Glossary of Terms

Glossary

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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

Rate used to capture a predetermined fee agreed between two parties.

ASLA

The Australian Securities Lending association (ASLA) formed in August 1991 in response to a perceived need amongst need amongst industry participants for unified representation in regulatory and other issues relevant to its members.

AMSLA

The Australian Masters Securities Lending Association (AMSLA) first issued in 1997 is the standard legal agreement used in Australia. This agreement was originally adapted from the ISLA overseas Securities Lender’s Agreement. This agreement is governed by, and shall be construed in accordance with, the law in force in NSW Australia

BASIS POINT

One hundred basis points equal one percent. One basis point is 0.01%

BUY-IN

If a lender recalls loaned securities from a borrower but the borrower is not able to return them in a line with either the lenders instructions or the normal market practice the lender may be forced to buy the securities4 (pls remove) in the open market. All the costs of the buy-in will be borne by the borrower.

CARRY

The differences between the interest return on the securities held and the financing costs. Any gain derived from holding or carrying a securities is known as a positive carry while any loss 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 on 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 to 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 they wish, finance the bond they acquire by a repo contract that lasts until the date of the futures delivery.

COLLATERAL

Securities, financial instruments or deposits of the currency that are delivered by the borrower to the lender to support a loan transaction. In repos and buys-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.

CROSS-CURRENCY REPO

A repo in which the securities are de nominated in a different currency to the collateral.

DELIVER OUT REPO

A repo which involves either the delivery out of securities against payment of funds.

DELIVERY VS PAYMENT

The simultaneous delivery of securities against the payment of funds.

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.

DISTRIBUTIONS

Entitlements arising on securities such as dividends, interests and non-cash distributions such as bonus shares.

DOMESTIC STOCK

Securities that are lent from a locally domiciled source.

DOUBLE DIPPING

The illegal practice of simultaneously pledging or allocating the same collateral to more than one counterpart.

DRP

Dividend Reinvestment Plan.

EQUITY REPO

Any purchase agreement in which equities rather than bonds are given as collateral against cash.

EQUITY SWAP

Any equity swap is the exchange of a equity return for an interest rate return. For equity financing the cash lenders actually buys the equity from the cash borrower and then transacts the swap.

During the term of the swap the cash lender received interest and pays the equity return to the borrower. At the end of the swap, which is typically transacted under 1992 International Swaps & Derivative Association master agreement, the cash lender sells the equity.

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.

FILL OR KILL ASLO KNOWN AS (FORK)

See holding stock.

FIRM FINANCING

The financing of long securities positions within a firm by repoing the securities out.

FIXED TERM TRANSACTION

Transactions where the expiry date has been agreed. Nether part to the transaction can break the expiry date.

FOREIGN STOCK

See Non Domestic stock.

GENERAL COLLATERAL (GC)

Refers to securities that are generally available.

GILT-EDGE SECURITIES LENDING AGREEMENT (GESLA)

The standard legal agreement for the 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 PSAs Master Repo Agreement, but under English law, and was first introduced in November 2002.

Annexes are available for repos of UK gilt-edge 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 held at source.

HAIR CUT

Initial margin. Usually expressed as a percentage of the market price.

HEDGE FUND

An investment fund that engages in trading, investing and/or hedging strategies which generally involve derivatives, leverage and/or short selling.

HOLDING STOCK

Holding stock, known as icing, is the practice of lenders reserving securities at a borrowers’ 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 “fill or kill” or “FORK”. 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.

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 in the buy/sell back price. The implied repo rate if return of a trader in cash and carry trade.

INITIAL MARGIN

Initial margin is the excess of cash over securities or securities over cash in repo or securities lending transaction. One party may require a 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.

Australian domestic loans are typically collateralised at 105% of their market value with cash collateral and 100% with non-cash collateral. The purpose of initial margin is usually to protect the supplier of cash with protection in the fall in market value of the collateral during the course of the trade.

The size of the margin often varies between 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 the International Stock Lenders Association in May 1996.

INTERNATIONAL SECURITIES MARKET ASSOCIATION (ISMA)

International Securities Market Association is an organization of international bond dealers, which sets standards of business conduct in fixed income securities market.

MANUFACTURED DIVIDENDS

When securities that have been lent to pay a dividend, the borrower of the securities is required to pass the dividend on to the lender of securities.

This payment is know as a manufactured dividend (as opposed to the normal dividend paid by the issuer of the securities) and will be an amount equal to the gross coupon. Manufactured dividends cause tax problems in some markets.

MARGIN CALL

A request by one counterpart 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 borrowed/loaned and collateral posted in a repo or securities lending transaction to current market values. This is either done daily of 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 in the principle exchange where the instrument is traded, or if not so traded using the most recent bid and offered price.

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 securities lending/repo trader may run. By matching/mismatching maturities, rates, currencies or borrowing margins, the stock lender/repo trader creates a profit or loss.

NET PAYING SECURITY

Securities on which interest or other distributions are paid net with holding taxes.

NON DOMESTIC STOCK ALSO KNOWN AS FOREIGN STOCK

Securities that are lent from a foreign/overseas domicile source.

NON CASH COLLATERAL

Where securities such as equities or bonds are pledged to the lender as support of a loan transaction in lieu of cash.

OPEN REPO

Repos which have no fixed term. They are automatically rolled over daily until one of the counterparts ends the agreement. At each rollover the repo rate is adjusted and the supplier of cash has the right to vary the amount. The supplier of collateral has the right to substitute it.

OPEN TERM TRANSACTION

Transactions without a fixed term.

OVERCOLLATERALIZATION

Over-collateraliztion protects a counterpart form a reduction in the market value of the collateral because of a fall in its market value.

OVERNIGHT REPO

A Repo that matures on the day following its value date.

OVERSEAS SECURITIES LENDERS AGREMEMENT (OSLA)

The standard legal agreement for the lending of non-UK counterparts. Introduced in December 1995 and under English law.

PAY FOR HOLD

A fee paid to the lender to hold securities in its portfolio for a particular borrower until such time as the borrower can actually take delivery of them. Unlike a regular hold these securities are no longer available for loan to another borrower.

PRIME BROKERAGE

A service offered to hedge funds and other customers by securities house to support their trading, investment and hedging activities. The service comprises of clearing, custody, securities lending and financing arrangements.

Effectively a non-stop banking service to eliminate the need for the hedge fund to have a large back office and multiple clearance relationships.

PRINCIPLE

A principle is a party to a loan transaction that acts on its behalf (and therefore always represents its own risks rather than that of a client).

PSA/ISMA AGREEEMENT

See Global Master Repurchase Agreement.

PUBLIC SECURITIES ASSOCIATION (PSA)

A UB-based industry organization of bond market participation. The PSA establishes non-binding standards of business conduct in the fixed-income securities market and advises regulators and others on market practices.

REBATE

A method of fee quotation used in the international securities lending market, the rebate is the difference between the interest rate obtained by the lender (on cash collateral lodged with the lender by the borrower) and the loan fee the lender wishes to charge.

RECALLh5>

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

REPO

A transaction whereby one part sells securities to another part and simultaneously both agree to repurchase the securities at a future date at a fixed price. Originally known as a sale and repurchase agreement, repo is economically a collateralized loan.

When specific collateral is in demand or special, repo will usually yield more income than deposit. A repo is more secure than a deposit because it is collateralized.

REPO RATE

The interest rate paid to the cash side of the repo/reverse transaction. A repo rate is similar to an interest rate, but also reflects the demand for the repoed securities. Technically repo rates are nit interest rates because the cash in repo is a purchase or repurchase price not a loan.

REPO TO MATURITY

A repo that matures on the maturity date of the security repoed.

REPRICING

When the market value of a security in a repo or securities lending transaction changes and the parties to the transaction adjust the amount of securities or collateral in the transaction to the correct margin level. A buy/sell cannot be re-priced without consent. Similar to variation margin.

REPURCHASE AGREEMENT

See Repo

RETURN

When the borrower of securities returns them to the lender.

REVERSE REPO

The mirror image of a repo. The party that is reversing purchases securities from another party and simultaneously agrees to resell the securities at a future date at a fixed price.

ROLL

To renew a trade at its maturity.

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 who 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 securities, the lender of cash (the security borrower) will usually except a lower rate of interest rate on the money lend against the special.

The interest rate charged for the money lent against the 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 bond to go special is that it is the cheapest issue to deliver into a futures contract.

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.

STRUCTURED REPO

A transaction, which enables a cash lender to give its counterpart, cash to a pre-arranged schedule. It allows the lender to look in a term rate while retaining and 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.

TERM REPO

A repo with a maturity of more than one day after its value date.

THIRD PARTY LENDING

Where the agent lends securities on behalf of a beneficial owner, and the agent has the 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 cash and securities are delivered by the counterparts to an independent custodian or bank or clearinghouse, 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.

Allow the consolidation of assets in one place and simplifies collateral substitutions. But triparty custodians charge for services, which can affect the economics of the deal.