Glossary of Terms

Credit rating.
The lowest credit rating category.

Carried forward.
Also written CF.

1. Chartered Accountant.

2. Designatory letters used by members of the Institute of Chartered Accountants of Scotland (ICAS).

The sterling/US dollar spot exchange rate.
(Named after the undersea cable which was formerly used to communicate these transactions.)

1. Cash Against Documents.

2. SWIFT currency code for the Canadian Dollar.

Compound Annual Growth Rate.

Calculated - for example - from total growth over a multiple years period as:
CAGR = ([End amount]/[Starting amount])^(1/n) - 1
Where n = number of years

For example, sales grow from $100m to $150m over a two-year period.
CAGR = (150/100)^(1/2) - 1
= 22.5%.

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

2. Call option.

Funds placed with a financial institution without a fixed maturity date (the money can be 'called' or withdrawn at any time).

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

A bond with a call provision giving the issuer the right to redeem the bonds under specified terms prior to the normal maturity date.

Capital, assets, management, earnings, liquidity.

US. Cumulative Auction Market Preferred Stock.

1.
An option hedging structure which effectively establishes a maximum worst case hedged rate or price for a cash outflow or a liability, 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 in relation to 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.

1. Chargeable Accounting Period.

2. The European Union's Common Agricultural Policy.

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.

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.

3. Company law.
More narrowly in the company law context, the component of the total equity represented by the share capital of the company.

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

1.
The system of regulating banks (and other financial institutions) by requiring them to maintain minimum acceptable levels of capital, adequate to absorb their potential credit losses and other trading losses.

2.
The current 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 internationally by the Bank for International Settlements (BIS) and monitored by domestic central banks.

Historically the BIS standard has been 8%.

(CAD). European directive issued in 1995 and subsequently revised as CAD2, aims to establish uniform capital requirements for both banking firms and non-bank securities firms.

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

(CAPM). The model links the expected 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 beta and the prevailing market risk-free rate of return.

The CAPM assumes a straight-line relationship between the beta of a traded asset and the expected rate of return on the asset.
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.

For example where:
Rf = risk free rate of return = 4%;
Beta = relative market risk = 1.2; and
Rm = average expected rate of return on the market = 9%.

Ke = 4% + 1.2 x [9% - 4% = 5%]
= 10%.

This investment requires an expected rate of return of 10%, higher than average rate of return on the market as a whole of only 9%, because its market risk (measured by Beta = 1.2) is greater than the average market risk of only 1.0.

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.

1. 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.

2. The amount of the realised increase in the value of a capital asset, as calculated for tax purposes. In the UK individuals and partnerships are liable to Capital Gains Tax on their capital gains, while companies are liable to Corporation Tax on their 'chargeable gains'.

(CGT). 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 capital lease usually involves the lessee paying - over the life of the lease - the full cost of the asset plus a return on the finance effectively provided by the lessor. The lessee effectively retains substantially all the risks and rewards of ownership.
But the lessee does not obtain legal title to the leased asset.

Also known as a finance lease.

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.

The extent to which private capital is free to be invested abroad.

(CRD). 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.

Also known 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.

Capital Asset Pricing Model.

An issue with an upper limit on the coupon rate. Under this type of issue, the lender forgoes the possibility of receiving a return above the cap rate should the market interest rate exceed the cap rate.

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 in relation to 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.

1.US. Capped index options.

2. US. Convertible Adjustable Preferred Stock.

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

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.

(CRC). Environmental policy.
Renamed the CRC Energy Efficiency Scheme.

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 hand or in banks or other financial institutions which is immediately available.

(CAD). 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 automated teller machines (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.

1. A business with a relatively large share of a slow-growing market.

2. Any business or product with an outstandingly reliable and substantial positive net cash flow.

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.

Concerned with the effect of currency changes on the present value of future cash flows generated by a company’s domestic and foreign operations.

Sometimes called economic exposure.

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.

It shows the cash movements within an entity, broken down into several categories - prescribed by accounting rules for external reporting and by management's requirements for internal reporting.

Same as Cashflow statement.

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.

Where delivery and settlement of the deal is immediate, or within a few days, as compared with the future and options markets where delivery and settlement are delayed.

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.

Also known 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.

(CF). The movement of cash in or out of a business, a project or a financial instrument in a particular period under review.

The cashflow for a given period may differ from the profit or loss for the same period because of:

1. Items in cashflow which are not part of profit or loss. For example capital expenditure or the collection of trade debtors arising and recognised in prior periods.

2. Items in profit or loss which are not cashflows, such as depreciation, amortisation, or making accruals.

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 - prescribed by accounting rules for external reporting and by management's requirements for internal reporting.

It may reconcile - for example - the accounting profit in the income statement with the total net changes in cash and cash equivalents in the balance sheet.

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

Also known as a bank draft.

Cost-benefit Analysis.

Cash Before Delivery.

Confederation of British Industry.

US. Collateralised Bond Obligation.

US. Chicago Board of Trade. Now merged with other groups to form the CME Group.

Competition Commission.

Cash Conversion Cycle.

Capacity, capital, character, collateral, conditions, compliance.

Cash Concentration or Disbursement.

Cash Concentration or Disbursement plus Addendum.

US. Commerce Clearing House.

Cross-Currency Interest Rate Swap.

Central Counterparty.

Cross-Currency Swap.

Certificate of Deposit.

Credit Default Swap.

Formerly the Committee of European Insurance and Occupational Pensions Supervisors now the European Insurance and Occupational Pensions Authority (EIOPA).

Also known as master account.

A bank which acts as bank for the government and the other banks in a country or economic area.
In the UK, this is the Bank of England.
In the Euro zone, 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.

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.

The central limit theorem is sometimes known as the law of large numbers.

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.

Chief Executive Officer.

US. Convertible Exchangeable Preferred Stock.

The Certificate in Corporate Finance and Funding awarded by the Association of Corporate Treasurers.

The Certificate in Financial Fundamentals for Business awarded by the Association of Corporate Treasurers.

The Certificate in Financial Maths & Modelling awarded by the Association of Corporate Treasurers.

The Certificate in International Cash Management awarded by the Association of Corporate Treasurers.

(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.

The Certificate in International Treasury Management awarded by the Association of Corporate Treasurers.

The Certificate in International Treasury Management - Public Finance, awarded by the Association of Corporate Treasurers and the Chartered Institute of Public Finance and Accountancy.

The Certificate in Risk Management awarded by the Association of Corporate Treasurers.

Committee of European Securities Regulators. Replaced by the European Securities and Markets Authority (ESMA).

Central European Time.

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.
Cash Equivalent Value.

1. Carried Forward.
Referring to the closing balance in an account for a period, carried forward to become the opening balance for the next period.

Sometimes written C/f.

Also sometimes known as "carried down", particularly in bookkeeping.

2. Cash Flow.

3. Compounding Factor.

Tax.
Controlled Foreign Company.

Contract for Differences.

Court of First Instance.

Chief Financial Officer.

Canadian Government Bonds.

Central Government Borrowing Requirement.

Central Gilts Office. Now owned and operated by Euroclear UK & Ireland Ltd (formerly CrestCo).

Credit Guarantee Scheme.

Capital Gains Tax.

Clearing House.

Clearing House Automated Payment System.

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

(CAP). UK Corporation tax.
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.

UK Corporation tax.
The amount of the realised increase in the value of a capital asset, as calculated for Corporation Tax purposes.

(In the UK individuals and partnerships are liable to Capital Gains Tax on their capital gains, while companies are liable to Corporation Tax on their 'chargeable gains'.)

UK 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.

A member of the Institute of Chartered Accountants in England and Wales, the Institute of Chartered Accountants of Scotland, Chartered Accountants Ireland or other similar chartered accountancy body in other jurisdictions.

An internationally recognised professional designation.

The US equivalent is a Certified Public Accountant (CPA).

The professional association for chartered accountants in Ireland.

(CIMA). A UK-based professional body offering training and qualification in management accountancy and related subjects, focused on accounting for business.

(CII). Professional organisation for those working in the insurance and financial services industry.

Historically, it was based on drawing and analysing charts of market prices. (Hence the name.)

Also known as Technical analysis.

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.

(CEO). The highest-ranking corporate officer (executive) or administrator in charge of total management of an organisation.

(CFO). A corporate officer primarily responsible for managing the financial risks of the corporation.

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

(COO). One of the highest-ranking corporate officers (executives) or administrators in charge of total management.

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.

Also known as an IC (integrated circuit) card or smart card.

Clearing House Interbank Payment System.

Denmark. Copenhagen Interbank Offered Rate.

France. Compagnie. French abbreviation for Company.

Cost, insurance, freight.

Chartered Insurance Institute.

Chartered Institute of Management Accountants.

Chief Information Officer.

The Chartered Institute of Public Finance & Accountancy.

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.

Commonwealth of Independent States.

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.
A claimant is the party who initiates a legal action before a court to seek a legal remedy, for example damages.

Also known as a plaintiff or a complainant.

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.

An exchange rate system characterised by the absence of government intervention.

Sometimes called a free float.

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 term is 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). US. 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.

(CH). 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 Clearing House (previously 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.

US. Collateralised Lease Equipment Obligations.

1. UK Tax.
A company controlled directly or indirectly by five or fewer participators.

2. UK Tax.
A company controlled entirely by participators who are all directors of the company.

3. More loosely, any company controlled by a small group of people or of other companies.

For a futures contract this means taking a second offsetting position in order to remove the delivery obligation.

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 as 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.

The exchange rate prevailing at a financial reporting date.

The price, or spread of prices, at which deals are made just before the close of official business in a particular market.

Also known as All-current rate method.

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.

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.

Constant Maturity Credit Default Swap.

US. Chicago Mercantile Exchange.
Now merged with other groups to form the CME Group.

Insurance and Pensions.
Continuous Mortality Investigation.

Collateralized Mortgage Obligation. A type of bond.

US. Capital market preferred stock.

Constant Maturity Swap.

Current Market Value.

Credit Note.

Constant Net Asset Value.

US. Continuous Net Settlement.

Same as Coefficient.

Same as coefficient of determination.

Same as Covariance.

Abbreviation for Company.

Close of Business.

Cash on Delivery.

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.

A measure of the variability of a distribution, expressed as a proportion of the expected value.
It is calculated as: [Standard Deviation]/[Expected value].

For example, if the Standard deviation of the Net Present Value of a project = $100m, and the Expected Net Present Value = $50m, then:
Coefficient of variation = $100m/$50m = 2.0.

France. Compangnie Francaise pour l'Assurance du Commerce Exterieur. The French export credit agency subsequently privatised by the government.

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.
Cost of Living Adjustment.

Collar hedge.

Risk management.
A form of hedge using options.

Collar hedges are more complex structures, compared with a simpler cap option or floor option.

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.

1. UK Tax.
A person or office of Her Majesty's Revenue & Customs responsible for collecting tax raised by assessments.

2. More generally a person, office or department of a tax authority responsible for collecting tax.

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.

US. Continuously Offered Long-Term Securities.

The former guidance on corporate governance issued by the UK Financial Reporting Council.
Superseded by the UK Corporate Governance Code.

US. New York Commodity Exchange.
Now merged with other groups to form the CME Group.

Also known as Fully planned economy.

(CCH). US. Organisation that provides software and information services for tax, accounting, and auditing.

The core business of these banks was traditionally the taking of deposits and making of loans, although most commercial banks now offer a broader spread of customer services including for example 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.

(CPD). US. Head of the Bureau of the Public Debt. The Bureau is the agency responsible for borrowing the money needed to operate the federal government, within the Fiscal Service of the United States Treasury Department.

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.

A committed borrowing facility is one in which the potential lender - for example a bank - is legally obliged to provide the funds when required to do so by the borrower (subject to the borrower complying with the terms of the related facility agreement).

A commitment fee will normally be charged to the borrower 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). Replaced by the European Insurance and Occupational Pensions Authority (EIOPA).

(CESR). Replaced by the European Securities and Markets Authority (ESMA).

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.

(CAP). A system of European Union agricultural subsidies and programmes.

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.

(CIS). Regional organisation whose participating countries are former Soviet Republics.

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. (Under UK tax rules, up to 25% for example, of the value of a pension may be taken in the form of a tax free lump sum.)

The official UK government register of UK companies.

The main functions of Companies House are to:

1. Incorporate and dissolve UK limited companies.

2. Examine and store UK company accounts and other information for over 2 million companies.

3. Make this information available to the public.

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, the easier transfer of ownership rights (in the form of shares), and limited liability for the shareholders.

In the US more commonly - though not always - known as a 'corporation'.

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.

1. The degrees of choice available to consumers and to other buyers in a market and of the rivalry between different suppliers in the market.

2. Perfect competition.

(CC). An independent UK public body which conducts inquiries into mergers, markets, trade practices and the regulation of the major regulated industries under competition law. It is a competition regulator.

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

In the US this is known as antitrust regulation.

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 depending on the relative lengths of the periods being considered.

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 (compounding up for two periods):

= [1.06 x 1.06] - 1
= 12.36% periodic interest for the two year period.

Decompounding is used to calculate periodic interest for a shorter period.
For example, if periodic interest is 12.36% for a two-year period, this means the total accumulated interest payable/receivable at the end of the two years is 12.36%.

Decompounding the 12.36% (per two years) to calculate the interest for just one year:
One year's interest = (1 + 0.1236)^(1/2) - 1
= 6.00% per one-year period.

The additional growth or additional interest, resulting from the compounding effects of - for example - interest on interest.
For example, interest quoted at 6% per annum, compounded annually, for two years maturity, means that the interest accumulated after two years is:

= [1.06 x 1.06] - 1

= 12.36% for the two year period.

Without the additional interest on interest, the total interest would have been simply 6% per annum x 2 years = 12.00%.
So the compounding effect of interest on interest here = 12.36% - 12.00% = 0.36% over the two year period (= 6% x 6%).

When both the number of periods and the rate of growth/interest are low, compounding effects are relatively small.
When either the number of periods or the rate of growth/interest - or both - are greater, compounding effects become very much larger.

(CF). 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).

For example when the annual effective yield (r) = 6% and the number of years in the total period (n) = 2, then:
Compounding Factor = (1+r)ⁿ
= 1.06²
= 1.1236

A company is liquidated by a court order made as a result of a petition by an appropriate person.

A calculation relating to tax.

Also known 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.

(CBI). Leading lobbying organisation for UK businesses on national and international issues.

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 from 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 letter of credit 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.

Consolidated stock.

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 Retail Price Index (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.

(CPD). A combination of formal and less formal activities usually following the completion of a more formally structured professional education process leading to a professional qualification.
CPD is generally designed to maintain or increase relevant professional knowledge, technical skills, organisational skills and interpersonal skills.

(CPE). Educational activities usually following the completion of a more formally structured professional education process leading to a professional qualification.
CPE is normally designed to maintain or increase relevant professional knowledge or technical skills.

The scope of CPE is generally narrower than that of Continuing professional development (CPD) which additionally extends into wider organisational and interpersonal skills.

(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.

(CMI). Insurance and pensions.
A body established by the actuarial profession to carry out research into mortality and morbidity experience covered by long term risk contracts issued by life assurance offices. It also conducts research into the mortality of members of self-administered pension schemes.

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/in.

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.

The ability to convert one currency into another without special permission from exchange control authorities.

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.

Also known as Convertibles.

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

A floating rate note (FRN) that can be converted into a fixed rate bond or into another FRN with a different maturity or a different currency denomination.

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.

Chief Operating Officer.

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.

The CORE system (Compensation Retail) is a platform for interbank or ACH (Automated Clearing House) providing real-time processing of clearing and settlement services. Mainly used in France it replaced the Système Interbancaire de Télécompensation (SIT).

It is managed by the company STET and is commonly called STET-CORE.

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.

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

2. External services supporting this activity, for example banking, legal or accounting advisory and reporting services.

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). The former name for the UK inflation index now known as the Services Producer Price Index (SPPI).

(CSR). Corporate governance.
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.

In the UK more commonly known as a 'company'.

1. (CT). The UK tax charged on companies based on the level of their taxable profits - including chargeable gains - in an accounting period.

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

UK Tax.
A return form for companies required to be sent to Her Majesty's Revenue & Customs to show a summary of taxable profits and their corporation tax liability.

(CTSA). UK Tax.
A system introduced in 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 - or predictable from - 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, near enough 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.

Broadly, 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.

For example if a firm's cost of capital is 8%, it must earn a return of at least 8% on its operational investments in order to provide the investors with the minimum investment return of 8% which they require.

The concept of cost of capital is important because when inferior rates of return are earned from operational investments - for example only 5% compared with a cost of capital of 8% - such operations are destructive of shareholder value and need to be improved or discontinued, even though the results of these operations may be profitable when considered in historical cost financial accounting terms.

(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 Market 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).

In a simple example, where the relevant cost of debt is 5% per annum before tax relief, all debt servicing costs are fully tax relieved at 28%, and assuming no timing differences between paying the debt servicing costs and enjoying the related tax relief, Kd(1-t) = 5% x (1-0.28) = 3.6%.

More strictly, the tax relief should be factored into 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.
For example 10%.

The cost of equity is often quantified in practice by using either the Capital asset pricing model, or the Dividend growth model.

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.

Financial distress costs can include:
o Higher rates of interest payable on borrowings.
o Additional fees payable on new borrowings.
o Additional restrictive covenants for new borrowings.
o Reduced availability of borrowings.
o Reduced availability of trade credit.
o Management time and loss of operational focus through the additional communications needed with lenders.
o In the worst case, actual insolvency.

The point at which financial distress costs become significant can be difficult to predict with precision.
However it can be estimated by reference to industry norms for key financial credit assessment ratios such as interest cover and debt equity ratios.

At the point at which the borrower breaches the industry norm for key ratios, it is likely that significant financial distress costs will be incurred.

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.

The interest rate on a loan expressed as a function of some publicly available cost-of-funds measure, such as LIBOR.

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. Near enough the 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). US. A technical process used in the US 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. 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.

Protecting the cash value of future proceeds usually from an international trade transaction, by buying or selling the proceeds in the forward market.

Although used interchangeably with ‘hedging’, covering is strictly speaking, protecting a future cash flow amount whereas hedging refers to the protection of foreign-denominated accounting assets or liabilities against pure translation losses.

Commercial Paper.

US. Certified Public Accountant.

1. US. Commissioner of Public Debt.

2. Continuing Professional Development.

Continuing Professional Education.

Consumer Price Index.

An exchange rate system in which the exchange rate is adjusted frequently and deliberately, perhaps many times a year, usually to reflect prevailing rates of inflation.

Carbon Reduction Commitment.

Environmental policy.
The UK's first mandatory carbon trading scheme to address climate change and to promote energy saving. It aims 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.

Previously called the Carbon Reduction Commitment (CRC).

Capital Requirements Directive.

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. Credits represent liabilities or income.

6. Tax.
A tax credit.

7. Any amount in favour the holder of the credit, entitling them either to future goods or services without further payment (or for a reduced payment) or alternatively to a repayment in cash.

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

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.
Historically there were three main methods of credit enhancement in the private sector:

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 backed 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 value and its current market value (margin).

More recently the term has been expanded more widely, to include various forms of support provided by national governments, government-sponsored agencies and international agencies.

Credit estimates relate to the creditworthiness of a company or of an obligation which does not have a full credit rating.
The credit estimate is a private opinion, provided by a credit rating agency to a third party, of what the full credit rating might be, if a full credit rating process and assessment were to be undertaken.

1. An event defined in a credit derivative agreement evidencing a weakening of the creditworthiness of a borrower, and triggering obligations under the credit derivative contract.

2. Any event evidencing a weakening of creditworthiness.
For example, failing to pay interest or capital under a loan agreement, or any other event of default under a loan agreement.

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 with the aim of making it easier for financial institutions to borrow money.

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 for example a bond issue by a large corporation, or by a government, would usually be given a credit rating by one or more rating agencies.

Tax.
A valuable type of tax relief given by deducting the amount of the credit directly from the amount of a tax liability.

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 both 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.

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.

(CSA). An agreement allowing the parties to an ISDA Master Agreement to mitigate their counterparty credit risk by requiring the "losing" counterparty to post collateral for the amount by which the related derivative instrument is currently out of the money for the losing counterparty.

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.

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

Also known as a Watchlist.

A working capital management ratio calculated by dividing accounts payable outstanding at the end of a time period by the average daily credit purchases for the period.

Also known 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.
Sometimes written 'credit worthiness'.

Formerly the Central Securities Depository for the UK market and Irish equities now owned and operated by Euroclear UK and Ireland Ltd.

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

Customer Relationship Management.

The management of a firm's relationships with its existing and prospective customers. Particularly when specialist software or other technology is used to facilitate the customer relationship management.

A foreign exchange transaction where neither the base nor quoted currency is the USD (US Dollar).

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 normally 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 GBP-based 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).

Also known as Currency interest rate swap or Foreign currency swap.

1. 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.

2. Similar guarantees given by companies within a group in relation to the financial obligations of other group companies.
For example in relation to servicing and repaying loans.

Cross-guarantees may have tax implications and may be difficult to enforce on a cross-border basis.

Credit Support Annex.

Central Securities Depository.

Corporate Services Price Index.

Corporate Social Responsibility.

Corporation Tax.

Corporation Tax Self Assessment.

Currency Unit.
Used for illustrative purposes in certain accounting standards and training materials, instead of using real currencies to illustrate with.

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.

A means of expressing the value of a financial asset or currency as a weighted average of more than one foreign exchange rate.

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). Near enough the 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
(i) a receipt/payment of more or less home currency than expected when a transaction is settled (transaction risk), or
(ii) a change in asset/liability values in a balance sheet, profit /loss in an income statement (translation risk), or
(iii) 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.

Also known as Currency exposure or Foreign exchange 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 Internal Revenue Service contribution calculations; it is analogous to Accrued Benefit Obligation, but based on statutory assumptions for mortality and discount rates.

All known as All-current rate method.

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.

Interest yield.

A foreign currency translation method in which current items in balance sheets denominated in foreign currencies are translated at current exchange rates and long-term items are translated at historical rates.

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, near enough the same as a Collar.