Glossary of Terms

Law.
Latin phrase meaning, 'things which are said in passing'. It is the part of a judgment which is not essential to the decision of the judge and does not create a precedent.

Company law.
Alternative name for an Objects clause.

Company law.
A clause in the memorandum of association which sets out the purposes for which the company was formed.

Also known as an object clause.

1.
Any financial commitment undertaken, most commonly in relation to repaying money.
For example the obligation to repay a bond - together with related interest - or the obligation to repay other borrowings or other debt.

2.
More generally, any legally binding financial or non-financial commitment.

3.
More broadly still, any type of commitment, whether or not it is legally binding.

A pension scheme provided by an employer to its employees, whether of a defined benefit or a defined contribution nature. Normally both the employer and the employee contribute to such schemes.

(OPAS).
Replaced by The Pensions Advisory Service.

(OPB).
The former UK statutory body previously responsible for ensuring the compliance of Occupational Pensions Schemes with relevant laws and regulations.

Its responsibilities and powers were transferred to the Pensions Regulator.

(OPDU).
A commercial organisation providing insurance cover to trustees, administrators and sponsoring employers of UK occupational pension schemes.

(OPRA).
A former UK regulatory organisation that has been replaced by the Pensions Regulator.

Organisation for Economic Co-operation and Development.

Open-Ended Investment Company.

1.
In financing where assets and liabilities are acquired indirectly by an entity by way of a financial structure but are not purchased directly by the entity, in such a way that the liabilities are not required to be disclosed in the entity's balance sheet.

The trend in financial reporting over time has been to restrict the types of structures which may be accounted for 'off balance sheet' in this way (instead requiring the liabilities to be appropriately reported in the balance sheet of the reporting entity).

2.
The indirect financial reporting of the related liabilities within the notes to the financial statements - or possibly not at all - rather than directly on the face of the balance sheet.
Sometimes known as 'off balance sheet treatment'.

Any form of finance that does not result in a corresponding liability appearing on the entity's published balance sheet.
On double-entry principles the asset being financed cannot appear either.

The effect of such financing and accounting methods is to show the company's borrowings and financial risk at a lower level than they really are.

1.
The price or rate at which market makers are willing to sell currency or other traded assets.

2. Law.
One essential element of a legally binding contract. Another essential element being acceptance of the offer.

An offering of securities for subscription by the general public.

The person to whom an offer is made.

The person who makes an offer.

(ONS).
The branch of the UK government responsible for the collection of various categories of financial and demographic statistics, including census information.

(OFT).
A UK Government department, which plays a leading role in promoting and protecting consumer interests throughout the UK, while ensuring that businesses are fair and competitive.

An officer of the court who is employed by the Insolvency Service to manage compulsory company liquidations.

The term 'Official Receiver' should not be confused with an administrative receiver who is appointed by debenture holders (floating charge holders).

Holdings of gold and foreign currencies by the official monetary institutions of a country.

1.
In the context of payment and settlement systems, this term may refer to the transmission of transfer instructions by users, through such means as voice, written or telefaxed instructions, that must subsequently be input into a transfer processing system.

2.
The term may also refer to the storage of data by a transfer processing system on media such as a magnetic tape or disk so that the user may not have direct and immediate access to the data.

3.
More generally, operating independently of - or disconnected from - another computer or electronic terminal. For example, not connected to the internet.

Ability to set assets against liabilities in multiple bank accounts. Also used in netting transactions.

1.
The siting of a currency asset in a location other than the country of which the currency is the domestic currency.
For example, a holding of Japanese Yen in the United States (which would also be known as 'Euroyen').

2.
The term is also used in the context of transactions with a company resident in a tax haven, or about a company itself resident in a tax haven.

Any fund or investment company (in the case of a unit trust or Fonds Commun de Placement) that is legally established outside the country of the investor.

Popular offshore fund locations are Bermuda, Luxembourg, Ireland and the Channel Islands.

Financial reporting.
Operating and Financial Review.

Office of Fair Trading.

Statistics.
A curve obtained by plotting cumulative frequencies.

Overnight Indexed Swap.

A market form, characterised by few sellers, selling either a homogeneous product or a differentiated product.

Owner Managed Business.

A statistical significance test where the critical region consists of only one tail of a distribution.

OverNight Index Average rate.

1.
In the context of payment and settlement systems, this term may refer to the transmission of transfer instructions by users through such electronic means as computer-to-computer interfaces or electronic terminals, which are entered into a transfer processing system by automated means.

2.
The term may also refer to the storage of data by a transfer processing system on a computer database so that the user has direct access to the data (frequently in real time) through input/output devices such as terminals.

3.
More generally, connected to another computer or electronic terminal. For example connected to the internet.

UK Office for National Statistics.

Occupational Pensions Advisory Service.

Occupational Pensions Board.

Occupational Pensions Defence Union.

Type of commercial trade credit in which the seller issues an invoice, which is formal evidence of an obligation, and records the sale as an account receivable.

Near enough the same as Close-out netting.

Contracts not yet offset by futures contracts or fulfilled by delivery.

The buying or selling of financial securities in the open market by the central bank to influence the amount of money in circulation.

A kind of auction system used by market traders under which all bids and offers are made openly by public, competitive outcry with the use of hand signals.

The difference between the amount of a foreign currency owned or receivable and the total of the same currency payable under definite contracts. If one exceeds the other, there is an open position.

(OEIC).
A limited company listed on a stock exchange whose sole aim is to invest in securities issued by other entities.

Unlike an investment trust, there is no limitation on the number of shares that can be issued (it is an open-ended structure). The value of the shares is determined by the OEIC’s underlying assets; however, there is no bid-offer spread.

OEICs can be the underlying structure for a single fund or the umbrella fund for a family of sub-funds.

Accounting.
Cash flows from operating activities are from principal revenue producing activities.

(OFR). Financial reporting.
The OFR describes the performance and development of the company and is intended to aid third parties to assess its strategy.

Formerly a mandatory legal requirement in a UK Annual Report (up to 2006). The ACT has recommended that it should continue to be included on a voluntary basis.

A company - usually within a larger group of companies - which trades actively.

Sometimes known as a 'opco'.

An operating lease involves the lessee (user) paying rentals for the hire of an asset for a period of time which is normally substantially less than the asset’s full useful life.

The owner (lessor) retains the significant risks and rewards of ownership - usually including the responsibility for maintenance, insurance and the like, and enjoyment of a significant residual value of the asset at the end of the lease term.

Under IAS 17 and SSAP 21, operating leases are accounted for 'off balance sheet' by the user of the asset.
This means that the obligations/liabilities to pay future lease instalments are only disclosed in the notes to the financial statements, not on the face of the balance sheet.

A part of a larger business having separately identifiable objectives, responsibilities and management.

More significant operating units may also be Strategic Business Units.

Operational risk is the risk of adverse effects resulting from inadequate or failed internal processes, people and systems and / or external events such as adverse changes to the economic environment.

Investors in companies generally expect the Board to mitigate or minimise these risks, to ensure that they cause as little harm as possible to the organisation.

The expected return that is foregone by investing in a project, rather than in the next best use of capital or other resources.

It is the opportunity cost of capital and other resources that is the relevant economic measure for financial decision making purposes.

A strict measure of the cost of capital, emphasising that it is the current market cost of capital - and not the historical cost or the cash cost - that is relevant for financial decision making purposes.

The worsening of a financial position when effectively 'locked in' to a course of action or to a particular fixed price or rate, compared with the alternative which could have been followed without the lock-in.

For example, there is always a risk of opportunity losses when we use a fixing instrument to effectively lock in a (committed) market price.

We are effectively locked in to the predetermined and committed market price, instead of being free to take advantage of actual market rates (if they turn out to be more favourable).

The risk of suffering an opportunity loss.

Sometimes known as 'regret risk'.

Occupational Pensions Regulatory Authority.

(OCR). Technical process that allows written text to be converted into an electronic format by the use of computer-scanning technology.

It is used to capture electronically information on cheques and other paper-based documents and is similar to magnetic ink character recognition (MICR).

1.
The capital structure which results in the lowest Weighted Average Cost of Capital (WACC).

2.
The most appropriate capital structure taking account of both:
(i) the cost saving benefits of a low WACC, and
(ii) the potential flexibility and safety benefits of a more conservative capital structure (with a relatively lower proportion of debt finance).

1.
A financial option is a derivative instrument giving the holder the right - but not the obligation - to buy or sell an underlying asset on or before a future date at a specified price.

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.

Like other derivative instruments, options can be used to:

• Speculate by creating new exposures to market rates.

• Hedge existing exposures to changes in market rates.

• Arbitrage in combination with other related instruments to achieve 'risk free' profits.

When used for hedging purposes, options generally provide insurance-like protection against worst case outcomes. (Contrasted with 'fixing' hedging instruments - such as FRAs - which effectively fix the market rate being hedged.)

2.
More generally, choice.

3.
A real option is an option relating to an operational decision or outcome.

Option holder.

An option holder is the party which enjoys the benefit of choosing whether or not to deal on the terms specified in the option. The holder pays a premium to the writer, in exchange for this benefit.

Also called an option buyer.

The price paid to the seller of a foreign exchange option for the rights involved.

Option writer.

VAT.
Turns an exempt supply into a standard rated supply for VAT purposes.

An option writer is the party which undertakes the obligation - in exchange for a premium - to deal with the option holder if the holder chooses to exercise the option.

Also called an option seller.

London Stock Exchange.
Order book for Retail Bonds.

London Stock Exchange.
(ORB).
An electronic order-driven trading service for selected UK government, corporate and supranational bonds.
The ORB aims to offer issuers an alternative source of funding through issuing tradeable retail bonds dedicated to private investors.

Accounting.
These are investments that do not give control or significant influence over the other undertaking.

Units of equity which have no special rights or powers. Similar to common stock.
By far the most common form of equity shareholding.

Ordinary shares are the last to be paid out in a liquidation.
Normal rights include the right to receive a dividend and to vote at meetings.

A strategy for growth based on increasing the sales of the existing business, rather than growing through mergers or acquisitions.

A body consisting of more than one individual, united for the achievement of a business or administrative purpose.

Types of business organisations include commercial companies and partnerships formed for the purpose of making profits.

Types of non-profit making organisations include local governments and charities.

(OECD). An organisation that provides inter-governmental discussion in the fields of economic and social policy.
It collects and publishes data and makes short-term economic forecasts about its member countries.

Law.
The authority which a third party is reasonably entitled in law to believe that an agent has.

Over the Counter.

Out of The Money.

(OTM).
1. An option is out of the money when immediate exercise of the option would result in a loss for the holder of the option.

2. A derivative such as a swap is out of the money when, for example, the swap rate is unfavourable compared with the current market rate, so that the net present value of the derivative is negative.

Same as Outturn.

A measure of the change in prices of goods sold by UK manufacturers. Sometimes called 'factory gate prices'.

UK VAT.
The VAT on goods and services out of a business.

The practice of having an outside entity perform all or part of a business operation which was previously handled in-house.

1.
'Outturn' market rates are the rates or prices which actually occur in the relevant market - in other words the rates which 'turn out' to be the case in the market.
Outturn market rates may be compared with, for example, forecast rates, expected rates, or hedged rates.

For example if hedging a borrowing with an interest rate option with a strike price of 6%.
At an outturn market rate of 8% the borrower's option would be exercised (and pay out to the holder assuming it was cash-settled).
At an outturn market rate of 5% the borrower's option would lapse worthless.

Outturn rates in this sense are related to - but different from - the all-in hedged rates achieved. The hedged rate achieved means the total income or expense resulting, taking account both of the underlying exposure and of the hedging instrument.

So continuing the same example, and assuming an option premium paid of 0.5%.

i. At an outturn rate of 5%, the hedged rate borrowing achieved = 5% market rate + 0.5% option premium = 5.5%.

ii. At an outturn rate of 8%, the hedged borrowing rate achieved = 6% option strike price + 0.5% option premium = 6.5%.

2.
The result or the net result of any activity.

3.
The all-in hedged rate or outcome achieved, as a result of hedging activities.

(ONIA). Overnight index average rates are calculated and published for a number of different currencies and markets. For example SONIA (for sterling), EONIA and EURONIA (for euro).

There are also many others including for example CZEONIA (Czech Over Night Index Average).

(OTC).
Direct dealing between counterparties - for example corporates and banks - which allows for tailoring of financial contracts but which also exposes the parties to credit risk.

Exchange trading is the alternative to OTC dealing. Exchange traded instruments are standardised, and less flexible, but the interposition of the exchange substantially reduces credit risk.

More specifically, this is a market for the trade of securities that are not listed on the stock exchange consisting of bilateral dealing contracts between brokers. As opposed to an organised stock exchange, prices on the OTC markets are set by direct negotiation between dealers and not by an auction system.

The OTC market is a market for companies which do not fulfil the listing requirements of the official stock exchange markets, or for derivatives or other financial instruments that do not have a liquid market.

A description applied to a business which has a deficit of working capital. It often results from a rapid expansion in sales to the detriment of liquidity.

A line of credit which is applied to a current account and may be drawn on demand.

It is also known as a demand loan, as it is repayable to the bank on demand.

Any accounting cost that cannot be traced directly to a product or service is known as an overhead.

"Overhedging" is a form of speculation.

It means intentionally "hedging" an amount GREATER THAN the total related risk exposure, for example by the use of a derivative instrument with a principal amount of 200% of the related risk exposure.
The effect of overhedging in this way is to create a new purely speculative position in the derivative instrument.

The size of the new speculative position is equal to the excess of the principal amount hedged, over 100%.
For example in this case the size of the new speculative position is 200% - 100% = 100%.
In other words equal in size to the original exposure being hedged.

The new speculative position is in the opposite direction to the original exposure.

The bank that provides an additional layer of bank accounts within a country to facilitate transfers between the operating local accounts and pooling structure accounts, with the aim of sweeping (notionally or effectively) the resulting balance cross-border into a central liquidity pool.

(OIS). A fixed rate interest rate swap against a floating rate index such as SONIA, EURONIA or EONIA.

The two parties to the OIS agree to exchange the difference between the interest accrued at an agreed fixed interest rate for a fixed period (for example 3 months) on an agreed notional amount, and the interest accrued on the same amount, by compounding the reference index daily over the term of the swap.

Settlement is made net at an agreed date after maturity (in the sterling market settlement is on the maturity date) so the principal never changes hands.

A loan with a maturity of one business day.

Technical analysis.
The tendency of markets to overreact to news, good or bad. Therefore the market price would also tend to go up or down by more than is justified by the news.

Part of a central bank’s remit, the main function of payment systems oversight is to promote the smooth functioning of payment systems and to protect the financial system from potential ‘domino effects’ that could be triggered by the credit or liquidity problems encountered by one or more participants in the payment system.

Payment systems’ oversight focuses on a system as a whole rather than on individual participants.

Owner earnings are defined briefly as:

Earnings after tax;
ADD
Depreciation and certain other non-cash charges;
LESS
Capital expenditure requirements;
LESS
Working capital requirements.