Clearing, Settlement and Custody

Glossary

30/360 Also 360/360 or 30(E)/360. A day/year count convention

assuming 30 days in each calendar month and a ‘year’ of 360 days;

adjusted in America for certain periods ending on 31st-day of the

month (and then sometimes known as 30(A)/360).

AAA The highest credit rating for a company or asset – the risk of

default is negligible.

Accrued interest Interest due on a bond or other fixed income

security that must be paid by the buyer of a security to its seller.

Usual compensation: coupon rate of interest times elapsed days from

prior interest payment date (i.e. coupon date) up to but not including

settlement date.

Actual settlement date Date the transaction effectively settles in

the clearing house (exchange of securities eventually against cash).

Add-on In capital adequacy calculations, the extra capital required

to allow for the possibility of a deal moving into profit before a mark-

to-market calculation is next made.

Affirmation Affirmation refers to the counterparty’s agreement

with the terms of the trade as communicated.

Agent One who executes orders for or otherwise acts on behalf of

another (the principal) and is subject to its control and authority. The

agent takes no financial risk and may receive a fee or commission.

Agent bank A commercial bank that provides services as per their

instructions.

Allocation (give up) The process of moving the trade from the

executing broker to the clearing broker in exchange-traded

derivatives.

Amortization Accounting procedure that gradually reduces the

cost value of a limited life asset or intangible asset through periodic

charges to income. The purpose of amortization is to reflect the resale

or redemption value. Amortization also refers to the reduction of

debt by regular payments of interest and principal to pay off a loan by

maturity.

Annuity For the recipient, an arrangement whereby the individual

receives a pre-specified payment annually for a pre-specified number

of years.

Ask price Price at which a market-maker will sell stock. Also

known as the offer price.

Assets Everything of value that is owned or is due: fixed assets

(cash, buildings and machinery) and intangible assets (patents and

goodwill).

Assignment The process by which the holder of a short option

position is matched against a holder of a similar long option position

who has exercised his right.

Authentication agent A bank putting a signature on each physical

bond to certify its genuineness prior to the distribution of the

definitive bonds on the market.

Bank of England The UK’s central bank which undertakes policy

decided by the Treasury and determines interest rates.

Bankers’ acceptance Short-term negotiable discount note,

drawn on and accepted by banks which are obliged to pay the face

value amount at maturity.

Bargain Another word for a transaction or deal. It does not imply

that a particularly favourable price was obtained.

Base currency Currency chosen for reporting purposes.

Basis (gross) The difference between the relevant cash instrument

price and the futures price. Often used in the context of hedging the

cash instrument.

Basis (value or net) The difference between the gross basis and

the carry.

Basis point (BP) A change in the interest rate of one hundredth of

one per cent (0.01%). One basis point is written as 0.01 when 1.0

represents 1%.

Clearing, Settlement and Custody194