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

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). Pensions. A UK independent voluntary organisation, although partially government funded, available to advise individuals involved in disputes over occupational pension schemes.

(OPB). A UK statutory body that came into effect in 1997 as a result of the Pensions Act 1995 for the purpose of being responsible for ensuring the compliance of Occupational Pensions Schemes with relevant laws and regulations. Its duties were absorbed by the Pensions Regulator with effect from April 2005.

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

(OPRA). Pensions. The UK regulatory organisation that preceded the Pensions Regulator.

Open Ended Investment Company.

Abbreviation for Open-Ended Investment Company.

In financing where assets and liabilities are acquired indirectly by a company by way of a financial structure but are not purchased directly by the company, so that the assets and liabilities are not required to be disclosed on the company'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 such structures to be reported on the balance sheet of the reporting entity).

An offering of securities for subscription by the general public.

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

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). An independent professional organisation, the OFT plays a leading role in promoting and protecting consumer interests throughout the UK, while ensuring that businesses are fair and competitive.
For more details see: www.oft.gov.uk

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).

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.

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.

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

It is generally used in the context of transactions with (or) a company resident in a tax haven.

Any fund or investment company (in the case of a unit trust or FCP) that is legally established outside the country of the investor. Popular offshore fund locations are Bermuda, Luxembourg, Ireland and the Channel Islands.

Financial reporting. Abbreviation for Operating and Financial Review.

Abbreviation for Office of Fair Trading.

Statistics. A curve obtained by plotting cumulative frequencies.

Abbreviation for 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. 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 (CZEech OverNight Index Average).

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.

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.

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.

Also known as Close-out netting.

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.

(OEIC). A limited company listed on the 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 (i.e. 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. A component of a UK Annual Report which was historically a legal requirement, but which may not continue to be mandatory. The ACT has recommended that it should continue to be included on a voluntary basis whether or not it remains a legal requirement.
The OFR describes the performance and development of the company and is intended to aid third parties to assess its strategy.

An operating lease involves the lessee paying rentals for the hire of an asset for a period of time which is normally substantially less than the asset’s useful life. The lessor retains the significant risks and rewards of ownership (including the responsibility for maintenance, insurance and the like).

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 expect the Board to mitigate (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.

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. An 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 rate being hedged.)

2. More generally, choice.

Same as 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.

Same as 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.

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 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.

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

Abbreviation for Over the Counter.

Abbreviation for Out of The Money.

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'.

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.

(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.

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.

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 (CZEech OverNight Index Average).

(OIS). An OIS is 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.

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.