Glossary
A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
Assured payment system
A mechanism whereby a seller delivers securities in exchange for an irrevocable commitment by the buyer's bank to make an unconditional and irrevocable payment to the seller's bank.
Beneficial ownership/interest
Entitlement to receive some or all of the benefits of ownership of a security or ~financial instrument (e.g. income, voting rights, power to transfer). geneficial ownership is usually distinguished from "legal ownership" of a security or financial instrument.
Bilateral netting
A netting between two parties.
Book-entry system
An accounting system that permits the transfer of securities without the movement of certificates.
Caps
Quantitative limits on the funds transfer activity of individual participants in a system; limits may be set by each individual participant or may be imposed by the body managing the system; limits can be placed on the net debit position or net credit position of participants in the system.
Central bank credit facility
A credit facility provided for certain account holders at the central bank; the loans typically take the form either of advances to, or secured overdrafts on, the current account (also known as lombard loans) or of traditional rediscounting of bills. In some cases the facility can be drawn automatically at the initiative of the account holder, while in other cases some degree of central bank discretion is involved.
Central securities depository
A facility for holding securities which enables securities transactions to be processed by means of book entries. Physical securities may be immobilised by the depository or securities may be dematerialised (so that they exist only as electronic records).
Certificate
The piece of paper which evidences the undertakings of an issuer of a security or financial instrument.
Chaining
A method used in certain settlement systems for processing transfers. It involves the manipulation of the order in which transfers are processed to increase the number or value of transfers that may be settled with available securities and funds balances (or available credit lines).
Clearance
The term "clearance" has two meanings in the securities markets. It may mean the process of calculating the mutual obligations of market participants, usually on a net basis, for the exchange of securities and money. It may also signify the process of transferring securities on the settlement date. In this report, the term is used in the first sense.
Clearing system
A mechanism for the calculation of mutual positions within a group of participants to facilitate the settlement of their obligations on a net basis.
Confirmation
The process by which a market participant not)fies its customers of the details of a trade and allows the customer to positively affirm or question the trade.
Counterparty
One party to a trade.
Credit risk/exposure
The risk that a counterparty will not settle an obligation for full value, either when due or at any time thereafter. Credit risk is generally defined to include replacement cost risk and principal risk.
Credit transfer system
A funds transfer system through which payment orders move from (the bank of) the originator of the transfer message or payer to (the bank of) the receiver of the message or beneficiary.
Custody
The safekeeping and administration of securities and financial instruments on behalf of others.
Customer
A buyer, seller or holder of securities and financial instruments that does not participate directly in a system. A participant's holdings in a system often include securities and financial instruments of which the participant's customers are the beneficial owners.
Daylight credit (or daylight overdraft' daylight exposure, intraday credit)
Credit extended for a period of less than one business day; in a credit transfer system with endof-day final settlement, daylight credit is tacitly extended by a receiving participant which accepts and acts on a payment order, even though it will not receive final funds until the end of the business day.
Debit transfer system (or debit collection system)
A funds transfer system in which debit collection orders made or authorised by the payer move from (the bank of ) the payee to (the bank of) the payer and result in a charge (debit) to the account of the payer; for example, cheque-based systems are typical debit transfer systems.
Default
Failure to complete a funds or securities transfer according to its terms for reasons that are not technical or temporary, usually as a result of bankruptcy. Default is usually distinguished from a "failed transaction".
Delivery
Final transfer of a security or financial instrument.
Delivery versus payment system
A securities settlement system that provides a mechanism that ensures that delivery occurs if and only if payment occurs.
Dematerialisation
The elimination of physical certificates or documents of title which represent ownership of securities so that securities exist only as accounting records.
Discharge
Release from a legal obligation imposed by contract or law.
Failed transaction
A securities transaction in which the securities and cash are not exchanged as agreed on the settlement date, usually because of technical or temporary causes.
Final transfer
An irrevocable and unconditional transfer which effects a discharge of the obligation to make the transfer. The terms "delivery" and "payment" are each defined to include a final transfer. See Provisional Transfer.
Gridlock
A situation that can arise in a funds or securities transfer system in which the failure of some transfer instructions to be executed (because the necessary funds or securities balances are unavailable) prevents other instructions from being executed, with the cumulative result that a substantial number of transfers fail to be executed on the scheduled date.
Haircut
The difference between the market value of a security and its collateral value. The haircut is intended to protect a lender of funds or securities from losses owing to declines in collateral values.
Immobilisation
Placement of certificated securities and financial instruments in a central securities depository to facilitate book-entry transfers.
Irrevocable transfer
A transfer which cannot be revoked by the transferor.
Issuer
The entity which is obligated on a security or financial instrument.
Legal ownership
Recognition in law as the owner of a security or financial instrument. Registration of a security or financial instrument usually confers legal ownership on the person or entity named, even in those cases where the legal owner has obtained the registration on behalf of another (e.g. custodian, trustee, broker).
Liquidity risk
The risk that a counterparty will not settle an obligation for full value when due, but on some unspecified date thereafter.
Loss-sharing agreement
An agreement among participants in a clearing or settlement system regarding the allocation of any losses arising from the default of a participant in the system.
Margin has at least two meanings. In the futures/commodity markets, margin is a good faith deposit (of money, securities, or financial instruments) required by the futures clearing system to assure performance. In the equities markets, margin is a sum of money deposited by a customer when borrowing money from a broker to purchase shares. In this report, margin refers to the equities market concept unless otherwise specified.
Matching (or comparison, checking)
The process used by market participants before settlement of a transaction to ensure that they agree with respect to the terms of the transaction.
The practice of revaluing securities and financial instruments using current market prices. In some cases unsettled contracts to purchase and sell securities are marked to market and the counterparty with an as yet unrealised loss on the contract is required to transfer funds or securities equal to the value of the loss to the other counterparty.
Multilateral netting
A netting among more than two parties.
Net credit or net debit position
A participant's net debit or net credit position in funds or in a particular security is the sum of all the transfers it has received up to a particular time less the transfers it has sent; if this sum is positive, the participant is in a net credit position, if the sum is negative, it is in a net debit position. The net credit or net debit position at settlement time is called the net settlement position. These positions may be calculated on a bilateral or multilateral basis.
Netting
An agreed offsetting of mutual positions or obligations by trading partners or participants in a system. The netting reduces a large number of individual positions or obligations to a smaller number of positions. Netting may take several forms which have varying degrees of legal enforceability in the event of default of one of the parties.
Net settlement
A settlement in which a number of transactions between or among counterparties are settled on a net basis.
Net settlement system
A system in which transfer orders are settled on a net basis. It is common for such systems to distinguish between types of transfer orders and settle some, such as payment orders, on a net basis and settle others, such as securities transfer orders, on a trade-for-trade basis.
Nominee
A person or entity named by another to act on his behalf. A nominee is commonly used in a securities transaction to obtain registration and legal ownership of a security.
Novation
The satisfaction and discharge of existing contractual obligations by the substitution of new obligations.
Obligation
A duty imposed by contract or law. It is also used to describe a security or financial instrument, such as a bond or promissory note, which contains the issuer's undertaking to pay the owner.
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The satisfaction and discharge of a monetary obligation by the debtor's unconditional transfer of a claim on a party agreed to by the creditor. Typically, the party is a central bank or a commercial bank.
Position netting
The netting of instructions in respect of obligations between two or more parties which neither satisfies nor discharges those original obligations. (Also referred to as payment netting in the case of payment instructions).
Principal risk
The risk that the seller of a security delivers a security but does not receive payment or that the buyer of a security makes payment but does not receive delivery. In this event, the full principal value of the securities or funds transferred is at risk.
Provisional transfer
A conditional transfer in which one or more parties retain the right by law or agreement to rescind the transfer.
Real time
The processing of instructions on an individual basis at the time they are received rather than at some later time.
Registration
The listing of ownership of securities in the records of the issuer. This task is often performed by an official registrar/transfer agent.
Replacement cost risk
The risk that a counterparty to an outstanding transaction for completion at a future date will fail to perform on the settlement date. This failure may leave the solvent party with an unhedged or open market position or deny the solvent party unrealised gains on the position. The resulting exposure is the cost of replacing, at current market prices, the original transaction.
Same-day funds
Money balances that the recipient has a right to transfer or withdraw from an account on the day of receipt.
Settlement
The completion of a transaction, wherein the seller transfers securities or financial instruments to the buyer and the buyer transfers money to the seller. A settlement may be final or provisional.
Settlement risk
The risk that a party will default on one or more settlement obligations to its counterparties or to a settlement agent.
Settlement system
A system in which settlement takes place.
Substitution
The process of amending a contract between two parties so that a third party is interposed as an intermediary creditor/debtor between the two parties and the original contract between the two parties is satisfied and discharged.
Systemic risk
The risk that the inability of one institution to meet its obligations when due will cause other institutions to be unable to meet their obligations when due.
Trade date
The date on which a trade/bargain is executed.
Trade netting
A legally enforceable consolidation and offsetting of individual trades into net amounts of securities and money due between trading partners or among members of a clearing system. A netting of trades which is not legally enforceable is a position netting.
Trade-for-trade (gross) settlement
A settlement in which a number of transactions between counterparties are settled individually.
Trade-for-trade settlement system
A system in which each individual transfer order is settled separately.
Transfer
An act which transmits or creates an interest in a security, a financial instrument or money.
Unwind
A procedure followed in certain clearing and settlement systems in which transfers of securities and funds are settled on a net basis, at the end of the processing cycle, with all transfers provisional until all participants have discharged their settlement obligations. If a participant fails to settle, some or all of the provisional transfers involving that participant are deleted from the system and the settlement obligations from the remaining transfers are then recalculated. Such a procedure has the effect of allocating liquidity pressures and losses from the failure to settle to the counterparties of the participant that fails to settle.
Variation margin
The amount which is paid by a counterparty to reduce replacement cost exposures resulting from changes in market prices, following the revaluation of securities or financial instruments that are the subject of unsettled trades.
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