Investments outside of the traditional asset classes, equities, bonds and cash. Alternative investments include property, hedge funds, commodities, private equity, and infrastructure.
An alternative investment fund refers to any vehicle established for the purpose of raising capital from a number of different investors with an aim to invest these funds into assets to generate favourable returns.
The Alternative Investment Fund Managers Directive is a regulatory framework for alternative investment fund managers (AIFMs), including managers of hedge funds, private equity firms and investment trusts. The AIFMD was implemented in the UK on 22 July 2013.
Negotiable certificate issued by a US bank representing a specified number of shares (or one share) in a foreign stock that is traded on a US exchange.
Anti-money laundering refers to the laws, regulations and procedures intended to prevent criminals from disguising illegally obtained funds as legitimate income. Though anti-money laundering laws cover a limited range of transactions and criminal behaviour, their implications are far-reaching. For example, AML regulations require banks and other financial institutions that issue credit or accept customer deposits to follow rules that ensure they are not aiding money-laundering.
An annual general meeting is a mandatory yearly gathering of a company's interested shareholders. At an AGM, the directors of the company present an annual report containing information for shareholders about the company's performance and strategy.
Artificial intelligence (AI) refers to the simulation of human intelligence in machines that are programmed to think like humans and mimic their actions. The term may also be applied to any machine that exhibits traits associated with a human mind such as learning and problem-solving.
Asset management is the direction of all or part of a client's portfolio by a financial services institution, usually an investment bank, or an individual. Institutions offer investment services along with a wide range of traditional and alternative product offerings that might not be available to the average investor.
When a central bank creates new money electronically to make large purchases of assets.
To calculate your AANA is to sum the total outstanding notional amount of non-cleared derivative positions during a prescribed period on a gross notional basis.
The back office is the portion of a company made up of administration and support personnel who are not client-facing. Back-office functions include settlements, clearances, record maintenance, regulatory compliance, accounting, and IT services.
An EU directive designed to create a framework for authorities to manage bank failures effectively.
Basel III is a global, voluntary regulatory framework on bank capital adequacy, stress testing, and market liquidity risk.
One one-hundredth of a percent, or 0.01%.
Securities that are not registered to any particular party and hence are payable to the party that is in possession of them.
A party that is entitled to the right of ownership of property. In the context of securities, the term is usually used to distinguish this party from the registered holder (a nominee, for example) that holds the securities for the beneficial owner.
Big data refers to the large, diverse sets of information that grow at ever-increasing rates. It encompasses the volume of information, the velocity or speed at which it is created and collected, and the variety or scope of the data points being covered.
Bitcoin is a digital currency created in January 2009 following the housing market crash. Bitcoin offers the promise of lower transaction fees than traditional online payment mechanisms and is operated by a decentralised authority, unlike government-issued currencies.
Blockchain is literally just a chain of blocks, but not in the traditional sense of those words. When we say the words block and chain in this context, we are actually talking about digital information (the block) stored in a public database (the chain).
A bond is a contract between two parties. Companies or governments issue bonds because they need to borrow large amounts of money. They also have to pay the investors a little bit more than they paid for the bond. Bonds are usually traded through brokers and are part of a financial instrument group called ‘fixed income’.
Brexit is an abbreviation for "British exit," referring to the UK's decision in a 23 June 2016 referendum to leave the European Union.
A broker-dealer is a person or firm in the business of buying and selling securities for its own account or on behalf of its customers.
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.
An EU initiative which aims to deepen and further integrate the capital markets of EU Member States.
A non-financing purchase or sale of securities.
A central counterparty clearing house is an organisation that exists in various European countries to help facilitate trading done in European derivatives and equities markets.
The Central Securities Depositories Regulation aims to harmonise the authorisation and supervision of central security depositories, across the EU and to improve settlement discipline in the securities settlement systems.
A financial organisation that specialises in holding securities so that ownership can be easily transferred electronically without the need for physical certificates.
To complete a trade, i.e. when the seller delivers securities and the buyer delivers funds on correct form. A trade fails when proper delivery requirements are not satisfied.
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.
Securities or cash delivered by a borrower to a lender to support a loan of securities or cash.
Collateral management is the method of granting, verifying, and giving advice on collateral transactions in order to reduce credit risk in unsecured financial transactions.
A CDM is a single, market-wide domain model: it is a common data representation of transaction events, used by the market as a whole. That common data representation is the foundation for the development of solutions that are scalable, efficient and that future-proof our market.
An information standard for the Automatic Exchange Of Information (AEOI) on a global level, between tax authorities.
A corporate action is an event initiated by a public company that brings or could bring an actual change to the securities—equity or debt—issued by the company. Corporate actions are typically agreed upon by a company’s board of directors and authorised by the shareholders.
Corporate governance is the system of rules, practices, and processes by which a firm is directed and controlled. Corporate governance essentially involves balancing the interests of a company's many stakeholders, such as shareholders, senior management executives, customers, suppliers, financiers, the government, and the community.
A coupon payment on a bond is the annual interest payment that the bondholder receives from the bond’s issue date until it matures.
A transaction concerning either more than one member state or a member state and a third country.
A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend.
Cryptocurrency custody solutions are independent storage and security systems used to hold large quantities of tokens. Custody solutions are one of the latest innovations to come out of the cryptocurrency ecosystem and have been expected to herald the entry of institutional capital into the industry.
An entity that holds securities of any type for investors, effecting receipt and deliveries, and supplying appropriate reporting.
Data analytics is the science of analysing raw data in order to make conclusions about that information. Many of the techniques and processes of data analytics have been automated into mechanical processes and algorithms that work over raw data for human consumption.
A mechanism in some settlement systems whereby a member may borrow or lend cash overnight against collateral. The system automatically selects and delivers collateral securities, meeting pre-determined criteria 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.
The simultaneous delivery of securities against the payment of funds within a securities settlement systems.
A depository is an authorised company, which is independent of the fund manager. It safeguards and secures your investment in an OEIC, providing oversight of the fund manager on your behalf. For a unit trust, this role is fulfilled by a trustee.
A financial security with a value that is reliant upon or derived from, an underlying asset or group of assets.
A digital asset is anything that exists in a digital format and comes with the right to use. Data that do not possess that right are not considered assets.
A directive is a legal act of the European Union but each member state is free to decide how to transpose directives into national laws.
Distributed ledger technology refers to the technological infrastructure and protocols that allows simultaneous access, validation, and record updating in an immutable manner across a network spread across multiple entities or locations.
Entitlements arising on the securities that are loaned out, e.g. dividends, interest, and non-cash distributions.
A dividend is the distribution of a portion of a company’s earnings, decided and managed by the company’s board of directors.
Environmental, social, and governance refers to the three central factors in measuring the sustainability and societal impact of an investment in a company or business. These criteria help to better determine the future financial performance of companies (return and risk).
Equities is another name for shares in a company.
An equity swap is a financial derivative contract (a swap) where a set of future cash flows are agreed to be exchanged between two counterparties at set dates in the future.
A term meaning 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 the loan, there is a corporate action in relation to loaned securities, the lender is normally entitled to specify at the 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.
The Employee Retirement Income Security Act of 1974 (ERISA) is a federal US tax and labor law that establishes minimum standards for pension plans in private industry. It contains rules on the federal income tax effects of transactions associated with employee benefit plans.
The use of a third party, which holds an asset or funds before they are transferred from one party to another.
The European Securities and Markets Authority is a European Union financial regulatory agency and European Supervisory Authority, located in Paris. ESMA replaced the Committee of European Securities Regulators on 1 January 2011.
The European Banking Authority is a regulatory body that strives to maintain financial stability throughout the European Union’s banking industry.
The European Central Bank is the central bank responsible for monetary policy of those European Union member countries which have adopted the euro currency.
Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements.
The European Market Infrastructure Regulation is a body of European legislation for the regulation of over-the-counter derivatives.
An evergreen trade automatically renews after the expiry date. The parties involved in the trade agree that it rolls over automatically until one gives the notice to terminate it.
A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange, thus experiencing price changes throughout the day as it is bought and sold.
The failure to deliver cash or collateral in time for the settlement of a transaction.
The FCA regulates authorised investment funds. The FCA is the UK regulator of financial services and requires firms to adhere to strict rules, principles and guidance to put their customers’ well-being at the core of their business.
In a financial crisis, asset prices see a steep decline in value, businesses and consumers are unable to pay their debts, and financial institutions experience liquidity shortages.
The Financial Industry Regulatory Authority is an independent, nongovernmental organisation that writes and enforces the rules governing registered brokers and broker-dealer firms in the US.
A financial institution is a company engaged in the business of dealing with financial and monetary transactions such as deposits, loans, investments, and currency exchange.
Proposed by the European Commission to impose a financial transaction tax within some of the member states of the European Union. The tax would be levied on all transactions on financial instruments between financial institutions when at least one party to the transaction is located in the EU.
The Foreign Account Tax Compliance Act is a tax law that compels US citizens at home and abroad to file annual reports on any foreign account holdings.
Foreign exchange is the trading of one currency for another. For example, one can swap the US dollar for the euro.
Delivery of securities with no corresponding payment of funds.
The fund manager, or management company, is the firm responsible for making decisions on how a fund should be invested. Working to the established rules set up by the regulator, they can also be described as the ‘fund provider’.
The fund provider has responsibility for its operation, and can establish an investment manager to oversee its assets and investor promotion.
Futures are derivative financial contracts that obligate the parties to transact an asset at a predetermined future date and price.
A set of security issues which trade in the repo market at the same or a very similar repo rate.
The General Data Protection Regulation is a legal framework that sets guidelines for the collection and processing of personal information from individuals who live in the European Union.
Government bonds in the UK, India, and several other Commonwealth countries are known as gilts. Gilts are the equivalent of US Treasury securities in their respective countries. The term gilt is often used informally to describe any bond that has a very low risk of default and a correspondingly low rate of return.
A green fund is a mutual fund or another investment vehicle that will only invest in companies that are deemed socially conscious in their business dealings or directly promote environmental responsibility.
Securities on which interest or other distributions are paid without any taxes being withheld.
A leveraged investment fund that engages in trading and hedging strategies, frequently using leverage.
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.
A particular security that is in high demand in relation to its availability in the market and is thus relatively expensive or difficult to borrow.
The practice whereby a lender holds securities at a borrower’s request in anticipation of that borrower taking delivery.
A form of guarantee or insurance, frequently offered by agents. Terms vary significantly and the value of the indemnity does also.
A share index is a number that indicates the state of a stock market. It is based on the combined share prices of a set of companies.
Initial margin is collateral collected by a counterparty and posted on a two-way basis (each party posts and receives at the same time) to minimise current and potential risk exposure.
The first sale of stock by a private company to the public.
An institutional investor is a company or organization that invests money on behalf of other people. Mutual funds, pensions, and insurance companies are examples. Institutional investors often buy and sell substantial blocks of stocks, bonds, or other securities.
The date that is entered into the securities settlement system as the settlement date, and on which the parties to a securities transaction agree that settlement is to take place.
An interdealer broker (IDB) is a specialist financial intermediary that facilitates transactions between broker-dealers, dealer banks and other financial institutions rather than private individuals.
International Financial Reporting Standards set common rules so that financial statements can be consistent, transparent, and comparable around the world. IFRS are issued by the International Accounting Standards Board (IASB).
An International Securities Identification Number is a code that uniquely identifies a specific securities issue.
A neutral non-profit association domiciled in Zurich (Switzerland), ISSA was conceived as an idea in 1975 for an association of securities services providers from across the globe. The association is designed to disseminate information on the developments in the rapidly changing securities markets and to offer securities operations professionals a forum to exchange ideas and issues of interest.
The International Swaps and Derivatives Association is a trade organisation created by the private negotiated derivatives market that represents participating parties.
An interest rate swap is a financial derivative that companies use to exchange interest rate payments with each other. Swaps are useful when one company wants to receive a payment with a variable interest rate, while the other wants to limit future risk by receiving a fixed-rate payment instead.
An institution that facilitates a financial transaction between two parties.
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.
The authority given by law on legal matters within a particular geographic area.
This document provides the investor with important information about their potential investment fund including costs, risks, performance and objectives. It is a requirement that this document be available to the investor prior to investment. The regulator specifies both the information contained in the document and the format of it.
Key performance indicators refer to a set of quantifiable measurements used to gauge a company’s overall long-term performance. KPIs specifically help determine a company's strategic, financial, and operational achievements, especially compared to those of other businesses within the same sector.
The legal entity identifier is a unique global identifier of legal entities participating in financial transactions. These can be individuals, companies or government entities that participate in financial transaction.
The term given to those portfolio assets that are placed into lending programmes, and made available to borrow in return for a fee.
The London Interbank Offered Rate is a benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans.
When securities that have been lent out pay a cash dividend, the borrower of the securities is in general contractually required to pass the distribution back to the lender of the securities. This payment “pass-through” is known as a manufactured dividend.
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.
Market capitalisation describes the value of a company or corporation, where their shares are traded and listed on the stock exchange. This value is estimated by multiplying the market price of its shares by the number of shares the company currently has in issue.
Markets in Financial Instruments Directive is a regulation that increases the transparency across the European Union’s financial markets and standardises the regulatory disclosures required for particular markets. This was updated in 2017 with MiFID II.
Markets in Financial Instruments Regulation, is a European law which demands its member states to comply with its regulations. As a result of the last financial crisis, the need for a European Union-wide regulation called for the emergence of MiFIR. This regulation was formed with the intent to not only protect the markets, but also the investors.
Market risk is an investment risk that can potentially impact the entirety of an asset class as asset prices rise and/or fall.
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, of not so traded, using the most recent bid offered prices.
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.
A memorandum of understanding is an agreement between two or more parties outlined in a formal document. It is not legally binding but signals the willingness of the parties to move forward with a contract.
Mergers and acquisitions is a general term used to describe the consolidation of companies or assets through various types of financial transactions, including mergers, acquisitions, consolidations, tender offers, purchase of assets, and management acquisitions.
A money market fund is an open-ended mutual fund that invests in short-term debt securities such as US Treasury bills and commercial paper. Money market funds are managed with the goal of maintaining a highly stable asset value through liquid investments, while paying income to investors in the form of dividends.
A multi manager fund is one which invests in other managers’ funds rather than directly into individual stocks and shares. (See ‘Fund of Funds’).
The entire summarised value of a fund’s liabilities and assets. This can be expressed as a total fund size in monetary terms or as a price per unit.
National competent authorities are organisations that have the legally delegated or invested authority, or power to perform a designated function, normally monitoring compliance with the national statutes and regulations.
Natural Language Processing is a field of artificial intelligence that enables computers to analyse and understand human language.
Securities on which interest or other distributions are paid net of withholding taxes.
The Official Journal of the European Union is a directory of official record. Legal acts published in the Official Journal are binding.
An open-ended fund is a fund where the number of shares or units in existence can increase or decrease. The fund manager creates units for new investors and cancels units for those selling out of the fund. The term ‘open ended’ is used because the number of units that can be created is theoretically unlimited.
A trade with no fixed maturity date.
Over-the-counter or off-exchange trading is done directly between two parties, without the supervision of an exchange. It is contrasted with exchange trading, which occurs via exchanges.
With overcollateralisation, excess collateral is used to enhance credit in order to get a better debt rating from a credit rating agency. An issuer backs a loan with assets or collateral which has value in excess of the loan, thereby, limiting credit risk for the creditor and enhancing the credit rating assigned to the loan.
A portfolio describes a collection of investments.
Post-trade processing occurs after a trade is complete. At this point, the buyer and the seller compare trade details, approve the transaction, change records of ownership, and arrange for the transfer of securities and cash. Post-trade processing is especially important in markets that are not standardised, such as the over-the-counter (OTC) markets.
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.
A private key is a sophisticated form of cryptography that allows a user to access his or her cryptocurrency. A private key is an integral aspect of bitcoin and altcoins, and its security make up helps to protect a user from theft and unauthorised access to funds.
The term packaged retail investment and insurance-based products refers to a category of financial assets that are regularly provided to consumers in the European Union through banks or other financial institutions as an alternative to savings accounts.
A proxy vote is a ballot cast by one person or firm on behalf of a shareholder of a corporation who may not be able to attend a shareholder meeting, or who otherwise desires not to vote on an issue. Shareholders receive a proxy ballot in the mail along with an information booklet called a proxy statement, which describes the issues to be voted on during the shareholder meeting.
When a central bank creates new money electronically to make large purchases of assets.
A dividend record date is the date on which the company finalises the list of investors who qualify as “shareholders of record.”
A regulation is a legal act of a government or other authority that becomes immediately enforceable as law.
A real estate investment trust is a company that owns, operates, or finances income-generating real estate.
Risk weighted assets are used to determine the minimum amount of regulatory capital that must be held by banks to maintain their solvency. This minimum is based on a risk assessment for each type of bank risk exposure; credit, market, operational, counterparty and credit valuation adjustment risks.
Robotic process automation occurs when basic tasks are automated through software or hardware systems that function across a variety of applications, just as human workers do.
Safekeeping, also known as safe keep, is the storage of assets or other items of value in a protected area. Many individuals choose to place financial assets in safekeeping. To do so, individuals may use self-directed methods of safekeeping or the services of a bank or brokerage firm. Financial institutions are custodians and are therefore legally responsible for any items in safekeeping.
Securities financing transactions allow investors and firms to use assets, such as the shares or bonds they own, to secure funding for their activities.
The completion of a securities transaction where it is concluded with the aim of discharging the obligations of the parties to that transaction through the transfer of cash or securities, or both.
The time period between the trade date and the intended settlement date.
SRD II is a European Union directive, which sets out to strengthen the position of shareholders and to reduce short termism and excessive risk taking by companies.
Short selling is the sale of a security that is not owned by the seller or that the seller has borrowed. Short selling is motivated by the belief that a security’s price will decline, enabling it to be bought back at a lower price to make a profit.
Sets out regulatory requirements for insurance firms and groups, covering financial resources, governance and accountability, risk assessment and management, supervision, reporting and public disclosure.
The stock market is an electronic system in which securities, bonds and shares are facilitated, either between buyers and sellers, or brokers and dealers.
Standard settlement instructions are the agreements between two financial institutions which fix the receiving agents of each counterparty in ordinary trades of some type. These agreements allow traders to make faster trades since the time used to settle the receiving agents is conserved.
Straight-through processing is an automated process done purely through electronic transfers with no manual intervention involved. Its popular uses are in payment processing as well as the processing of securities trades.
T+1 (T+2, T+3) abbreviations refer to the settlement date of security transactions. The T stands for transaction date, which is the day the transaction takes place. The numbers 1, 2 or 3 denote how many days after the transaction date the settlement or the transfer of money and security ownership takes place.
T2S is a platform for securities settlement in the EU where an exchange of delivery of securities vs payment can occur simultaneously.
A transfer agent is a trust company, bank, or similar institution assigned by a corporation for the purposes of maintaining an investor's financial records and tracking each investor's account balance.
Tri-party arrangements involve two counterparties to a transaction and the entity that acts as an independent, third-party collateral agent to manage the collateral securing the transaction. Tri-party structures have long been used for repo and securities lending in global markets.
tZero is a distributed ledger platform and cryptocurrency launched by Overstock. tZero is considered an alternative trading system (ATS) and is regulated by the Securities and Exchange Commission.
A regulation requiring the implementation of margin requirements for non-centrally cleared derivatives.
UCITS came about from a 1985 EU directive that aimed to standardise the rules and regulations across Europe regarding open-ended funds and transferable securities. The plan was to make funds approved in one country easy to market and sell to investors throughout the EU. The first two versions of UCITS were not adopted, but UCITS III was approved in 2001, and remains in force today.
The amount of stock which has been borrowed, as a percentage of the amount which is available to borrow from the majority of the world's major custodians and beneficial owners. Utilisation numbers need to be used in conjunction with the percentage of market cap on loan and new loan volumes in order to get a full picture of activity in stock lending.
Variation margin reflects the daily change in market value of a contract due to market movements.
The Volcker Rule is a federal regulation that generally prohibits banks from conducting certain investment activities with their own accounts and limits their dealings with hedge funds and private equity funds, also called covered funds. The Volcker Rule aims to protect bank customers by preventing banks from making certain types of speculative investments that contributed to the 2008 financial crisis.
XBRL or eXtensible Business Reporting Language is a software standard that was developed to improve the way in which financial data is communicated, making it easier to compile and share this data.