| Accrued
Interest — Interest
that has accumulated
between the most recent
payment and the sale
of a bond or other
fixed income security.
The buyer of the security
pays the quoted dollar
price plus accrued
interest, calculated
by multiplying the
coupon rate by the
number of days that
have elapsed since
the last payment. |
| Agencies — Securities
issued by a federal
agency. |
| Agent – A
firm that executes
orders for, or acts
on behalf of, another
party (the principal).
An agent does not have
title to the principal's
property, and owes
the duty of obedience
to the principal's
orders. |
| Agent
Bank — To
be considered a securities
lending agent, the
lending institution
must disclose the names
of all parties involved
in a transaction and
disclose any compensation
it receives to the
client. |
| American
Depository Receipt
(ADR) – Domestically
issued and traded securities
representing claims
to shares of foreign
stocks. |
| Arbitrage – The
process of buying and
selling similar securities,
commodities or currencies
in order to profit
from temporary price
differentials between
two markets. |
 |
| Bankers
Acceptances – A
draft or bill of exchange
accepted by a bank
or trust company. The
accepting institution
guarantees payment
of the bill. |
| Basis
Point – One
one-hundredth of a
percent. |
| Bear
Market – A
prolonged period of
falling prices; a period
in which market declines
are anticipated. |
| Beneficial
Owner — The
actual owner of the
securities as opposed
to the custodian or
broker in whose name
the shares may be registered. |
| Best
Efforts — All
reasonable efforts
will be taken to follow
the client's wishes;
however, completion
of the client's wishes
cannot be guaranteed. |
| Blind
Broker – A
broker who acts as
principal and does
not give up names to
either side of a brokered
trade. |
| Bonds
Borrowed – A
type of loan that U.S.
Treasuries or Agencies
receive as collateral
and a premium is paid
by the borrower. |
| Book
Entry System – An
accounting system that
facilitates the change
of ownership of securities
electronically. Securities
move between parties
without the need for
the movement of physical
documents. |
| Borrower –The
broker/dealer or bank
to whom securities
are lent subject to
a securities lending
agreement. |
| Borrower
Agreement – A
contract written between
the lending institution
and the borrowing broker
to lend securities. |
| Break
a Trade – To
unwind a long or short
position in a security
prematurely with respect
to the intended trading
strategy. |
| Broker – A
person who acts as
an intermediary between
a buyer and seller
and who usually receives
a commission. |
| Broker
/ Dealer – A
securities firm that
sometimes acts as broker
and sometimes acts
as principal in security
transactions. |
| BTANs – French
government notes |
| Bull
Market – A
prolonged rise in the
price of stocks, bonds
or commodities. A period
of optimism when rising
prices are anticipated. |
| Bund – German
government bonds. |
| Business
Day – A
day on which regular
trading occurs in the
market for the loaned
security or security
accepted as collateral. |
| Buy-In – The
action taken by a broker
who fails to receive
securities from a counterparty
on settlement date
and purchases securities
in the open market;
in the event of a borrower
default, when a securities
lender liquidates the
borrower's collateral
to purchase securities
in the market. |
|
| Carry - The
interest cost of financing
securities inventory;
may be either positive
or negative. |
| Central
Securities Depository
(CSD) - A
facility for holding
securities, either
in certificated or
uncertificated form,
which enables book
entry transfer of those
securities. A CSD may
perform comparison
and clearance functions
in addition to safekeeping. |
| Chinese
Wall - The
imaginary wall between
two different areas
of a securities firm
or bank, denoting a
commitment in one area
not to disclose confidential
information to another. |
| Clearance - The
process of determining
accountability for
the exchange of money
and securities between
counterparties in a
trade which creates
statements of obligation
for securities and/or
funds due; a trade
that does not clear
properly is said to
fail. |
| Collateral - Cash
or other assets pledged
to a lender as security
until a loan is repaid.
The most common forms
of collateral in stock
lending are cash, letters
of credit and U.S.
government and agency
bonds. |
| Commercial
Paper - An
unsecured promissory
note with a fixed maturity
of no more than 270
days. |
| Conduit
Borrower - An
intermediary in the
securities lending
chain, acting as principal,
that borrows securities
in order to lend them
at a higher spread
to another borrower
whose credit may not
be acceptable to the
original lender or
whose credit facility
is filled with the
original lender. |
| Contractual
Settlement Date
- The
agreed upon day in
which securities and/or
funds are to be transferred
to clear a trade. |
| Corporate
Bond - Long-term
debt instruments issued
by corporations, typically
paying interest semi-annually
and returning the face
value of the bond at
maturity. |
| Country
Risk - Also
known as sovereign
risk. |
| Credit
Risk - In
securities lending,
the possibility that
a borrower may default
on its obligations. |
| Cross
Border Trading - Trading
that occurs between
counterparties from
different countries. |
| Cross
Hedge - Hedging
a risk in a cash market
security by buying
or selling a futures
contract for a similar,
but not identical,
instrument. |
| Current
Issue - In
Treasury securities,
the most recently auctioned
issues. Trading is
more active (and securities
lending spreads higher)
in current issues than
in off-the-run issues. |
|
| Dealer - Individual
or firm that acts as
a principal in a securities
transaction, trades
for its own account,
maintains inventory
and accepts risk; a
specialist trading
for its own account. |
| Default - The
failure to fulfill
a contract or an agreement. |
| Delivery
Versus Payment (DVP) - The
simultaneous exchange
of securities (delivery)
and cash value (payment)
to settle a transaction. |
| Depository
Trust Company (DTC) - The
central U.S. depository
for many lendable securities,
including common and
preferred stocks and
corporate bonds. |
| Directed
Agent - If
the customer directs
all aspects of the
transaction, including
the negotiation and
administration of the
loan, the lending institution
is considered a directed
agent. |
| Dividend
Reinvestment Program
(DRIP or DRP) - The
automatic reinvestment
of shareholder dividends
into more shares of
the company's stock,
usually at a discount. |
| Dividend
Requirement - Refers
to the taxation applicable
to foreign stocks when
dividends are paid
out. |
| DK - A
questioned trade; a
trade that is rejected
because of some type
of problem or operational
error. |
|
| Emerging
Market - Immature
securities market in
which there is not
a long history of substantial
foreign investment. |
| Entitlement
Points - Used
to determine an account's
position in the queue
which allocates loan
opportunities. Each
time an account participates
in a new loan or does
not participate in
a loan of securities
held in the account,
the account's entitlement
position changes. |
| Equity - Lendable
securities, both domestic
and foreign, generally
known as common and
preferred stocks. |
| ERISA - The
Employee Retirement
Income Security Act
of 1974, a law which
governs the operation
of most private U.S.
pension and benefit
plans. Amendments to
ERISA in 1981 permitted
these entities to loan
out their securities
and thus earn additional
income on their portfolios. |
| Eurobond - Bonds
issued in Europe outside
the jurisdiction of
any single country.
A eurobond may or may
not be denominated
in the currency of
the issuer. |
| Euroclear - Central
European Depository
located in Belgium
acting as a clearing
house for European
bond issues and Global
Depository Receipts. |
| Execution - The
agreement to exchange
securities and cash
on a future specified
settlement date. |
|
| Fail - A
situation where either
the seller fails to
deliver the security
in proper form or the
buyer fails to deliver
funds in the proper
form on settlement
date. As long as the
fail exists, the seller
will not be paid. |
| Fed
Funds - Noninterest-bearing
deposits held by member
banks at the Federal
Reserve. |
| Fed
Funds Rate - The
rate of interest at
which Fed funds are
traded among banks.
This rate currently
is pegged by the Federal
Reserve through its
open market operations.
This rate generally
also is acknowledged
as the basis upon which
rebate rates are set. |
| Federal
Reserve Book Entry
System - The
central depository
for U.S. government
and agency securities. |
| Final
Settlement - The
completion of both
sides of a securities
trade (delivery of
the security and payment
in cash). Finder -
A company that acts
as an intermediary
between borrower and
lender whose job is
to locate, price and
set up loans and returns. |
| Floating
Rate Notes - A
security whose rate
of interest or return
adjusts or floats,
based on other agreed-upon
structure. |
| Foreign
Bond - A
bond issued by a non-domestic
borrower in a domestic
capital market. |
|
| General
Collateral - Issues,
usually bonds, that
are in significant
supply and are not
traded actively. These
issues generally are
seasoned (not "on the
run") government securities,
which carry higher
rebate rate requirements
to lend. |
| Global
Custodian - A
financial institution
that provides safekeeping
and clearing services
for its institutional
clients. Custodians
also collect dividend
and interest income
on securities, monitor
corporate actions,
process tax reclaims,
and provide reporting
and cash management
services in multiple
currencies. |
| Government
Bond - A
bond issued by a federal
sovereignty that is
backed by the full
faith and credit of
the sovereignty. |
| Hedge - To
reduce risk by taking
a position in the futures
market that is equal
or opposite to an existing
or anticipated cash
position; shorting
a security in which
a long position has
been established. |
| Hold - The
practice whereby a
specific security is
reserved for a particular
borrower for a short
length of time. |
| Hot
Issues - An
issue much in demand
by borrowers, and thus,
hard to find. These
issues generally carry
lower rebate rate requirements. |
| Indemnification - An
agreement to compensate
securities lending
clients for damage
or loss. Global custodians
may offer to indemnify
a lender against several
types of risk, including
broker/dealer default,
market risk on the
difference between
the value of the securities
out on loan and the
value of the underlying
collateral; or reinvestment
risk associated with
cash collateral. Contingent
liabilities associated
with indemnified contracts
impose additional capital
requirements for the
agent bank or custodian. |
| Insolvency - The
point at which a borrower
becomes unable to pay
its debts or declares
bankruptcy. |
| Italian
BPTs - Italian
government bonds. |
|
| JGBs - Japanese
government bonds. |
| Lending
Agreement - A
contract between a
client and its custodian
which authorizes participation
in the custodian's
securities lending
program. |
| Letter
of Credit - A
form of collateral
that is issued by the
borrowing broker's
bank. The L/C states
that the bank will
guarantee to the lending
institution the amount
of the letter upon
presentation in the
case of a broker defaulting
under the terms of
the loan agreement. |
| LIBOR - The
London Interbank Offered
Rate on Eurodollar
Deposits traded between
banks, and the basis
upon which many interest
rate levels are set. |
| Margin - The
amount or percentage
by which collateral
value exceeds the value
of the loaned security.
The party that is accepting
credit risk and price
risk generally will
require a margin of
2% on domestic loans
(102%) and 5% on foreign
loans (105%). |
| Mark
to Market - Pricing
outstanding loans to
the current market
price of the security
to ensure full collateralization. |
| Matched
Loan - A
securities lending
trade in which the
terms of the loan (rebate
rate and maturity)
coincide perfectly
with the terms of the
investment (interest
rate and maturity). |
| Mismatched
Loan - A
securities lending
trade in which the
terms of the trade
(rebate rate or maturity)
do not coincide perfectly
with the terms of the
investment (interest
rate or maturity).
In such a loan, there
is an expectation that
interest rates will
move during the term
of the loan in a direction
that will result in
additional profitability
for the loan. |
| Money
Market Mutual Fund - A
mutual fund that invests
solely in money market
and other short-term
instruments |
|
| NAV - The
net asset value of
a fund. |
| NRSROs - Nationally
Recognized Statistical
Rating Organizations;
the commonly utilized
rating organizations
of the creditworthiness
of investment issuers,
including Standard & Poor's,
Moody's Investor Services,
Fitch's Rating Service,
Duff & Phelps, Thomson
BankWatch and International
Bank Credit Analyst. |
| OATs - French
government notes |
| On-the-Run
Issues - Terminology
used to refer to current
U.S. Treasury issues,
which generally are
issues more in demand
by borrowers and usually
carry lower rebate
rate requirements. |
| Open
Loan - A
securities loan with
no fixed rate to maturity,
capable of being terminated
by either the lender
or the borrower on
short notice. |
| Payment
in Lieu - A
substitute payment
for a dividend or other
payment, as in "a payment
in lieu of a dividend." |
| Premium - Securities
lending fee associated
with loans for which
noncash collateral
is involved. |
| Price
Risk - The
risk that the price
of a security may change
as a result of a rise
or fall in market interest
rates. |
| Principal - Major
party to a transaction,
acting as either a
buyer or seller (or
lender or borrower),
acting on its own account
and at its own risk. |
| Proprietary
Trading - When
a dealer trades in
securities or derivatives
for the account of
the firm itself rather
than on behalf of its
clients. |
|
| Rebate - A
percentage of a cash
loan's market value
which is returned to
the borrowing broker
for the use of its
cash in the investment
of a short-term instrument.
The percentage varies
depending on the institution
and the current short-term
interest rate. |
| Recall - When
a lending institution
notifies the borrowing
broker to return the
loan. On a standard
loan agreement, three
days' notification
is required for equities
and corporate bonds;
one day is required
for U.S. government
securities. Notification
requirements vary by
country. |
| Reclaim - When
an item is sent back
to the delivering broker
by the receiving broker
because of some type
of problem with the
trade; the delivering
broker calls this a
reclaim. |
| Repurchase
Agreement (Repo) - A
method of financing
dealer positions whereby
the dealer sells U.S.
government securities
to an investor for
cash and agrees to
repurchase the securities
at a future date for
a fixed price. Terms
of the agreement are
structured to compensate
the buyer of securities
for what effectively
is a short-term loan. |
| Right
of Substitution - The
right of a lender to
substitute the securities
of one client for identical
or similar securities
of the same or another
client in a securities
loan. |
|
| Settlement - The
final transfer of securities
and cash in fulfillment
of the obligations
committed to in an
executed trade. The
transfer of securities
is referred to as "delivery" and
the transfer of money
as "payment." |
| Short
Sale - A
transaction in which
a market participant
sells a security that
he or she does not
own with the expectation
that the price of the
security will fall
or in connection with
an arbitrage strategy.
A broker/dealer may
borrow the needed security
on a temporary basis
to effect settlement.
Eventually, however,
the broker/dealer must
purchase the security
in order to redeliver
the borrowed security. |
| Sovereign
Bond - Bonds
issued by a foreign
government. |
| Sovereign
Risk - The
special risks, if any,
that attach to a security
because the country
of issuance is different
than the country of
the investor. |
| Specials - Specific
issues borrowed to
fulfill trading strategies.
These trades generally
are made up of "on-the-run" government
issues and are more
in demand by borrowers;
therefore, they carry
lower rebate rates. |
| Spread - In
securities lending,
the difference between
the rate of investment
of cash collateral
and the rebate rate
of a loan; in investments,
the difference between
bid and asked price
on a security or the
difference between
yields on or prices
of two securities that
have different characteristics
or maturities. |
| Spread
Trade - A
structured transaction
wherein a security(ies)
is/are placed on loan,
simultaneously, the
cash received is invested
in a short-term investment.
Generally both sides,
loan and investment,
are entered into with
the same party. The
investment and loan
transaction "mirror" each
other in terms of reset,
pay down and final
maturity. See matched
Loan. |
| Split - The
revenue sharing relationship
between an account
and its securities
lending agent, as in
a 60/40 split (60%
to client and 40% to
agent). |
| STIF - A
Short-Term Investment
Fund. |
| Subcustodian - A
custodian bank that
is responsible for
safekeeping of securities
within a single country
and in only one currency.
In contrast, a global
custodian manages a
network of subcustodians
in order to perform
custody operations
for its clients worldwide. |
| Substitute
Payments - A
payment made in lieu
of another payment,
as a substitute payment
in lieu of a dividend. |
| Supranationals - The
International Bank
for Reconstruction
and Development (World
Bank), Interamerican
Development Bank, Asian
Development Bank, African
Development Bank, European
Investment Bank and
other multilateral
lending institutions
or regional development
banks in which the
U.S. government is
a shareholder or contributing
member. |
|
| Tax
Treaty - Treaty
existing between U.S.
and foreign governments
regarding taxation
of foreign investors. |
| Term
Loan - A
commitment for a loan
for a specific time
frame, as one week,
one month or for a
longer-term duration. |
| Term
Repo - A
repurchase agreement
that extends for a
period of time longer
than overnight; the
repurchase agreement
may, as an example,
have a maturity of
seven days, 30 days,
two months, etc. |
| Thin
Market - A
market in which trading
volume and issue liquidity
are low and in which
bid and asked quote
spreads are wide. |
| Trade
Date - The
date on which a transaction
is initiated. |
| Unmatched
Book (Open Book, Short
Book) - When
the average maturity
of a bank's or a portfolio's
assets exceed the average
maturity of its liabilities. |
| Yankee
Bond - A
foreign bond, issued
in the U.S. markets,
payable in dollars
and registered with
the Securities and
Exchange Commission. |
|
