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  GLOSSARY
GLOSSARY
 
 
 
 
The following glossary of terms is not intended to provide legally precise definitions for all relevant jurisdictions.
 
 
 
 

Back-to-back trades: a pair of transactions that requires a counterparty to receive and redeliver the same securities on the same day. The transactions involved may be outright purchases and sales or collateral transactions (repurchase agreements or securities loans). For example, a securities dealer might buy and sell the same securities for the same settlement date in the course of making markets for customers or it might buy securities for inventory and finance the position through a repurchase agreement.

 
 
 
 

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). Beneficial ownership is usually distinguished from "legal ownership" of a security or financial instrument.

 
 
 
 
Bilateral netting: netting between two parties.
 
 
 
 

Book-entry system: an accounting system that permits the electronic transfer of securities without the movement of certificates.

 
 
 
 
Bridge: the "bridge" is the name commonly used for the link between Euroclear and Cedel that permits cross-system settlement of a trade between a participant in one ICSD and a participant in the other ICSD.
 
 
 
 
Cash correspondents: banks (or similar institutions) used by the SSS to make or receive payments.
 
 
 
 
Cash deposit risk: the credit risk associated with the holding of funds with an intermediary for the purpose of settling securities transactions.
 
 
 
 

Cash memorandum accounts: records kept by the SSS of the funds due to be paid to or received by participants in conjunction with their securities settlements; the records are for information purposes only and do not represent legal claims or liabilities between the SSS and its participants.

 
 
 
 

Central securities depository (CSD): an institution 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 document 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, and in this sense the term "clearing system" is sometimes used to refer to securities settlement systems. In this disclosure framework, the term is used only in the first sense.
 
 
 
 
Collateral: an asset or third-party commitment that is accepted by the collateral taker to secure an obligation of the collateral provider vis-a-vis the collateral taker.
 
 
 
 
Confirmation: the process by which a market participant notifies 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: the risk that a counterparty will not settle an obligation for full value, either when due or at any time thereafter. Credit risk includes replacement cost risk, principal risk and cash deposit risk.
 
 
 
 
Cross-border settlement: a settlement that takes place in a country other than the country in which one trade counterparty or both are located.
 
 
 
 
Custodian: an entity, often a bank, that safekeeps and administers securities for its customers and that may provide various other services, including clearance and settlement, cash management, foreign exchange and securities lending.
 
 
 
 

Custody-only link: a link between two SSSs which enables transactions in securities held in SSS1 to be settled using SSS2 (rather than SSS1) when the buyer and seller are both participants in SSS2. Custody-only links do not provide for the transfer of funds between SSS1 and SSS2 and cannot be used to settle transactions between a participant in SSS1 and a participant in SSS2.

 
 
 
 
Custody risk: the risk of loss of securities held in custody occasioned by the insolvency, negligence or fraudulent action of the custodian or of a sub-custodian.
 
 
 
 

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 end-of-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 balance: see net debit position.
 
 
 
 
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: a link between a securities transfer system and a funds transfer system 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.
 
 
 
 
Depository receipt: an instrument issued in one country that establishes an entitlement to a security held in custody in another country.
 
 
 
 
Domestic settlement: a settlement that takes place in the country in which both counterparties to the trade are located.
 
 
 
 
Domestic trade: a trade between counterparties located in the same country.
 
 
 
 
Failed transaction: a securities transaction that does not settle on the contractual settlement date, usually because of technical or temporary difficulties.
 
 
 
 
Finality risk: the risk that a provisional transfer of funds or securities will be rescinded.
 
 
 
 

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 as a final transfer. See provisional transfer.

 
 
 
 
Forced settlement: securities or funds settlement that is either mandated or enforced by the actions of a third party.
 
 
 
 
Global custodian: a custodian that provides its customers with custody services in respect of securities traded and settled not only in the country in which the custodian is located but also in numerous other countries throughout the world.
 
     
 
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.
 
 
 
 
Gross settlement system: a transfer system in which the settlement of funds or securities transfer instructions occurs individually (on an instruction-by-instruction basis).
 
 
 
 
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.
 
 
 
 
Internal settlement: a settlement that is effected through transfers of securities and funds on the books of a single intermediary. An internal settlement requires both counterparties to maintain their securities and funds accounts with the same intermediary.
 
 
 
 
International central securities depository (ICSD): a central securities depository that settles trades in international securities and in various domestic securities, usually through direct or indirect (through local agents) links to local CSDs.
 
 
 
 
Irrevocable transfer: a transfer which cannot be revoked by the transferor.
 
 
 
 
Issuer: the entity that is obligated on a security or financial instrument.
 
 
 
 
Issuing agent: an institution that acts on behalf of the issuer of securities in distributing the securities and in realising the proceeds thereof for the benefit of the issuer.
 
 
 
 
Legal ownership: recognition in law as the owner of a security or financial instrument.
 
 
 
 
Legal risk: the risk of loss because of the unexpected application of a law or regulation or because a contract or other right cannot be enforced.
 
 
 
 
Liquidity risk: the risk that a counterparty will not settle an obligation for full value when due, but on some unspecified date thereafter.
 
 
 
 

Local agent: a custodian that provides custody services for securities traded and settled in the country in which it is located to trade counterparties and settlement intermediaries located in other countries (non-residents).

 
 
 
 
Local custodian: a custodian that provides custody services for securities traded and settled in the country in which the custodian is located. See global custodian.
 
 
 
 
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 or of the system itself.
 
 
 
 
Loss-sharing pools: cash, securities or possibly other assets that are provided by the participants in advance and are held by the system to ensure that commitments arising from loss-sharing agreements can be met.
 
 
 
 
Marking to market: 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. See variation margin.
 
 
 
 

Matching (or comparison, checking): the process for comparing the trade or settlement details provided by counterparties to ensure that they agree with respect to the terms of the transaction. Settlement instructions that have been successfully matched between counterparties are referred to as matched settlement instructions. In some securities settlement systems, penalties may apply to participants that unilaterally revoke matched settlement instructions. In other systems, unilateral revocation of matched settlement instructions may not be possible.

 
 
 
 
Member: in this disclosure framework, the term is used synonymously with participant. See participant.
 
 
 
 
Multilateral netting: netting among more than two parties.
 
 
 
 
Net credit or net debit position: a participant's net credit or net debit 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.
 
 
 
 
Net settlement: a settlement in which a number of transactions between or among counterparties are settled on a net 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.

 
 
 
 
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.
 
 
 
 

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.

 
 
 
 
Omnibus customer account: an account in which the securities held by a participant on behalf of all (or at least several) of its customers are kept. See also proprietary account, segregation.
 
 
 
 
Participant: a party which participates in a system. This generic term refers to an institution which is identified by the system and is allowed to send transfer instructions directly to the system or which is directly bound by the rules governing that system.
 
 
 
 
Paying agent: an institution that, acting on behalf of an issuer, makes payments to holders of securities (e.g. payments of interest or principal).
 
 
 
 
Payment: the satisfaction and discharge of a monetary obligation by the debtor's final 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.)
 
 
 
 

Pre-matching process: process for comparison of trade or settlement information between counterparties that occurs before other matching or comparison procedures. Generally, pre-matching does not bind counterparties as matching can do.

 
 
 
 
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.
 
 
 
 

Proprietary account: an account in which a participant holds only those securities it is holding on its own behalf (as opposed to those securities it is holding on behalf of its customers). See also omnibus customer account, segregation.

 
 
 
 
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.
 
 
 
 
Repurchase agreement (repo): a contract to sell and subsequently repurchase securities at a specified date and price. Also known as an RP or buyback agreement.
 
 
 
 

Rolling settlement: a situation in which settlement of securities transactions takes place each day, the settlement of an individual transaction taking place a given number of days after the deal has been struck. This is in contrast to a situation in which settlement takes place only on certain days – for example, once a week or once a month - and the settlement of an individual transaction takes place on the next settlement day (or sometimes the next but one settlement day) following the day the deal is struck.

 
 
 
 
Same-day funds: money balances that the recipient has a right to transfer or withdraw from an account on the day of receipt.
 
 
 
 
Securities borrowing and lending programme: a facility whereby a loan of securities is made to facilitate timely fulfilment of settlement obligations.
 
 
 
 
Securities depository: see central securities depository (CSD).
 
 
 
 
Securities settlement system (SSS): a system in which the settlement of securities takes place. Often the SSS is a CSD.
 
 
 
 
Segregation: optional or compulsory separation of the securities held by a participant on its own behalf from those held on behalf of its customers. See also omnibus customer account, proprietary account.
 
 
 
 
Self-collateralising: an arrangement whereby securities being transferred can be used as collateral to secure risks involved in the transfer process.
 
 
 
 
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.
 
 
 
 
Settlement date: the date on which the parties to a securities transaction agree that settlement is to take place. The intended date is sometimes referred to as the contractual settlement date.
 
 
 
 
Settlement interval: the amount of time that elapses between the trade date (T) and the settlement date (S). Typically measured relative to the trade date, e.g. if three days elapse, the settlement interval is T+2.
 
 
 
 
Settlement risk: general term used to designate the risk that settlement in a transfer system will not take place as expected. This risk may comprise both credit and liquidity risk.
 
 
 
 
Sub-custodian: where one custodian (e.g. a global custodian) holds its securities through another custodian (e.g. a local custodian), the latter is known as a sub-custodian.
 
 
 
 

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-for-trade (gross) settlement: a settlement in which a number of transactions between counterparties are settled individually.
 
 
 
 
Trade matching: see matching.
 
 
 
 
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.
 
 
 
 
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. Unwinds can be distinguished from debits to securities accounts that do not imply the original transfer is rescinded (e.g. in cases where securities are discovered to be forged or stolen).

 
 
 
 
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.
 
 
 
 
Zero-hour rule: a provision in the insolvency law of some countries whereby a bankruptcy or similar procedure declared by a court during the day is considered to have been declared at 0.00 a.m. of the same day. This generally has the effect of retroactively rendering ineffective all transactions of the closed institution that have taken place after 0.00 a.m. on that date.