Banking Terms - Set 31 (Unlisted, Underlying Option, Cabinet & Underlying Security)

Unlisted Security

A financial instrument that is not traded on an exchange, but through the over-the-counter (OTC) market. Unlisted securities are also called OTC securities. Market makers facilitate the buying and selling of unlisted securities in the OTC market. Because they are not exchange traded, unlisted securities can be less liquid than listed securities.

Securities must meet a number of requirements to be listed on an exchange. For example, to be listed on an exchange such as the NYSE or AMEX, a publicly traded stock must represent a company that surpasses an annual income or market capitalization threshold. The company also must have issued a specific number of shares and be able to afford the exchange's listing fee, which often exceeds $100,000. These requirements ensure that only the highest quality companies trade on exchanges. Thus, unlisted securities may be of lower quality and present a greater risk to investors.

Underlying Option Security

An underlying option security is the financial instrument on which a derivative's (i.e., an option's) value is based – it provides the price that is used to determine the value of the derivative. An option is classified as a derivative because its value is derived from the underlying security.

An option holder has the right, but not the obligation, to buy or sell a particular instrument at a specified price and date in the future.

Cabinet Security

A security that is listed under a major financial exchange, such as the NYSE, but is not actively traded. A cabinet security is traded by an inactive investment crowd, and is more likely to be a bond than a stock. 

The cabinets would typically hold limit orders, and the orders were kept on hand until they expired or were executed.

Underlying Security

The security on which a derivative derives its value. For example, a call option on Company X stock gives the holder the right, but not the obligation, to purchase Company X’s stock at the price specified in the option contract. In this case, Company X’s stock is the underlying security.

Generally, an underlying security's value should be independently observable by both parties, so that there is no potential for confusion regarding the value of the derivative. Investors dealing in derivatives must closely research the underlying security in order to ensure that they fully understand the factors affecting the value of the derivative.

Banking Terms - Set 30 (IDS, Security Deposit, Tax-Exempt Security, Authentication vs Authorization)

Income Deposit Security - IDS

A security that combines common stock and notes of the issuer to provide regular income payments to the holder of the security. The holder of the income deposit security receives dividends from the common stock, and fixed income from the debt instrument in the IDS.

These types of securities are traded on stock exchanges and can be purchased by any type of investor. The companies that use this form of security are usually very stable and mature businesses.

Security Deposit

A monetary deposit given to a lender, seller or landlord as proof of intent. Security deposits can be either refundable or nonrefundable, depending on the terms of the transaction. As the name implies, the deposit is intended as a measure of security for the recipient. 

Security deposits are not considered taxable income. Local laws often treat security deposits as trust funds. Security deposits that are used as final rent payments must be claimed as advance rent and are taxable when paid.

Tax-Exempt Security

A security in which the income produced is free from federal, state and local taxes. Most tax-exempt securities come in the form of municipal bonds, which represent obligations of a state, territory or municipality. For some investors, U.S. savings bond interest may also be free from federal income taxes.

A tax-exempt security will carry a tax-equivalent yield that is often higher than the current yield, as determined by the investor's tax bracket. The higher the tax bracket, the more beneficial tax-exempt securities can become in a taxable investment account. 

Authentication vs Authorization

Authentication is a process where a cardholder proves that they are the genuine cardholder.   Examples of authentication are - The credit card holder fills up his credit card details on a site where he is a payer and then the bank sends him a 'one time password (OTP)' on his registered mobile phone. The transaction is completed when the OTP is entered. OTP is valid for that one transaction and expires after the use. Every new transaction made on the credit card generates a new OTP. Alternatively the credit card holder is prompted to a 'Visa or Master verified' site and then he is expected to insert his password, which is known to him only. This ensures that even if one gets to know the credit card details of an individual one cannot misuse the credit card online. This is called double factor authentication.

While Authorizations are provided by card issuers and confirm that the card number is valid, that the funds are available at the time the transaction takes place and the card had not been reported as lost or stolen at the time of the transaction.  Authorizations are not a guarantee of payment.

Banking Terms - Set 29 (Taxable Preferred Securities, Senior Security, Chargeback, Convertible Security)

Taxable Preferred Securities

A type of preferred equity security that does not qualify for the dividends-received deduction for corporations of typical preferred securities, defined in Section 243 of the Internal Revenue Service (IRS) Code. Taxable preferred securities are usually junior level liabilities, and the coupons tied to them can either be fixed or variable, and for indefinite or specific maturities.

As with regular preferred stocks, these securities trade like bonds with regular denominations of $25 par and $1,000 par. The dividends paid are treated as regular income instead of dividends to the investor, but receive favorable tax treatment for the issuing company.

Senior Security

A security that ranks above another security in the event of the company's bankruptcy or liquidation. A senior security is called such, because it is considered "senior" to another in the company's hierarchy of capital providers. Should the company go bankrupt or face another liquidating event, holders of the senior-most security will be in line to receive repayment of their invested monies first, before other creditors receive any payment. Next in line would be holders of the second-most senior security. 

For an instance, debt is always considered senior to equity. In terms of debt, secured debt is considered senior to unsecured debt, such as debentures, while preferred securities are considered senior to common shares.

Chargeback

A credit card transaction that is billed back to the merchant after the sale has been settled. Chargebacks are initiated by the card issuer on behalf of the cardholder and typically involve product delivery failure or product/service dissatisfaction.

Convertible Security

A convertible, sometimes called a CV, is either a convertible bond or a preferred stock convertible. A convertible bond is a bond that can be converted into the company's common stock. You can exercise the convertible bond and exchange the bond into a predetermined amount of shares in the company. The conversion ratio can vary from bond to bond. You can find the terms of the convertible, such as the exact number of shares or the method of determining how many shares the bond is converted into, in the indenture. For example, a conversion ratio of 40:1 means that every bond (with a $1,000 par value) you hold can be exchanged for 40 shares of stock. Occasionally, the indenture might have a provision that states the conversion ratio will change through the years, but this is rare.

Banking Terms - Set 28 (Hedge Fund, Brokerage Account, Floor Limit, Prime Brokerage)

Brokerage Account

An arrangement between an investor and a licensed brokerage firm that allows the investor to deposit funds with the firm and place investment orders through the brokerage, which then carries out the transactions on the investor's behalf. The investor owns the assets contained in the brokerage account and must usually claim as income any capital gains he or she incurs from the account.

Brokerage accounts can also differ in terms of order execution speed, analysis tools used, scope of tradable assets, and the extent to which investors can trade on margin.

Floor Limit

An amount that Visa and MasterCard have established for single transactions at specific types of merchant outlets and branches, above which authorization is required.

Hedge Fund

An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).

Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for at least one year.

Prime Brokerage

A special group of services that many brokerages give to special clients. The services provided under prime brokering are securities lending, leveraged trade executions, and cash management, among other things. Prime brokerage services are provided by most of the large brokers, such as Goldman Sachs, Paine Webber, and Morgan Stanley Dean Witter.

Hedge funds were what started the prime brokerage option. Hedge funds place large trades and need special attention from brokerages.

Banking Terms - Set 27 (Closed Vs Open Loop Card, POP, Master Feeder Fund, Rehypothecation)

Closed loops Card vs Open Loop Card

General purpose and limited-purpose payments networks primarily operate under two different business models. Open-loop payments networks, such as Visa and MasterCard, are multi-party and operate through a system that connects two financial institutions—one that issues the card to the cardholder, known as the issuing financial institution or issuer, and one that has the banking relationship with the merchant, known as the acquiring financial institution or acquirer—and manages information and the flow of value between them. In a typical closed-loop payments network, the payment services are provided directly to merchants and cardholders by the owner of the network without involving third-party financial institution intermediaries. Closed-loop networks can range in size from networks such as American Express and Discover, which issue cards directly to consumers and serve merchants directly, to an individual merchant that issues limited-purpose private-label credit cards to its customers for use only in that merchant’s stores.

Prime of Prime - POP

A brokerage that provides service to traders (especially Forex traders) who need micro-contract trades. Prime of Prime (PoP) brokerages also often allow for trades of greater leverage and, as a result, more risk. Many of the brokers using PoP brokerages are small regional banks with clients that need smaller currency trade options.

One of the reasons that regular forex prime brokerages dont provide the services that PoPs do is that there is a smaller profit margin in the smaller trades. Additionally, their systems often dont support a cost-effective way to complete smaller trades. PoP brokerages are also equipped to deal with increasing regulatory requirements for highly leveraged trades.

Master Feeder Fund

A structure commonly used by hedge funds to pool investment capital raised by U.S. investors - both taxable and tax-exempt - and overseas investors into one central vehicle called the master fund, with separate investment vehicles or feeders created for each investor group. Investors invest in the feeder funds, which in turn invest their assets in the master fund. The master fund makes all the portfolio investments and conducts trading activity, while management and performance fees are payable at the feeder-funds level.

Rehypothecation

The practice by banks and brokers of using, for their own purposes, assets that have been posted as collateral by their clients. Clients who permit rehypothecation of their collateral may be compensated either through a lower cost of borrowing or a rebate on fees. 

In a typical example of rehypothecation, securities that have been posted with a prime brokerage as collateral by a hedge fund are used by the brokerage to back its own transactions and trades. While rehypothecation was a common practice until 2007, hedge funds became much more wary about it in the wake of the Lehman Brothers collapse and subsequent credit crunch in 2008-09. 

Banking Terms - Set 26 (UCommerce, Vantage Score, PSS Act, 2007, Prime Brokerage Fees)

UCommerce

Universal Commerce or UCommerce is the intersection of online, kiosk, and in-store payment enablement, incorporating social media and near-field communications..

Vantage Score

A credit score product launched in March 2006 by the three major credit bureaus (Equifax, Experian and TransUnion) as a competitor product to the FICO score. Like a FICO score, a Vantage Score is a three digit numeric value that assesses a borrower's credit risk. Vantage Scores range from 501 to 990, with a higher score representing a lower risk to the creditor.

Payment and Settlement Systems Act, 2007 (PSS Act, 2007)

The PSS Act, 2007 provides for the regulation and supervision of payment systems in India and designates the Reserve Bank of India. The Act also provides the legal basis for “netting” and “settlement finality”.

Prime Brokerage Fees

Prime brokers do not charge a fee for the bundled package of services they provide to hedge funds. Rather, revenues are typically derived from three sources: spreads on financing (including stock loan), trading commissions and fees for the settlement of transactions done away from the prime broker. The financing and lending spreads, which are charged in basis points on the value of client loans (debit balances), client deposits (credit balances), client short sales (short balances), and synthetic financing products such as swaps and CFDs (Contract for difference), make up the vast majority of prime brokerage revenue.

Therefore, clients who undertake substantial short selling or leverage represent more lucrative opportunity than clients who do less short selling and/or utilize minimal leverage. Clients whose market activities are principally fixed income-oriented will generally produce less prime brokerage revenue, but may still present significant economic opportunity in the repo, foreign exchange (fx), futures, and flow business areas of the investment bank.

Banking Terms - Set 25 (Smishing, TARGET2, Tiered Pricing, Token Based Authentication)

Smishing

Smishing is a technique used by criminals to steal bank or credit card information using text messages. In such an incident, the mobile device user receives a fake text message that appears to be from a bank. The text message may request that the consumer call a phone number to provide card or account information to a criminal posing as a bank employee.

TARGET2

TARGET2 is an interbank payment system for the real-time processing of cross-border transfers throughout the European Union and replaced TARGET in 2007. TARGET2 has to be used for all payments involving the Eurosystem, as well as for the settlement of operations of all large-value net settlement systems and securities settlement systems handling the euro and is operated on a single technical platform. The business relationships are established between the TARGET2 users and their National Central Bank.

It stands for Trans-European Automated Real-time Gross Settlement Express Transfer System 2.

Tiered Pricing

Tiered pricing is a merchant account rate structure that credit card processors use to assess charges. It is also referred to as bundled pricing because it allows processors to group interchange fees into general rate tiers of their choice. There are two types of Tier Pricing 3-Tier Pricing and 6-Tier Pricing.

Token Based Authentication

Allows cardholders to connect remotely to services by authenticating their identity through the use of a password that is not transmitted between the two parties. Often a password is generated by a device issued by the service provider, e.g., a bank or card issuer, to the customer or cardholder, and when prompted the password is entered by the customer and is recognised by the service provider.

Banking Terms - Set 24 (Upstairs, Sweetheart & Package Deal, Apple Pay)

Sweetheart Deal

A merger, a sale or an agreement in which one party in the deal presents the other party with very attractive terms and conditions. The terms of a sweetheart deal are usually so lucrative that it is difficult to justify turning the offer down.

This term can be used to describe a variety of deals, but in general, a sweetheart deal is a transaction that simply can't be passed up. For example, a merger may be a sweetheart deal for the top executives of the target firm because they get very healthy buyout packages. This kind of sweetheart deal is usually considered unethical, however, because it may not be in the best interests of shareholders.

Package Deal

An order that contains a number of exchange or deposit items that must be completed simultaneously, or not at all. Package deals allow traders to ensure specific prices or times to maturity for multiple assets.

A trader may want to participate in a package deal to properly execute an investment strategy. For example, let’s say an investor wants to enter into a long-short strategy, where he or she purchases one stock and short sells another. Making this order a package deal will protect the investor in case either stock is not immediately available for purchase or sale. The investor may not want the exposure of being only long or short for the period of time required to complete the second transaction.

Apple Pay

Apple Pay is a mobile payment service that lets certain Apple mobile devices make payments at retail and online checkout.  It intends to digitize and replace the credit or debit magnetic stripe card transaction at credit card terminals. The service lets Apple devices wirelessly communicate with point of sale systems using a near field communication (NFC) antenna, a "dedicated chip that stores encrypted payment information" (known as the Secure Element), and Apple's Touch ID and Passbook.

Upstairs Deal

A business agreement that is made by upper management, and is generally unknown to lower-level employees until it is publicly announced. The deal is referred to as an "upstairs deal" because executives typically have their offices in the higher floors of an office building. In mergers and acquisitions, an upstairs deal between two companies is more likely to result in a friendly takeover, as opposed to a hostile takeover.

E.g. Keeping word of a potential merger quiet allows executives to operate with a reduced risk of outside parties profiting from the deal by driving up share prices. Once a takeover offer is announced, share prices will react by either moving up or down to the indicated target price. For example, a deal in which a company tenders an offer of $15 per share with shares currently trading at $10 per share will likely result, when announced, in shares adjusting to $15.

Banking Terms - Set 22 (Deal Blotter, Pre-Authorization, No Dealing Desk, Deal Slip)

Deal Slip

A record of the essential details of a transaction entered into by a forex dealer. It is the primary source of record-keeping for a dealer. Deal slips are generally required to be archived for a certain number of years stipulated by the regulatory authority where the deal is recorded. Also known as deal ticket.

A deal slip is generally time-stamped to record the date and time of the transaction. It contains all of the information pertinent to a transaction, including but not limited to the amount of the transaction, whether it was a purchase or sale, the counterparty to the transaction, settlement date, transfer price, customer price and so on.

Deal Blotter

A trader's record of all the transactions executed on a given day. The deal blotter contains basic information pertinent to a transaction, with additional information included on the deal slip. The deal blotter for a forex trader would include both opening and closing currency positions initiated by the trader.

In a forex trading firm with several traders, the sum of the positions on all the traders' deal blotters at the end of the trading day will indicate the change in the firm's net position at close. While deal blotters were paper-based before the advent of computerization, they are now increasingly computer-based, enabling traders to analyze and monitor their currency trades more rapidly and efficiently.

Pre-Authorization

Pre-authorization is a banking term describing a practice where money is not taken from the payee’s account at the moment the transaction is made. The amount charged is instead made unavailable on that customers’ account – this is also known as authorization hold. Pre-authorisation is normally valid for 1- 5 days on debit cards, while credit card pre-auth periods can be longer and vary between issuers. This pre-auth period is usually used by retailers to make additional security checks on the card and the cardholder, to make sure that the transaction is not fraudulent. It also allows them time to make sure that the item being sold is in stock and ready to be shipped. Consumers near their credit or debit limits need to watch their available balances carefully, or the hold amount could push them over the limit, triggering a fee. Holds, also called blocks, are usually released within minutes or hours, but can sometimes last days.

No Dealing Desk

A way of forex trading that provides immediate access to the interbank market. The interbank market is where foreign currencies are traded. This is different than trading through the dealing desks that are found in many banks and financial institutions. By using a dealing desk, a forex broker who is registered as a Futures Commission Merchant (FCM) and Retail Foreign Exchange Dealer (RFED) can offset trades. If a no dealing desk system is used, positions are automatically offset and then transmitted directly to the interbank.

Forex brokers who use this system work directly with market liquidity providers. When trading through a no dealing desk, instead of dealing with one liquidity provider, an investor is dealing with numerous providers in order to get the most competitive bid and ask prices. An investor using this method has access to instantly executable rates.