back) the securities. Used as an alternative to repos/reverses.

Carry: Difference between interest return on securities held and financing costs.

Cash-Orientated Repo: Transaction motivated by the need of one counterpart to invest cash and the other to borrow. See also ‘Securities-Orientated Repo’.

Cash Trade: A non-financing purchase or sale of securities.

Close-out (and) netting: An arrangement to settle all existing obligations to and claims on a counterpart falling under that arrangement by one single net payment, immediately upon the occurrence of a defined event of default.

Contract for Differences (CFD): An OTC derivative transaction that enables one party to gain economic exposure to the price movement of a security (bull or bear). Writers of CFDs hedge by taking positions in the underlying securities, making efficient securities financing or borrowing key.

Corporate action: A corporate event in relation to which the holder of the security must or may make an election or take some other action in order to secure its entitlement and/or to opt for a particular form of entitlement (see also equivalent).

Corporate event: An event in relation to a security as a result of which the holder will be or may become entitled to: a benefit (dividend, rights issue etc.); or securities other than those which he holds prior to that event (takeover offer, scheme of arrangement, conversion, redemption etc). This type of corporate event is also known as a stock situation.

Daylight exposure: The period in the day when one party to a trade has a temporary credit exposure to the other due to one side of the trade having settled before the other. It would normally mean that the loan had settled but the delivery of collateral would settle at a later time, although there would also be exposure if settlement happened in reverse order. The period extends from the point of settlement of the first side of the trade to the time of settlement of the other. It occurs because the two sides of the trade are not linked in many settlement systems or settlement of loan and collateral take place in different settlement systems, possibly in different time zones.

Deliver-Out Repo: Standard two-party repo, where the party receiving cash delivers bonds to the cash provider.

Delivery by Value (DBV): A mechanism in some settlement systems (including CREST) whereby a member may borrow or lend cash overnight against collateral. The system automatically selects and delivers collateral securities meeting pre-determined criteria and to the value of the cash (plus a margin) from the account of the cash borrower to the account of the cash lender and reverses the transaction the following morning.

Distributions: Entitlements arising on securities that are loaned out, e.g., dividends, interest, and non-cash distributions.

DVP: Delivery versus payment, or the simultaneous delivery of securities against the payment of funds within a securities settlement system.

Equivalent (securities or collateral): A term denoting that the securities or collateral returned must be of an identical type, nominal value, description and amount to those originally provided. If, during the term of a loan, there is a corporate action in relation to loaned securities, the lender is entitled to specify at that time the form in which he wishes to receive equivalent securities or collateral on termination of the loan. The legal agreement will also specify the form in which equivalent securities or collateral are to be returned in the case of other corporate events.

General Collateral (GC): Securities that are not “special” (see definition below) in the market and may be used, typically, simply to collateralise cash borrowings. Also known as “stock collateral”.

Global Master Securities Lending Agreement (GMSLA): The Global Master Securities Lending Agreement has been developed as a market standard for securities lending of bonds and equities internationally. It was drafted with a view to compliance with English law.

Gross-Paying Securities: Securities on which interest or other distributions are paid without any taxes being withheld.

Haircut: Initial margin on a repo transaction. Generally expressed as a percentage of the market price.

Hot/Hard Stock: A particular security that is in high demand relative to its availability in the market and is thus relatively expensive or difficult to borrow.

Hold in custody: An arrangement under which securities are not physically delivered to the borrower (lender) but are simply segregated by the lender in an internal customer account.

Icing/Putting Stock on Hold: The practice whereby a lender holds securities at a borrower’s request in anticipation of that borrower taking delivery.

Indemnity: A form of guarantee or insurance, frequently offered by Agents. Terms vary significantly and the value of the indemnity does also.

Inter-dealer Broker: Agent or intermediary that is paid a commission to bring buyers and sellers together. The broker’s commission may be paid either by the initiator of the transaction or by both counterparts.

Intermediary: A party that borrows a security in order to on-deliver it to a client, rather than borrowing it for its own in-house needs.

International Securities Lending Association (ISLA): A trade association for securities lending market practitioners.

ISMA: The Zurich based International Securities Market Association is the self-regulatory organisation and trade association for the international securities market. ISMA sets standards of business conduct in the global securities markets, advises regulators on market practices and provides educational opportunities for market participants.

Manufactured Dividends: When securities that have been lent out pay a cash dividend, the borrower of the securities is generally contractually required to pass on the distribution to the lender of the securities. This payment “pass-through” is known as a manufactured dividend.

Margin, Initial: Refers to the excess of cash over securities or securities over cash in a repo/reverse repo, sell/buy-buy/sell, or securities lending transaction. One party may require an initial margin due to the perceived credit risk of the counterpart.

Margin, Variation: Once a repo or securities lending transaction has settled the variation margin refers to the band within which the value of the security used as collateral may fluctuate before triggering a margin call. Variation margin may be expressed either in percentage or absolute currency terms.

Margin Call: A request by one party in a transaction for the initial margin to be reinstated or to restore the original cash/securities ratio to parity.

Mark-to-Market: The act of revaluing the securities collateral in a repo or securities lending transaction to current market values. Standard practice is to mark to market daily.

Market Value: The value of loan securities or collateral as determined using the last (or latest available) sale price on the principal exchange where the instrument was traded or, if not so traded, using the most recent bid or offered prices.

Master Equity and Fixed Interest Stock Lending Agreement (MEFISLA): This was developed as a market standard agreement under English law for stock lending prior to the Global Master Securities Lending Agreement. It has a legal opinion from Queen’s Counsel and has been mainly, but not exclusively, used for lending UK securities excluding Gilts.

Master Gilt Edged Stock Lending Agreement (GESLA): The Agreement was developed as a market standard exclusively for lending UK gilt-edged securities. It was drafted with a view to compliance with English law and has a legal opinion from Queen’s Counsel.

Matched/Mismatched Book: Refers to the interest rate arbitrage book that a repo trader may run. By matching or mismatching maturities, rates, currencies, or margins, the repo trader takes market risk in search of returns.

Net Paying Securities: Securities on which interest or other distributions are paid net of withholding taxes.

Open Transactions: Trades done with no fixed maturity date.

Overseas Securities Lender’s Agreement (OSLA): The Agreement was developed as a market standard for stock lending prior to the Global Master Securities Lending Agreement. It was drafted with a view to compliance with English law and has a legal opinion from Queen’s Counsel. Intended for use by UK based parties lending overseas securities (i.e. excluding UK securities and Gilts), it has since become the most widely used global master agreement.

Pair off: The netting of cash and securities in the settlement of two trades in the same security for the same value date. Pairing off allows for settlement of net differences.

Partialling: Market practice or a specific agreement between counterparts that allows a part-delivery against an obligation to deliver securities.

Pay for Hold: The practice of paying a fee to the lender to hold securities for a particular borrower until the borrower is able to take delivery.

Prime Brokerage: A service offered to clients – typically hedge funds – by investment banks to support their trading, investment and hedging activities. The service consists of clearing, custody, securities lending, and financing arrangements.

Principal: A party to a loan transaction that acts on its own behalf or substitutes its own risk for that of its client when trading.

Rebate Rate: The interest paid on the cash side of securities lending transactions. A rebate rate of interest implies a fee for the loan of securities and is therefore regarded as a discounted rate of interest.

Recall: A request by a lender for the return of securities from a borrower.

Repo: Transaction whereby one party sells securities to another party and agrees to repurchase the securities at a future date at a fixed price.

Repo Rate: The interest rate paid on the cash side of a repo/reverse transaction.

Repo (or Reverse) to Maturity: A repo or reverse repo that matures on the maturity date of the security being traded.

Repricing: Occurs when the market value of a security in a repo or securities lending transaction changes and the parties to the transaction agree to adjust the amount of securities or cash in a transaction to the correct margin level.

Return: Occurs when the borrower of securities returns them to the lender.

Reverse Repo: Transaction whereby one party purchases securities from another party and agrees to resell the securities at a future date at a fixed price.

Roll: To renew a trade at its maturity.

Securities-Orientated Repo Trade: Transaction motivated by the desire of one counterpart to borrow securities and of the other to lend them.

Shaping: A practice whereby delivery of a large amount of a security may be made in several smaller blocks so as to reduce the potential consequences of a fail. May be especially useful where partialling is not acceptable.

Specials: Securities that for several reasons are sought after in the market by borrowers. Holders of special securities will be able to earn incremental income on the securities by lending them out via repo, sell/buy, or securities lending transactions.

Spot: Standard non-dollar repo settlement two business days forward. This is a money market convention.

Substitution: The ability of a lender of general collateral to recall securities from a borrower and replace them with other securities of the same value.

TBMA/ISMA Global Master Repurchase Agreement (GMRA): The market-standard document used for repo trading. The GMRA, whose original November 1992 version was based on the PSA Master Repurchase Agreement, was revised in November 1995 and October 2000.

Term Transactions: Trades with a fixed maturity date.

Third-Party Lending: System whereby an institution lends directly to a borrower and retains decision-making power, while all administration (settlement collateral monitoring and so on) is handled by a third party, such as a global custodian.

Tri-party: The provision of collateral management services, including marking to market, repricing and delivery, by a third party. Also known as escrow.

Tri-party Repo: Repo used for funding/investment purposes in which bonds and cash are delivered by the trading counterparts to an independent custodian bank or central securities depository (the Triparty Custodian). The Triparty Custodian is responsible for ensuring the maintenance of adequate collateral value, both 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, is required. Triparty repo reduces the operational and systems barriers to participating in the repo markets.

Source: Spitalfields Advisers.