Banking Terms - Set 21 (VAR, Business Risk)

Value-at-risk (VAR)

A value-at-risk (VAR) model is a procedure for estimating the probability of portfolio losses exceeding some specified proportion based on a statistical analysis of historical market price trends, correlations, and volatilities. A loss which exceeds the VaR threshold is termed a "VaR break".

For example, if a portfolio of stocks has a one-day 5% VaR, there is a 0.05 probability that the portfolio will fall in value.

Business Risk

The risk that the cash flow of an issuer will be impaired because of adverse economic conditions, making it difficult for the issuer to meet the company’s operating expenses.

E.g. Manufacturer of a particular product, the consumption of which is declining because of adverse economic conditions will be finding it difficult to look at the expenses of the industry for further production/development.

Banking Terms - Set 20 (ICSD, Short Position, Capital Gain Tax, Book Building)

Announcement Date

The date at which a corporate actions event is officially announced. The announcement can either be made by the issuer or by the lead agent in the market.

For e.g. Company A announces a dividend of Rs. 10 per share on Apr 20, which means Apr 20 is the announcement date.

ICSD

The letters are standing for "International Central Securities Depository". It is in fact a Central Securities Depository through which securities from other countries can be held and that settles trades in international securities such as Eurobonds although many also settle trades in various domestic securities, usually through direct or indirect (through local agents) links to local CSDs.

Most well-known ICSD's are: DTC [it’s a national CSD of USA but it holds a good amount of non-US securities too], Clear stream, Euro clear.

Short position

Short positions happen when a client sells more shares than he actually owns (he could do this for example when he expects the share price of the stock he is short selling to go down). At the end of each day, however, he needs to make sure he covers these short positions. He could do this by borrowing the shares from another party in the market in return for a fee.

E.g. A person trades/sells 1000 shares of company A, but his portfolio says he doesn’t possess any single share of this particular company to his name in his account. In this case, it is termed as a short position, which means he has to buy the same amount of shares before the end of that particular trading session.

Capital Gains Tax

The tax that needs to be paid over profits that were made for the securities that a person holds - i.e. a percentage has to be paid over the difference between the price at which a security was sold and the price at which it was bought. Several Corporate Action events result in profits over which capital gains tax needs to be paid.

E.g. For the Financial Period considered for tax calculation, consider, a person has earned a profit of Rs.1,00,000 including the trading gains, dividends received etc. Then, the person has to pay Capital Gains tax for the above amount which also depends on his/her tax terms for that particular year.

Book Building

Book building is a type in which the investors are asked to indicate the price on a firm, i.e. the best price that they will offer and the maximum number of shares that they will buy at particular time. This information will establish the most appropriate offer price for the issue.

For example in a rights issue event. the price at which shareholders can subscribe to new shares is being established by calculating the weighted average of share prices and trading volumes over a certain period of time. This method of calculation is called book building.

Banking Terms - Set 19 (Gearing, Call payment, CDI, Fractions)

Futures

A future is a contract between a buyer and a seller whereby the buyer agrees to buy a predetermined amount of a product at a predetermined price at a predetermined date in the future. Please note the difference between a future and an option: with a future, there is an obligation to buy/sell, whereas with an option there is a right to buy/sell.

Gearing

Gearing describes the level of a company's net debt compared with its equity capital, and usually it is expressed as a percentage. So, a company with gearing of 60 per cent has levels of debt that are 60 per cent of its equity capital.

The gearing ratio shows how encumbered a company is with debt. Depending on the industry, a gearing ratio of 15% would be considered prudent while anything over 100% would be considered risky or 'highly geared'.

Call Payment

A payment made for the Subscription of new securities, or in payment for sums outstanding to the issuer, in relation to existing Securities (commonly in the context of Rights Issues, Open Offers or partly paid securities).

For instance, if you subscribe to an offer on floatation, the terms may require you to pay in two installments – first one at the time of your subscription and the second six months later. Issuing companies use this as a device to attract shareholders, and it was widely used when the UK government privatized state-owned industries during 1980s and 1990s.

CDI [Crest Depository Interests]

Crest Depository Interests are independent Securities constituted under English Law, which may be held, transferred and settled within CREST. CDI holders will not be the legal owners of the shares to which they are entitled as a result of a Corporate Action. They will however, have an interest in the shares through their ownership of CDIs.
CREST issues a CDI to each holder of the security. This is similar to depositary receipts issued in other countries.

Fractions

In several corporate actions events, ratios are involved that will lead to entitlements that are less than one share.

For e.g. Consider a reverse stock split (ratio being 10:1), i.e.  Every 10 shares entitle to receive one new share, shareholders who hold let's say 9 shares before the reverse split will be entitled to 0.9 shares after the reverse split. Securities are generally not trade able in quantity less than 1, so the lead agent can chose to round up or down, or cash compensate the shareholders for fractions.

Banking Terms - Set 18 (At the money, Data vendor, SEDOL, Default Option)

Default Option

Some Corporate Actions require response/instruction from the shareholder to decide the course of action. So, in this case there is a Default option that refers to the course of action that will be taken in case no instruction is received from the shareholder as to what decision will be made.

For e.g. In a dividend issue, company is willing to issue the same either in CASH or as ADDITIONAL SHARES and it needs an instruction from the shareholder to proceed further. In case, if there is no response from the shareholder, it says dividend will be distributed as CASH by default.

SEDOL

SEDOL stands for Stock Exchange Daily Official List, and serves as the National Securities Identifying Number for all securities issued in the United Kingdom and are therefore part of the security's ISIN as well. The numbers are assigned by the London Stock Exchange on request by the security issuer.
The SEDOL Master file (SMF) provides reference data on millions of global multi-asset securities each uniquely identified at the market level using a universal SEDOL code.

Data Vendor

A company that sells information about corporate actions event to the financial services industry.

e.g. DTCC is a vendor agency which passes on information about the corporate action happening across to the servicing industries like JP Morgan, BNYM etc.

At the Money

One of the three forms of moneyness of a derivative (in-the-money, at-the-money and out-of-the-money).
When "at-the-money", the price of the underlying security is exactly same as the strike price of the derivative.
Also said as, a situation where the exercise price of a call/put option/a warrant is equal to the current market price of the underlying instrument.

Cum (Ex)

Cum stands for "with" in Latin. When one is trading shares "cum", it means that one is trading the shares "along with" the entitlements to a certain corporate action event.

When one is trading shares "ex", it means that one is trading the shares "without" the entitlements to a certain corporate action event.
It can be associated with Ex-Date. For example, in a normal cash dividend, if the ex-date is 01.08.2013 then the stock will trade without the right to the cash dividend from the 01.08.2013 onwards.

Banking Terms - Set 17 (Tax and loan acc, TAB, Exchange rate risk, Hard call protection, Corporate sector securities)

Corporate Sector Securities

Securities issued by U.S. corporations and non-U.S. corporations in the United States which excludes the general government, private households, and non-profit organizations serving individuals. The corporate sector is divided into investment grade and non-investment grade sectors by rating agencies such as Moody’s and S&P.

E.g. Includes bonds, MTNs, structured notes and commercial paper issued by those organizations.

Hard call protection

Hard call protection usually refers to callable bonds. The protection is the period of time when the bond cannot be called, no matter what the interest rate is. That is, if the interest rate falls sharply, most callable bonds will be called. Hard call protection ensures that the holder of the bond can benefit when rates fall.

E.g. Company A has issued 1000000 bonds which has a protection period of 4yrs. from the date when the bond/security is being issued. This assures the holder that the company will not be able to call back the bonds that are outstanding before this period.

Exchange Rate Risk

A foreign currency nominated bond has unknown domestic currency cash flows. The domestic currency cash flows are dependent on the exchange rate at the time when the payments are received. In Simple terms, it can be referred as the risk that an investor faces when he/she invests on a foreign currency bonds.

For example, suppose that a German investor purchases a bond whose payments are in British pounds (GBP). If pounds depreciate relative to euros (EUR), fewer euros will be received and vice versa. This risk is also referred to as currency risk.

Tax Anticipation Bill (TAB)

Short-term obligation issued by the U.S. Treasury to raise funds during a period when tax receipts are not large enough to cover current disbursements. TABs mature approximately one week after quarterly corporate tax payments are due. The attractiveness of TABs is that the government will accept them in payment for taxes at their face value.

Tax and loan account

Account in a private-sector depository institution, held in the name of the district Federal Reserve Bank as fiscal agent of the United States that serves as a repository for operating cash available to the U.S. Treasury. Withheld income taxes, employers' contributions to the Social Security fund, and payments for U.S. government securities routinely go into a tax and loan account.

Banking Terms - Set 16 (Call risk, Default risk & Reinvestment risk on bond, Accrual bond, Irredeemable bonds)

Reinvestment Risk on bonds

When the yield of a bond is calculated, it is assumed that the coupons received before maturity is being reinvested. That additional income [received from such reinvestment] is sometimes referred to as interest-on-interest which depends on the prevailing interest-rate levels at the time of reinvestment. Volatility in this reinvestment rate because of changes in market interest rates is called reinvestment risk.

Accrual Bond

A bond on which interest amount accrues, but is not paid to the investor during the time of accrual. The amount of accrued interest is added to the remaining principal of the bond and is paid at the time of maturity. We can simply say it to be like Cumulative Deposits kind of.

Irredeemable bonds

Bonds with a fixed maturity but not subject to prior redemption; bonds that cannot be called for redemption by the issuer (payer or obligor) before maturity. They should not be confused with perpetual bonds or intermediate bonds. UK Irredeemable (undated) bonds have no final maturity date. They are callable by the government at any time within 3 months. As their coupons range between 2.5% and 4% they are unlikely to be called. War loan, issued by the UK government during the First World War, is the best known of this kind.

Default Risk on Bonds

Issuers could potentially run into cash flow problems, simultaneously attaches default risk to their bonds if there is uncertainty whether they can afford to pay coupons and principals. Bonds with default risk trade in the market at a price that is lower than comparable U.S. Treasury securities, which are considered free of default risk. Default risk is gauged by quality ratings assigned by recognized rating companies such as Moody’s Investor Service, Standard & Poor’s corporation, Morningstar and Fitch IBCA. Also referred to as credit risk.

Call risk on bonds

Usually bonds include a call feature that allows the issuer to redeem (call) all or part of the bonds issued before the maturity date. The issuer usually retains this right in order to have flexibility to re-finance the bond in the future, if the market interest rate drops below the coupon rate.

Banking Terms - Set 15 (Exchage rate risk, Inflation risk & Put provision on bond, Unsystematic risk, Call premium)

Call premium

Premium in price above the par value of a bond or share of preferred stock that must be paid to holders to redeem the bond or share of preferred stock before its scheduled maturity date.

Put Provision on Bond

A put provision grants the bondholder the right to sell the issue back to the issuer at par value on designated dates. Here the advantage to the investor is that if interest rates rise after the issue date, thereby reducing a bond’s price, the investor can force the issuer to redeem the bond at par value.

Unsystematic risk

It is also called as the diversifiable risk or residual risk. The risk that is unique to a company such as a strike, the outcome of unfavorable litigation, or a natural catastrophe that can be eliminated through diversification.

Inflation risk on bonds

If investors purchase a bond on which they can realize a coupon rate of 5% but the rate of inflation is 6%, the purchasing power of the cash flow actually has declined. Inflation risk arises because of the variation in the value of cash flows from a security due to inflation, as measured in terms of purchasing Power.

Exchange-rate risk on bonds

A non-domestic-currency nominated bond has unknown domestic currency cash flows. The domestic currency cash flows are dependent on the exchange rate at the time the payments are received.

For example, suppose that a German investor purchases a bond whose payments are in British pounds (GBP). If pounds depreciate relative to euros (EUR), fewer euros will be received and vice versa. This risk is also referred to currency risk.

Banking Terms - Set 14 (Rights issue, Acceptance period, Bearer shares, Compensation, Book value)

Book Value

The value of a company's assets as shown in the Annual Report and Accounts. It stands to the net assets of the company [total assets - total liabilities].

For E.g. Company A has $24 billion in assets and $19.3 billion in liabilities, then the company’s book value would be the difference between above two i.e. $4.7 billion.
This value divided by the total number of outstanding shares will give the book value per share of a company. If this value is greater than company's market value, then it is considered as undervalued.

Compensation

Compensation is the amount of money (or) additional securities a purchaser receives from the seller, if he had bought the shares before the ex-date of a corporate action and the shares gets settled in his account only after the ex-date.

For E.g. Person A buys 100 shares from Person B before the ex-date of a cash dividend. Shares and the price he pays for them however settle after the ex-date. This means that, the seller will receive the cash proceeds as a result of cash dividend, while the buyer is entitled to them. The buyer has to CLAIM the cash proceeds from the seller.

Bearer Shares

Securities can either have "bearer" or "registered" form. For E.g. In the past, when securities were in paper form, a shareholder would go to his bank and take the paper with him to collect for example a dividend. As proof that the dividend was paid out, the bank employee would tear off one of the many coupons from the share. The name of the shareholder was not registered anywhere by the issuer of the security. The bank could go to the issuer and exchange the coupon for the dividend payment.

Acceptance Period

The acceptance period is the period in which shareholder can accept the offer. They would usually do so by sending an instruction to their broker or custodian.

E.g. Company A has announced a tender offer, it has announced a period of 7 days to accept the tenders/bids which has been allocated to them, such a period is called a Acceptance Period.

Entitlement Calculation for Rights Issue

If a Rights Issue or an Open Offer is announced, the ratio and Call Cost will be used to calculate the entitlement of a particular person.

Company X announces a Rights Issue offering 2 new shares for every 5 held, at 1USD and person A has 1000 Ordinary shares on the EX-Date, then A's entitlement would be as follows,
2 new shares for every 5 held on the Ex-date means, that person A will be able to buy 400 new shares & Call cost of 1USD per new share purchased = 400x1USD = 400USD.

Banking Terms - Set 13 (Foreign housing, CIBIL, Cambist, Bill buying rate, FIE)

Foreign invested enterprise (FIE)

A legal structure that permits a company to set up business in a foreign country. Various types of foreign invested enterprises exist in different countries. They tend to be highly regulated, especially in China. Deep regulation tends to limit avenues the enterprise may pursue to make a profit. Limitations on control of the enterprise by the parent company are common.

Bill Buying Rate

Bill Buying Rate is to be applied when a foreign bill is purchased. When a bill is purchased, the rupee equivalent of the bill value is paid to the exporter immediately. However, the proceeds will be realized by the bank after the bill is presented to the drawee at the overseas centre. In case of a usance bill, the proceeds will be realized on the due date of the bill which includes the transit period and the usance period of the bill.

Cambist

An individual or broker considered to be an expert in foreign exchange rates. Cambist may also refer to book providing information such as exchange rates on world currencies and other medium of exchange.

CIBIL [Credit Information Bureau (India) Limited]

Credit Information Bureau (India) Limited or CIBIL is a Credit Information Company (CIC) founded in August 2000. CIBIL collects and maintains records of an individual‘s payments pertaining to loans and credit cards. These records are submitted to CIBIL by banks and other lenders, on a monthly basis. This information is then used to create Credit Information Reports (CIR) and credit scores which are provided to lenders in order to help evaluate and approve loan applications.

Foreign housing exclusion and deduction

An IRS deduction that allows a taxpayer to exclude payment from an employer to cover foreign housing expenses when filing annual income tax forms. The payment is not considered income, whether the employer pays on the employee's behalf or pays directly to the employee.

Banking Terms - Set 12 (Allotment Letter, Transformation, Basket Trading, BIN, CDPD)

Cellular Digital Packet Data (CDPD)

A method of sending data through cellular networks. CDPD is used with wireless credit card terminals to transmit transactions and deposits in mobile environments.

Bank Identification Number (BIN)

A unique series of numbers assigned by Visa/MasterCard to a member institution, which identifies that institution in transaction processing. The BIN comprises the first six digits of a standard credit card number.

Basket Trading

A group of securities that can be traded, managed and tracked as one entity. One of the aims of creating a basket is to spread risk. Basket trading is common for institutional investors and investment funds who wish to hold a large number of securities in certain proportions.

Index Funds are good example, which holds all kinds of securities at certain proportions

Transformation

Transformation are the second type of claims [similar to compensation discussed on Tuesday]. They occur in corporate actions events where the ISIN/Nominal Value changes. All trades instructed before the ex-date have to be cancelled on the ex-date and they have to be replaced by new trades in which new ISIN or ratio getting applied.

For E.g. :  10:1 stock split takes place with ex-date July 30, 2013. "A" instructs to buy 100 shares from "B" with trade date July 29, 2013 and contractual settlement date of Aug 01, 2013 at Rs. 10000 (the price per share = Rs. 100). On the ex-date, the pending trade will have to be reversed and replaced with a new trade for 1000 shares at Rs. 10000 (the price per share post-split = Rs. 10).

Allotment Letter

A legal document sent to shareholders during a Rights Issue. It represents the unconditional right to buy new shares. Shares should be paid for in advance. Allotment letters can be traded as renounceable documents, where the seller signs over the rights to a buyer.