Glossary of Terms

Abbreviation for Weighted Average Maturity.

UK Corporation Tax - chargeable gains. A pool of shares acquired on or before 31 March 1982 and after 5 April 1965.

Pensions. A reduction to a pension, for example as a result of early retirement, often according to a formula set out in the pension scheme Rules.

UK company law. In order to reduce administrative burdens on small and meduim sized companies in the UK, they are not required under company law to produce full accounts. Instead they are allowed to prepare shorter-form 'abbreviated accounts'.

Abbreviation for Asset Backed Commercial Paper.

Abbreviation for Association of British Insurers.

Abbreviation for Accrued Benefit Obligation.

Abbreviation for Asset-Backed Securities.

Loan documentation. The requirement for the immediate repayment of the whole of a loan by a borrower - regardless of the scheduled repayment terms - following an Event of default.

Credit transfer. Giros usually supplied and completed by the beneficiary with all the relevant details and sent to the payor along with an invoice. The payor then signs the giro (in other words he/she accepts it) and forwards it to his/her bank. The bank debits the payor’s account and puts the giro into the clearing system.

1. A bill of exchange which has been 'accepted' by a high quality credit - usually a bank - effectively guaranteeing payment and thereby enhancing the credit quality of the bill.

2. Law. One of the essential requirements for the formation of a contract. Another essential requirement being an offer.

1. A balance held with a financial institution to facilitate transactions, such as a bank account or securities account.

2. Accounting. A division of a ledger for entries recording related transactions.

A statement, essentially an invoice for services, which a financial institution provides to its commercial customers specifying services provided, volumes of transactions processed and charges assessed. The statement is used by the customer for cash management and other purposes.

Also known as cash positioning. The task of establishing, usually on a daily basis, the expected end-of-day closing cash position.

The practice and theory of preparing Accounts for an organisation, whether for internal or for external use.

The methods developed for applying fundamental accounting concepts to individual transactions and financial items.

Four fundamental concepts which underlie the completion of periodic financial accounts of businesses under UK GAAP. The concepts are going concern, accruals, consistency and prudence.

The potential impact on an entity's accounts of a particular policy or transaction. For example the effect on group accounts in applying accounting policies relating to the translation of assets and liabilities denominated in currencies other than the group's functional currency.

A group is deemed to exist for accounting purposes in circumstances where a parent undertaking controls one or more subsidiary or associate undertakings.

1. A period upon which UK corporation tax is assessed and charged on profits arising in the period. This period cannot exceed 12 months.

2. Same as period of account.

Accounting bases of valuation or measurement specific to a reporting entity. The entity should consistently follow accounting policies from period to period. Accounting policies must be determined in accordance with the relevant GAAP.

(ARR). A measure of accounting return on investment.

The date to which a reporting entity's accounts are made up.

A measure of profitability based on accounting profits divided by the book value of invested capital.

This measure may be calculated in a number of different ways, for example:
[Average annual accounting profit over the project life] ÷ [Average book value of investment in the project]

Published guidance for the preparation of financial statements including - in the UK - FRSs (Financial Reporting Standards) and IASs (International Accounting Standards).

(ASB). That part of the Financial Reporting Council in the UK that is responsible for making, amending and withdrawing accounting standards.

Details of their work and standards issued are available from: www.frc.org.uk.

1. The externally reported financial statements of an organisation. These include summaries, in conventional and prescribed formats, of the organisation's assets, liabilities, income, expenditure and cash flows.

2. The internal financial summaries used by an organisation. Also known as management accounts.

3. The fully detailed internal financial records of an organisation.

Short-term obligations owed by a business to creditors, suppliers and vendors.

The different strategies that allow companies to manage the cost of the liabilities resulting from the purchase of goods and services.

Assets resulting from the extension of trade credit to customers. Also known as trade debtors.

(ARC). USA An automated clearing house transaction format that allows the electronic clearing and settlement of cheques by converting them to electronic transactions at lockboxes or other collection sites. Also know as conversion.

The different strategies that can be adopted to manage the collection of outstanding receivables.

A term meaning that the principal amount is increasing over time, for example as a result of the scheduled drawdown of a loan in tranches. This would also apply to a deposit where any interest is effectively re-invested.

A type of interest rate swap.

An accreting swap is one where the notional principal amount is growing over time. Used - for example - to hedge a loan being drawn down in instalments.

1. In accounting, an amount owing - but not yet invoiced - for services or goods received during the accounting period. An accrual is a form of liability, because it represents cash that will have to be paid out in the future, for a benefit that has already been received.

2. In a Defined Benefit Pension Scheme, the build up over time of entitlement to future benefits, resulting from additional years of pensionable service.

Pensions. The rate at which benefits build up for each year of service in a Defined Benefit pension scheme. See also Pensionable service.

1. In financial accounting, the spreading of profits and losses on hedging instruments over the life of the underlying exposure being hedged.

2. In accounting more generally, the appropriate spreading of income and expenditure items into the periods to which they relate. This may differ from the period in which the associated cash receipts or payments take place. (An alternative simpler basis of accounting would be a cash basis.)

3. A basis of taxation which follows the accruals basis of financial accounting.

4. UK tax. The recognition for UK tax purposes of all profits and losses on a loan relationship over the life of the loan.

The accounting principle that revenues, profits and the associated costs incurred while earning them should be included in the same Profit and Loss Account or Income Statement.

(ABO). The present value of pension benefits owed to employees under a pension scheme’s benefit formula without any projected salary increases and discounted at a nominal rate of interest.

Pensions. The benefits for service up to a given point of time in a Defined Benefit pension scheme, whether or not vested. They may be calculated in relation to current salary or projected salary and allowance may also be made for statutory or discretionary revaluation.

A pensions Funding method in which the Actuarial valuation at the Valuation date relates to the actual benefits for Pensioners and Deferred pensioners and their Dependants and the Accrued benefits of Active members. Allowance will generally need to be made for future increases to salaries and benefits and for new members and Early leavers.

Revenue earned by a business but not yet invoiced or received.

(AI). The interest accumulated on a debt security since its issue date but not yet paid out. This is accounted for in the actual gross purchase price of the debt security.

The accounting values of most fixed assets, such as buildings, machinery, office equipment and vehicles are depreciated over their useful lifetime. Land is not depreciated as its value is not considered to diminish over time.

(ANAV). A method of compensating money market fund investors through increasing the net asset value (NAV) of each fund unit rather than through dividend payout.

(ANAV). A method of compensating money market fund investors through increasing the net asset value (NAV) of each fund unit rather than through dividend payout.

Abbreviation for Automated Clearing House System.

An automated clearing house (ACH) transaction that involves the transfer of funds from an originator’s account to a receiver’s account.

An automated clearing house (ACH) transaction that moves funds from the receiver’s account to the originator’s account.

An automated clearing house (ACH) association or Federal Reserve Bank that processes and distributes ACH transactions received from an originating financial institution.

Same as Quick ratio.

Same as Quick ratio.

A financial institution - often a subsidiary of a bank - that ‘buys’ credit card transactions, with recourse, from a retailer. The acquirer will present the transactions to the card issuer for payment and will then pay the retailer the amount of the card transactions less a discount - which covers their own and the card issuer’s fee for handling the transaction. This is how retailers get paid.

The purchase by a business of another business (including its assets and its liabilities, its contracts with employees, and its other contractual rights and obligations).

This is now the generally accepted method of financial accounting for subsidiaries, also known as full consolidation.

Acquisition accounting regards the combination of the holding company and the subsidiary as being the acquisition by one company of another. The difference between the fair value of the consideration given and the fair values of the entity acquired is accounted for as goodwill.

VAT. Goods or services purchased by a UK VAT registered business from a business registered for VAT in another EC member state.

Abbreviation for Automated Clearing Settlement System.

1. Abbreviation for UK Advanced Corporation Tax.

2. Association of Corporate Treasurers.

3. An Act is a formal codification of law by a country's legislative body (for example the Companies Act 2006 of the UK Parliament).

Actuarial Standards Board.

Tax. Income for which the taxpayer performs services. Examples are wages, salaries, tips, bonuses, and business and partnership income.

Pensions. A member of a Defined Benefit pension scheme who is at present accruing benefits under that scheme by virtue of continuing service.

A financial ratio designed to measure the efficiency of management in controlling the working capital of the business.
For example, the inventory turnover ratio.

See Actuarial gains and losses.

Pensions accounting.
Changes in actuarial deficits or surpluses over time arising from either or both of:
1. Differences between the actual events as they have turned out and the assumptions that were made as at the date of the earlier actuarial valuation. (Known as Experience gains and losses.)
2. Changes in the actuarial assumptions.

Pensions. The value placed on all the liabilities of a Defined Benefit pension scheme falling due after the Valuation date.

See Actuarial gains and losses.

(Act SB). A body proposed by the Morris Review to set technical standards for the actuarial profession.

1. Pensions. An investigation by an Actuary into the ability of a Defined Benefit pension scheme to meet its Actuarial liability.

2. The related money amounts - assessed by an Actuary - of the pension scheme's liabilities, assets and surplus or deficit.

An individual qualified - amongst other skills - to advise on certain financial matters in connection with pension schemes, for example the valuation of assets and liabilities, including key assumptions such as mortality.

Economics. Aggregate demand.

A charge based on the value of the transaction.

(AVCs). UK pension contributions over and above those contractually required, paid by a scheme member and thus securing additional pension benefits. Payments to a scheme separate from the members’ Occupational pension scheme are known as free-standing additional voluntary contributions (FSAVCs).

UK tax. The process in stamp duty whereby the document and supporting evidence is sent to HMRC to determine the amount of stamp duty payable.

Pensions. This is the Normal contribution rate adjusted to eliminate any difference between the Target Fund and actual asset value at the Valuation date (the difference being the surplus or the deficit).

(APV). A method of project appraisal which seeks to identify and evaluate separately the benefits of using debt for part of the capital requirements of the project.

It does this by calculating separately:

1. The net present value of the project assuming it were all-equity financed.

2. The Present Value of the tax shield benefits of the proposed debt finance (+/- PV of any other benefits/costs of debt finance).

The APV of the project is the total of these two items.

These encompass the general costs of running the business. For example salaries and related costs of general management including administrative overheads.

UK insolvency law. An order of the court made in relation to a company in financial difficulties with a view to securing its survival as a going concern or, failing that, to achieving a more favourable realistion of its assets than would be possible on a liquidation or through a voluntary arrangement. While the order is in force, the affairs of the company are managed by an administrator.

An insolvency practitioner appointed by the holder of a floating charge over a company's property.

1. The person notified to HMRC (in the UK) as being responsible for the management of a pension scheme.

2. More generally, a person responsible for day to day administration, in any type of organisation.

3. Loosely, an administrative receiver.

American Depository Receipt. These are certificates representing ownership of a company’s shares held by a depository (usually a US bank) in the issuing company’s country. Each ADR represents, say, 10 shares in an Indian company. These ADRs are then traded independently of the underlying shares. This system avoids the problems of direct listing inherent in US securities regulations. It also simplifies dividend payments as they can be in dollars.

(ACT). A payment which was formerly made to the Inland Revenue whenever a UK company paid a dividend - now abolished.

In transactions involving letters of credit (LCs), an institution advising the beneficiary (exporter), of an LC opened in its favour.

Also called Position netting.

Abbreviation for Annual Effective Rate.

Abbreviation for Annuity Factor.

A written statement of fact made for legal purposes under oath before a notary public or other authorised officer.

Agency is a relationship between at least two parties in which one, the principal, authorises the other, the agent, to represent his legal interests and to perform legal acts that bind the principal.

See Agency theory.

This theory states that company directors act on behalf of shareholders as their agents.
An important consequence of agency theory is agency costs. Agency costs can arise when the interests of directors and shareholders are not well aligned, and the directors act in their own personal interests, and not in the best interests of the shareholders.

See Agency.

1. A bank which is responsible for the administration (including interest rate fixing) of a syndicated credit or bond issue, and which represents the lenders collectively in any negotiations with the borrower.

2. A custody term designating any bank providing custody services on behalf of a custodian for securities traded in the country where the bank is based.

(AD). Total demand for goods and services in the economy. Aggregate demand is defined as: Budget deficit + Investment + Consumption expenditure + Balance of trade surplus.

In pensions funding, an example of a Projected benefits funding method.

Aggregate demand for goods and services measured in nominal terms.

Total supply of goods and services in an economy by firms.

Accounting. One of the key stages in the preparation of consolidated group accounts. Aggregation is the adding up of the individual assets, liabilities and trading of each of the entities in the group.

The other key stage in this process is the making of consolidation adjustments.

Abbreviation for Annual General Meeting.

Abbreviation for Accrued Interest.

Abbreviation for Association of International Bond Dealers.

Company law. The process whereby a company issues shares to its members, for value.

Abbreviation for Asset-Liability Management.

That portion of an investment’s return arising from specific (that is non-market) risk. It is a measure of the difference between the actual return and the expected performance arising from exposure to market risk factors. Also known as the error term.

The hypothesis that applies when the null hypothesis is false.

See American-style option.

An option which can be exercised at any time up to and including its final maturity.

1. The spreading of a pension scheme surplus or deficit over a period of time, often for the purposes of granting a Contributions holiday (in the case of a surplus) or calculating deficit reduction contributions (in the case of a deficit).

2. The repayment or reduction of the principal amount of an obligation over time. For example the repayment of loan principal by instalments.

3. In financial accounting, the writing down of the value of an intangible asset over time. Similar to the depreciation of tangible fixed assets.

A type of interest rate swap.

Amortising swaps calculate interest on a reducing notional principal amount over the life of the swap, in order to hedge underlying exposures whose principal amount is also reducing. For example, to hedge a loan being repaid by instalments.

Same as Amortisation.

Abbreviation for Accumulating Net Asset Value.

VAT. An adjustment made at the year end to correct errors in the allocation of input tax recovered.

(AER). The same as Effective Annual Rate (EAR).
The term AER is more commonly used in the context of investment. (The term EAR being more commonly used in the context of borrowing.)

Near enough the same as Effective Annual Rate.

The same as the Effective Annual Rate.

UK company law. Also known as AGM. A meeting of company members required to be held each year.

UK tax. Interest which is not short interest.

A legally defined consistent basis for quoting and comparing retail rates of return and interest payable (especially interest payable).
Similar to the effective annual rate.

The complete document produced by a company (or other reporting entity) each year including the complete set of financial statements and other matter required under company law and relevant accounting practice together with - for companies with listed securities - relevant securities law and regulation, listing regulations, and other relevant regulations. Sometimes known as the Report and accounts.

1. UK company law. A formal document that UK registered comapanies are required by law to send to the Registrar of Companies, each year.

2. More generally, any other similar report containing financial or other information.

1. A series of equal future periodic cash flows, starting at Time 1 and ending at a predetermined future Time n.

2. More generally, any series of future periodic cash flows, either equal in amount or growing at a fixed compound rate per period, starting at a future time or already in payment, and usually ending at a later future time.

3. Any financial arrangement in which a periodic income is paid to an individual, often as a pension.

4. An insurance contract purchased from a life assurance company that pays an income in exchange for a lump sum. There are many variations on such annuities, depending on the nature of the income stream.

An annuity in which each of the cash flows is paid in advance (at the start of each period).

A method for calculating the total present value of a simple fixed annuity. Mathematically it is the cumulative discount factor for maturities 1 to n inclusive, when the periodic cost of capital is the same for all relevant maturities.

The present value of the annuity is then:
= AF x Time 1 cash flow.

The Annuity Factor for 'n' periods at a periodic yield of 'r' is calculated as:
AF(n,r) = 1/r x [1-(1+r)^-n]

Also known as the Annuity formula.

The present value of an annuity calculated using an annuity factor as:

= AF x Time 1 cash flow.

An annuity in which each of the cash flows is paid in arrears (at the end of each period).
This is the usual case, so that such a pattern of cash flows is more commonly called simply an annuity.

Tax. A rule introduced by governments and/or tax authorities to combat avoidance of tax.

An increased likelihood for people to take out insurance contracts where they believe their particular risk is higher than the insurance company has allowed for in calculating its premiums.

Laws that discourage monopoly and restrictive practices and encourage greater competition.

Auditing Practices Board.

Asset Purchase Facility.

Pensions. See Scheme Actuary.

Law. In administrative law, the allocation of a sum of money to a particular purpose.

A retirement benefit scheme approved by HMRC (in the UK) and thus qualifying for certain advantageous tax treatments.

Abbreviation for Assured Payment System.

Abbreviation for Adjusted Present Value.

1. In a broad sense, arbitrage means identifying discrepancies between quoted market prices, and then dealing simultaneously in the related market instruments to earn profits free from the risk of changes in market prices.
The simplest theoretical form of arbitrage activity would be to deal simultaneously in two identical instruments at two different market prices.
In practice such simple arbitrage opportunities are very rare. More commonly, arbitrage activities involve dealing in equivalent combinations of larger numbers of different instruments.

A market participant who takes advantage of arbitrage opportunities is known as an arbitrageur.
Under efficient market conditions, the activities of arbitrageurs and other market players create supply and demand pressures in the market which act to eliminate temporary pricing discrepancies.

Many valuation and pricing models are based on ‘no arbitrage’ assumptions. In other words, the valuation models assume that all pre-existing arbitrage opportunities in the market have been identified and eliminated, so that it is now possible to predict the values and market prices of traded instruments by calculating them from other related market prices.

2. Defined more narrowly, arbitrage means the purchase of securities in one market and the simultaneous sale of the same or equivalent securities in the same or related markets, in order to earn immediate profits from a price differential within a market or between related markets.

A market participant who takes advantage of arbitrage opportunities.

Contract law. A term of a contract constituting an agreement to refer disputes arising out of the contract to arbitration.

Abbreviation for Accounts Receivable Conversion.

The arithmetic mean of a set of data is the simple average calculated by adding up all of the values and dividing by the total number of items. For example, the arithmetic mean of 4%, 5% and 6% is = (4% +5% +6%)/3 = 5%.
Also known as the Mean or the Expected value E[X].

See Arm's length principle.

When a transaction between two related or affiliated parties is conducted (and priced) as if they were unrelated, so that there is no question of a conflict of interest (or of tax avoidance).

Accounting Rate of Return.

A front-end fee normally charged by a lead bank for arranging a syndicated credit. Occasionally a lender may seek to charge a similar fee in a bilateral arrangement, depending on market conditions.

This is the formal document that explains the internal organisation of a UK company. The Articles of Association are filed along with the Memorandum of Association when registering a company.

Accounting Standards Board.

A type of option where the amount that needs to be repaid is determined by the underlying asset’s average value over a specific period of time.

1. Same as ask rate (also known as offer rate).

2. Request.

The offered (selling) price of traded securities or other instruments, i.e. the price which a buyer would be expected to pay.

Same as offer rate.

Abbreviation for Application Service Provider.

(ABCP). Commercial paper secured by specified bundles of assets. For example mortgage loans, consumer loans, car loans and the like. Frequently issued by special purpose vehicles to fund the investment in those assets.

The beta value for the securities issued by a company which can be observed incorporates both financial and business risk. The asset beta is calculated from the observed beta; to reflect the beta value which would be observed if the company were all equity financed. It is therefore indicative of the business risk of the company. The asset beta is also called the ungeared beta.

A ratio of tangible assets to debt. Loan covenants often require a minimum asset cover to protect the lender's security.

(APF). An arrangement established in January 2009 under which the Bank of England is authorised to buy high-quality private sector assets including: corporate bonds, securities issued under the Credit Guarantee Scheme, syndicated loans and asset-backed securities created in structures acceptable the Bank.

1. Pensions. The risk of adverse effects resulting from (i) losses in the market values of assets invested in by a pension fund, or (ii) worse than expected investment returns from those assets.

2. Similar risks for any other organisation which has part or all of its funds held in the form of investment assets.

1. The value of an asset in the accounts of a company.

2. The value of a business determined by estimating the value which might be obtained by selling the assets (as distinct from selling the business as a going concern). This use of the term originally meant literally selling assets; now it is as likely to mean selling the component businesses of a group as separate assets.

(ALM). An approach to risk management which analyses an organisation's assets and liabilities as a combined portfolio.

Asset-liability management is particularly concerned with the management of interest rate risk, taking account of the expected impact of interest rate changes both on assets and on liabilities, and also taking account of the relationships between the expected impact on the assets and the expected impact on the liabilities.

1. Financial accounting. Possessions or resources controlled or owned by the reporting entity.
2. More generally, possessions or resources (whether or not owned by a financial reporting entity).

The formal process by which a right or contract is transferred from one party to another.

Financial accounting. An investment is classed and accounted for as an associate (or associated undertaking) when:
(i) the investor exercises significant influence over the operating and financial policies of the other entity, which is normally through holdings of over 20%, but less than 50%; and
(ii) that other entity is not a subsidiary undertaking and the investment does not constitute an interest in a joint venture.

UK tax. A company which is either under common control or where one company controls the other.

UK group accounting. An undertaking in which another undertaking included in the consolidation has a participating interest, and over whose operations and financial policy it exercises a significant influence, and which is not a subsidiary or a joint venture.

(ACT). The leading global provider of treasury education, established in the UK in 1979.

(APS). An arrangement in an exchange-for-value system under which completion of the timely settlement of a payment instruction is supported by an irrevocable and unconditional commitment from a third party (typically a bank, syndicate of banks or clearing house).

Same as Public key encryption.

1. An option is at the money when immediate exercise of the option would result in neither a gain nor a loss.

2. A derivative such as a swap is at the money when, for example, the swap rate is equal to the relevant current market rate, so that the net present value of the derivative is Nil.

1. Abbreviation for Automated Teller Machine.

2. Abbreviation for At The Money.

Pensions funding. An example of a Projected benefits funding method.

In relation to accounting for long-term contracts, that part of the total profit currently estimated to arise over the duration of the contract, after allowing for estimated remedial and maintenance costs and increases in costs so far as not recoverable under the terms of the contract, that fairly reflects the profit attributable to that part of the work performed to date, as at the accounting date.

1. The financial auditor’s primary role is to form an independent opinion on the truth and fairness of primary financial statements.

2. In a broader sense, auditing refers more generally to the process of independent reviewing and reporting on financial and non-financial information.

These are issued by the Auditing Practices Board in the UK and give guidance to external auditors, but they are not mandatory.

(APB). This body establishes auditing standards and guidelines for professional auditing firms.

UK auditing standards are prescriptive rules for external auditors on all audits.

A required constituent of a company’s annual audited accounts. The auditors’ report states the financial information has been audited, it states the respective responsibilities of auditors and directors and gives the basis for the audit opinion and the opinion itself. The opinion will relate – among other things - to whether the accounts present a true and fair view of the state of affairs of the company.

Pensions. The improvement of benefits contractually payable under a pension arrangement, either by the exercise of discretionary powers by the Trustees, or at the request of the employer (in which case they will usually be accompanied by additional contributions).

Treasury. A key control in treasury. Authorisation needs to be provided for all transactions in treasury and given only by a small number of people with the appropriate (seniority) qualifications. The individuals with power of authorisation should be listed in a document also specifying the various transactions that can be authorised, procedures for controlling authorisation, etc.

Treasury. Limits set by treasury to the number of dealers allowed to carry out transactions, the value of the transactions they can execute and the number of people giving authorisation. More generally, limits can also be applied to the financial risk that a company or organisation is willing to bear. Limits can, for example, be set for the proportion of foreign exchange exposures and the time period within which they should be hedged. The company/organisation may also, for liquidity reasons, limit the types of deals that it wants to have transacted. Another area of authority limit concerns the level of counterparty credit exposures resulting from deals such as those in derivative products. In some exceptional situations, the dealer may have to exceed the risk and authority limits set by the management. In such cases, it is essential for the dealer to have the transaction approved by the relevant responsible manager.

(ACH). A domestic electronic clearing system in which payment orders are exchanged among financial institutions, primarily via magnetic media or telecommunication networks, and handled by a data-processing centre.

(ACSS). Canada. Low value transfer system.

(ATM). An electromechanical device that permits authorised users, typically using machine-readable plastic cards, to withdraw cash from their accounts and/or access other services, such as balance enquiries, transfer of funds or acceptance of deposits. ATMs may be operated either online, with real-time access to an authorisation database, or offline.

1. When funds deposited with a bank or other financial institution will become available for use.

2. The time lag in days before funds will become available for use.

The amount of funds available for withdrawal from an account.

A third party guarantee of payment on a bill of exchange or promissory note.

Pensions. Additional Voluntary Contribution(s).

1. A calculation of the maturity of a bond taking account of any potential early redemption.

2. A calculation of the weighted average of the maturities of bonds in a portfolio, which includes all adjustable coupons, mortgage prepayments and puts.

The weighted average maturity of a loan, bond or security - after taking into account amortisation provisions.

The amount of time needed for all securities held in a portfolio to reach maturity, weighted by the amount of assets invested in each security.

As opposed to average effective maturity, it does not take account of a potential early call, adjustable coupons, mortgage prepayments and puts.

Management accounting. Total cost divided by output.

Also known as Weighted Average Maturity. A calculation of the weighted average of the maturities of fixed income instruments held in a portfolio. Average weighted maturity is correlated to the risk profile of the portfolio, for example, longer Average Weighted Maturity implies greater price volatility.

Abbreviation for Business to business.

Abbreviation for Business to customer.

Abbreviation for Banker's Acceptance.

The part of the treasury organisation that administers and supports the trading activities of the treasury front office. The back office’s main functions are to process, confirm, verify, settle, reconcile and record financial market transactions. The back office is also responsible for ensuring that the organisation’s treasury management policy and controls are followed, as well as ensuring general compliance with rules and regulations. In a more general sense, the term refers to all administrative functions that support an organisation and includes areas such as payroll and expenses, accounts payable, accounts receivable and accounting.

1. Back testing is a form of scenario analysis in which historical data are input into a financial forecasting model.
The idea is to identify - according to the model being used for the back testing - what the future outcomes would be if the selected historical scenarios were to recur in the future.

2. Another use of back testing is to test the validity and accuracy of the forecasting model itself, in cases where actual historical data is available in relation to the output of the model. In this form of back testing historical data are input into the forecasting model, and the outputs from the model being back tested are compared with the related actual data for the variable being forecast by the model. Any differences identified may be the result of errors or limitations in the forecasting model.

Compensation practice of banks in some jurisdictions where debits to a customer’s statement of account will reflect a date prior to the actual outflow of funds.

See Back value date.

1. A mechanism under which two parties lend each other matching sums on matching terms in different currencies or on a different interest rate basis, with the objective of obtaining a cost advantage or of hedging currency or interest rate risk.

2. A similar arrangement undertaken for any other purpose.

The extent to which a spot price of a foreign currency plus carrying cost exceeds the forward price.

Abbreviation for Bankers' Automated Clearing Service. A funds transfer system.

Accounting. An item in the income statement of a reporting entity, reflecting the total amount of losses from irrecoverable trade receivables during the accounting period under review.

Accounting. An item in the balance sheet of a reporting entity, reflecting the estimated amount of total trade receivables which are expected to be irrecoverable.

In accounting terms, bad debts are a potential source of overstatement of assets as a result of credit customers being unable to pay their debts to the company.

In commercial terms, bad debts are a potential source of losses.

Tax. The six elements which identify whether or not trading is taking place for tax purposes.

Banking. Information on current ledger and collected balances, one and two-day float, debit and credit detail, and adjustment items. Average balances and a balance history may also be reported.

Same as Single legal account pooling.

A pension scheme where the beneficiary makes a defined contribution (usually a percentage of Pensionable Salary) and the main sponsor pays the remainder of the (unknown) cost of providing the benefits. Most UK Defined Benefit pension schemes have historically been of this type.

A financial statement prepared for a country summarising the flow of goods, services and funds, inwards and outwards, between the residents of that country and the residents of the rest of the world during a particular period.

The level of a country's exports minus imports. A trade surplus is where exports exceed imports. A trade deficit is where imports exceed exports.

One of the primary statements of a company’s financial accounts. The balance sheet lists the assets, liabilities and shareholders’ funds at the balance sheet date.

Tax. An adjustment arising on the disposal of an asset for UK capital allowance purposes.

UK tax. Capital allowances adjustments arising on the disposal of certain individual fixed assets where the sale proceeds are less than the balance of unrelieved expenditure (TWDV).

UK tax. Capital allowances adjustments arising on the disposal of certain individual fixed assets where the sale proceeds exceed the TWDV or where there is a negative value in the general capital allowances pool.

A final repayment of a loan or bond which is substantially larger than any previous amortised payment.

1. A regulated institution offering certain financial services.
In the UK, the banking system includes the Bank of England (the Central Bank), the Commercial Banks, Merchant banks plus branches of foreign banks and the National Savings bank and the National Girobank.

2. To deposit (cash, cheques or similar) in a bank or transact business with a bank.

An account maintained by a bank or a building society in which a depositor’s money is kept.

A cheque drawn by a bank on itself. The cheque is purchased by the payor and sent to the payee, who presents it to its bank for payment. That bank presents it to the payor’s bank for reimbursement.

A draft drawn by a bank on itself. The draft is purchased by the payor and sent to the payee, who presents it to its bank for payment. That bank presents it to the payor’s bank for reimbursement.

Time during which a remittance in the banking system is available neither to the payer nor to the payee.

(BIC). Banking. An internationally agreed ISO standard, a bank identifier code uniquely indentifies a bank’s address. Also known as a SWIFT address.

The central banking authority in the UK.

A comprehensive approach to managing important banking relationships, covering both credit and non-credit services.

A remittance process whereby a payer may make a payment at any branch of any bank for the account of a payee at any branch of the same or any other bank. Also called credit transfer or direct transfer.

(BA). A bill of exchange (draft) which has been accepted by a bank.
A draft accepted by a bank constitutes an unconditional and binding obligation on the part of the bank to pay the draft at maturity.

Payment order issued by a bank on behalf of its customer, whereby the recipient looks to the bank for settlement, thus minimising credit risk for the recipient.

Same as Costs of financial distress.

A chart where the quantity of an item is represented by the height of a bar.

Obstacles which prevent a new firm from entering a market. Barriers may include natural, legal or artificial barriers.

1.The base currency in a foreign exchange rate quotation is the currency which there is one of.

For example in the quotation 1 GBP = 1.4600 USD, the base currency is GBP; meaning one British pound is exchanged for a variable number of USD, depending on the rate quoted.

Also known as the Reference currency or the Fixed currency.

2. Generally it means the currency to which other currencies are compared. In a multicurrency liquidity arrangement, refers to the currency in which the master account is denominated and to which all other currencies are converted. The base currency also serves as the basis for all interest rate calculations.

A widely recognised and quoted interest rate - such as the Fed funds rate, the prime rate, or the London Inter Bank Offered Rate (LIBOR) - by reference to which a rate of interest is calculated.

For example, ‘LIBOR plus 50 basis points’.

An agreement developed by the Basel Committee on Banking Supervision to promote international standards for measuring the adequacy of a bank's capital.

The flat rate pension (in the UK) paid to all who have met the minimum National Insurance Contribution requirements and reached the statutory retirement age.

1. The method or convention under which a value or price has been calculated.

2. See Basis risk.

3. In futures markets, the price differential between the price of the asset underlying the futures contract and the price of the futures contract.

In futures markets, the price differential between the price of the asset underlying the futures contract and the price of the futures contract.

1. One hundredth of 1% = 0.01% = 0.0001 as a decimal.

2. While bond coupons may be expressed in fractions (for example, quarters, eighths or sixteenths), yields and prices of most money market instruments, such as commercial paper or treasury bills, are quoted in basis points.

See basis point.

Basis risk means the risk of an unfavourable change in the relationship between the price of a derivative and the market value of an underlying asset or liability being hedged. For example resulting in a smaller profit being enjoyed on a hedging derivative, than the loss suffered on the underlying exposure. Good hedge design therefore seeks to eliminate or minimise basis risk in the hedged position, so far as practicable.

A swap that exchanges two floating interest rates, each being calculated on a different basis. For example, 3-month LIBOR against 6-month LIBOR, or LIBOR against Prime.

The use of a basis swap for hedging is to transform a borrowing or deposit with interest calculated on a particular basis, into a synthetic liability or asset with interest effectively calculated on an alternative basis. This alternative interest basis being considered preferable by the hedger.

The transmission or processing of a group of payment orders and/or securities transfer instructions as a set at discrete intervals of time.

Abbreviation for British Bankers’ Association.

Business contingency management. Same as disaster recovery planning.

An investor or trader who takes the view that market prices are likely to fall and sells securities hoping to make a profit by subsequently buying at a lower price. Hence 'bear market' describes a market which is on a trend of falling prices.

1. Options speculation. A composite speculative deal in two options, which results in a profit/loss profile similar to a conventional put option, except that the upside potential is capped in return for a reduction in the net premium payable. A bear spread can be constructed using put options by buying a put with a given strike price, and selling an otherwise identical put with a lower strike price. It can also be constructed using appropriate call options.

2. Hedging with options. A composite transaction in two options plus an underlying asset or other exposure, resulting in the same profit/(loss) profile as the deal described in 1. above.

Description of a Bearer instrument.

A bond/security that is not registered in the name of a specific owner. The owner of the bond is the person who holds it. Thus, title to the bearer bond is transferred through delivery. Principal and interest were historically paid, upon presentation of coupons, to a paying agent though nowadays bearer bonds usually operate by book entry, whereby investors buy and sell their interests in a global note representing the entire issue and held within the clearing system.

A valuable document, which does not bear the name of its legal owner and may be redeemed by whoever is in possession of it. Bearer instruments are not registered to the holder, and can therefore be transferred by delivery.
Also known as a bearer security.

The same as a Bearer instrument.

Economic analysis which takes explicit account of the social, emotional and psychological drivers of economic activity, including behaviours deemed to be 'irrational' under more traditional economic theories.
The insights of behavioural economics into 'irrational' decision making in the economy may provide a theoretical basis for some types of technical analysis and forecasting of market prices.

A standard set by the market (such as stock market index) or by an institutional investor (such as an internally developed benchmark) against which the performances of a fund or portfolio can be managed and tracked.

The practice of comparing performance of a business or investment operation, typically against a best practice standard in a given field, industry, or investment asset class.

The party that is named by the grantor, settler or creator of the trust and is entitled, according to the terms in the respective trust deed, the benefit from the revenues of the trust.

(BIK). A benefit - usually taxable - received by an employee due to their employment.

Pensions. The main administrative body within the UK Department for Work and Pensions, responsible for ascertaining the entitlement of individuals to State pension benefits and for making such pension benefit payments.

Abbreviation for Break even point.

See Bermudan-style option.

An option which can be exercised only on pre-specified dates up to its maturity. So Bermudan options’ characteristics are part-way between European-style and American-style options in respect of their exercise dates.

The term derives from Bermuda's geographical location 'part-way' between Europe and America.

Dealer’s instruction to sell securities or assets at the highest price possible.

Dealer’s instruction to buy securities or assets at the lowest price possible.

A measure of market risk.

Beta can refer to the market risk for a single financial asset or to an entire portfolio. By definition, the beta of the whole market is one.

Therefore a beta of greater than 1 means that, on average, the asset will increase in value by more than the market when the market is rising – and reduce by more than the market when the market is falling. An asset with a beta less than 1 will increase and reduce in value by less than the market.

Abbreviation for Bond Equivalent Yield.

Abbreviation for Bank Identifier Code.

A form of guarantee by a bank or insurance company to a potential customer against a tenderer's failure to sign a contract in accordance with the terms of the tender.

The market-maker’s buying price of securities or assets.

The price at which market makers are willing to buy currencies or other traded assets.

The same as Bid-offer.

Bid offer prices (or bid-ask prices) are quoted by market makers simultaneously as the prices at which they will deal with the market either to buy or to sell.

Spread means the difference between the bid price and the offer price. The greater the spread, the greater the market maker’s compensation for their work and risk in making the two way price; and the greater the all-in transaction cost for the price taker.

The difference between the prices at which market makers (such as banks and other foreign currency dealers) are willing to buy and sell currencies or other traded assets.

Benefit in Kind.

Involving two parties only. For example, a bilateral loan is a loan agreement between one lender and one borrower.

A settlement system in which participants’ bilateral net settlement positions are settled between every bilateral combination of participants.

An arrangement between two parties to net their bilateral obligations. The obligations covered by the arrangement may arise from financial contracts, transfers or both.

For example purchases between two subsidiaries of the same company may be netted against each other so that over time, typically one month, only the net difference is transferred.

Bills of exchange are widely used to finance trade and, when discounted with a financial institution, to obtain credit.

The formal legal definition of a bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a certain sum in money to order or to bearer.

Expressing this in less formal language, it is a written order from one party (the drawer) to another (the drawee) to pay a specified sum on demand or on a specified date to the drawer or to a third party specified by the drawer.

Document signed by a freight carrier to show receipt of goods for transportation.

Binomial probability distributions assume that at any one time there are only two possible outcomes. For example a fixed percentage size jump up or jump down in the market price of an asset. A binomial tree or binomial lattice can then be built up from a series of binomial outcomes, to model asset prices or other variables over longer periods.

A discrete probability distribution that applies when an experiment is conducted n times with each trial having a probability p of success and each trial is independent of every other trial.

An option pricing model which assumes a binomial tree of possible underlying asset market prices.

See Binomial.

The Black Scholes option pricing model is an example of a risk-neutral valuation model. It models the value of European-style options on non-dividend paying assets, based on the underlying price, the strike price, the underlying volatility, the time to expiry and the risk-free rate of return.

Endorsement of a negotiable instrument without naming the person to whom it would be paid.
(Also known as Endorsement in blank.)

VAT. Input tax that can never be recovered, for example Input tax on business entertaining.

The UK City Code on Takeovers and Mergers.

A worker who performs manual labour.

The managers of a company elected by the shareholders or members.

Latin term referring to persons or actions that are in good faith and honest.

1. A marketable longer-term debt instrument usually administered by a trustee. Bonds typically require the issuer to repay the amount borrowed plus interest over a designated period of time. The current market yield on the bond is both the market rate of return to the debt investor and the pre-tax market cost to the issuer of debt capital. Issuers of bonds include a wide range of corporate and public sector entities, including central governments.

2. A guarantee provided by one party to another as part of a contract.

3. An amount of money provided as security for a guarantee.

4. An instrument issued by a bank or an insurance company, in favour of a buyer, on behalf of a supplier, as additional assurance to the buyer that the supplier will perform its obligations under the supply contract. Such a bank bond or insurance company bond will be supported by an indemnity issued by the supplier in favour of the bank or insurance company.

The method used to calculate accrued interest in the eurobond market using a 360 day year of twelve 30 day months (known as 30/360).

(BEY). A conventional basis of short term yield quotation, which counts Actual days per 365 day conventional year.

Bond futures are an example of long term interest rate futures.

They are derivative contracts whose price is related to the market price of a specified reference bond.

A specialised Trust deed used in a bond issue.

1. An issue of bonds.

2. A term to describe all of the bonds issued at the same time, under the same terms.

A distribution of free shares to shareholders based on existing shareholdings.

An abbreviation for Book value.

An electronic method of registering ownership of and transferring securities.

Transfers directly from one account to another account within a bank.

A person who records business transactions in a ledger (paper or electronic).

The skill or occupation of systematically recording business transactions.

1. Any provision in a company's financial accounts.

2. A provision in a company’s accounts for a future pension benefit liability for which no funds have been set aside. Book reserves are commonly encountered in countries such as Germany.

The value as recorded in a company’s books, in other words its accounts including its published balance sheet. Historically the book value of an asset was normally its original cost less any depreciation or other write-down in value. This is distinct from market value, the fair market price which the asset might be expected to raise if offered for sale.

More recently, accounting practice has been moving toward a system of book valuation which is aligned more closely with market values.

An accounting system that allows the transfer of claims (for example, securities) without the physical movement of paper documents or certificates.

1. To calculate zero coupon yields from given par yields for the same maturities of funds.
2. More generally, to calculate any yield curve from another given yield curve for the same maturities.
3. To undertake any calculation process where the results from earlier calculations are inputs to subsequent calculations.
4. See Bootstrap effect.

The short-run increase in earnings per share which occurs in a share for share exchange when a company trading on a higher price to earnings ratio acquires a company trading on a lower price to earnings ratio.

See Bootstrap.

1. Accounting. An informal name for Net profit.
2. By analogy, the net result or net effect of any decision or other course of action.

A new issue procedure for securities whereby one or more lead managers commit to underwrite an entire offering of securities on agreed terms, rather than offering to place the issue on a best efforts basis.

An abbreviation for Basis point.

Abbreviation for Basis point.

Abbreviation for Business process re-engineering.

Failing to perform any term of a contract, written or oral, without a legitimate legal excuse.

1. (BEP). The number of units of production at which contribution is equal to total fixed cost, in other words this is the level of production at which a producer will neither earn a profit nor make a loss.

2. The market price at which a strategy results in neither a profit nor a loss.

3. A point - however measured - at which two alternative strategies give the same result. It is therefore the point of indifference between two choices or strategies, for example two trading strategies each resulting in the same expected profit. So when the breakeven point is crossed, the optimum decision or choice will change.

See Break even point.

Same as Liquidation value.

See Break even point.

1. A market intermediary who brings together buyer and seller for a commission paid by the initiator of the transaction or by both sides. The broker does not take market positions itself.

2. More specifically, an individual or a firm (also called broking house) that acts as an agent for investors by dealing in securities. Usually, the broker will charge commissions (called brokerage) for providing advisory and trading services. Brokers do not buy or sell on their own account but act as agents for clients.

Abbreviation for Business Service Provider.

1. Any plan expressed in monetary terms.

2. The level of taxation minus government spending. A budget surplus is where taxation exceeds government spending. A budget deficit is where government spending exceeds taxation.

3. A formal statement - normally made annually - by the UK Chancellor of the Exchequer setting out the government's taxation proposals for the next fiscal year.

A graphical representation of the amounts an individual can buy of two alternative goods, given his income and the prices of the goods.

See retail funds transfer system.

Pensions. The transfer of pension liabilities (and usually an equivalent value of assets), relating to a group of members, from one pension scheme to another. Such transfers often arise in connection with merger and acquisition activity.

An investor or trader who takes the view that market prices are likely to rise and buys securities hoping to make a profit by subsequently selling at a higher price. Hence 'bull market' describes a market which is on a trend of rising prices.

1. Options speculation. A composite speculative deal in two options, which results in a profit/loss profile similar to a conventional call option, except that the upside potential is capped in return for a reduction in the net premium payable. A bull spread can be constructed using call options by buying a call with a given strike price, and selling an otherwise identical call with a higher strike price. It can also be constructed using appropriate put options.

2. Hedging with options. A composite transaction in two options plus an underlying asset, resulting in the same profit/(loss) profile as the deal described in 1. above.

A sterling denominated bond issued by a foreign borrower in the UK domestic market.

Repayment of a loan or bond in a single lump sum at final maturity, without amortisation.

Activities undertaken for the purpose of earning profits.

Larger businesses are normally undertaken by companies. Smaller and medium-sized businesses are more commonly undertaken by sole traders or by partnerships.

(BCM). Same as disaster recovery planning.

The purpose, strategy and trading practices of a business.

(BPR). An approach to business analysis and development which seeks improvements by adopting a 'clean sheet' approach, without preconceptions.

UK and other financial reporting. A narrative report, which may also contain numerical tables and other analysis, required in an Annual report (or similar financial report).
Similar to the Management discussion and analysis under US financial reporting.

1. In the Capital Asset Pricing Model this term is used to mean the ungeared beta of the business. Because it is ungeared it represents the overall risk (beta) of the business with its element of financial risk removed. Risk in this CAPM context is defined narrowly to mean the correlation between movements in the company's share returns and the returns to the overall market.

2. The term is also used more broadly to refer to the set of risks taken by a business in seeking to operate in a normal competitive environment; launching a new product or investing in new equipment. These decisions are risky and they may or may not result in the expected reward, they may even result in extreme cases in the demise of the business. Many firms attempt to limit the scale of this risk by restricting the range of their business to their core competences.

Same as operating unit.

A form of export finance under which the Export Credit Guarantee Department's (ECGD's) unconditional guarantee to a bank in the UK enables that bank to make a loan to the overseas customer of a UK exporter, which in turn enables that customer to pay the exporter on cash terms of payment.

The sterling/US dollar spot exchange rate.

1. A request or demand, which may (or may not) be legally enforceable.

2. An abbreviation for Call option.

Funds placed with a financial institution without a fixed maturity date (i.e. the money can be 'called' or withdrawn at any time).

An option which gives the holder the right to buy an underlying asset at the strike price specified by the option.

1. An option hedging structure which effectively establishes a maximum worst case hedged rate or price, while allowing the holder of the cap to retain the potential benefit of more favourable lower market rates or prices.

2. A risk management arrangement whereby limits are placed on the positions that participants in an interbank funds transfer system can incur during the business day; they may be set by each individual participant or by the body governing the transfer system; they can be set in multilateral net, bilateral net or (less commonly) gross terms and can be either a credit cap or a debit cap; for example, bilateral net credit caps, set by an individual participant, will constitute a limit on the credit exposure which that participant will accept vis-à-vis each other participant; in contrast, sender net debit caps, which may for example be set by the governing body of the clearing system based on a particular formula, limit the aggregate value of transfers that an individual participant may send to all other participants over and above its incoming transfers. Sender net debit limits may be either collateralised or uncollateralised.

Abbreviation for Chargeable Accounting Period.

Environmental policy. Cap and trade is an environmental policy tool that aims to deliver results with a mandatory cap on emissions while providing sources flexibility in how they comply. Cap and trade programmes aim to reward innovation, efficiency, and early action and to provide environmental accountability without inhibiting economic growth.

1. Law. Anyone can enter a contract, whether or not they have ‘capacity’ to do so. But if an individual who lacks contractual capacity enters a contract, the contract may not be enforceable. Problems of capacity may arise in relation to minors, mental incapacity or intoxication.

2. More generally, the ability to absorb or hold. For example, tax capacity or borrowing capacity.
(Tax capacity being the ability to use tax reliefs efficiently to shelter otherwise taxable profits or gains.
Borrowing capacity being the maximum amount of borrowing which can be sustained based on a firm's expected future cashflows and its assets.)

3. Banking. In relation to the individuals whom a bank will authorise to open and operate a bank account, the appropriate level of seniority and the role of the individuals within the business of the customer.

Abbreviation for capital expenditure.

1. Financial accounting. Money the business owes the owner. This is equal to assets minus liabilities (including debt). In other words, the equity.

2. Corporate finance. More broadly, the total amount of funding available for the operations of a firm. This would include both its debt and its equity.

Economics. The part of the balance of payments related to movements of long and short term capital.

The minimum amount of risk weighted capital that banks are required to maintain in proportion to the risk assets that they assume, normally used in connection with the requirements laid down by the Bank of International Settlements (BIS) and monitored by central banks. Historically the BIS standard has been 8%.

Relief from income tax and corporation tax based on eligible capital expenditure.

(CAPM). The Capital Asset Pricing Model links the expected market rates of return on traded assets with their relative levels of market risk (beta). The model’s uses include estimating a firm’s market cost of equity from its estimated volatility of returns and the prevailing market risk-free rate of return.

Expressed as a formula:
Ke = Rf + beta x [Rm-Rf]

Where:
Ke = cost of equity.
Rf = risk free rate of return.
beta = relative market risk.
Rm = average expected rate of return on the market.

Under the Capital Asset Pricing Model only the (undiversifiable) market risk of securities is rewarded with additional returns, because the model assumes that rational market participants have all fully diversified away all specific risk within their investment portfolios.

An accounting measure of the total value of resources available to management for use in the business.

(Capex). Amounts spent on acquiring fixed assets.

A realised increase in the value of a capital asset, as when a security or commodity is sold for more than the price at which it was purchased.

A UK tax charged on capital gains, when an asset is disposed of.

A UK VAT scheme used to reconsider the input tax recovery over a long period for certain classes of assets.

A loss arising on a chargeable disposal for UK tax purposes.

Capital markets trade longer-term financial instruments (usually with a life of more than one year) and equity.

Yields on instruments with maturities of more than one year are commonly quoted on an effective annual rate basis. (An exception to this being bonds with semi-annual interest payments, which are more commonly quoted on a semi-annual basis.)

A capital market swap is a longer-term derivative instrument. It is an agreement to exchange a series of cashflows at pre-determined future dates, usually settled for difference.

Examples of capital market swaps include interest rate swaps, basis swaps, and cross currency interest rate swaps.

Like other derivative instruments, capital market swaps can in theory be used for hedging, for arbitrage or for speculation.

Banking. The common framework for implementation of Basel II in the European Union.

Capital structure refers to the sources of capital for a firm as well as the proportion in which they are present.
This term is also used in a simpler way to refer to the relative proportions of equity and debt within the firm’s long-term capital.

1. Financial accounting. When a fixed asset is purchased the cost is not debited to the income statement (or profit and loss account). Instead the debit is to the balance sheet, creating an asset.

2. The total market value of a firm's capital.

The same as a Bonus issue.

Accounting. To treat an item of expenditure as the purchase of an asset (rather than as an expense). For example when a fixed asset is purchased the amount paid is not debited to the income statement (or profit and loss account). Instead the debit is to the balance sheet, creating an asset.

Abbreviation for Capital Asset Pricing Model.

1. A risk management arrangement whereby limits are placed on the positions that participants in an interbank funds transfer system can incur during the business day; they may be set by each individual participant or by the body governing the transfer system; they can be set in multilateral net, bilateral net or (less commonly) gross terms and can be either a credit cap or a debit cap; for example, bilateral net credit caps, set by an individual participant, will constitute a limit on the credit exposure which that participant will accept vis-à-vis each other participant; in contrast, sender net debit caps, which may for example be set by the governing body of the clearing system based on a particular formula, limit the aggregate value of transfers that an individual participant may send to all other participants over and above its incoming transfers. Sender net debit limits may be either collateralised or uncollateralised.

2. Option hedging structures which effectively establish a maximum hedged rate or price, while allowing the holder of the cap to retain the benefit of more favourable lower market rates.

A non resident company which is established in a low tax domicile, to insure the risks of its parent company and group subsidiaries.

Abbreviation for Courtesy Amount Recognition.

Environmental policy. Key component of national and international attempts to reduce the increase in concentrations of greenhouse gases. One Carbon Credit is equal to one ton of Carbon.

Environmental policy. (CRC). The UK's first mandatory carbon trading scheme (renamed the CRC Energy Efficiency Scheme) to address climate change and to promote energy saving from April 2010. Its aim is to reduce carbon dioxide emissions not already covered by climate change agreements and the Emission Trading Scheme, by reducing the UK's carbon footprint and meeting the emissions reduction targets set out in the Climate Change Act of 2008.

Environmental policy. Carbon trading is an application of an emissions trading approach. Greenhouse gas emissions are capped and then markets are used to allocate the emissions among the group of regulated sources. This approach is designed to allow market mechanisms to drive industrial and commercial processes in the direction of low emissions or less carbon intensive solutions.

A Defined Benefit pension scheme where the benefit for each year of membership is related to the Pensionable Earnings for that year. In some such schemes the benefits may be revalued each year by a formula related to retail price inflation.

A group of firms which collectively agree to fix their selling price or output or market share.
This is a breach of the law in most developed legal systems.

Documentation and regulation. A carve-out is a special exception. It can be used in the context of a loan agreement; a negative pledge might apply to all but specific subsidiaries. It might also be used in the context of regulation where, effectively, a section might be dis-applied.

Same as carve-out.

Reported decisions of the courts.

The most liquid of current assets, cash represents money in banks which is immediately available.

Documentary collection instructions requesting the presenting bank to deliver documents only upon receipt of payment from the importer.

A pension scheme in which the benefits are expressed in terms of a fund value that accumulates through indexation of the fund and the addition of future accrual. The accumulated fund value is used to purchase the required form of benefits when those benefits become due.

Accounting. The cash book will encompass any transaction which affects the bank account.

A card for use only in ATMs or cash dispensers (often, other cards also have a cash function that permits the holder to withdraw cash).

The movement of funds from outlying depository locations to a central bank account where they can be utilised and managed more effectively.

(CCD). An Automated Clearing House (ACH) payment format for concentration and disbursement of funds within a company or between companies.

(CCD+). An automated clearing house (ACH) format used for US Treasury Vendor Express Program and corporate-to-corporate payments.

(CCC). Indicates how long it takes a company to convert cash outflows into cash inflows.
For example in a manufacturing firm, the average length of time between payment for raw materials and other inputs, and the receipt of cash from the firm's customers.

An electromechanical device that permits the withdrawal of cash, typically using machine-readable plastic cards.

(CEV). Pensions. A lump sum in present day terms of the accrued rights of a member within a pension scheme. It assumes that the member is leaving service and makes a transfer to an alternative pension arrangement. The basis for the calculation of a CEV may be set out in the Trust deed, but even then may give Trustees discretion with respect to the valuation of discretionary benefits, which are often not taken into account. Generally the Scheme Actuary, or some other appointed actuary, will have considerable freedom in the actuarial assumptions used in calculating CEVs.

The same as cashflow.

A regular report sent by the company’s operations and subsidiaries to the treasury management headquarters informing about any cash excesses and deficits that they may have in the future.

The monitoring, analysing and adjusting of cash flow to organisation requirements.

Same as Cashflow Statement. It shows the cash movements within an entity, broken down into several categories prescribed by accounting rules.

The same as cashflows.

The process of predicting cash flows for the purposes of liquidity management and financial control.

Banking. A bundle of cheques accompanied by a list of individual items and control documents.

The effective planning, monitoring and management of an organisation's liquid and near liquid resources.

A cash pool is a structure involving several related bank accounts whose balances have been aggregated for the purposes of optimising interest paid or received and improving liquidity management. A cash pool can be physical or notional. A physical cash pool is a concentration account used for the purposes of managing liquidity. Surplus funds are physically concentrated into the account in order to maximise interest. Deficit accounts are covered by transfers from the cash pool in order to minimise overdraft interest.

A notional cash pool is a structure involving several related accounts whose balances have been aggregated for the purposes of optimising interest paid or received. In other words a bank looks only at the total balance of the accounts in the notional pool when calculating interest, but there is no physical movement of funds.

Same as Account positioning.

1. The total of cash deposits, short-term bank deposits, money market instruments and Treasury bills.

2. A firm’s cash reserves are the funds available to meet the firm’s needs for cash, including unanticipated needs.

Options are more commonly ‘cash settled’ by paying or receiving a net cash amount, rather than being settled by physical delivery of the underlying asset.

Credit terms under which the buyer generally has a week to 10 days to make the payment.

The movement of cash in or out of a business, a project or a financial instrument in a particular period.

1. One of the primary published financial statements of a reporting entity. The Cashflow Statement shows the cash movements within the entity, broken down into several categories prescribed by accounting rules. It reconciles the accounting profit in the income statement with the changes in cash and cash equivalents in the balance sheet.

2. An internal report giving similar information, but formatted according to internal management requirements.

Same as Bank draft.

Abbreviation for Cash Conversion Cycle.

Abbreviation for Cash Concentration or Disbursement.

Abbreviation for Cash Concentration or Disbursement plus Addendum.

Abbreviation for Cross-Currency Interest Rate Swap.

Abbreviation for Central counterparty.

An abbreviation for Certificate of Deposit.

Abbreviation for Credit Default Swap.

Abbreviation for Committee of European Insurance and Occupational Pensions Supervisors.

Same as Master account.

Same as Master account.

A bank which acts as bank for the government and the other banks in a country. In the UK, this is the Bank of England. In the EU, it is the European Central Bank. In the US, it is the Federal Reserve.

Requirement in some countries to report transactions between residents and non-residents to the central bank.

(CCP). A financial institution that acts as an intermediary between security market participants.

The central limit theorem is sometimes known as the law of large numbers. It states formally that the average of a large number of independent identically distributed random variables will have a normal distribution.

The central limit theorem is important in sampling theory. It explains that sample means follow a normal distribution - regardless of the actual distribution of the parent population - and that the sample mean is an unbiased estimate of the parent population mean.

The central limit theorem also explains why larger samples will - on average - produce better estimates of the parent population mean.

Statistics. Measures of the central location (or position) of a frequency distribution give an indication of where the data is grouped. Three commonly used measures of central location are the mean, the median and the mode.

(CSD). A facility for holding securities that allows securities transactions to be processed by book entry. Physical securities may be immobilised by the depository or securities may be dematerialised (solely recorded as electronic records). In addition to safekeeping, a central securities depository may produce comparison, clearing and settlement functions.

Abbreviation for Chief Executive Officer.

(CD). CDs evidence fixed maturity time deposits with issuing banks or other deposit-taking institutions. Maturities range from less than a week to five years. They are normally negotiable and enjoy a liquid secondary market.

A document issued by the UK Registrar of Companies giving a company its legal existence and its right to function as a company.

A certificate issued to prove ownership of a given security.

Abbreviation for Committee of European Securities Regulators.

An assumption in economic analysis that other variables remain unchanged. For example, looking at the relationship between demand and price, we assume for analysis purposes that all other variables are held constant.

Pensions. Abbreviation for Cash Equivalent Value.

Abbreviation for Compounding Factor.

Tax. Abbreviation for Controlled Foreign Company.

Abbreviation for Contract for Differences.

Abbreviation for Chief Financial Officer.

Credit Guarantee Scheme.

Capital Gains Tax.

Abbreviation for Clearing House Automated Payment System.

Tax. A recurring liability which income tax law allows as a deduction from the taxpayer's total taxable income.

UK corporation tax. (CAP). An accounting period for which a tax charge is made.

Any asset which is not an exempt asset for UK tax purposes.

UK tax. A company taxed in the UK on the gains arising on disposals of its world wide assets.

Tax. The price paid by the purchaser for determining UK stamp duty land tax.

Tax. A group of companies which may transfer assets around the group without an immediate chargeable gain arising for UK Corporation Tax purposes.

UK tax. An individual resident in the UK, a company in the UK or a company not resident in the UK, but which trades in the UK through a branch or agency.

The same as Technical analysis. Historically, it was based on drawing and analysing charts of market prices. (Hence the name.)

Tangible moveable property.

A written order from one party (the drawer) to another (the drawee, normally a bank) requiring the drawee to pay a specified sum on demand to the drawer or to a third party specified by the drawer. Cheques are widely used for settling debts and withdrawing money from banks.

The process by which a cheque is presented to and accepted by the drawee bank, the institution on which it is drawn.

A card issued as part of a cheque guarantee system. This function may be combined with other functions in the same card, for example those of a cash card or a debit card.

Scanning technology that allows cheques and other paper-based documents to be digitalised so as to allow electronic clearing.

Banking. The process by which essential information contained on a conventional paper cheque is captured electronically and the electronic information, not the paper cheque, is sent through the clearing system.

(CIO). The head of internal information technology in an organisation.

Also known as an IC (integrated circuit) card or smart card. A card containing one or more computer chips or integrated circuits for identification, data storage or special-purpose processing used to validate personal identification numbers (PINs), authorise purchases, verify account balances and store personal records.

Abbreviation for Clearing House Interbank Payment System.

Abbreviation for Chief Information Officer.

An economic model illustrating the flow of money from firms to households (in return for factor services provided) and from households to firms (in return for goods and services).

Currency interest rate swap. Same as cross-currency interest rate swap.

This is the short-form title of the UK City Code on Takeovers and Mergers, also referred to as the 'Blue Book'.

Body of law concerned with private rights and remedies.

Law. Also known as a plaintiff or a complainant, a claimant is the party who initiates a legal action before a court to seek a legal remedy, for example damages.

In the context of UK group tax relief, the company which obtains the benefit of the relief from another group company (the surrendering company) under group relief provisions.

Corporate finance. When arranging a placing of new shares there may be uncertainty about whether existing shareholders may take up their rights. In such cases the placing would be subject to the right of the issuer to reduce the number of securities placed. This reduction is called clawback.

Draft (bill of exchange) that is not accompanied by documents.

Letter of credit that calls for nothing more than a draft to trigger payment.

Bond pricing. The clean price is a conventional basis of quoting bond prices which excludes accrued interest. So the clean price is always less than or equal to the dirty price.

The funds in a bank account which are available for the account holder to drawn down against.

Banking. The process of transmitting, reconciling and, in some cases, confirming payment orders or security transfer instructions prior to settlement, possibly including netting of instructions and the establishment of final positions for settlement. In the context of securities markets this process is often referred to as clearance. Sometimes the terms are used (imprecisely) to include settlement.

1. In relation to facilities provided by a group of banks, the clearing bank is the primary bank which clears and settles a particular customer’s transactions.

2. More generally, a bank which provides clearing services.

The delay between the time a cheque is deposited by a payee and the time the payor’s bank account is debited.

(Check 21). USA A federal US law that aims to facilitate cheque truncation by creating a new negotiable instrument - the substitute check. Under the law, banks can truncate original cheques and process cheque images electronically as well as deliver substitute checks to banks that want to continue receiving paper cheques. However, the law does not require banks to accept cheques in electronic form or to create substitute checks, although it does require banks to accept substitute checks.

Funds transfer. A formal or informal association of banks in a geographic area that facilitates the exchange of items drawn on participants. This exists via a central location or central processing mechanism through which financial institutions agree to exchange payment instructions or other financial obligations (for example securities). The institutions settle for items exchanged at a designated time based on the rules and procedures of the clearing House. In some cases, the clearing house may assume significant counterparty, financial or risk management responsibilities for the clearing system.

(CHAPS). A UK-based payment system for high-value, same-day settlement of transactions. As a result of its migration to a new platform, it is also called NewCHAPS.

(CHIPS). An independent message-switching system that permits international financial transactions to be settled among New York banks. CHIPS is operated by the New York Clearing House Association.

A set of procedures whereby financial institutions present and exchange data and/or documents relating to funds or securities transfers to other financial institutions. The procedures often also include a mechanism for the calculation of participants’ bilateral and/or multilateral net positions with a view to facilitating the settlement of their obligations on a net or net net basis.

In addition to Euroclear, Clearstream is one of the leading clearing systems and depositories for euromarket securities as well as being a major international central securities depository (ICSD) and the central securities depository for the German and Luxembourg markets. Clearstream is owned by the Deutsche Borse.

A special form of netting that occurs following some predefined event such as default. Close-out netting is intended to reduce exposures on open contracts if one party meets certain conditions specified by the contract (for example, becomes subject to insolvency procedures) before the settlement date. Also referred to a default netting, open contract netting or replacement contract netting.

A pension scheme which does not admit new members. Contributions by existing members may or may not continue and benefits may or may not continue to accrue in relation to future service.

Pensions. Ceasing to allow new members to join a pension scheme. Closure of a pension scheme does not - of itself - mean the freezing of benefit accrual for existing members of the scheme.

Abbreviation for Continuous Linked Settlement.

1. Loans. A syndicated loan in which the (initial) members of the syndicate are each requested by the borrower. In such cases there is an agent bank but not necessarily an arranging (or managing) bank although larger lenders may be allocated such a title in order to justify additional fees.

2. Private equity. A transaction in which a number of private equity firms jointly undertake a buyout larger than any of them would wish to undertake alone.

A statistical sampling technique where the population is first divided up into non-overlapping areas and then some clusters are selected at random with items selected within these selected clusters at random.

Abbreviation for Constant Maturity Credit Default Swap.

Insurance and Pensions. Abbreviation for Continuous Mortality Investigation Bureau.

Abbreviation for Collateralized Mortgage Obligation. A type of bond.

Abbreviation for Constant Net Asset Value.

Same as Coefficient.

Same as coefficient of determination.

Same as Covariance.

1. A document issued by the UK Pensions Regulator providing practical guidelines on the requirements of pensions legislation and setting out standards of conduct and practice expected of those who must meet these requirements. They are not statements of law and there is no penalty for failing to comply with them, but courts and tribunals must take any relevant Codes of Practice into account.

2. More generally, relevant published and authoritative guidance not having direct legal effect.

Law. The process of collecting and arranging systematically, usually by subject, the statutes of a State.

Same as Correlation coefficient.

A statistical measure of the goodness of fit of a proposed regression with the observed data.

1. Pensions. A generational group of people as defined in demographical or statistical studies.

2. Any group of associates, for example a group of people taking an exam at the same sitting.

US Pensions. Abbreviation for Cost of Living Adjustment.

See Collar hedge.

Risk management. A form of hedge using options.

Collar hedges are more complex structures, compared with a simple cap option or floor option. But an advantage of collars is that they can reduce the net premium paid for the hedge. They do this by adding a short option position to the simple cap or floor. In other words by the corporate hedger selling an option (in addition to buying the simple cap or floor option).

The premium received by the corporate reduces their net premium payable. The net premium payable is often zero. (This arrangement is called a zero cost collar.)

It is also possible - though less common - to construct a negative cost collar, the net premium being receivable by the corporate.
The case where the corporate hedger pays a net premium for the collar is known as a positive cost collar.

In all cases, the net result and intention is to ‘collar’ the all-in hedged rate achieved within a range which is acceptable to the hedging corporate.

Collars are also known as cylinders, corridors or range forwards.

1. An asset provided as security for a debt.

2. Security provided in respect of a financial transaction, such as a swap. Collateral is normally provided in the form of cash or readily marketable securities.

A subsidiary agreement, for example an agreement providing additional security for a debt.

International trade. In a transaction involving a documentary collection, the remitting bank’s correspondent, which is responsible for contacting the buyer (importer), collecting the amount due, and releasing documents as instructed.

A bank account opened for the specific purpose of speeding up the receipt of cleared value for remittances from specific customers or groups of customers, usually at a distant or foreign location or in a foreign currency. In the US called a 'lock-box'.

The interval between when a cheque is mailed and the time the payee receives available funds in its bank account.

A local officer of the UK Board of Inland Revenue responsible for collecting tax raised by assessments.

1. An agreement between firms to restrict competition to the advantage of the firms and to the disadvantage of consumers. May result in a cartel being formed.

2. More generally, secret agreement for the purpose of improper acts or omissions.

See Fully planned economy.

The core business of these banks was traditionally the taking of deposits and making of loans, although most commercial banks now offer a broad spread of customer services such as foreign exchange and asset finance.

The risk that a customer will not pay on time, due to insolvency or other causes specific to the customer rather than to the country or currency; contrasts with political or transfer credit risk.

(CP). Unsecured promissory notes issued by strong credits including both financial institutions and non-bank corporates, generally with maturity of 270 days or less.

1. International trade. Commercial risk arises from a foreign business partner’s insolvency or unwillingness to pay its debt or to perform according to the contract. For example the insolvency or unwillingness of a bank, customer, supplier or guarantor. Letters of credit and documentary collections can provide some measure of protection against commercial risks of this kind.

2. More generally, risk arising directly from, or in the context of, the commercial activities of the business.

A fee payable by a potential borrower to a potential lender, in consideration of the lender undertaking the legal commitment to advance the funds under the terms of the facility agreement.

An committed borrowing facility is one in which the potential lender - for example a bank - is legally obliged to provide the funds (subject to the borrower complying with the terms of the loan facility agreement).

A commitment fee will be charged to the lender on any undrawn part of the facility.
An alternative basis of charging commitment fees is on the basis of the whole of the facility (whether or not it is drawn down). This is of course a more favourable basis for the lender.

(CEIOPS). A Committee of the European Union in the Lamfalussy process. CEIOPS consists of the European Union's insurance and pension fund supervisory authorities.

(CESR). The Committee's role is to improve co-ordination amongst securities regulators, to act as an advisory group to the EU Commission and to work to ensure more consistent and timely day-to-day implementation of community legislation in Member states.
For more details see: www.cesr-eu.org.

A good which is supplied without qualitative differentiation across a market.
Traditionally a commodity was a physical raw material that was an essential ingredient in a manufactured product. The definition has expanded to encompass manufactured basic industrial inputs such as steel and even intangible rights such as carbon emissions created by legislation rather than by nature.

Risk management. When commodities are part of a company’s core business or processes there can be exposures arising from both price fluctuations (commodity price risk) and from lack of availability of the commodity.

The law of a country based on custom, usage, and the decisions of the courts. Also called 'case law' as distinguished from statutes and regulations.

A unit of equity shareholding with no special rights or powers. Similar to ordinary shares. By far the most common form of equity shareholding.

The law created by the European Community.

Pensions. The foregoing of part or all of the pension payable from retirement in exchange for an immediate lump sum benefit. In some countries there may be a tax benefit to partial commutation. (For example, under current UK tax rules up to 25% of the value of a pension can be taken in the form of a tax free lump sum.)

An artificial legal person with a separate identity from its members.

Among other important benefits, undertaking business activities through a company enables the separation of day to day management from overall ownership and control, and the easier transfer of ownership rights (in the form of shares).

An agreement between a company and its creditors concerning the payment of its debts under the provisions of UK insolvency law.

Bank balances held by a company in the form of collected balances to pay for bank services.

See Perfect competition.

Government policy which aims to increase levels of competition between firms, for example by prohibiting certain anti-competitive practices, such as the formation of cartels.

Economics. A product which is used in conjunction with another product. For example breakfast cereal and milk.

Procedures and processes in corporations or public agencies to ensure that personnel are aware of relevant laws and regulations and take appropriate steps to comply with them.

A type of bar chart, where each bar is split into several component parts.

These measure average changes over time for a number of items.

This is where a financial instrument has both an equity element and a liability element, the most common example being convertible debt.

Compound interest is calculated as ‘interest on interest’ as well as interest on the original principal amount.

Compound interest per year is the usual quotation basis for periods of more than a year.

To calculate compound interest for different periods we compound up or de-compound the interest.

For example, interest quoted at 6% per annum, compounded annually, for two years maturity, with all of the interest paid at the final maturity, means that the interest paid after two years will be:

= [1.06 x 1.06] - 1

= 12.36% for the two year period.

A number greater than one which we multiply a present value by, to work out its Future Value as: FV = CF x present value. The periodic Compounding Factor is calculated from the periodic yield as: CF = (1 + periodic yield).

Same as Master account.

An agreement between a number of people to acquire shares in a company in order to accumulate a significant holding of its voting shares.

1. An important term of a legal contract which, if breached, entitles the innocent party to terminate the contract as well as claim compensation.

2. More generally, an action, omission or relationship on which another action, omission or relationship is considered to be dependent; but not necessarily being formally linked in law.

1. A condition of a loan agreement which must be satisfied before the loan may be drawn down.

2. More generally in contract law, a contractual condition which must be satisfied, before a party becomes legally obliged to perform their side of the contract.

3. Even more generally, any event which must happen first, before another event can happen.

The probability that a particular event will occur, when it is given that another event has already occurred.

Statistics. An interval based on observations of a sample and so constructed so that there is a specified probability that the interval contains the unknown true value of a parameter.

A document through which a market participant notifies its counterparties or customers of the details of a trade/transaction and, typically, allows them time to affirm or question the trade/transaction. The issue and matching of confirmations is one of the key controls in treasury dealing activity. Increasingly confirmations are being transmitted and matched by electronic mean, but the same rules, relating to the separation of the dealing function form the confirmation function, still apply.

International trade. Letter of credit to which the advising bank adds its confirmation to the credit, assuring the exporter that payment will be made under the terms of the L/C even if the issuing bank defaults.

In a transaction involving a letter of credit (LC), a bank that adds its confirmation to the LC, committing to the beneficiary that it will ensure payment regardless of the issuing bank’s ability to pay.

A financial intermediary which assists with shipment of exports and guarantees prompt payment.

The risk that assests in a foreign country may be confiscated, expropriated or nationalised, or that the distant owner's control may be interfered with.

A person or corporate entity connected to a director, such as a member of the director's family or a company controlled by the director. This is defined for the purposes of the UK Companies Act and of FRS 8 in relation to disclosure.

A Latin term meaning a meeting of the minds and signifying agreement between parties.

A required element in a contract by which something of value, including a promise, is exchanged for the act or promise of another.

One of four fundamental accounting concepts. Requires that like items be treated consistently within each accounting period and between accounting periods.

These report the activities of a group of companies presented as if they were a single entity.

1. In financial accounting, the process of combining financial information about two or more related entities for presentation in a single set of consolidated financial statements.

2. The process of combining two or more Acts of Parliament into a single Act.

3. More generally, the process of combining one or more things into a single thing, and of making appropriate related changes.

Accounting. One of the key stages in the preparation of consolidated group accounts, the other key stage preceding it being aggregation.

Aggregation is the adding up of the individual assets, liabilities and trading of each of the entities in the group.
Consolidation adjustments then remove non-external amounts - such as intercompany trading and indebtedness - from the consolidated group figures.

UK tax. A company owned by consortium members.

UK tax. The companies which own a consortium company.

UK tax. A restricted version of group tax relief in the UK, in the situation where the ownership percentages are not sufficiently great to qualify for group relief.

(CMCDS). A variation on the basic Credit Default Swap involving a fixed payment on one side and a floating payment on the other, the latter being related to the credit spread on a CDS of the same initial maturity at periodic reset dates.

(CNAV). A constant net asset value per share money market fund. A money market fund whose distributing shares maintain a ‘constant’ price of USD 1, EUR 1 or GBP 1 if the value of their underlying portfolio of money market instruments itself maintains a market price per share within 50 basis points of the constant price.

(CPI).
1. A leading measure of inflation in the UK, calculated as the change from month to month in the prices of a standard basket of consumer goods and services. Previously known as the Harmonised Index of Consumer Prices (HICP). The CPI has replaced the RPI for a number of purposes as the primary measure of inflation in the UK.

2. One of the leading inflation indices used in the US. Its uses include the limited indexation of certain US pensions.

Economics. Spending by households on goods and services.

Economics. An equation which defines the relationship between consumption and income.
Usually defined as: C = a + bY
where C = consumption,
a = consumption at zero income,
b = marginal propensity to consume, and
Y = income.

Financial accounting.
Contingent assets are defined as possible assets that arise from past events and whose existence will be confirmed only by the occurrence of one or more uncertain events not wholly within the reporting entity’s control.

The generally accepted accounting treatment for contingent assets is that a contingent asset should not be recognised because it could result in the recognition of profit that may never be realised. Where the inflow of economic benefits is probable the entity should disclose a brief description of the contingent asset and an indication of its financial effect. If there is only the possibility of an asset arising no mention at all should be made in the accounts.

A condition which exists at a reporting date where the outcome will be confirmed only on the occurrence or non-occurrence of one or more uncertain future events.

Financial accounting.
A contingent liability is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence of one or more uncertain future events not wholly within the reporting entity’s control, or a present obligation that arises from past events in circumstances where it is not probable that a transfer of economic benefits will be required to settle the obligation, or the amount of the obligation cannot be measured reliably.

The generally accepted accounting treatment for contingent liabilities is to disclose them in the notes to the financial statements, but not to record them within the balance sheet.

A risk that may arise depending on particular events. Often this term is used in currency risk to refer to the situation where a bid for a commercial contract has been submitted at a fixed currency price. The risk is contingent on both being successful in the bid and the size of the eventual order placed.

(CLS). A global real-time settlement system for foreign exchange transactions that eliminates foreign exchange settlement risk caused by delays arising from time-zone differences; the so-called Herstatt risk.

(CMIB). Insurance and Pensions. A body established by the actuarial profession originally to carry out industry-wide claims experience investigations in the field of life and health insurance, now also in pensions.

A random variable that can take any real number value within a certain range.

The more frequently a nominal annual rate of interest is compounded within a given time period, the greater the total interest accrued by the end of the period. Continuous compounding takes this process to its theoretical limit by assuming that the nominal annual interest is calculated and compounded continuously at the given continuously compounded % rate.

Interpreting a contractual term against the interests of the party who inserted the term in the contract.

A legally binding agreement between two parties.

Essential elements of an enforceable contract include offer and acceptance, consideration, and legal capacity to contract (together with other legal requirements).

The same as Contract for differences.

(CFD). An arrangement whereby the difference in price between two underlying securities or financial instruments (one of which could be cash) is settled in the future in cash, rather than by the delivery of the securities or instruments. Effectively the CFD is a spread bet on the outturn market price or rate.

A CFD provides an investor with the benefits and risks of ownership of a security (or other market position) without actually owning it.

Examples include Forward Rate Agreements (FRAs) and Non-Deliverable Forwards (NDFs).

(Also known as a Contract for Difference.)

Pensions. See contracted out.

Pensions. The terms 'contracted out' and 'contracted in' are applied to Occupational pension schemes in the UK in relation to the State Second Pension (S2P). A scheme is contracted out where it provides benefits in place of S2P and contracted in where it provides benefits in addition. Other terms encountered in relation to contracting in and out include the Lower Earnings Limit (LEL), Upper Earnings Limit (UEL) and Guaranteed Minimum Pension (GMP).

Management accounting. Sales less variable costs.

Pension contributions payable, expressed as a percentage of the related pensionable salary.

Pensions. Payments made into an occupational pension scheme by the employer and/or the employee. Contributions are normally classifiable as ‘normal’, generally calculated as a percentage of pensionable salary, or, in the case of employer contributions, ‘deficit reduction’. The former are designed to provide for the benefits accruing over the period concerned, the latter to reduce any deficit.

Pensions. A temporary cessation in pension contributions, usually by the employer only, but sometimes also by the employee, when a surplus exists in a pension scheme.

A cash management service that provides same-day notification, usually by early or mid-morning, of the cash amount of cheques that will clear against the controlled disbursement account that day.

(CFC). Tax. A company which is resident outside the UK but which is controlled from the UK and therefore subject to UK CFC anti-avoidance tax rules.

The premium over an ordinary share's current market price at which the holder of the convertible security may convert it into ordinary shares.
For example, say the current market price of the ordinary shares is £2, and the conversion price is £2.50. The conversion premium = [£2.50 - £2.00 = £0.50]/£2.00 = 25%.

The specified price at which the principal or nominal value of convertible securities may be converted into the underlying shares.
For example, say the nominal value of the convertible bonds is £100, and each convertible bond may be converted into 40 ordinary shares. The conversion price = £100/40 = £2.50.

Convertible bonds. The number of ordinary shares (or other securities) for which each convertible bond may be exchanged, at the bondholder's option.
For example, if each convertible bond may be exchanged for 40 ordinary shares, then the conversion ratio is 40.

Convertible bonds. The total current market value of the ordinary shares (or other securities) for which each convertible bond may be exchanged (at the bondholder's option).
For example, if each convertible bond may be exchanged for 40 ordinary shares, and the ordinary shares are currently trading in the market at £2 each, then the conversion value = 40 x £2 = £80.

Bonds which have the right but not the obligation to convert into a specified number of ordinary shares (or other securities) under specified terms and conditions.

Debt which has the right but not the obligation to convert into ordinary shares under specified terms and conditions.

Abbreviation for convertible bonds.

1. Broadly, convexity measures the curvature of the line representing the relationship between an instrument’s yield and its value. Duration and Modified duration can be used as the basis for straight line estimates of the rate of change of price/present value. Convexity is an estimate of the rate of change of duration. This is often visualised as the degree of 'curviness' of the line representing value versus yield.
Convexity is calculated as:

Sum [PV x t x (t+1)]/Sum(PV)

2. More strictly defined, convexity is the rate of change of duration, and modified convexity is the rate of change of modified duration, for small changes in yield from the given starting yield.

3. More loosely, the terms convexity and Modified convexity are often used interchangeably. Obviously this can lead to potential confusion, so it is important to clarify whether convexity or modified convexity is intended in any particular context.

A type of corporate body. A cooperative financial organisation is one in which the members (depositors) have shares. Their money is used to fund other members as a form of mutual self-help.

1. Noun. A non-financial business organisation usually, but not always, being a company.

2. Adjective. Relating to a large organisation, often a profit seeking organisation (including banks and other financial institutions).

3. Adjective. Relating to the more formal (or even bureaucratic) aspects of large profit seeking organisations.

Bonds issued by companies, usually for terms of more than a year. Some bonds are listed on a securities exchange.

Also known as Travel and entertainment card.

The analysis and management of a firm's shareholder value, particularly in relation to its capital structure and in relation to any proposals for major acquisitions or disposals.

The analysis and management of the relationship between an organisation's financial activities and its business strategy.

1. In the commercial context, the framework that provides guidance on corporate strategy including assessing risk, ensures effective monitoring of management by the board of directors and makes certain the board is accountable to the company and the shareholders.

2. Comparable frameworks in non-commercial organisations. In the non-commercial context the term 'governance' (without the 'corporate' part) is more common.

A plan of the total resources of an organisation for the achievement of quantified objectives within a specific period of time.

(CSPI). A measure of the change in prices for services provided by UK companies to other UK companies and to the UK government.

Corporate governance. (CSR). A form of corporate self-regulation integrated into a business model. Ideally, CSR policy is a built-in, self-regulating mechanism where business monitors and ensures its adherence to law, ethical standards, and international norms. Business would embrace responsibility for the impact of its activities on the environment, consumers, employees, communities, stakeholders and all other members of the public sphere. Business would also proactively promote the public interest by encouraging community growth and development, and voluntarily eliminating practices that harm the public sphere, regardless of legality.

An individual skilled in the theory and practice of corporate treasury.

A corporate function concerned with the management of financial risk. The individuals who work in this function are known as corporate treasurers.

Law. A company, usually with limited liability and on a sole basis, which acts as a trustee. For example, as a Trustee of a pension scheme. The directors of the corporate trustee effectively act as Trustees in the normal sense. A corporate trustee of a pension fund may be a nominee of the sponsoring company, or entirely independent, as long as it complies with the relevant law.

An entity formed by a group of individual people which has a separate legal identity from the individuals.
Frequently, but not always, corporations are established for the purposes of undertaking particular business activities.

1. The UK tax charged on companies based on the level of their taxable profits in an accounting period.

2. More generally, a tax charged on a corporation.

UK tax. A return form (CT600) for companies required to be sent to HMRC to show a summary of taxable profits and their corporation tax liability.

UK tax. A system introduced in July 1999 for companies to self assess their taxation liabilities.

The Value at Risk of a portfolio, calculated by taking account of the degree of correlation between the constituents of the portfolio.

Correlation describes the extent to which changes in one variable are associated with changes in another variable.

The correlation coefficient is a relative measure of the correlation between two variables. It measures the degree to which their values are interdependent. In other words, the extent to which changes in the value of one of the variables are associated with changes in the value of the other variable. Correlation coefficients are widely used in portfolio diversification and hedging calculations.
Mathematically, correlation coefficient is the covariance divided by the product of the standard deviations.

A correlation coefficient of -1 means perfect negative correlation. The two variables always move in opposite directions by a perfectly predictable proportionate amount.
A correlation coefficient of 0 means that there is no correlation between the values of the two variables. The variables are statistically independent.
A correlation coefficient of +1 means perfect positive correlation. The two variables always move in the same direction by a perfectly predictable proportionate amount.

Also known as the Coefficient of correlation.

An arrangement under which one bank provides payment and other services to another bank.

Payments through correspondents are often executed through reciprocal accounts - nostro and loro (or vostro) accounts - to which standing credit lines may be attached.

Correspondent banking services are primarily provided across international boundaries but are also known as agency relationships in some domestic contexts.

A loro account is the term used by a correspondent to describe an account held on behalf of a foreign bank. The foreign bank would in turn regard this account as its nostro account.

An option hedging strategy, the same as a Collar.

Budgeting. Cost behaviour analysis recognises that only certain costs will change as overall activity levels change. Cost behaviour describes the way in which costs behave as activity level changes in the business.

Producing a good outcome in relation to the amount of money spent.

The rate of return on a firm’s investments which is required to service the providers of the firm’s capital.
Often the term is used in a more specific sense to refer to the weighted average cost of capital of a business.

(Kd(1-t)). The component of a firm's weighted average cost of capital which relates to the servicing of the firm's providers of debt capital. The calculation of the current market cost of debt is based - among other inputs - on the Yield to maturity of any debt currently in issue.

The calculation should also take account of related corporate tax relief on the debt servicing costs. Hence the '(1-t)' term in Kd(1-t).

More strictly, the tax relief should be factored in to the net cost of debt calculation by taking account of any timing differences between the debt servicing cash outflows and the related tax savings.

Cost of debt is often denoted more simply as 'Kd'. However this is not best practice, because it may be ambiguous whether the 'Kd' figure is stated before or after the related tax relief.

(Ke). The rate of return on a company’s net investments financed by equity which is required to service the providers of the company’s equity capital.

Corporate finance. According to Modigliani and Miller's theory, as a company’s capital structure is composed of more and more debt a point is reached where equity cost and debt cost increase beyond that predicted by pure arbitrage of the appropriate cost of capital for the business. This extra cost is described as the cost of financial distress; potentially the cost of dealing with a near-insolvency situation.

Also known as Bankruptcy costs.

(COLA). US pensions. The Consumer Price Index (CPI) based adjustment provided annually to Social Security beneficiaries in the US to maintain the purchasing power of their benefits. Relatively few US occupational pension schemes have COLA clauses.

Accounting. Cost of Sales is calculated as opening stock plus purchases less closing stock plus other direct costs.

Inflation caused by an increase in costs for firms (for example, trade unions driving up wages), which in turn are passed on to consumers in the form of higher prices.

A new offer that varies the terms of the original offer and so rejects the terms of that original offer.

The same as Countertrade.

The opposite party to a financial transaction, such as a securities trade or swap agreement.

The risk to each party of a contract that the counterparty will not live up to its contractual obligations.

International trade. An arrangement whereby export sales to a less developed overseas market are made conditional on accepting imports of comparable value from the same overseas market.
The simplest form of countertrade arrangement is barter.

Cheques drawn on banks located outside areas serviced by a federal reserve, city or a regional cheque-processing centre (RCPC).

The risk that a country or an entity within a country will not be able to honour its financial obligations. Exposures can arise from - for example - interruption of business at the country level (political sovereign risk), currencies being blocked from cross-border repatriation (transfer risk) and central bank liquidity shortages preventing conversion (convertibility risk).

1. The fixed amount of periodic interest paid by a coupon bond over its life.

2. Same as Coupon rate.

A bond which pays periodic coupons to the holder.

The nominal annual rate of interest on a security, expressed as a percentage of the principal amount.

A stream of - usually fixed - periodic coupons payable and receivable, which can be valued as a simple annuity in the case of fixed coupons.

An institution for the resolving of disputes.

(CAR). USA A technical process used in the USA to convert the hand-written data on cheques and other paper-based documents into electronic data.

Statistics. Covariance is an absolute measure of the correlation between two variables.
The greater the positive covariance, the more likely the variables are to move in the same direction at the same time.

Covariance is calculated as the expected value of the product of the differences of each variable from its mean.

1. A formal legal agreement to take, or not to take, certain actions.

2. In loan documentation, a promise given by the borrower to take, or not to take, relevant actions. For example, a financial covenant to maintain a minimum ratio of net worth to debt.

3. In relation to pension funds, the credit strength of the sponsoring employer and its commitment to the pension fund.

1. See Cover ratio.

2. Hedging.

An investor's measure of the safety of their future income flow from an investment.

Simultaneously borrowing and depositing in two different currencies and dealing a forward foreign exchange contract between the same currency pair to cover the related foreign exchange exposure.

Covered interest arbitrage activity normally results in the rapid alignment of the forward foreign exchange rate with the related interest rates, as predicted by Interest rate parity theory.

A market position which is matched and offset by another market position, substantially eliminating the risk of adverse movements in the related market prices.

An abbreviation for Commercial Paper.

Consumer Price Index.

Abbreviation for Carbon Reduction Commitment.

1. In relation to a bank account, a credit balance is one which stands in favour of the customer. The bank owes money to the customer. (Contrasted with a debit, or overdrawn, balance.)

2. An item paid into an account.

3. Borrowings, especially short term ones relating to particular goods or services. So an entity which lends money, or which provides goods or services on deferred payment terms, is 'extending credit' to its customer.

4. Credit strength, or creditworthiness, means an entity's capacity and willingness to meet its financial obligations.

5. In double entry book-keeping, every accounting transaction is recorded with both a Debit entry and a Credit entry in the accounting records. Debits represent assets or expenses. While Credits represent liabilities or income.

Financial accounting. This is either liability or capital within the balance sheet, and revenue within the profit and loss account.

See Caps.

A card indicating that the holder has been granted a line of credit. It enables the holder to make purchases and/or withdraw cash up to a pre-arranged ceiling; the credit granted can be settled in full by the end of a specified period or can be settled in part, with the balance taken as extended credit. Interest is charged on the amount of any extended credit and the holder is sometimes charged an annual fee.

A company which owns the trademark of a particular credit card, and may also provide a number of marketing, processing or other services to its members using the card services.

1. A large and rapid reduction in the general availability of borrowings, or a similarly large and rapid increase in the cost of borrowing.
2. In particular, the rapid reduction in interbank lending from 2007, and its wide ranging adverse effects on other financial markets and on the economy.

(CDS). A variety of swap agreement that enables the effective transfer of credit risk from one party to the other.

A contract allowing for the transfer of credit risk via a derivative instrument. The party transferring credit risk is obliged to pay a fee to the transferee.

The increasing of the creditworthiness of securities. There are three main methods of credit enhancement:

1. Junior/Senior tranches: The entire debt is divided into so-called junior and senior tranches, with the former bearing all the first losses. Thus, the credit standing of the remaining senior tranches is raised considerably.

2. Insurance: A third party, usually an insurance company, undertakes to insure the credit risk of the respective securities (called ‘wrapping’).

3. Collateralisation: Securities may be back by other financial assets, usually equity, of higher values. The difference serves as collateral for the repayment of the debt (overcollateralisation). The issuing company may also put collateral on the differential between the respective security’s original and market values (margin).

The maximum possible amount of a credit loss.

(CGS). A UK Treasury scheme under which banks and other financial institutions can obtain credit insurance effectively backed by the government in return for a fee (calculated on a full commercial basis). The CGS was launched in 2008 with the aim of making it easier for financial institutions to borrow money. It is currently scheduled to end in 2014.

This allows a company to withdraw and repay funds up to a maximum amount for the term of the facility. They can be committed or uncommitted, and secured or unsecured.

An assessment of creditworthiness. Although the general term can apply to individuals, in treasury it is usually used with reference to public debt issued by corporations or public bodies. So a bond issue by a large corporation, or by a government, would usually be given a credit rating by one or more rating agencies.

1. The risk that a counterparty will not settle an obligation for full value, either when due or at any time thereafter. In exchange-for-value settlement systems, the risk is generally defined to include replacement cost risk and principal risk.

2. A weighted measure reflecting both the maximum possible amount of the credit loss (also known as the credit exposure), and the likelihood of such loss.

A summary based on the credit record of an individual or a business, to represent their creditworthiness. Potential lenders, such as banks and credit card companies, use credit scores to evaluate the risk of lending money or of advancing other forms of credit, and to reduce the incidence or size of losses resulting from bad debts.

The extra yield on a debt security over the equivalent 'risk-free' security. In other words the proportion of the total return that the issuer must pay due to credit risk.

1. The difference in yield between a given security and a comparable benchmark government security. It gives an indication of the issuer’s credit quality.

2. The difference in value of two securities with comparable maturity and yield but different credit jurisdiction.

3. The extra yield on a debt security over the equivalent 'risk-free' security. In other words the proportion of the total return that the issuer must pay due to credit risk.

A payment order or possibly a sequence of payment orders made for the purpose of placing funds at the disposal of the beneficiary. Both the payment instructions and the funds described therein move from the bank of the payor/originator to the bank of the beneficiary, possibly via several other banks as intermediaries and/or more than one credit transfer system.

A funds transfer system through which credit transfer (or giro) orders and the related information and funds may be transmitted for the purpose of executing credit transfers (or bank/postal giros). Also known as Giro system.

(Or Watchlist). A list of issues and issuers in relation to which a downgrading or upgrading of the credit rating could be imminent.

The same as payables management.

1. Payments a company is obliged to make.

2. The firms or other entities to whom payments are owed.

A measure of the ability and the willingness of a business or of an individual to honour their financial obligations.

Laws dealing with crimes against the public and members of the public.

A foreign exchange transaction where neither the base nor quoted currency is the USD.

A clause in a loan agreement. It states that a default with any other lender will constitute a default under this agreement.

It is designed for the benefit of the lender to ensure that they will enjoy a 'seat at the table' in any refinancing negotiations with the defaulting borrower.

Economics. The percentage change in quantity demanded of product A divided by the percentage change in price of product B.

Most foreign exchange rates are quoted against a widely traded currency, most commonly USD.
For example USD/EUR, USD/JPY.

The related cross rates are the foreign exchange rates between the other related currency pairs, calculated via the USD rates.
For example in this case the EUR/JPY rate, as calculated from the USD/EUR and USD/JPY quotes.

Cross rate bid-offer spreads are wider than the bid offer spreads quoted against USD because they incorporate two bid-offer spreads against the USD, not just one.

A cash management technique used to automatically concentrate funds derived from different countries into a bank account located in a different jurisdiction.

(CCIRS). A longer term derivative contract which is used to transform longer term interest rate related obligations or assets in one currency, into another currency. For example, a firm with a USD borrowing might use a CCIRS to transform the USD borrowing into a synthetic GBP borrowing.

The concept of a CCIRS was developed from the (same currency) interest rate swap market, which most commonly swaps fixed and floating interest rate streams in the same currency.

Same currency interest rate swaps exchange interest flows in the same currency (but calculated on different bases). Cross currency interest rate swaps exchange interest flows denominated in different currencies. Cross currency interest rate swaps usually exchange currency principal amounts at their maturity (unlike same currency interest rate swaps).

Guarantees given by the participants in a notional pooling scheme to the bank providing the notional pooling service that they will honour any outstanding dues in the event of the failure of one of the members to fulfil its duties. Cross-guarantees may have tax implications and may be difficult to enforce on a cross-border basis.

Abbreviation for Central Securities Depository.

Abbreviation for Corporate Services Price Index.

Abbreviation for Corporate Social Responsibility.

Abbreviation for Cum dividend.

1. In relation to a transfer of equity shares, a transfer including the entitlement to receive the next dividend payment.

2. The normal basis of quoting equity prices, which includes the entitlement to the next dividend.

Abbreviation for Cum interest.

1. In relation to the transfer of a debt instrument, a transfer including the entitlement to receive the next interest payment.

2. The normal basis of quoting prices for traded debt, which includes the entitlement to receive the next interest payment.

Statistics. A cumulative representation of any frequency distribution.

Bank accounts that are denominated in a different official currency to the one that is legal tender in the country where the accounts are held. Also known as Foreign currency bank accounts.

Refers to the UK’s paper-based currency clearing facility for cheques, drafts, banker’s payments and mandated currency debits in USD drawn on or payable at certain branches of the UK’s clearing banks.

A contract whereby a company is entitled to receive payment at a specified date of a specified amount in one currency and must pay in return an amount on the same date in another currency.
Also known as a foreign exchange contract.

Another term for currency risk.

An agreement to buy or sell a specified amount of a foreign currency at a future date for a price agreed upon today.

Futures relating to currencies or exchange rates.

(CIRS). Same as cross-currency interest rate swap.

An option to enter into a currency contract. Also known as a foreign exchange option.

The risk that arises from a change in currency rates. This can take the form of a receipt of more or less home currency than expected when a transaction is settled (transaction risk), or a change in asset/liability values in a balance sheet, profit /loss in an income statement (translation risk), or a change in competitiveness as rates change relative to buyers, suppliers or competitors (economic risk). A more complex area of risk concerns contingent, or pre-transaction risk.

A derivative contract to exchange any type of ongoing payments which give rise to a foreign currency exposure.
For example, a cross-currency interest rate swap.

Economics. As used in the national balance of payments, that section which records all transactions in goods and services between one country and the rest of the world.

Assets that are likely to be converted into cash within a year or a normal accounting cycle.

A basis of valuation in published financial statements drawing mainly on replacement cost accounting techniques but also on net realisable values and economic values. Its purpose was to adjust for the effects of inflation on the historic costs of balance sheet items by bringing all items within the accounts to present day values.

1. Liabilities that are likely to be settled within a year or a normal accounting cycle.

2. Pensions. A US term for a pension fund liability important in IRS contribution calculations; it is analogous to Accrued Benefit Obligation, but based on statutory assumptions for mortality and discount rates.

Current assets ÷ Current liabilities.

The current ratio gives a very rough indication of the liquidity (or solvency) of the reporting entity.
If the current ratio were to fall below 1.0, this would indicate that the entity would not be able to meet its current liabilities out of its cash in hand and the proceeds of its other current assets.

Pensions accounting.
The increase in the present value of the pension scheme liabilities expected to arise from employee service in the current period.

Pensions funding. An example of an Accrued benefits funding method.

Pensions. An event that reduces the expected years of future pensionable service of present employees, or otherwise reduces the expected pension liability in respect of future service.

An organisation that undertakes the role of holding and accounting for assets, including cash, and investment income in an investment portfolio on behalf of Trustees or an investment manager.

The registration and administration of securities and financial instruments on behalf of investors.

An option hedging strategy, the same as a Collar.

The daily rate of interest (or yield) is a quoting convention for the simple interest nominal annual rate for compounding once per day.

For example, if the quoted daily rate is 5.11%, the amount of interest compounded daily is 5.11%/365 = 0.014%.

Not to be confused with the annual effective rate, which in this case would be 1.00014³⁶⁵ - 1 = 5.24%.

A sum of money paid in compensation for loss or injury. Usually under the terms of a contract, or following a legal action.

An arrangement in which a financial institution or a third-party reporting service gathers and consolidates account balances and transactions from various financial institutions with which the company has accounts.

Ways of illustrating statistical results.

1. The number of days within a specific interest payment period in which interest payments are due.

2. The convention governing the way such interest payments are to be calculated (for example, 360/365 days).

An intra-day exposure of a bank when account is in an overdraft position at any time during the business day vis-à-vis credit extended for a period of less than one business day. Daylight credit may be extended by central banks to even out mismatches in the settlement of payments. In a credit transfer system with end-of-day final settlement, daylight credit is tacitly extended by a receiving institution if it accepts and acts on a payment order even though it will not receive final funds until the end of the business day. Also known as Daylight overdraft, Daylight exposure, or Intra-day credit.

Same as Days Sales Outstanding.

(DSO). A credit measurement ratio calculated by dividing accounts receivable outstanding at the end of time period by the average daily credit sales for the period. Also known as Days Billing Outstanding (DBO).

(DSO). A credit measurement ratio calculated by dividing accounts receivable outstanding at the end of time period by the average daily credit sales for the period.

Pensions. Abbreviation for Defined benefit pension scheme.

Abbreviation for Days Billing Outstanding.

Pensions. Abbreviation for Defined contribution pension scheme.

Abbreviation for Discounted Cash Flow.

Abbreviation for Dividend Discount Model.

The maximum amount to which a person will be liable.