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Algorithmic trading is a trading system that utilizes very advanced mathematical models to make transaction decisions in the financial markets. The programmes built into the model attempt to determine the optimal time for an order to be placed that will cause the least amount of impact on a stock’s price. Large blocks of shares are usually purchased by dividing the large share block into smaller lots and allowing the complex algorithms to decide when the smaller blocks are to be purchased.  ^ back to top

Alternative Investment Funds (AIF) are defined by the European Commission as all funds that are at present not harmonised under the UCITS Directive, see UCITS.  ^ back to top

Arbitrage relates to the competitive pressure to keep standards low to attract and please business. Regulatory and supervisory arbitrage between countries has contributed significantly to the financial crisis.  ^ back to top

Assets are anything with a commercial or exchange value and owned by a business, institution or individual. Also see (risk-weighted) assets^ back to top

Asset stripping is the practice of buying a company in order to sell its assets individually at a profit.  ^ back to top

Bank branch is an office of a bank based in another country than the head office. A branch is fully subject to supervisors in the country of the head office.  ^ back to top

Bank subsidiary is an office of a bank based in another country than the head office. Subsidiaries are subject to supervision by supervisors from the country of the head office (home supervisors) and those of the host country (host supervisors). Cooperation and decision-making between the two supervisors is somewhat agreed by the Basel Committee on Banking Supervision but is part of the discussions about reform of the supervisory structures.  ^ back to top

Block trading is wholesale trading that allows traders to buy or sell very large numbers of securities bilaterally outside exchanges or electronic markets. Because block trading is typically between two parties, often between institutional investors and facilitated by an investment bank, prices are set with certainty and execution is done without delay. It avoids the sale or purchase of very large number of securities having too much undesired impact on the price.  ^ back to top

A bond is a debt instrument by which a government or company (or other entity) borrows money from an investor for a defined period of time at a fixed interest rate. The height of the interest rate is now determined by the market based on the perceived riskiness of the entity.  Bonds are used by companies, municipalities, states and governments to finance a variety of projects and activities. Bonds can be resold on a secondary market.  ^ back to top

Capital requirements: Regulations on capital requirements set criteria for minimum capital reserves for banks, so that every loan granted is being covered by a certain percentage of the bank’s own money. This way the bank can cover defaults on loans and not go bankrupt when too many borrowers default. The Basel Committee on Banking Supervision (BCBS) started to work on a new Basel Capital Accord in 1999. After five years of consultations, the Basel Capital Accord II (Basel II) was finalized by the BCBS in June 2004. Basel II not only sets the amount of capital reserves, but also regulates how banks should calculate the risks of the loan for which capital reserves are needed, and describes how supervisors should deal with the Basel II regime.  ^ back to top

Carbon derivatives, see derivatives.  ^ back to top

Central counterparty (CCP) is an entity that interposes itself between the counterparties to the contracts traded in one or more financial markets, becoming the buyer to every seller and the seller to every buyer. CCP clearing is a central issue nowadays in the discussion on Credit Default Swaps trading.  ^ back to top

CEBS is the Committee of European Banking Supervisors. This committee consists of the banking supervisors, like central banks and other supervisory authorities of the EU Member States. This committee is currently revised and will be turned into the European Banking Authority.  ^ back to top

CEIOPS is the Committee of European Insurance and Occupational Pension Supervisors. This committee consists of the insurance and pension fund supervisory authorities of the EU Member States. This committee is currently revised and will be turned into the European Insurance and Occupational Pensions Authority.  ^ back to top

CESR is the Committee of European Securities Regulators. This committee consists of the security supervisors of the EU Member States. This committee is currently revised and will be turned into the European Securities and Markets Authority.  ^ back to top

Clearing is the process by which obligations arising from a financial security are managed over the lifetime of a financial contract. It is also the way by which risks are outlined and mitigated. Until now, credit default swap (CDS) trades – like most over-the-counter (OTC) financial derivatives – are predominantly cleared bilaterally between two contracting parties.  ^ back to top

Collateralized Debt Obligations (CDO) consist of a pool of assets and/or mortgage backed securities with loans, bonds or other financial assets as the underlying. A CDO is divided into different risk classes (tranches), whereby “senior” tranches are considered the safest securities. Interest and principal payments are made in order of seniority, so that junior tranches offer higher payments (and interest rates) or lower prices to compensate for additional default risk. This implies that junior tranches will be first in line to absorb potential losses in case of default. Each tranche has its own credit rating based on the potential risks.  ^ back to top

Collective investment schemes pool together many different individuals’ savings and then invest them collectively. For example, mutual funds or investment funds, commodity index funds or exchange-traded funds (ETC) are all examples of collective investment schemes. It is important to note that hedge funds and private equity funds are not classified as collective investment schemes and some collective investment schemes are not regulated by UCITS Directives.  ^ back to top

Commodity derivatives have commodities, such as oil and agricultural products, as the underlying value of a contract; a derivative. The prices of commodities have become a target of speculation and are now instruments for investors to diversify portfolios and reduce risk exposures.  ^ back to top

A commodity index fund is a fund for (institutional) investors who get a return on their investment based on the performance, i.e. the value, of the commodity index that the fund is tracking and sometimes managing. A commodity index is a price indicator that reflects the price of a composition of commodity futures that are traded on exchange. There many different commodity index funds. The managers of commodity index funds buy to a certain extent futures contracts of commodities that are included in the tracked commodity index.  ^ back to top

Credit default swaps see derivatives.  ^ back to top

Credit rating agency (CRA) is a credit bureau that estimates the market value and the credit worthiness of an individual, a company, a financial product or a country. A credit rating is often used to assess the ability of a potential borrower to repay a loan or other debt, and is made by a CRA at the request of the lender or issuer of a financial product. A low credit rating indicates a high risk of defaulting on a loan or other debt (e.g. a bond), and thus leads to high interest rates, or the refusal of a loan by the creditor.  ^ back to top

Credit risk is the risk that the debtor of a loan or other type of credit will not (be able to) repay it’s debt.  ^ back to top

Credit securitization consists in repackaging loans in tradable securities.  ^ back to top

Dark pool / dark pool trading is trading of large volumes of securities by institutional investors who remain anonymous during the trade. Dark pools are inaccessible to the public and orders are executed on closed trading venues away from the central exchanges. The bulk of dark pool liquidity is represented by block trades on the basis of anonymity.  ^ back to top

Deposit is a sum of money lodged at a bank or other depository institution. The simplest forms of deposits are savings of individuals. The money can be withdrawn immediately or at an agreed time. A deposit can also refer to money transferred in advance to show intention to complete the purchase of a property.  ^ back to top

Depositories are institutions that are entrusted with the duty of “safekeeping” and “supervision” of the assets belonging to a collective investment scheme. For example, they keep records of where and how a given fund has invested. These assets may also be physically stored by the depository, i.e. depositories may also act as custodians. However, depositories may choose to sub-contract these duties to a sub-custodian. Depositories are frequently involved with the administration of the fund, e.g. they may be responsible for ensuring that dividends, from shares and interest payments from bonds held, are received. They also oversee the issuance of “units” of a fund, which can be thought of as shares in a fund that investors can purchase, and any subsequent sales of these units.  ^ back to top

Derivatives are financial instruments whose prices are based on the price of an underlying instrument, such as assets, credits, foreign exchanges, interest rates or commodities. A derivative contract specifies the right or obligation between two parties to receive or deliver future cash flows, securities or assets, based on a future event. The underlying itself is not traded. However, small movements in the underlying value can cause a large difference in the value of the derivatives as a derivative is often leveraged. For example, the financial crisis has shown us the consequence of a decrease in American housing prices, which was an underlying for many derivatives. Derivatives traders speculate on the movement of the value of the underlying, this way attempting to make profit. Furthermore, derivatives are often used to hedge (insure) against the risk) of an investment in the underlying instrument.
Derivatives can be broadly categorized by:

  • Futures are contracts to buy or sell a specific amount of commodity, a currency, bond or stock at a particular price on a stipulated future date. A future contract obligates the buyer to purchase or the seller to sell, unless the contract is sold to another before settlement date, which happens if a trader speculates to make a profit or wants to avoid a loss.
  • Options are the right, but not the obligation, to buy (call option) or sell (put option) a specific amount of given stock, commodity, currency, index or debt at a specific price during a specific period of time. Each option has a buyer (called a holder) and a seller (known as the writer). The buyer of such a right has to pay a premium to the issuer of the derivative (i.e. the bank) and hopes the prices of the underlying commodity or financial asset to change so that he can recover the premium cost. The buyer may choose whether or not to exercise the option by the set date.
  • Swaps involve two parties exchanging specific amounts of cash flows against another stream. The swap agreement defines the dates when the cash flows are to be paid and the way they are calculated .
  • Equity derivatives are derivatives with the underlying existing of equity securities.
  • Foreign exchange/currency derivatives with the underlying existing of a particular currency and/or its exchange rate.
  • Credit derivatives are contracts to transfer the credit risk of an entity from one counterparty to another. The underlying exists of a bond, loan or another financial asset.
  • Credit Default Swaps (CDS) are insurance contracts by which investors protect themselves in case of future defaults.  For this “insurance” the protection buyer pays a premium to the seller of the CDS and the seller is obliged to make a payment in the event of a default by the ”insured”. The contracts are thus used to transfer credit risks. These type of contracts are usually not closed on the regulated and supervised exchanges but rather over-the-counter. Besides this, there exist so-called “naked” credit default swaps, whereby the protection buyer does not hold (or does not have any interest in) the underlying bond. This way naked CDS’s give purchasers the ability to speculate on the creditworthiness of a company without holding an underlying bond . The overall CDS market has grown many times the size of the market for the underlying credit instruments and causes systemic risks.
  • Commodity derivatives have commodities, such as oil and agricultural products, as the underlying. The prices of commodities have become a target of speculation and are now instruments for investors to diversify portfolios and reduce risk exposures.
  • Carbon derivatives have pollution permits as the underlying. The emission trading is based on the principle that polluting companies buy carbon credits from those who are polluting less somewhere in the world and have therefore pollution permits to sell. Financial engineers already developed complex financial products, such as derivatives, to speculate and such products are now seen as a potential financial bubble.
  • Exchange traded derivatives are products that are traded via specialized derivatives exchanges or other exchanges. A derivatives exchange acts as an intermediary to all related transactions, and demands a deposit from both sides of the trade to act as a guarantee to potential credit risks..
  • Over The Counter (OTC) trading is an exchange directly between the buyer and seller.  Around 85% of the derivatives transactions are over-the-counter. They are not listed on the exchange and there is no trade through third parties, this way making the market much less transparent.

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Diversification of portfolios takes place because the financial sector considers it not prudential to put too many eggs in one basket, if the basket breaks, the whole business might be lost. As a consequence, they combine pool and restructure all sort of financial products.  ^ back to top

EFRAG, the European Financial Reporting Advisory Group – was set up in 2001 to assist the European Commission in the endorsement of International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB) by providing advice on the technical quality of IFRS. EFRAG is a private sector body set up by the European organisations prominent in European capital markets, known collectively as the ‘Founding Fathers’ or Member body organisations.  ^ back to top

The European Financial Stability Facility (EFSF) is a special purpose vehicle financed by members of the Eurozone to address the debt crisis of European governments, which created financial instability and lack of access by governments to loans. It was agreed by the 27 member states of the European Union in May 2010 in order to preserve financial stability in Europe by providing financial assistance to Eurozone states in financial or economic difficulty. Treasury management services and administrative support are provided by the European Investment Bank through a service level contract.  ^ back to top

The European Market Infrastructure Regulation (EMIR) is the new European regulation on over-the-counter (OTC) derivatives, central counterparties and trade repositories, to come into force by the end of 2012 at the earliest. It requires that standardised OTC derivatives are cleared through a central counterparty in the European Union in an effort to reduce counterparty and operational risk in the OTC derivatives market, which was identified as a contributing factor to the financial crisis.  ^ back to top

Equity is the value of an ownership interest in property or a company, including that of shareholders.  ^ back to top

ESCB (European System of Central Banks) is composed by the European Central Bank (ECB) and the national central banks of all 27 EU Member States.  ^ back to top

The European Systemic Risk Board (ESRB in new window) ) is a supervisory EU body responsible for the macro-prudential supervision of the financial system within the Union. The ESRB monitoring should result in warnings about risks for the financial system that arise from macroeconomic developments and developments within the financial system. Its objective is to contribute to the prevention or mitigation of systemic risks to financial stability and to prevent financial crisis in the Union. The seat of the ESRB is in Frankfurt am Main, serviced by the European Central Bank.  ^ back to top

An Exchange trade fund (ETF) is a fund whose shares are traded on an exchange. The price of ETF shares changes throughout the day as they are bought and sold on an exchange. The value of the fund and its shares is related to the value of an index that it tracks (similar to an index fund), a commodity or a basket of assets which the fund buys with the money of the investors who buy shares of the fund. Synthetic ETFs base their value on an index or an asset but the money invested in that fund is not used to buy the named assets but to buy (or to swap with) other assets.  ^ back to top

Fair value accounting (or mark-to-market accounting) is a principle of the International Financial Reporting Standard (IFRS) and implies that company assets are valued on the basis of the price they would fetch if they were offered for sale on the market right now instead of what they would be valued were the company to hold on to them until maturation.  ^ back to top

Financial bubbles exist if assets or products are traded with highly inflated values, an example of this is the case of the American housing prices.  ^ back to top

The Financial Stability Board (FSB www.financialstabilityboard(opens in new window) ) is an international body that coordinates at the international level the work of national financial authorities and international standard setting bodies in order to preserve financial stability. It also advises and promotes the implementation of effective regulatory, supervisory and other financial sector policies in the interest of financial stability, especially through recommendations to the G20 about the reform and operation of the global financial system. The Board includes supervisors and finance ministries of all G-20 countries, the FSF members, and the European Commission. It is being critically monitored by FSB Watch(opens in new window) .  ^ back to top

Financial transaction tax (FTT) is a tax applied to financial transactions, usually at a very low rate. A financial transaction applies to the exchange of financial instruments and transactions on the financial markets. The financial instruments in question can for instance include securities, bonds, shares and derivatives. They do not include the transactions typically undertaken by private households or businesses. The particularities of an FTT application are dependent on legal requirements and are at the core of the debate about the introduction of an FTT within the EU. (see articles in the different Newsletters)  ^ back to top

Futures see derivatives.  ^ back to top

Hedge Funds are specialist investment funds that engage in trading and hedging strategies.  Hedge funds make use of speculative strategies, such as short-selling, leverage and derivative trading to obtain the highest possible return on their investments. These funds aim to make short-term profits by speculating on the movement of the market value of the shares, the sustainability on the long-term is inferior. Moreover, hedge funds are activist shareholders, which use a certain amount of shares to influence the outcome of the general meeting of shareholders and so the long-term strategy of a company with the aim to make short-term profits.  ^ back to top

High frequency trading (HFT) refers to a trading program that uses powerful computers to transact a large number of orders at extremely fast speeds. Typically, the traders who execute a transaction at the fastest speed (as fast as within as 0.005 time of a second) will be more profitable than traders with slower execution speeds. Already in 2009, it was estimated more than 50% of stock exchange volume comes from high-frequency trading orders. High-frequency trading often uses complex algorithms to analyse multiple markets and execute orders based on market conditions.  ^ back to top

Inclusive finance focuses on expanding access by poor and vulnerable populations to affordable and responsible financial products and services. The target groups also include organisations or businesses that are often unable to gain access to financial products and services such as micro- and small-enterprises. A range of basic financial products and services are incorporated within the remit of inclusive finance including savings, credit, insurance, remittances, and payments.  ^ back to top

Incurred losses are the losses that have occurred within a stipulated time period.  ^ back to top

Leverage is the use of borrowed funds at a fixed rate of interest in an effort to boost the rate of return from an investment. Leverage takes the form of a loan or other borrowings (debt), the proceeds of which are (re)invested with the intent to earn a greater rate of return than the cost of interest. Increased leverage also causes the risk on an investment to increase. Leverage is among others used by hedge and private equity funds. This means that they finance their operations more by debt than by money they actually own. The leverage effect is the difference between return on equity and return on capital employed (invested).  ^ back to top

Leveraged buyout is the main practice of private equity funds. It implies that a healthy company is bought with borrowed money. The ratio of what is invested by the fund and what is borrowed money for a buy-out is usually around 25% (invested) to 75% (borrowed) . As a result, a company is saddled with an enormous debt and the private equity fund starts lending money to repay the money that was borrowed to buy the company. The interest payments are at the cost of the company and are often eligible for tax deduction. As a result of the amount of interest payments, the balance sheet of the company is negative. Such an artificially created loss often leads to a tax rebate. Moreover, the artificially created losses are used as an argument to cut costs at the expense of workers, research and development, environment or consumers. The company structure is overhauled and certain company divisions and assets are sold. After such an overhaul the company is sold to the highest bidder.  ^ back to top

Mark-to-market accounting, see fair value accounting.  ^ back to top

MiFID: Markets in Financial Instruments Directive regulates financial markets (e.g. exchanges), trading practices and investment (advisory) services and related financial products (including derivatives), suppliers and marketing practices. MiFID aims at protecting the integrity of the financial markets, protecting investors e.g. to get the best prices, providing a single market in the EU for financial instruments to compete, and improving transparency.  ^ back to top

Money market funds (MMFs) are mutual investment funds that sell shares to institutional investors or individuals who use them as more profitable alternatives to (short term) saving accounts.  ^ back to top

Moral hazard refers to the principle that in good times the profits of the financial service industry are privatized, while the losses in case of emergency are socialized. Financial bail-outs of lending institutions by governments, central banks or other institutions can encourage risky lending in the future, if those that take the risks come to believe that they will not have to carry the full burden of losses. Lending institutions need to take risks by making loans, and usually the most risky loans have the potential for making the highest return. So called “too big to fail” lending institutions can make risky loans that will pay handsomely if the investment turns out well but will be bailed out by the taxpayer if the investment turns out badly. It can concluded that moral hazard has contributed significantly to the practices of excessive risk-taking by the financial sector.  ^ back to top

Mutual funds are open-ended funds operated by an investment company, which raises money from shareholders and invests in a (diversified) group of assets, in accordance with a stated set of objectives . This way enabling small private investors to invest in a diversified portfolio of shares, bonds and other securities. Mutual funds are open-ended funds since there is no fixed amount of capital in the fund. If new investors want to invest, the fund can issue new units, accepting the money into the pool.  ^ back to top

Naked short-selling, see short-selling.  ^ back to top

Off-balance sheet practices refer to certain assets and debts that are not mentioned on the balance sheet of the company. These practices are not transparent and lack of oversight by supervisors. Banks have traditionally used off-balance-sheet practices to avoid reporting requirements or to reduce the amount of capital they needed to hold to satisfy regulatory requirements.  ^ back to top

Options, see derivatives.  ^ back to top

Over-the-counter (OTC) see derivatives.  ^ back to top

Position limit is a pre-defined limit on the amount, or the maximum number, of derivatives contracts a (legal) person, or a class of traders, can enter into or hold in one particular underlying security (e.g. hard red winter wheat futures) at a particular moment. Position limits can be designed by the exchanges on which the derivatives are traded, or by regulators and/or supervisors, and enforced by exchanges and/or supervisors. They aim at preventing excessive market and price instability.  ^ back to top

Prime brokerage is a package of professional services to hedge funds and other large institutional investors mainly provided by investment banks, such as Morgan Stanley and Goldman Sachs. These services include financing to facilitate leverage, securities lending between hedge funds and institutional investors, clearing and settlement of trade, capital introduction (by introducing hedge fund clients to qualified hedge fund investors who have an interest in exploring new opportunities to make hedge fund investments), risk management advice and operational support. Cash lending to support leverage and securities lending to facilitate short selling are the main prime brokerage services. Globally more than 90% of these activities is based in London. Their 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.  ^ back to top

A Packaged Retail Investment Product (PRIP) is a financial product offered to retail (non-institutional) investors. It is a combination or wrapping of (different) assets, or other mechanisms, in a financial product as opposed to direct holding of such assets. The amount payable to the investor is based on the market value of assets or payouts from assets of which the PRIP is composed. Assets of which PRIPs are composed cover investment funds, structured products in any form, and derivative instruments.  ^ back to top

Private equity funds vary from hedge funds as they operate in a different way as an activist shareholder. Generally speaking, private equity funds engage in two types of activities: a) they provide venture capital for start-up firms and small business with growth potential that look for investors; b) their most substantial and striking activities are leveraged buyouts. Private equity firms have a short term focus as they wants their investment back as soon as possible with the highest return as possible. In the first half of 2006 private equity leveraged buy-outs have got 86% of their investment back in just 24 months engagement in the target company . The biggest five private equity deals involved more money than the annual budgets of Russia and India.  ^ back to top

Procyclicality implies that the value of the good, service or indicator tends to move in the same direction as the economy, growing when the economy grows and declining when the economy declines. In particular, the financial regulations of the Basel II Accord have been criticized for their possible procyclicality. The accord requires banks to increase their capital ratios when they face greater risks. Unfortunately, this may require them to lend less during a recession or a credit crunch, which could aggravate the downturn. A similar criticism has been directed at fair value accounting rules.  ^ back to top

Public trading: generally refers to regulated markets and multilateral trading facilities subject to public disclosure requirements.  ^ back to top

Regulated market for derivatives is a venue for trading derivatives over which a government body exerts a level of control. An example of a regulated market is a commodity derivative exchange which is under supervision, as opposed to OTC markets which were until recently not regulated nor supervised.  ^ back to top

Re-securitizations have underlying securitization positions, typically in order to repackage medium-risk securitization exposures into new securities. Because of their complexity and sensitivity to correlated losses, re-securitizations are even riskier than straight securitizations. See also: securitization.  ^ back to top

(Risk-weighted) assets: the minimum amount of capital that is required by financial regulators to be put aside by banks and other (financial) institutions, based on a percentage of the assets, weighted by risk. The idea of risk-weighted assets is different from a static requirement for capital. Instead, capital requirements are based on the riskiness of a bank’s assets. For example, loans that are secured by a letter of credit would be weighted riskier than a mortgage loan that is secured with collateral.  ^ back to top

Securitisation is the process of converting a pool of illiquid assets, such as loans, credit card receivables (Asset Backed Securities) and real estate securities (Mortgage Backed Securities) into tradable debt securities. These new sophisticated instruments were supposed to refinance pool of assets, to diminish risks and to enhance the efficiency of the markets, but they resulted in increasing the risks by spreading “toxic assets” throughout the financial system.  ^ back to top

Securities lending is the borrowing of securities, which primarily takes place between investors, such as hedge funds and institutional investors. The latter does not want to sell the securities in the short run and earns money from the fees it receives for lending its stocks. Besides short selling, the practice of securities lending may be used for activist practices during the general meeting of shareholders. A lender of a security loses its voting rights to the borrower who may use it for activist short-term goals.  ^ back to top

The shadow banking system is the collection of financial entities, infrastructure and practices which support financial transactions that occur beyond the reach of existing state sanctioned monitoring and regulation. It includes entities such as hedge funds, money market funds and structured investment vehicles. Investment banks may conduct much of their business in the shadow banking system, but they are not shadow banking institutions themselves.  ^ back to top

Short selling is the practice of selling assets, usually securities, which have been borrowed from a third party (usually a broker) with the intention of buying identical assets back at a later date to return to the lender. The short seller hopes to profit from a decline in the price of the assets between the sale and the repurchase, as he will pay less to buy the assets than he received on selling them. So, short sellers make money if the stock goes down in price . If many market participants go short at the same time on a certain stock, they call down an expected drop in prices because of the growing amount of stocks that have become available. Such practices hold the risk of market manipulation.  ^ back to top

SIFI is short for systemically important financial institutions. These are global financial services firms – almost exclusively banking conglomerates – so big that governments believe they will be forced to rescue these financial conglomerates, in case they collapse, in order to avoid the risk of lasting damage to the financial and economic system. G-SIFIs is the abbreviation of globally systemically important financial institutions, being able to pose a threat to the global financial system in case of collapse. Domestic or national SIFIs (D-SIFIs) can threaten the financial stability of a country in case of distress.  ^ back to top

Special Purpose Vehicles (SPVs) or Special Investment Vehicles (SIVs) are legal entities created (sometimes for a single transaction) to isolate the risks from the originator. As a result, financial firms set up an SPV/SIV in which they usually do not contribute risk capital. The firm transfers assets to the SPV for management or uses the SPV to finance a large project, thereby achieving a narrow set of goals without putting the entire firm at risk. The SPV primarily holds investments of other financial firms or other (institutional) investors. The financial firm that set up the SPV/SIV receives fees for their services that have been agreed in the memorandum of association or the statutes of the SPV/SIV.  ^ back to top

Stealth acquisitions are acquisitions of large stakes in companies without required notifications to the market and the company through the use of cash-settled derivatives.  ^ back to top

Sub-Custodian: A sub-custodian is a third party who is sub-contracted by a fund’s depository to act as a custodian for all or part of the fund’s assets.  ^ back to top

Swaps see derivatives.  ^ back to top

A trade depository refers to an entity with ‘safekeeping’ duties over invested assets (e.g. the shares of a company the fund invests in). Depositories allow brokers and other financial companies to deposit securities used to perform other services (e.g. mutual funds).  ^ back to top

A trade repository is an entity that centrally collects and maintains the records of trading of (over-the-counter (OTC)) derivatives. These electronic platforms, acting as authoritative registries of key information regarding open OTC derivatives trades. Their purpose is to provide an effective tool for mitigating the inherent opacity of OTC derivatives markets.  ^ back to top

Trading book refers to the portfolio of financial instruments held by a brokerage or a bank. The financial instruments in the trading book are purchased or sold to facilitate trading for their customers, to profit from spreads between the bid/ask spread, or to hedge against various types of risk . The trading book consists of all the financial instruments that a bank holds with the intention of re-selling them in the short term, or in order to hedge other instruments in the trading book.  ^ back to top

A trading platform is the software through which investors and traders can open, close and manage market positions. Trading platforms are frequently offered by brokers either for free or at a discount rate in exchange for maintaining a funded account and/or making a specified number of trades per month.  ^ back to top

UCITS (Undertakings for Collective Investment in Transferable Securities) are investment funds established and authorized in conformity with EU legislation. The UCITS Directive lays down common requirements for the organisation, management, free movement, liquidity and oversight of these funds.  ^ back to top

UCITS directives: The Undertakings for Collective Investment in Transferable Securities Directives (“UCITS Directives”) lay down common requirements for the organisation, management, free movement, liquidity and oversight of UCITS funds. The UCITS Directives aim to protect investors and foster a single European market for collective investment schemes. The directives consist of a Management Directive and a Product Directive. Any collective investment scheme that satisfies the extensive criteria detailed in the UCITS directives can apply to be UCITS certified, i.e. to become a “UCITS fund”. This is an enormous help when it comes to marketing the fund to retail investors, i.e. the general public.  ^ back to top

UCITS fund is a collective investment scheme that satisfies the extensive criteria detailed in the UCITS Directives. These funds have many restrictions placed on how they can invest, and what products they can purchase, because these funds are generally marketed to “retail investors”, i.e. the general public. It is important to note that hedge funds and private equity funds are not UCITS funds. They have been subject to a separate EU legislation (decided upon by the European Parliament in Autumn 2010): The Alternative Investment Fund Managers Directive (AIFMD).  ^ back to top

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