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.