SECURITIES LENDING & REPO MARKETS

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - OCTOBER 2010

GLOSSARY

A department of an exchange or a separate legal entity that pro- vides a range of services related to the clearance and settlement of trades and the management of risks associated with the result- ing contracts. A clearing house is often central counterparty to all trades to be settled through the clearing house, that is, the buyer to every seller and the seller to every buyer. An arrangement to settle all existing obligations to and claims on a counterparty by one single net payment, immediately upon the occurrence of a defined event of default. The second leg of a pair of transactions in the same securities, i.e. a securities lending transaction – one for a near value date, the other for a value date further into the future. See opening (or front) leg. In a securities loan, securities or cash delivered by the borrower to the lender to secure the transaction. In a repo transaction, the securities accepted by the cash-giver to secure the transaction. Collateral arrangements may take different legal forms; collateral may be obtained using the method of title transfer or pledge. The procedure for verifying trade details with a counterparty. This is generally done by exchanging via fax or mail a document (i.e. a confirmation) identifying the trade details and any governing legal documentation and verifying the accuracy of the information pro- vided by the counterparty (i.e. matching). A financial contract in which the difference between the agreed fixed price of an asset and its prevailing market price is periodi- cally credited to the counterparty in the money. Since there is no transfer of principal, a CFD covers hedging or speculative needs. The risk that a counterparty will not settle an obligation for full val- ue, either when due or at any time thereafter. Credit risk includes replacement cost risk, principal risk and cash deposit risk. An entity, often a bank, that safe-keeps and administers securi- ties for its customers and that may provide various other services, including clearing and settlement, cash management, foreign ex- change and securities lending. The risk of loss of securities held in custody occasioned by the in- solvency, negligence or fraudulent action of the custodian or of a sub-custodian. The period in the day when one party to a trade has a temporary credit exposure to the other due to one party having settled before the other (e.g. in a securities loan, it could happen if the loan had settled but the delivery of collateral would settle at a later time). Limits set by a trading party to restrict the largest amount of its credit exposures to different counterparties.

Clearing house

Close-out netting

Closing (or back) leg

Collateral

Confirmation

Contract for difference (CFD)

Counterparty credit limits

Credit (or Counterparty) risk

Custodian

Custody risk

Daylight exposure

page 62 | Securities Lending & Repo markets